The world of supply chain and distribution is evolving at a rapid pace. Since the on-set of Amazon’s Prime shipping, companies have followed suit by rethinking their distribution strategies. Speed, flexibility and customization are the name of the game.
And then came 2020. The world was hit with a pandemic, and once again we are seeing businesses forced to change processes.
In order to compete, both now and in the future, companies are re-evaluating their operations and considering distribution center (DC) expansions, retrofits, and the development of new DCs to better support customers, especially those shopping online. Developing a robust plan for the DC of the future is critical for mitigating risk and ensuring success. While it can take time to see a return on investment from necessary changes, the long-term benefits outweigh the possibility of complications from another supply chain interruption.
So, what factors should an operations manager consider for their DC? What requirements and alternatives should be considered?
Collect and Analyze Data
One of the first steps in developing a distribution center plan is to collect and analyze data. Data ensures objectivity and that the plan is based on a solid foundation. Data should be collected from several sources including historical transactions, operational audits, growth forecasts, and strategic plans. By collecting data from the vantage point of the past (historical transactions), the present (operational audits), and the future (strategic plans, growth forecasts and risk mitigation), you can develop a holistic view of your DC requirements.
Historical data helps describe the behaviors of your business; e.g., “what” an order looks like in terms of size and frequency. Inbound and outbound transactional data provides critical throughput information that helps depict the scale, complexity and seasonality of your distribution operations. Historical inventory data can provide insight into stocking levels and storage needs.
Operational audits are another important source of data that should be leveraged in the planning process. By walking through your current DCs, both pre and post COVID-19, you can identify issues and potential root causes of inefficiencies. Interviews with operators and key personnel can also provide valuable insight into problems and how they can be solved moving forward.
Forecast data needs to be collected from key stakeholders so that the throughput, space and customer requirements of the DC can be incorporated into the future state design parameters. Key forecast drivers on the DC are volume growth, the number of SKUs projected, and expected inventory turns. Typical planning horizons range from three to 10 years. Strategies and initiatives should also be considered so that other factors such as changes in distribution channels, order profiles, product mix and service requirements can be incorporated into the plan.
Establish Future State Requirements
Planning involves projecting the needs of the business over time. Once all the data has been collected, analyzed and validated, it can be transformed into a comprehensive set of future state requirements. This is the heart of the planning process - establishing the throughput and space needs for the business over the design horizon.
Do you change your DC to reflect possibilities of future crises like COVID-19? Or, should you be evaluating how to improve processes based on the inevitable change in consumer expectations? It’s important to consider recent data carefully. Customers are now more comfortable with ecommerce, direct shipping, and buy online, pick-up in-store operations. As people avoid in-person buying or brick-and-mortar stores remain closed, buying patterns are changing and will surely change more in the coming months.
Facility requirements should define both the average and peak volumes to be processed in every functional area of the DC (receiving, storage, picking, value added services, packing, shipping). The quantification of requirements for each functional area in the DC is critical for evaluating the trade-offs in space, equipment, systems and labor of various alternatives.
Certain industries may find that lean inventory practices are less than beneficial during ‘crisis’ situations. Manufactures of children’s play sets, or arts and craft projects, were unable to keep inventory in stock as the world stayed home and looked for new hobbies. Mangers in facilities like these may need to increase storage or change slotting layouts.
On the other hand, industries like restaurant supply or automotive parts saw a huge decrease in orders, and now have too much inventory – this could mean similar changes, but in the ‘opposite’ direction. Inventory, and how much you have of it, acts as an insurance policy for less-than-normal supply chain situations.
The first step in evaluating alternatives is to establish a baseline. Typically, the baseline is an extension of current state operations. It may be heavily dependent on labor and requires the minimal amount of capital investment to meet the requirements. The capital investment and annual costs of labor, space, equipment, systems, etc. over the planning period must be developed for the baseline as well as each alternative.
Once the cash flows have been developed for all alternatives, the solutions can be compared financially to determine which option offers the best return on investment. The justification of higher levels of capital investment should focus on evaluating the incremental cost differences of the alternatives as compared to the baseline. Typical approaches for analyzing the merit of a recommended investment include simple payback, internal rate of return and net present value.
In addition to the financial evaluation, qualitative factors such as risk, capacity, labor availability, training, implementation schedule, scalability, and flexibility of each alternative should be considered. Sensitivity analysis around key drivers can also be performed to help refine the recommendation. Once a preferred option is identified, you’re ready to get the project approved and execute the plan.
Planning for the DC of the future can be a daunting task. But with careful, thorough analysis, a disciplined methodology, and the involvement of key stakeholders, a well-thought-out plan that meets the needs of the business with minimum risk and maximum value can be developed to meet ‘normal’ procedure requirements as well as less frequent ‘crisis’ situations. Even with the rapid changes occurring in today’s global environment, our supply chain consulting team is keeping up with changes in our industry and doing their best to continue to bring the latest in automation and technology to our clients.