Small is beautiful
At a time when most companies are vying to see who can build the biggest DC, pharmacy chain CVS has decided that small is better. Way better.
Given Americans' infatuation with all things large—whether it's sport utility vehicles that break the five-ton barrier or larger-than-life TV screens—it's hardly surprising that the distribution centers through which all those items pass are being super-sized as well. And it's not just the Wal-Marts and Targets of the world that boast facilities whose square footage is measured in the millions. When Columbia Sportswear dedicated its new 550,000- square-foot distribution center in Kentucky early this year, CEO Tim Boyle hastened to assure onlookers that the company was committed to making it a bigger operation "as quickly as we can." And that wasn't just talk. Columbia, whose goal is to operate a DC in the one million square foot range, has already completed land preparation on an adjacent lot for an expansion in the not-too-distant future.
But not everyone is convinced that bigger is better. The pharmacy chain CVS opened a DC measuring just 400,000 square feet in Ennis, Texas, this past fall. And far from apologizing for its size, Kevin Smith, the chain's senior vice president of supply chain and logistics, touts it as a selling point. The Ennis facility, he claims, will service the same volume and number of stores as a DC twice its size. Let the others keep building their mega-structures, he says; CVS will be sticking with the "small is beautiful" philosophy going forward. "We've determined that the optimal operating model for the future will [feature] less labor, more automation and a smaller footprint."
What's the attraction of that smaller footprint? It's partly about productivity. "There are distinct productivity opportunities with smaller DCs," says Smith."Engineering studies show that for every 100,000 square feet you expand a DC beyond 500,000 square feet, you give up 10 to 12 percent of productivity. At a large DC, 70 percent of labor time is spent traveling to select an item or to put something away. That is unproductive time for us, so small is better."
Another consideration is the rising cost of real estate and construction in the parts of the country where CVS does business. "Over the years, DCs have become bigger and bigger, primarily because there is a belief that there is an administrative benefit to running one large facility as opposed to two small ones," says Smith. "But there are drawbacks to large buildings. They require large investments in land and building construction."
Rx for a labor shortage
But beyond cost and real estate considerations, CVS believes there's an even more compelling reason for investing in smaller, but more automated, facilities: a projected shortage of labor. Smith is convinced that declining birth rates and the emergence of alternative service-oriented jobs will significantly drain the labor pool available to DCs in coming years.
It's clear that CVS's management has given a great deal of thought to how it will cope with that shortage. "What we need to do is develop an environment that attracts enough labor to our operations, but that capitalizes on automation as much as possible to limit our dependence on labor," Smith says."Of course,we will always need people to move product. There is simply no reasonable substitute for the flexibility of the human hand when it comes to picking the 20,000 odd items that we pick and ship every day."
Though CVS's distribution operations will always rely on workers to some degree, Smith says the company has made every effort to reduce its dependency on labor. For example, when it built the Ennis facility, CVS installed a state-of-theart material handling system. Designed by Witron, the system uses extensive automatic storage and retrieval technology to present items to pickers as needed. Key features include Witron's Dynamic Picking System for piece-picked items and its Module Picking System for items picked in full cases.
If the automated system performs as projected, CVS will consider it money well spent. The pharmacy chain, which currently operates 13 regional DCs that total 7.2 million square feet, is in the midst of reorganizing its DC base after acquiring the 1,260-store Eckerd chain last year. Plans call for the company's DC in Garland, Texas, which is 35 miles down the road from Ennis, to be closed by July, with the Ennis facility picking up the slack. "By next summer we will be servicing our 5,375 stores from 7.2 million square feet in 12 DCs," says Smith. " That means we'll absorb $7 billion of additional sales [from the Eckerd merger] and do it from one less DC."
Those savings all add up for CVS, a company that considers logistics to be a core competency. "The contribution we make is non-marginable," says Smith. "Every dollar we save goes directly to the bottom line and represents a dollar of profit. Over the past few years, we've been able to save lots of [money] through process improvements, inventory control and good labor management."
It appears that the company has achieved those results without sacrificing performance. Smith reports that the logistics group has maintained an on-time delivery rate of 98.4 percent (within a 15- minute window) for the 300,000 store deliveries made each year and an inventory turn rate of five turns per year. But that hasn't kept it from striving for improvement. "We continue to pursue the ?Wow' factor," he says. "We want our competitors and our suppliers to shake their heads and ask ?How do they operate at such low costs with such high quality and accuracy and instock rates?'"
When a new rule limiting how long truck drivers can stay on the road took effect in January 2004, it wasn't just drivers and fleet managers who were thrown for a loop. The managers who oversee distribution networks found their operating models shaken to the core as well. For decades, it's been common practice to operate a few strategically located super-sized DCs, from which truckers would fan out to cover far-flung geographic territories. But now that drivers face severe restrictions on how long they can remain on the road, DC managers are beginning to wonder if they wouldn't be better off with more, smaller DCs.
"Some companies are evaluating if they should go to smaller DCs in order to provide more just-in-time deliveries to their retail locations ," says Erin Henderson, manager of site selection and economic development for The Facility Group. "The old trucking laws played a part in [justifying] large DCs, but because the new law requires drivers to have more rest time, retailers are realizing they can't meet their daily delivery requirements."
What's sparked all the turmoil are provisions in the new federal truck driver hours-of-service (HOS) rule mandating more rest time for drivers. Prior to Jan. 4, 2004, when the new regulations kicked in, drivers had the flexibility of using mid-day breaks to extend the on-duty period if necessary. But the new rule, which was aimed at preventing accidents caused by driver fatigue, eliminated that option. It also limited drivers to a maximum of 11 hours of driving in a 14-hour shift (in contrast to the former 10 hours of driving within a 15- hour shift). A shift cannot begin unless the driver has taken at least 10 hours off, and each shift must be followed by at least another 10 hours off.
Some of the loudest rumblings are coming from companies that supply retailers scattered throughout the Southeast. It's been generally held that the I-85 corridor just north of Atlanta is the best location from which to serve the Southeast. Now, however, that's been called into question. The time restrictions have made it much tougher for Florida-bound drivers to reach their destinations in a single shift. Things only got worse recently when the city of Atlanta banned trucks from entering the city unless they had a bill of lading for a delivery inside city limits, depriving truckers of a traditional shortcut.
But what's bad news for truckers may be welcome news for real estate developers in places like Fayetteville and Hampton, Ga. Facing a logistical nightmare, some companies are said to be considering revamping their DC networks with an eye toward opening facilities in communities not north, but south of Atlanta.
About the Author
John Johnson joined the DC Velocity team in March 2004. A veteran business journalist, John has over a dozen years of experience covering the supply chain field, including time as chief editor of Warehousing Management. In addition, he has covered the venture capital community and previously was a sports reporter covering professional and collegiate sports in the Boston area. John served as senior editor and chief editor of DC Velocity until April 2008.
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