Opening a second distribution center can more than double day-to-day complexity and increase the cost of operations. While most companies tend to focus on the network and facility design, it’s important to also consider the less obvious factors that can make running a multi-site DC environment challenging. One needs to look beyond the network models, facility designs and pure cost analysis, and consider the impact on customers and daily operations.
Maintaining service levels
Expanding your operation will not only put a lot of stress on your people, processes and resources, it could put stress on your customer relationships, too. That’s why it is important to tell your customers about your decision to expand your operations ahead of time. This way you can tell them what to expect – after all there might be a few “glitches” that will occur as a result of the reorganization. At the same time, it is also an opportunity to tell them how the expanded network will improve customer service.
Clarify what will take place during the transition period. Ask your customers about their concerns and worries, and be sure to address them in your transition planning.
Start by developing a plan to determine what products you’ll stock at each location by reviewing customer demands and usage patterns. Strive to provide the best service possible while keeping your inventory costs down. For some customers, stocking and shipping from a single location may be the best choice.
Align the sites by customer needs. If a site is dominated by a few customers, look at how you can optimize the flow of orders at each site. For example, you may focus one facility on pallet level fulfillment and another on case- and unit-level fulfillment.
If you deliver to the same customer from more than one location, your customer will naturally compare service levels. If these are not the same, you could run into trouble. Fix any service imbalances quickly. Be sure that you understand your customers’ requirements and have a plan in place to address their concerns.
Also, when you add a new facility you will need to review — and possibly renegotiate — your customer agreements. Some agreements will require more inventories if you serve your customer from multiple locations. For example, it is common for retailers to require their orders to be shipped form a single location or on the same truck. To meet this requirement you may need to hold your compete product line at all locations. This drives higher inventory or it may require the transfer of product between distribution centers. If you can compromise with the customer to modify this requirement, your inventory cost can be significantly reduced.
Maintaining knowledge and common processes
Obviously, it is more difficult to manage multiple DCs than just one — especially when they are spaced apart by long distances. The biggest challenge is to keep processes common across all sites. Using formal documented processes and training will help.
When documenting your processes, include as much of the “tribal knowledge” in the process as possible. Remember that when you hire new employees you will need to train them from beginning to end, and processes often fail to cover all the possible responses to situations that experience brings. Capturing this knowledge is important. Once that’s done, establish a formal change process and include reviewers and approvers from each site. Be diligent in documenting changes to processes, as informal or undocumented processes will affect performance and cannot be maintained across multiple sites.
Next, develop formal training plans. Include both new and current employees in the training rotations. Capture any concerns your employees have with the current process and follow up with a review. Modify the process if needed and retrain.
You might also want to consider the exchange of key employees between your sites. This will facilitate the transfer of knowledge, improve communication and develop a web of resources. Recognize that there is often a difference in employee turnover from site to site and adjust training to support this.
It is crucial that your information systems are capable of supporting a multi-location environment. Therefore it is essential to make a complete assessment of your information technology before you take the multi-site DC plunge.
Some processes such as procurement, planning/forecasting, and order management, may be centralized. But you will still need to be able to access them, in real time, from each site.
Order management systems must be able to allocate inventory across multiple sites, and, providing your customer allows it, should allow shipments from any location in your network. Being able to view order processing information in real-time will allow the order management team to provide information to customers quickly.
Similarly, your inventory management and fulfillment system must also be multi-site capable, and should be able to support inventory leveling between DCs. Forecasting algorithms need to support forecasts at the companywide level, as well as at the site level. Companies need to review and modify variables used in their programs. These variables will have to be monitored for some time as the additional facility usage data becomes available.
Common reporting and review of key metrics is also important when moving to a multi-site model, so you need to develop a performance management plan that supports multiple facilities as well. First, you must enforce common metrics across sites – because if the metrics are not equivalent, the management team will make erroneous decisions. To do this, define your metrics and document how each is calculated. When possible, gather data from the same systems using identical methods.
Ensure that improvement projects include all locations. Assign employees from each location to the improvement team. Open communication is required to support performance and improvement programs. Establish regular review meetings and facilitate peer-to-peer support networks.
Managing multiple DCs also requires added diligence to manage operating costs. Some cost tradeoffs will be necessary because each site will have differing labor, facility, and transportation costs. Tracking and understanding these costs will be essential. Measuring on a per-unit, per-order or some other common basis will help in the review.
Some of the most significant cost impacts incurred when adding a new facility are related to inventory and transportation costs. Adding a second site could boost inventory levels by 30% to 40% (in part due to forecasting errors), therefore it becomes more challenging to balance inventory across sites. You must have a review process in place to assess the costs associated with the balancing inventory. Be sure to explore all options before you put product on a truck. Also keep in mind that reallocating inventory includes more than just the cost of transportation – there’s the cost to pick the product, pack it, load and unload it, receive it, as well as the cost to put it away.
For many companies one of the factors driving the decision to add a facility is the reduction in lead-time – and with this often comes a reduction in outbound transportation costs. But inbound transportation costs and the cost of managing multiple deliveries from suppliers may not have been assessed. Review the impact to receiving labor, transportation and procurement costs that split supplier orders may bring about.
Kate Vitasek is the founder/managing partner and Steve Symmes is a principal of Supply Chain Visions (www.scvisions.com), a Bellevue, WA-based consulting practice specializing in supply chain strategy and education.