Are You a Candidate For Network Consolidation?

If you're considering consolidating your company's distribution network into a single central distribution center (DC) or just consolidating regional DCs into super regional DCs, you’ll quickly see that it's no small undertaking.

Consolidation affects everyone—customers, employees and supply chain partners. Everyone in your supply chain is impacted by a decision to combine geographic locations or even different divisions.

Consolidating multiple divisions of the same company or multiple companies often involves bringing a mix of unique product lines under one roof. For example, if your company sells and distributes athletic wear, you may have one division that markets your apparel and associated accessories and another that markets footwear.

For this company, consolidating the two divisions into one facility may provide an opportunity to achieve significant cost savings by taking advantage of a consolidated shipment to its customers rather than smaller, multiple shipments. The customer would benefit from fewer shipments as well as potentially reduced order placement effort.

Consolidating divisions into one facility or DC would also allow you to combine functions such as order management, purchasing, and inventory, leading to greater operational efficiencies.

While consolidating the same operation or division for geographic reasons adds capacity, it’s not necessarily a different product mix. The supply chain benefits from this type of consolidation are achieved through costs savings derived from increased volumes. These benefits include:

--Reduced space by increasing storage density
--Reduced safety-stock inventory by consolidating stock
--More efficient methods and equipment to manage the increased volume
--Reduced overhead and redundant management costs

When consolidating facilities geographically, you must ensure that the cost efficiencies gained through operational consolidation will not decrease your current service levels or increase transportation costs.

There are significant issues that you will need to consider before you decide whether facility consolidation is the right thing to do.

Will consolidation benefit your company?

Determining if the timing or potential benefits of a consolidation is right for your organization requires consideration of many issues. The primary concerns are labor, technology and automation, logistics and transportation, and customer service.

Labor

Labor is a key issue—especially if you're consolidating union and nonunion operations or moving to an area dominated by unions and you are nonunion. How you structure wage rates, incentive pay, and how you will use temporary and part-time labor will be impacted by this choice. Most important, consider these questions for the existing labor pool today, and for employees in the different locations:

--What are your existing labor contracts, and how much will potentially unfulfilled contracts cost you?
--How will a consolidation and possible relocation impact your current and future workforce?
--Is there a temporary or seasonal workforce available to handle peak seasons?
--What hourly or managerial positions will be eliminated or increased?
--Will you be able to find a skilled workforce in the new location?

You will not want to choose space savings over availability of a labor pool with the right level of technical skill—unless you plan to make a substantial investment in your training budget.

Technology and automation

When evaluating any consolidation, it's important to consider the amount of technology and automation in existing facilities. Then determine the best mix of automation and technology to support the future consolidated business model. An assessment of your material handling equipment and methods against the future product mix will identify any gaps in the consolidated product handling capability, any throughput limitations, and any limitations in tracking and processing capabilities.

Next, investigate whether the systems in the various locations are compatible or whether will you need new/additional equipment, additional software licenses and more robust technology to achieve your goals.

For example, if the bulk of your system needs a tilt tray or carousels but one division that you'll be consolidating works best with a large, gravity-feed conveyor, which will you choose? Will you use both systems or will you sacrifice one to save space? Or is there a single system that will meet all needs?

You will need to complete a review of your primary information management systems will need to be completed first—business/order entry, warehouse management systems (WMS) and transportation management systems (TMS)—to determine how compatible they are. If your systems are not compatible, you must weigh the advantages of interfacing them using middleware or the cost of replacing them with a new solution. A good guide to follow is to look at each facility you're consolidating, focus on the best (and usually latest) technology, and then lose the rest.

Next, compare the costs of reconfiguring and relocating your material-handling equipment against the cost of purchasing and implementing new equipment and its benefits. With material-handling equipment as well as systems such as WMS, the efficiency of the operators, throughput limitations, expandability, and relocation/upgrade/maintenance costs must be part of the equation.

Many companies may initially think that more automation is the way to go because of the savings it can offer in space and labor. But automation is not always the best option.

Automation must work in concert with the product and your workforce to be successful. Too much automation can make your equipment inflexible and expensive to adapt to meet changing marketplace requirements. Inadequately designed automation is generally focused on a single solution and hence not very flexible.

Taking the time to fully identify your current and potential future needs will have a significant impact in determining how much or how little automation you need. Working with an experience integrator or operational design consultant will add invaluable insight and vision to this step in the process.

Logistics and transportation

Logistics and transportation issues are equally important, as they directly impact fulfillment—speed and cost—of customer orders. Customer service is one of the primary issues to consider about a new geographic location. It is critical to understand your key customers, their expectations, and their service to cost tolerances. Questions critical for you to answer include:

--Will the new location be able to provide the same or better level of service to the majority of customers? Are any major customers or geographic areas negatively impacted?
--Will customers who are used to same-day or next-day service still be able to get it without extra cost?
--Will your logistics model provide the same or better access to your standard inbound and outbound modes of transportation—truckload, LTL, parcel, rail, ocean and air?
--Will the site you choose make sense for the majority of your customer’s fulfillment lead-time expectation? How will the new traffic patterns impact the lead-time for your shipments?
--Does the consolidation affect any port or supplier choices? Does it impact any inbound consolidation operations or outbound pool points?

Customer satisfaction

Perhaps the most important consideration is whether your customers will directly receive the benefit of the consolidation or willingly adapt to service changes. If you're consolidating different divisions, this may offer your customers the opportunity to receive fewer, larger shipments.

Some customers may like receiving their entire order on the same day, while others may insist that they receive separate shipments, therefore not generating the transportation efficiencies for which you'd hoped.

In a consumer-direct environment, having fewer orders will offer consumers reduced shipping charges and in some case, complete orders the same day. But consolidation can increase the fulfillment cycle as noted earlier, which will adversely impact some customers or increase costs.

Another customer service factor to consider is reverse logistics:

--How will returns be consolidated and handled in the new facility that is providing service to the customer?
--Where will you process returns? How much capacity and space will be needed to process them?
--If you are serving customers from different divisions, what returns policies are these customers accustomed to?

Next time we’ll look at best practices for developing a consolidation strategy.

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