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Bucking The Trand Facility Expansion Strategies In A Fast-Growth Environment

By Art Van Bodegraven

It seems irrelevant to talk about growth and expansion when cable news assures us daily that the end of the economy as we know it is fast approaching. Truth is, some – maybe many – companies and industries are doing just fine, thank you, in this difficult period. So, they’ve got to face up to planning for growth – big growth, fast growth.
The, there’s the phenomenon of what CSCMP’s Rick Blasgen calls the “post-recession rally.” His point is that, when the overall economy rebounds, it’s likely to be both fast and comprehensive – and that distribution operations are going to have to gear up to handle pent-up demand, not missing a beat in the customer service equation.
So, we’re likely to find ourselves dealing with a rash of challenges. The distribution center is full, and we don’t know where to put the increased product volume. Order fulfillment operations are breaking down; conveyors and sorters can’t handle current demand levels; and dock door appointments are tough to get.
Material handling and/or control systems failures in one corner of the building are shutting down operations. We need advanced technology, but there’s no room, and we can’t shut down to take out the old.
Rare events? No. Familiar stories? Probably. Avoidable? More often than we think. All it takes is vision, forward planning, and the courage to invest in extra space.
You can go through whatever facility sizing and design process you choose, if you’re working in a no/low growth world; but, the world is different and the stakes are higher if you’re in a high-growth model. Worse yet, the pace and extent of growth may not lend itself to conventional planning. So, how are you to plan facilities in such an environment?

Starting At The Beginning

It’s easy to construct a vision of the future if you’re looking at 1-2-3 % growth: It’s tough when anticipated growth is 10-15 % a year, or when the business is expected to double, or triple.
Establishing a design capacity for the new building is a critical first step, and two elements are “musts” in the process. One is to put as many stakes in the ground as possible for overall growth even if it is unknowable. The other is to size the peaks.
You’ve got to establish assumptions that everyone can buy into for growth rates. While fifteen years is too far out, five years is probably not enough. A two-year build would leave only a three-year useful life, so a seven-year horizon ought to be the minimum. An annual growth rate of only 5% amounts to a 40% increase over seven years. That’s in both storage and pick/pack/ship dimensions. Consider that a 15% growth rate over ten years would yield a 400% increase!
Very few operations can be planned on the basis of flat volumes, so establishing peak capacity is critical. As a consequence, once the peak annual volume has been estimated, the next step is to determine how that translates to peak season, peak day(s), and even peak hour demands.
Calculated peak capacities, like inventory requirements in a 100% service level environment, become infinite. Therefore, sensible planning requires that the impact of additional solutions, e.g., added shifts, overtime, or 3PL support, be factored in to estimate a practical peak planning capacity.
Finally, for this initial set of steps, a design capacity to meet realistic volume peaks must be analyzed to evaluate both target year and initial year average use. Unacceptably low results could require re-thinking the approach entirely. In any case, the off-peak utilization also needs to be understood. Simple Excel tools can help with both target year volume estimation, and peak season/peak day/peak hour calculations.

A Few Tools In The Toolbox

This is not an academic exercise. Real life will intrude, usually at the worst possible time. So, in the course of executing an orderly growth plan, you’ve got to be prepared to do more than build the facility of the future. There are a number of tactics that can help you get through the eruptions that characterize a fast-growth enterprise.
One is to acquire land early, possibly more than you’ll need even if ultimate use is decades down the road. Seldom is land less expensive in the future than it is currently. In the United States, the tax consequences of the acquisition can be reduced significantly by converting the land to agricultural use until it is needed.
If auxiliary storage is needed during a transition period, consider these options:

Temporary buildings (inflatables, pole barns, sheds, lean-tos) on the extra land.
Trailer storage for slow-moving products, or for fast-movers that support pallet movement, and relatively fast consumption of trailer loads.

Exceptionally slow-moving items may be kept off-site for subsequent order fulfillment or independent customer shipment.
If product attributes permit, storage on an existing concrete or blacktop pad could be an option. As with aforementioned alternatives, this would be only a short-term expediency.
Just-In-Time (JIT) receiving from suppliers can reduce inventory holding needs by cross-docking receipts into active picking locations, or into staged customer shipments. The tactic is so powerful that it should be considered for inclusion in permanent processes, and the facility should be designed to facilitate cross-dock.

Within The Four Walls

What should we do when reality requires that we depart from the plan? Handling the unexpected becomes enormously easier when the probability of significant growth and expansion is factored into the facility plan. Consider the basic facility, illustrated in Figure 1.

