The True Cost of Fragmentation

Jan 11, 2006 8:31 PM  By

In the world of distribution, “fragmentation” describes fulfilling from more than one location. It is the opposite of “consolidation,” the act of bringing multiple points of distribution under one roof. You say you’ve never heard “fragmentation” used this way before? That’s because I just made it up—call it literary license.

Regardless, almost every seasoned distribution manager has experienced the joys of a “satellite” warehouse. Most fast-growth companies rely on them to soak up excess inventory, for use as a “bridge facility” to get you through the next peak season, or to store slow-moving SKUs, corrugated cardboard, dunnage, or discontinued merchandise.

But using separate buildings to warehouse goods has hidden costs:

  1. Redundancy of infrastructure. Almost every suitable storage facility will have a dock door, a staging area, an electrical service, and access to a parking lot, and usually plumbing and heating. So you are not just renting additional storage space, but you’re also paying for additional utilities and maintenance costs such as snow-plowing. What’s more, the plumbing, electrical units, and whatnot take up space: You will need to rent 15% of space beyond the storage area you require for all these things.
  2. Redundancy of staffing and management. Most satellite facilities require a person or two to run them. If you manage people, you know that every subordinate takes time and attention from your busy day.
  3. Travel time. The to-and-fro of multiple warehouses adds up to inescapable costs. You need vehicles, which depreciate, must be repaired once in a while, use fuel, require insurance and registration, and unintentionally but all too frequently run into other things. People must also be paid to drive them, and it is difficult to add value to anything from behind the wheel…this is especially true of managers.
  4. Fondling the merchandise. More-subtle expenses come from the number of times an employee touches your stored product. (Remember, embedded direct labor is based on the number of touches, not the distance traveled.) You are guaranteed to add at least two more touches to every item stored “elsewhere”, and it is probably more like four or five. As a result, damages will increase, and costs will go up.
  5. Communication. Inventory tracking is complicated when you have to trick your computer into thinking that all your merchandise is in one location when some of it is actually somewhere else. Then there is the need to speak with those in the satellite facility, so a phone becomes necessary. And perhaps a data line?
  6. Leakage. It is hard to keep product from disappearing when it is not subject to the security of a single facility.

My advice is to exhaust all options before renting space across the parking lot or across town. Here are a few things to consider instead:

  1. Get the owner’s boat and personal furniture out of your building. You can do this be explaining the true cost to the company of working around that stuff. Good luck…
  2. Question the need to store accounting records. The cost of conversion to electronic media is nearly always worth it these days.
  3. Wring every cubic foot of storage out of your existing facility. Don’t let the cost to lease an appropriate forklift send you off to find rental space. Racking is cheap compared with space and frequently available on the used market.
  4. Plead with the company’s merchandise buyers to do a better job of exploring options beyond the bulk purchase. Arm yourself with the costs of long-term storage first. Turning your inventory is always cheaper than watching it gather dust.
  5. Finally, take the time to evaluate all the costs of fragmentation before executing that month-to-month lease for an additional 10,000 sq. ft.

Steve Harris is principal of Lincoln, VT-based Harris & Harris Consulting