Operations and Management: Is Your Fulfillment Center a Tight Squeeze?

Most catalog executives underestimate their space needs when it’s time to move or expand their distribution center, according to Haskell, NJ-based operations consultant Bill Kuipers.

If your distribution space is at 80%-85% capacity, Kuipers says, you should start thinking about an expansion of some kind. In a cramped or crowded facility, “people don’t realize how much time is wasted in picking, replenishment, and travel,” he says. “By the time management realizes it’s time to move, it’s already too late.”

Lincoln, VT-based operations consultant Steve Harris says the right size for any warehouse is a function of the merchandise moving through it. But the cost and size of the product, how many times your product turns over, and the variety of your SKUs should be taken into consideration.

Scotty Dean, distribution center manager for knives and swords cataloger Bud K, has his own metric: “When you start putting stuff on the floor and reserve stock in the staging area, it’s too late to begin thinking about expansion. You’re in survival mode.”

No more shuttle trucks

Ferrisburgh, VT-based food cataloger/retailer Dakin Farm knew it had to expand when inefficiencies led to increased fulfillment labor costs, says president Sam Cutting IV. Because business had grown rapidly, some of Dakin’s merchandise was stored in trailers three miles from its distribution center.

“We would have to drive pickup trucks and vans to the merchandise,” Cutting says. “We would load by hand and shuttle the product down to the pick/pack/ship area and fill our flow-through racks by hand.”

Dakin simply could not handle any more volume out of its roughly 2,000-sq.-ft. facility. “We were not making our service levels, Cutting says. “We had numerous mistakes, and we had to tell our customers we could no longer guarantee Christmas [2002] delivery” of the orders already in the warehouse.

In October 2003, the $5 million food marketer completed construction on a 13,000 sq.-ft. facility built on three floors. Though from the outside it resembles a traditional barn, the building houses refrigerated and freezer storage, a complete fulfillment operation, and a contact center. Including equipment, the new building cost about $2 million.

Like Dakin Farm, Moultrie, GA-based Bud K is leasing space off-site until its new, larger facility is completed later this year. In addition to renting an additional 6,000 sq.ft. near its headquarters, the company purchased storage containers for its campus.

In Bud K’s case, increasing the percentage of imported products was responsible for eating up available storage space. Overseas shipments are typically larger than domestic shipments, because catalogers order more to compensate for longer lead times, and because reordering offshore goods can be a slow and expensive process. If you intend to import product, says consultant Kuipers, you’ll typically need more space in your reserve storage area.

Because its packing and shipping area was finding it difficult to process orders in a timely manner, KV Vet Supply decided to build a 17,500-sq.-ft. addition to its 40,000 sq.-ft. distribution center, says founder Dr. Raymond Metzner.

The facility, scheduled to open next January, will allow the David City, NE-based pet supplies cataloger to expand from 18 packing stations to about 30. The company will also be able to run two eight-hour shifts.

KV Vet Supply, which mails separate catalogs devoted to pets, horses, and livestock, is no stranger to facility expansion: It has had five expansions since 1986.

“We’ve always planned a year in advance,” Metzner says. “And it was important to grow as needed according to our history and our growth projections.” KV took into account five years’ worth of data; anything more than that tends to be inaccurate, he says.

Calculating need

Once you’ve determined that you need to expand, the next hurdle is figuring out how much more space you’ll need.

When Kuipers helps clients with DC expansions, he doesn’t estimate the square footage needed based strictly on sales projections. He examines the operations and use of space within each department of the warehouse. “I’ll take picking and ask how much space does picking need — 30,000 sq.ft.?” he says. “Or how much space does reserve need — 50,000 sq. ft.?”

In reviewing each department, Kuipers takes into account whether the company is making the most of the DC space it has. For instance, “most pallets are underused,” he says, and take up precious space. If you have just a few items remaining on a pallet, take them off, get rid of the pallet, and hand-stack the rest of the goods vertically.

After arriving at the initial estimate, Kuipers will check his projections against the overall company metrics, such as orders per square foot and dollars per square foot.

Both Kuipers and consultant Harris suggest a good rule of thumb is to divide your company’s annual revenue by the footage of floor area in your fulfillment center devoted to handling your product. Catalogers should be in the range of $550 sales per square foot-$970 sales per square foot.

If your number is lower than the low end, you probably have too much warehouse. If your number is higher than the high end, either you are selling jewelry, drugs cosmetics — small products with high dollar amounts — or your warehouse is too small.

More Signs Your DC Is Too Small

If your fulfillment center suffers from at least three of the five conditions below, says Lincoln, VT-based operations consultant Steve Harris, it’s time to expand:

  • At peak inventory, less than 20% of your bin locations are empty.
  • When you retrieve something from the storage racks, too often you have to move something else out of the way.
  • Less than 15% of the floor area of your warehouse is unassigned and available to handle incoming merchandise.
  • Your direct labor cost per order is nudging past $5.00.
  • Inbound trucks are waiting in line to get to a dock to unload goods.

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