Knowing Your Options for Distribution Center Expansion

Having efficient operations means ensuring the distribution network can support the demands of the organization and the customers. This often means bringing a new distribution center online or moving to a more capable third-party logistics (3PL) provider. Companies typically perform the due diligence after peak seasons, with the hopes of implementing the changes prior to the next season.

However, we frequently see companies that don’t allow sufficient time to analyze the options, and don’t implement in an appropriate timeframe thus risking the business. Here is a quick look at what we consider reasonable timeframes based on various options. Remember that each company is different, and individual requirements can impact these timeframes.

The three options are:

  • Using the 3PL option
  • Internal fulfillment through leasing an existing distribution center
  • Internal fulfillment through build to suit

The 3PL Option

Whether it’s moving the entire business to a 3PL or supplementing your operations, there are several critical steps that can take some time. Most companies need at least six to nine months to successfully transition to a 3PL, depending on services required. 

Typical minimum timeframes

  • Develop business requirements: 30 days minimum
  • Submit RFP and evaluate vendor responses: 45-60 days minimum
  • Due diligence, site visits with one or two vendors, reference checks etc.: 30-45 days minimum
  • Contract negotiations and legal review, including service-level agreements (SLAs) and statement of work (SOW): 30 days minimum
  • Vendor transition, interface programming, file conversions, inventory setup etc.: 90-180 days minimum before shipping new orders

Companies attempt to shorten the process by not developing an RFP and bidding the services of several companies. This makes vendor comparison very difficult. The basis of their bids must be your business requirements, systems required (credit processor, interfaces, drop shipping, etc.), and critical services (e.g. kitting). Others attempt to forgo good system interfaces with the 3PL. This can create a situation that doesn’t benefit you or your customers, and risks your business.

Leasing an Existing DC

In many markets available warehouse inventory is very thin. As we assist clients with distribution center searches and evaluations, we find numerous facilities that don’t match their requirements (size, clearance heights, dock doors, parking, etc.). This leads companies to evaluating other regions and markets to support their needs, which can take eight to 12 months.

Note: The following points assume a new facility is within 35 miles or so of your existing one. Otherwise the magnitude and timeframe will expand to include hiring new management and employees.

Typical minimum timeframes

  • Develop the facility requirements: 30-45 days minimum
  • Search and evaluate available facilities, including site visits: 30-60 days minimum
  • Preliminary negotiations on tenant improvements and other lease aspects: 30-60 days minimum
  • Legal review of lease agreements, terms and tenant improvements: 30-60 days minimum
  • Develop a detailed facility layout and design: 30-60 days minimum. This is heavily dependent on how much automation and material handling equipment is required, which could add months and months of work.
  • Purchase and implement racking solutions etc.: Typical lead time for larger volumes of steel can be 8-10 weeks for new racking, shorter if it’s used. For higher levels of automation and material handling, the lead time and implementation could be six months or more.
  • Transition to the new facility: 60-180 days. This can be less if your plan is to direct new receipts to the new facility and draw down inventory from the existing one.

These timeframes don’t include time for major system changes (e.g. WMS selection and implementation), major requirements for automation and sortation, or selecting a material handling systems integrator in a new distribution center, if required.

Internal Fulfillment through Build-to-Suit

While a build-to-suit option may deliver the most ideal facility, giving you the greatest fit and best long-term option, it’s definitely the longest option. The total timeframe for most companies is 2-3 years. Purchasing the land, site preparations and financing options with the developer/owner are time-consuming tasks that preempt design and construction. As above, these points assume the new facility is within 35 miles or so of your existing one.

Typical minimum timeframes

  • Develop the facility requirements and land needs: 60-90 days minimum
  • Search for available parcels, evaluate developer options: 60-90 days minimum
  • Develop initial design with architect and engineering firm, get municipal approval: 90-120 days minimum. This can be longer for a DIY scenario where you purchase the land, select the architect, designer and contractor vs. a turnkey solution through a developer. In this process, you would also be developing the detailed MHE design.
  • Completing construction, including installation of all MHE: 10-14 months. This is heavily dependent on the size of the facility, amount of site prep, region of the country and how winter might affect the timeline, and the amount of automation required.
  • Transition to the new facility: Up to 180 days. The new facility will have to go through final acceptance and approval by your company and the local authorities.

Again, these timeframes don’t include major system options (e.g. WMS) major requirements for automation and sortation or selection of a material handling systems integrator.

Hopefully this sheds some light on the scope of the three options for expanding your fulfillment operations, the timeframes and what’s involved. In all cases don’t skimp on the risk analysis work, giving management a decision-support assessment of the key risk factors associated with each option.

Brian Barry is President of F. Curtis Barry & Company

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