Hershey Foods’ DC design

Nov 01, 2005 10:30 PM  By

When Hershey Foods Corp. (HFC) decided to build a new mega-distribution center near its Pennsylvania manufacturing plant a few years ago, the mammoth candymaker went through the same meticulous steps of budgeting that much smaller operations must perform before upgrading a facility.

As Hershey operations manager Kenneth D. Miesemer describes it in his book-length case study, “Starting Up a World-Class DC” (Warehousing Education and Research Council, 2001), the complex project required multiple teams, phases, studies, installations, and tests. Hershey’s design/build team examined more than 70 potential sites, with lots ranging from 75 acres to more than 400 acres. Land costs ranged from $15,000 to $70,000 an acre. The Hershey team took into account total costs rather than land cost alone — for instance, high cost per acre did not necessarily disqualify a site, provided it offered other amenites such as access to good transportation.

Following the choice of a construction partner, the team analyzed numerous cost alternatives for facility construction, including fixed-price, fixed-price with incentives and penalties, and cost-plus arrangements. Even a monthly delay was calculated to have a major impact on the operating budget. Since time was critical, the final choice was a fixed-price contract with hefty incentives for early completion.

To keep costs under control, financing was secured under a “synthetic lease,” with a financial entity owning the DC and Hershey paying a fee to secure the lease and then paying only the interest on the principal. The distribution division thereby netted a lower annual charge.

Hershey had specified a roughly 1 million-sq.-ft. DC, but the project team members were not sure which building footprint or equipment would work best for such a large space. Ultimately the company hired an engineering firm to determine these and other requirements such as traffic flow models, staffing models, savings estimates, and databases. The consulting firm proposed several building designs with a 160,000-pallet storage capacity; total cost estimates for the facility were $70 million-$125 million. Hershey rejected one automated option because of its high cost and opted for a more conventional design.