Allocating sufficient resources to fund a distribution center move or expansion is a momentous undertaking that requires months of meticulous planning, research, and negotiation. The first part of this series, published in the September 2005 issue, focused on macro issues such as real estate costs, building size and shape, and site selection. This article deals with micro-level budgeting for facility equipment and business processes. n Once you have selected your site and decided on the type of commercial space you’re looking for, you’re ready to proceed to the next, and critical, stage — a detailed building evaluation. If you plan to lease a facility, always try to find more than one structure in any area. Minimum criteria for comparison include the following:
utility adequacy, especially sewer and fire-suppression water
expansion potential, perhaps for a call center
adequacy of dock space (one dock per 1,200 sq. ft. of staging area, or one dock per $10 million of annual sales) and “apron” space for an equal number of trailer parking spaces
adequacy of employee parking
condition of air-handling and refrigeration equipment
estimated operations expense (heat, light, taxes, common area maintenance [CAM] charges)
access to truck routes
proximity to major shippers
Assign one person in your organization to speak for the company when dealing with real estate brokers and landlords. If you wish not to tie up your staff with the details, you can select a “buyer’s broker” in exchange for a 6%-10% transaction fee, but most fulfillment companies prefer to manage the process inhouse.
Next, create a description of what you are looking for, contact the major developers/landlords in your area, build a spreadsheet, and rate the results as they come in. Take along your operations staff to visit the leading candidates. Call for final offers by a certain date. If you do not find your ideal building, the rental community is at least aware of what you are seeking and will contact you when and if it becomes available.
Allow four to six weeks for this stage. With the exception of the distraction and the staff time it will take to make a few visits and evaluate the results, costs should be negligible. Don’t panic, but don’t wait until you are confronted with a time crunch either.
Do we have the right equipment?
This is the most difficult question to answer with any specificity when addressing a wide audience. As one DC manager told me, “There is no such thing as ‘state of the art’ in operations.” Since every direct commerce business offers a unique combination of products to a specific market sector, there is no magic solution that works perfectly at some given moment in the growth of your operation. A frustrated operations executive once warned me, “Listening to you makes me want to cut off one of your arms! Then you will have to stop using your favorite expression, ‘on the other hand!’”
A good rule of thumb used to be that $10 per sq. ft. would equip your plain-vanilla DC. Well, ladies and gentlemen, once you reach 100,000 sq. ft., we’re starting to talk real money.
Lasting solutions can be expensive and fugitive. To provide an appropriate array of fulfillment equipment, engineers and suppliers must first learn all they can about your business. They usually charge you for the education. Then, with any luck, they can develop a relationship with you that will allow them to continue to adjust, enhance, and supplement the hardware and software to meet your ever-changing requirements.
This process requires a genuine sharing of information that many companies view as highly proprietary. Wal-Mart has been willing to take the risk, approaching its suppliers as if they were partners, not adversaries, and implementing a collaborative planning, forecasting, and replenishment (CPFR) program that has reduced inventory carrying costs for all parties involved. The result of squeezing excess inventory out of the supply chain is an estimated 5%-10% price advantage to Wal-Mart. That benefits the consumer, Wal-Mart, and the manufacturer, since the latter can now sell more of its product to a fewer number of buyers, with lower risk and less administration.
It is always interesting to grasp that you save on inventory holding costs by processing just the right amount of product. It is very hard to train buyers to think this way. Everybody gravitates to the comfort of a “cushion.” So there are no reliable estimates of just how much equipment to buy or how many systems to install, because so much depends on how much product you have on hand. But there is a way of approaching the equipment challenge that produces continuous improvement, increased productivity, and a well-funded retirement for anyone who uses it (not a bad offer, actually).
Conducting a business process review
The most successful approach to creating a good match between your operations needs and your facility’s equipment — and thereby arriving at a realistic cost estimate — is the competent conduct of a business process review (BPR). In the interest of clarity, I will oversimplify the procedure and reduce it to its simplest characteristics.
If we go backward through your operation, we start at the dock door and experience, in reverse order, the following predictable and usually discrete departments:
- reserve storage
- receiving (quality assurance)
If any one of these steps is faulty because of inconsistent methods or inaccurate prediction of demand, we also experience returns, whereupon products are reconditioned and reinjected into the system to await another chance at (yes, you guessed it) fulfillment.
If you “think like your merchandise,” you’ll see that there are a number of general conditions that all of us products would appreciate:
We would appreciate getting through your DC quickly.
We would like to be moved no more than five times (once for every department).
We would appreciate leaving your DC in the same or better condition than that in which we arrived.
We would like to be processed in a way that returns a good margin to you, our host, at an attractive price to our consumer. And as much as we love you, we would like to avoid coming back, because nobody likes a loser.
Like all compartmentalized processes in the material handling universe, risk and cost reside not in the operational departments themselves but in the journeys between departments. Certainly we need to be comfortable and protected when resting, but it is when we are in motion that the battle for margin and user satisfaction is won or lost.
A well-performed business process review examines departmental efficiency and the flow of products and information among the departments. It concludes with a long-range, staged plan that will accompany you as you grow, and it makes specific recommendations to reduce waste and enhance productivity. Whew!
So how does an operations manager conduct a BPR, and what are its results (“deliverables”)? In the first part of this series, we discussed the idea of “listening for pain” the way a good doctor would. Here are some of the diagnostic tools available to the “DC doctor”:
data acquired from the patient file (DC performance data)
data acquired from well-considered questions (staff interviews)
examination (methodical observation, or “shadowing”)
From there it’s simply a matter of diagnosis and prescription — the BPR plan and recommendations.
