A Look at Mega DCs

Distribution centers have grown from an average size of 173,592 sq. ft. in 1997 to an average of 308,034 sq. ft. in 2006, according to research by warehouse facilities provider ProLogis.

What’s more, the number of “mega DCs,” facilities measuring 500,000-plus sq. ft., has grown to more than 22% of the total — whereas 10 years ago they represented only about 4.4%.

“More companies today are building and buying big warehouses than little ones,” says Kate Vitasek, founder/managing partner of Supply Chain Visions, a consulting practice specializing in supply chain strategy (and which conducted the research for ProLogis).

Why are some merchants migrating to these larger facilities?

Companies are generally finding that by consolidating their supply chains and taking a more centralized approach to fulfillment, they can speed service and gain operational efficiencies in ways that they cannot with a highly distributed network. Some are adding mega DCs to their existing networks and closing some of their smaller facilities, while others are using one giant centralized facility for nationwide fulfillment instead of several.

Similarly, some merchants are using mega DCs to serve only their retail operations, while others are building them as dedicated direct-to-consumer fulfillment centers. Macy’s, for example, built two 600,000 sq.-ft. mega DCs – one in Goodyear, AZ, in the spring of 2008, the other in Portland, TN, in the spring of 2007 – to serve only its direct-to-consumer operations.

“Simply put, it’s economies of scale,” says Craig Adkins, vice president of fulfillment operations for online footwear merchant Zappos.com, which recently built a centralized, 830,000 sq. ft. DC at its headquarters in Shepherdsville, KY. “If we split our DC up into a distributed network, it wouldn’t nearly as efficient – plus it would be a lot more expensive to operate.”

Adkins says with a larger DC you can achieve higher throughput, which means you don’t need to keep as much merchandise in stock: As soon as the items come in, it’s typically just a matter of days or weeks before they’re shipped out the door. This reduces the operational cost of the facility, because you’re using less floor space for warehousing.

“If we had a distributed network, we would have to replicate a lot of inventory that we don’t have to replicate right now,” he explains. “It would force us to carry more inventory, because it would have to spread it across multiple facilities.”

Of course, there risks with going the mega-DC route. “Insurance carriers get very nervous when the dollar value of the stored goods reaches a certain amount,” explains Ken Ackerman, president/founder of K. B. Ackerman Co., a logistics consultancy.

Ackerman doesn’t understand why so many companies are willing to take such a huge risk by having all of their merchandise under one roof. That’s why he’s a proponent of using the “campus style” approach to a mega DC – which is where you have numerous medium-sized buildings on a single site.

There’s also the risk that the mega DC you build today will be difficult to sell tomorrow, in the event you no longer need it.

“Years ago Sears Roebuck built a 4 million sq. ft. mail order plant on the west side of Columbus, OH, and it’s a real white elephant,” Ackerman says., The hulking, two-level structure was custom-built, which is part of the reason it is still on the market today. “It was a single purpose building – Sears doesn’t want it anymore, and apparently nobody else does either.”

To read the full article, see “The new big thing: Super-size DCs” in the November issue of Multichannel Merchant. What? You don’t have a subscription yet? Then click here!

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