Best Practices for Network Consolidation

Mar 04, 2009 9:02 PM  By

If you’ve decided to consolidate your company’s distribution network into a single central distribution center (DC), getting started requires that you develop a strategy that covers every aspect of the project.

Last week’s article we looked at why companies may need to consider consolidation. Now we’ll cover the best way to do it.

First off, have the expertise on hand to do the job. DC consolidation is no small venture. You need an experienced team to cover all the bases, and even more important, strong, effective full-time project management to get the job done.

Build your project team with an experienced set of project managers to cover every aspect of the consolidation—analysis, design, implementation, start-up, training and beyond. Your project team should have representation from each of the following areas: DC design, transportation, inventory planning and management, information technology (ERP, WMS, TMS, etc.), customer service, sales and marketing (to provide growth projections—where growth will be and for which products, etc.) as well as finance and administration.

Assign a project leader to communicate with each of the areas so your consolidation team is working together and talking with one another through every step of the project. Leadership is of utmost importance with a project of this magnitude. It’s leadership’s responsibility to set clear expectations and to manage the entire process. This includes establishing clear communications with customers and suppliers, managing the cultural problems that may crop up, and keeping everyone focused on the end goals.

Ensure that you have a sound justification for every step of the project. Remember your two goals of increasing service and reducing costs—a consolidation should ideally improve customer service, improve efficiency and reduce costs. You should be able to justify the consolidation at every turn.

Analysis

The quality and depth of the inputs will determine the validity and quality of the analysis. Accurate projections for sales growth and volumes, SKUs, and future operating environment are critical components to focus on.

These figures will help you determine the amount of space, labor, equipment and technology that you’ll really need. If you’re considering consolidating into an existing facility, you’ll need to know whether that facility can really handle the consolidation volume. You will need a detailed analysis of:

–Facility space (storage areas, receiving dock, order processing area, returns area, shipping, etc.)
–Methods of storage (single pallet, two- or three-deep push back, bulk floor, etc.)
–Inbound product volume (trailers and pallets per day, etc.)
–Order profile, outbound order volume, order processing methods, peak volumes, seasonality, etc.
–Design: It is key to understand where to begin with the design. The best practice is to design for the process and equipment.

Don’t try to fit it into a footprint. But if you choose an existing facility, the design must leverage its limitations into benefits rather than build in obstacles for the future operations. For the design, you need to consider:

–How should the new facility be designed to meet its objectives?
–What is the best layout?
–What technology, automation and labor will you need?
–What labor functions are required?

There is likely automation and technology already in place in the facilities being consolidated—which of this existing technology is the best and can be retrofitted in the new facility?

Are there different systems in place at each facility and if so, are they compatible or would a completely new system be a better choice?

Set clear goals and a realistic schedule for the consolidation in order to measure its success. Setting a date and the building an unrealistic schedule to reach it is one of the most common mistakes.

Schedules should first and foremost allow for proper implementation and testing of systems and equipment prior to start-up. Next, develop an orderly transition plan, including a detailed contingency plan. If you take these two steps and dedicate the proper project management time, the transition will generally run fairly smooth.

Establishing key performance indicators (KPIs) for operational ramp-up pre-go-live and then monitoring them post start-up will provide a roadmap of benchmarks. Most people are surprised that it takes three to six months to reach productive levels in a new DC operation, and much longer if performance measures are not monitored and acted upon. A few of the common KPIs to consider establishing include:

–Labor per unit received/picked/packed/loaded (key items to see if the new process is working or not)
–Order cycle time (time from order received to shipped) will be less than X
–Inventory turns (how long product “sits” in the warehouse) will be greater than X
–Damages: inventory write-off due to damages will be less than X %
–Returns: customer returns will be less than X%
–Lost-time accidents: there will no worker who is absent from work due to injury suffered while on the job
–Total labor hours overall and by department
–Inventory accuracy: will be greater than X%. Space utilization (how much space do I have vs. how much am I using) will be less than X%
–Order accuracy: (what did the customer order vs. what did I ship) will be at least X%
–Order fill rate: (for every customer order, how many times did it take me to ship this customer the entire order) will be greater than X%
–Employee satisfaction: employees will report that they love to work here and turnover will be reduced

Maintenance downtime for systems

Encourage buy-in and support to make it all happen. Consolidation often means that jobs will be lost, old processes will change and new processes adopted. So the plan for consolidation may be met with resistance from the existing staff.

You’ll need effective communication with the workforce to garner and build the necessary support and to make the transition go as smoothly as possible. To manage this process effectively, hold regular project status meetings to ensure everyone is aware of the goals and the challenges of the consolidation project. Meeting objectives and overcoming obstacles together and head on is best for overall morale and acceptance.

Effective communication with business partners and customers will also be necessary to ensure their support in the transition to consolidation transition. Developing a transition plan and a communication strategy will ensure that all parties are aware of critical milestones that may impact them.

For example, there could be delays in ramping up to previously established volumes and service levels, which could cause problems for your customers. Formal, advance communication to customers and vendors/suppliers will help calm any fears and solidify relationships in the event that things do not go exactly according to plan.

The point of consolidation

There are significant operational and logistics savings associated with consolidating some distribution networks. What’s more, consolidation presents an organization with the opportunity to icrease throughput capacity, improve employee safety, ergonomics and working conditions.

Even with the negatives of accepting change, altering customer expectations, closing of old operations and the effort associated with the transition, it may be the right decision. The key is to carefully analyze and plan, dedicate the right resources, leverage outside experts, and to do your homework up front with all partners in your supply chain—including internal ones.

Brian Hudock is a partner with Tompkins Associates, which designs and integrates global end-to-end supply chain solutions for merchants and other companies.