Part of evaluating and planning large DTC fulfillment projects such as opening a distribution center or implementing an ERP or WMS system should include a risk assessment of the various options being considered.
The Project Management Institute (PMI) says the different types or categories of risk include technical, organizational, environmental and external risks.
We find that risk analysis is often part of the project management methodology in large companies. But all too often small-to-medium-sized companies leap into an option without studying and quantifying the risks of each option.
Risk analysis is essential for large and complex DTC fulfillment projects including the above as well as moving to or from third-party fulfillment operations. As a result, most large projects are not delivered on time or within budget. Understanding risk and the likelihood of negative outcomes will help reduce costs and improve on-time implementation.
New Fulfillment Center Example
The management of a large direct-to-customer company decided they need a new 300,000-square-foot distribution center within two years, which would meet their projected needs for the next decade. They want the new center to be on the opposite coast from the current facility to reduce time-to-customer and reduce shipping costs.
The following list is illustrative of the various risks involved in this DTC fulfillment project, but is by no means exhaustive. For this example we have assumed that plans and budgets have been projected for each of these options.
Option 1: Design/build a new FC as a Greenfield Project
Selected risks:
- Timeframe to build a new facility and open in 24 months. Potential delay in opening the facility from weather or local government permitting.
- Complex project management
- Selecting a design/build team of architects and engineers
- Hiring a new management team and hourly employees; turnover of personnel; costs of hiring replacements
- Lost production time as new staff becomes familiar with the facility, systems and working for a new company
- Potential variances in construction and opening costs
Option 2: Locate a Leased Facility Meeting Your 10-Year Requirements
Selected risks:
- Timeframe to locate building; plan and leasehold improvements; hire staff and install fulfillment system (12 months).
- Project management
- Hiring a new management team and hourly employees; turnover of personnel; costs of hiring replacements
- Are there sufficient choices for facilities of this size?
- Does the selected facility provide good options for growth?
- Lost production time as new staff becomes familiar with the facility, systems and working for a new company
- Potential variance in start-up costs
Option 3: Use a 3PL Rather Than Internal Fulfillment
Selected risks:
- Timeframe of three months to select a 3PL and six months to implement
- Project management
- Performance at your standards and quality
- Annual price increases over the 10-year planning horizon
- Risk of 3PL being acquired. What are the costs of changing providers if the new ownership and performance aren’t acceptable?
- Risk that the provider won’t meet your company’s short-term and long-term growth and fulfillment requirements
- Capital requirements the company won’t have to fund or implement (e.g. phone system, ERP, facility, etc.)
- One-time costs to implement 3PL
For each option and risk, determine the probability and the impact of it occurring and the associated costs. Take for example personnel turnover involved in options 1 and 2. It’s impossible to hire the perfect staff without any turnover, especially with a new remote facility. Turnover can range from a minimum of 15%, to a likely 25%, to a high of 35% or more. What are the hiring and recruiting costs and the impact of this turnover on processing orders?
The outcome of the risk analysis should drive the option that you select. The process should involve the project manager, CEO and CFO and other key stakeholders like operations management. With this knowledge you can better manage the risks and costs as your DTC fulfillment project progresses.
To explore risk analysis in greater depth, read “A Guide to the Project Management Body of Knowledge (PMBOK).” It is available from major book retailers and at www.PMI.org, and is recognized by the American National Standards Institute (ANSI) and around the world.
Curt Barry is Chairman of F. Curtis Barry & Company