Merchants have plenty of reasons to go from a single distribution center to two or more DCs — reducing transit times to customers, supporting business growth, combating rising transportation costs, to name just a few. But keep in mind that your distribution and fulfillment business will change forever when you are no longer a network of one.
How many companies operate more than one DC? A recently released survey of Warehouse Education and Research Council (WERC) members found that, on average, respondents had 7.46 distribution centers in their networks; for small companies, the average was 3.96.
Yet 21% of those responding to the survey still had only one facility. Based on the averages, about a quarter of those will consider adding a center this year.
Opening a second distribution center can more than double the day-to-day complexity and increase the cost of operations, and for more than a few companies the growing pains cause a migraine-sized headache.
That’s because companies generally tend to focus on the network and facility design, whether novices at operations growth or veterans. Industry magazines are full of articles related to network and facility design. But what about the less obvious concerns you need to think about when you take the plunge into a multiple DC environment?
Some of the factors that show on a merchant’s radar can create the biggest problems. Let’s look beyond the network models, facility designs, and the pure cost analysis to see what managing more than one DC requires.
Maintaining service levels
Expanding your operation can be traumatic to the organization, and it will likely place a lot of stress on your people, processes and resources. And if you aren’t careful, it will place stress on your customer relationships.
You have to consider your customer’s reaction to your decision. Whatever else you do or promise to your customer, you must ensure that your current service levels do not fall.
Especially for merchants selling to businesses and companies that provide fulfillment service for other entities, communication with customers is key. Start by setting customer expectations. Develop 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.
Align the sites by customer needs. If a site is dominated by a few key 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 one on case- and unit-level fulfillment.
Discuss how the improved network will improve customer service and point out the benefits the new facility will bring. 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. Never underestimate the power of perception; if the customer thinks you are out of control, it will be very hard to change that perception.
If you deliver to the same client from more than one location, your customer will naturally compare service levels. If these are not the same, you will run into trouble. Fix any service imbalances quickly. Be sure that you understand and measure to your customer’s requirements and have a plan in place to address concerns.
When you add a new facility, you need to review your customer agreements. Some agreements will require more inventories if you serve your customer from multiple locations.
For example, retailers often require orders to be shipped from a single location or on the same truck. To meet this requirement, you may need to hold your complete product line at all locations. This boosts inventory; it may require the transfer of product between DCs to fill orders.
If you can compromise with your customer to modify this requirement, the impact on your inventory cost may be significant.
Maintaining knowledge and common processes
Keeping control of the operation will be more difficult going from one DC to two. This will be even more complex if the facilities are separated by time zones and long distances.
It is always a challenge to keep processes common across multiple sites. Using formal, documented processes and training will help.
In documenting your processes, include as much of the “tribal knowledge” in the process as you can. Remember that you will be hiring new employees for the additional DCs and you’ll need to train them. Processes often just do not cover all the possible responses to situations that experience brings, so capturing this knowledge is important.
Establish a formal change process and include reviewers and approvers from each site. This will help keep processes common across sites. Be diligent in documenting changes to processes, as informal or undocumented processes will affect performance and cannot be maintained across multiple sites.
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.
Part of your training plan should include 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.
Information technology
Assess your current information systems to be sure that they will support a multilocation environment. The systems used to manage a single distribution location may not be designed to manage the dynamic environment of multiple DCs. Make a complete assessment of your information technology before you make the move to add a location.
Some processes, such as procurement, planning/forecasting, and order management, may be centralized. These processes need to be able to seamlessly access real time information from each site.
Order management systems must be able to allocate inventory across multiple sites. Order processing information should be real-time to allow the order management team to provide information to customers.
Inventory management and fulfillment systems must be capable of managing more than one DC. The systems will also need to support inventory leveling between DCs.
Forecasting algorithms need to support forecasts at the companywide level, as well as at the site level. Companies must review and modify variables used in their programs. These variables will have to be monitored as the additional facility usage data becomes available.
Keep in mind that transportation management becomes more complex for both inbound and outbound flows. The number of shipments managed will increase, and it is possible that shipping modes to customers will change.
Review your transportation management processes and systems to be sure that they will support this more complex environment.
Managing performance
Managing performance and making improvements requires high-quality and believable metrics. Common reporting and review of key metrics are important, so you need to develop a performance management plan that supports multiple facilities.
You must enforce common metrics across sites. To do this, you need to define your metrics and document how each is calculated. Whenever possible, gather data from the same systems using identical methods. If the metrics are not equivalent, the management team will make erroneous decisions.
Ensure that improvement projects include all locations. Assign employees from each location to the improvement team. You need open communication 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 costs. Some cost tradeoffs will be necessary because each site will have differing operating costs. Costs such as labor, facility, and transportation will vary; this is to be expected. Tracking and understanding these costs will be essential, and measuring on a per-unit, per-order or some other common basis will help in the review.
Many experts say that adding a second site will boost inventory levels by 30% to 40%. In part this is due to forecasting errors, but by adding a second site you have added in another factor to manage.
Multiple facilities may require you to balance inventory across sites. You must have a review process in place to assess the costs associated with balancing inventory. Look into all possible options before you put product on a truck. Reallocating inventory includes transportation, the cost to pick the product, pack it, load and unload it, receive it, as well as the cost to put it away.
Make sure inbound transportation costs and the cost of managing multiple deliveries from suppliers have been assessed. Review the impact to receiving labor, transportation and procurement costs that split supplier orders may bring about.
Having more than one DC can bring opportunity, from expanding your market share with a customer to penetrating a market in a new region. But don’t lose sight of the operational opportunities a second facility may bring.
Identify the differences between the sites; by understanding what drives these differences you can make process improvements that benefit all sites and lower operational costs. Seek out best practices at each site, review performance measures; investigate what drives high performance and what causes poor performance.
Use this information to support training programs and process-improvement projects. Always be on the lookout for opportunity and best practices in your own backyard.
Maintaining customer service levels is critical to success. Understanding your system capabilities before you get started will help you close the gaps that may be caused by managing multiple DCs. By establishing common processes, and training and keeping common metrics, you’ll better control your expanded operations.
Kate Vitasek is the founder/managing partner and Steve Symmes is a principal of Supply Chain Visions (www.scvisions.com), a Bellevue, WA-based operations consulting practice.