Sounds quite simple, but as in medicine, it is very risky to diagnose yourself. In order to have a reliable result that will produce measurable improvement, it’s best to seek the advice of an independent outsider who has experience treating ailments like yours.
Practitioners include, in descending orders of expense:
Engineering consultant groups
Systems integrators (staffed by knowledgeable ex-vendors)
Small consultancies (like mine)
Equipment dealers (conveyor, rack, or forklift truck dealers)
Design/build contractors (Don’t laugh, these guys are getting good!)
According to Ian Hobkirk of Beacon Systems, a systems integrator located in Tewksbury, MA, a complete BPR should include an analysis of problem areas, in addition to a comprehensive diagram of existing operations, review of current procedures, proposal for a phased implementation of solutions, cost-justification of each improvement, and diagram of proposed operations. This document becomes an operations manual for your future DC.
Choosing a partner for the creation of a BPR is like choosing a heart surgeon. The last thing you should concern yourself with is the cost of the best advice you can get. Solicit proposals and interview their authors. Check references and choose carefully. Buying expertise on cost is like buying too-little real estate for a growing business — a false economy. Figure on spending, at the very least, eight to 12 weeks and $25,000 to $100,000, depending upon the experience and credibility of the practitioner and the complexity and size of your system.
When should I conduct a BPR?
If you manage a small DC, you should have a BPR in your head. If you manage a medium-sized DC, you should have a BPR in the works. If you manage a large DC, you should have a BPR on the office wall of each of your subordinate managers. You should be implementing the one you completed three years ago and reviewing the success or disappointments of each implemented phase. Finally, you should be planning to initiate the next one by speaking with your peers, visiting slightly larger facilities, and calculating whom to add to the planning group.
Louis Pasteur said, “Chance favors the prepared mind.” The prepared mind is characterized by a clear vision of where you are going next. Great hockey players skate to where the puck is going and prepare for it to arrive. Experience allows them to do this. When you hire consultants, it is their experience that you are renting.
A business process review is your road map through the next five years. It should be a living document, modified by experience and continual collaboration with the authors and the people running the systems. The BPR allows you to surround yourself and your subordinates with smart people determined to help you succeed.
Paying the price
As you prepare your business process review, ponder the second highest expense you control, labor. In a warehousing survey of 211 operations conducted by the Bala Cynwyd, PA-based consulting firm Spaide, Kuipers & Co., the respondents’ equipment costs went up as labor costs declined. There is an obvious conclusion to draw from this discovery: Reducing the costs of labor helps you pay for more equipment and systems. The table “Per-order labor costs” on page 57 shows that the higher the company’s sales, the lower the cost of direct labor per order. In this case, the direct labor cost of each order shrinks from $2.62 for companies with annual sales of less than $30 million to $1.33 for those with revenue of more than $100 million.
If you dwell on this correlation and do some simple math, you can see that the large DC has created a system that gives its operation a $6.37 million annual advantage over the smaller facility when having to fulfill its 4,941,000 orders. Schedule a quiet moment with your chief financial officer and make sure he understands this. It will make it much easier for you to justify the expense of a BPR and the implementation of the hardware and software that follows.
Remember, Wal-Mart has become what it is by cutting costs. This is not gloriously creative work, but if you are passionate and organized about it, it can make you rich.
Stephen Harris is a principal of Lincoln, VT-based Harris & Harris Consulting, specializing in distribution facility planning, design, and construction. Special thanks go to Ian Hobkirk, Ken Soper, and Ted Elkins at Beacon Systems in Tewksbury, MA.
PER-ORDER LABOR COSTS
|Annual sales||Less than $30 million||$30 million-$100 million||More than $100 million|
|Direct labor cost||$2.62||$2.04||$1.33|
|Indirect labor cost||$1.49||$1.23||$1.02|
|Total dist. cost||$4.02||$3.87||$2.48|
|Source: Warehousing Survey, Spaide, Kuipers & Co., 2004; number of respondents = 211|
When to relocate your DC
The need to relocate one’s warehouse or fulfillment center is frequently occasioned by storage or logistical logjams. Five fairly obvious symptoms of clutter:
- having less than 20% of pallet locations empty at any given time
- storing product in staging areas and aisles
- frequently needing to move one thing to get at another (excessive “touching”)
- constant replenishment of pick locations
- increasing employee injury rates
If your operation is experiencing any of the above maladies, take the time to chart a detailed map of your distribution center and its space utilization. Compare your diagram with the standards shown in “DC space allocation” at right. This is the one area where the numbers don’t change much as companies grow in sales.
Get your operations employees to think about variations and justify any wild discrepancies. (Usually there are good reasons for deviations from the norm.) Create a diagram of your ideal facility, and use this document as the basis of the request for proposal that you send to the site developers/landlords. If you choose to hire a facilitator to conduct this exercise, anticipate a time frame of eight weeks and $10,000 in fees.
DC SPACE ALLOCATION
|Annual sales||Less than $30 million||$30 million-$100 million||More than $100 million|
|Total sq. ft.||27,000||118,000||481,000|
| Source: Warehousing Survey, Spaide, Kuipers & Co., 2004; number of respondents = 211
Note: Numbers may not equal 100% due to rounding.