Insert Figure 1 here

Within the pick/pack/ship side of the facility, empty space has been reserved for the installation of advanced technology. This permits the parallel installation of the technology while maintaining “normal” operations, and avoids disrupting continuous order fulfillment.
Since idle space is designed into the facility, it is counter-intuitive, but the longer-term payback on that investment is enormous. Also, the space investment permits you to postpone major technology investment until it is needed rather than forcing premature investment in a costly, down-the-road requirement.
The empty space investment may be even greater, as shown in the block layout solution of Figure 2.

Insert Figure 2 here

The initial design starts small in picking for A & B products, with substantial unused space that gradually will be filled with growth in A & B item movement. Also provided is empty space for installation of a high-technology solution. That installation will immediately reduce the use of the full A + B area, allowing for growth in those volumes in the future.
In addition, the full space allocated for pallet rack is only half-racked at the outset, the remainder being racked and used over time, as volume indicates. This tactic defers the rack investment, and avoids the need to knock out walls in reaching the throughput potential of the facility.
Eventually, a facility layout using this general approach might look like Figure 3, in which shipping capacity has been added, and warehouse storage is not only filled, but expanded.

Insert Figure 3 here

In order to take advantage of these possibilities the original design must designate which walls to remove for later expansion. The timing of incremental space and additional technology can be planned by using Excel tools to identify order/line/unit trigger points.

What Do You Do When The Well Runs Dry?

Okay, these plans are great if you’re facing a fast track progression from, half a million orders a year to four million; but, how can you approach the capacity and design challenges if you’re facing the prospect of expanding to fifteen or twenty million orders in a hot new product and/or a brand-new market?
Our bias favors the modular addition of clone pick/ pack/ship modules around a central warehousing/storage module; not for construction of a million square foot behemoth with miles of conveyor, sortation requirements that require platoons of engineers to understand, and recirculation conveyor loops in every corner.
The initial layout is shown in Figure 4, with expansion construction illustrated in Figure 5.

Insert Figures 4 and 5 here

In this example, pad size, traffic flows, and total land requirements must be considered from day one. Outbound dock doors are located on the long sides of each shipping module and inbound receiving doors may be on both ends of the warehouse/storage module. Knowing which walls to remove is critical to design success.

Send In The Clones

Revealed in the design process is an optimum-sized fulfillment module. When the market demand is some multiple of that “natural” facility size, the answer is not to create a bigger, more complicated, physical solution. Instead, create enough clones, or mirror images, of the module to meet demand; then, stage their construction and installation to parallel the pace of market-place growth.
This “cloning” process has several advantages, including the prudent management of capital investment. It also results in a distribution center in which shutdown in one module does not cripple the entire facility. That is a huge advantage in a world of demanding customers.
The managed growth aspect is powerful. Each new shipping module adds outbound dock doors, and is accompanied either by filling in existing warehouse storage capacity, or adding more to reach the ultimate design state. Admittedly, careful design of internal activities in the warehouse is required to establish replenishment flows to each of the pick/pack/ship modules.
Next is the question of what to do when demand eventually exceeds the four-module solution. In the master plan, you must consider how the gradual build of another four-module facility can be positioned to balance geographic coverage at overall higher levels of business. Having a cloned mega-facility also provides tremendous operational back-up to help maintain business continuity within a market.

When Disaster Strikes

Contingency plans must be included in all facility designs, no matter how clever or elegant. A catastrophic failure in inventory management, product quality, or natural disaster could shut down all four shipping modules. So, arrangements need to be in place with supply sources to maintain or restore product flow.
Such arrangements become much easier when there is a cloned mega-facility serving related markets with similar products.

Summing Up

In this article, a lightning tour through alternative approaches to planning and handling growth in distribution facilities has been presented. Not all of the recommendations are easy sells. When construction costs approach $100 a square foot, the CFO is likely to look askance at an “extra” 50,000 square feet unless you can show the alternative cost of tear-down and rebuild.
Also, there may be temptations to keep interim solutions for the long haul, unless you can demonstrate the year-on-year cost, in time, handling, and errors, of trying to get by on the cheap.
The keys are vision, courage, attention to detail, and knowing where the walls are coming down. This proactive approach is difficult and costly, but it works: The alternative is reactive, incredibly expensive, and it doesn’t work.

Bruce Strahan is a Partners in The Progress Group, Inc., an international supply chain and logistics consulting firm headquartered in Atlanta. He lead the Supply Chain and Manufacturing practice groups for TPG. Bruce did his graduate work at Georgia Tech, and was previously a Manager in Coopers & Lybrand’s SysteCon division. He may be reached at 770-804-9920 or bstrahan@theprogressgroup.com

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