This five-step process helps ensure a new distribution center maximizes supply chain effectiveness.

By Donald J. Derewecki, CMC

When a company properly plans and executes its plan, a new distribution center will be a major contributor to the effectiveness of its supply chain. But a rough start-up, with cost overruns and delays, has the opposite effect. Here’s how to ensure a smooth process.

Step One:

Determine the requirements the new facility must satisfy.

To prevent numerous additional capital outlays, think in terms of requirements five to seven years into the future. In most facilities, the primary space drivers are how much inventory needs to be contained and what are the associated pick facings. Profile the projected inventories as accurately as possible; a 20 percent deviation on a 200,000 square foot storage area results in a 40,000 square foot shortfall or surplus, for example.

The planned number of stock keeping units (SKUs) along with the associated cube, velocity, seasonality, and handling characteristics of the inventory are all critical design elements as well. If operating requirements include lot number control, consider this in the projected profiles. If a company is implementing an enterprise resources planning (ERP) system, the requirements of the system must be considered.

Dock operation is another critical design factor. Shortfalls in dock capacity can significantly affect a company’s operation. Key elements to determining the required number of docks and the associated operating space include the timing of the arrival of receiving and shipping vehicles, wait times, true unloading and loading times, the number of SKUs, and breakdown and handling requirements. Opportunities to improve the operation through better scheduling and reduced handling may appear. A new distribution center may present opportunities to balance receiving and shipping peaks with a common dock area, for example.

Projected order statistics also must be factored into design. Because almost all business segments are experiencing a shift to smaller, more frequent orders, projections for the number of orders per day, lines per order, and pieces per line must be calculated. Coordinate these projections with marketing executives to account for anticipated customer needs.

Before proceeding to the next step, get the design criteria approved at the highest management levels. This will allow top executives to provide input and guidance relative to future operating requirements. It also will minimize second-guessing from the “Monday morning quarterbacks” lurking in every organization.

Step Two:

Determine the feasible alternatives to satisfy the projected business requirements.

These alternatives typically involve varying levels of technological sophistication and may be limited by several factors including the availability of capital, information systems resources, acceptable levels of risk based on management policies, requirements for flexibility, and uncertainty about the future direction of the company.

The alternatives should address material flows, picking and storage modules, material handling equipment, information systems support, building configurations, and layouts. Some of the best ideas may originate in other industries that may have similar operating requirements.

Give the alternatives a quick evaluation to make sure they are sensible before moving on to a more detailed analysis. This quick evaluation should test payback, or other investment hurdle criteria, as well as practicality. Some very technologically interesting concepts may not pass this initial test, but don’t assume the answer will be found among the low- and medium-tech alternatives.

Step Three:

Analyze the viable alternatives, including both quantitative and qualitative aspects.

The quantitative analysis requires that operating methods and the resultant layouts be developed in sufficient detail to permit proper analysis (see illustration). For more sophisticated alternatives, this process may require computer simulation to properly evaluate the relative productivity and throughput capacities. If simulation is not used, thorough static testing will be necessary to determine which alternative best meets design requirements within corporate financial guidelines.

At a minimum, the analysis should include the following:

Flows. How well do materials move into, within, and out of the facility? Are there bottlenecks in the process or layout that will restrict movement or throughput?

Picking and storage modules. Do the picking modules hold enough inventory to avoid excessive replenishment? Are the storage modules appropriately sized for the inventory profiles? Special consideration must be given when lot number control is an issue.

Mobile equipment. What are the right types and capacities for the various functional requirements? Is there enough equipment to meet peak requirements?

Conveying and sortation equipment. Are the right types and capacities in each zone? Will the system satisfy design requirements?

Staffing. How many people will be required to run the operation?

Capital budgets. Include facility-related costs, equipment, and information systems software and hardware.

Comparative annual operating budgets. Include staffing, maintenance, utilities, and information systems costs.

In too many projects, qualitative analysis is not given enough emphasis. Elements to be considered in the process of qualitatively analyzing alternatives include:

Is it flexible? How well will the operation adapt to changing operations requirements? Can the mechanized and/or automated components of the system be upgraded and/or modified at reasonable expense?

How difficult will implementation be?

How difficult will maintenance be?

How much training will be required at startup and ongoing?

How well does the warehouse management system work with the mechanized and/or automated material handling system components?

How user-friendly are the information and material handling systems components?

Step Four:

Make and document the rationale for decisions.

This documentation will come in handy when preparing the rationale and justification presentations for the management committee. Committee members rarely are convinced to part with the company’s money based on justifications such as “Bob and I thought it was a good idea.” The numbers also will be required for the capital authorization request forms.

Step Five:

Implementation.

The biggest problem most companies have during this stage of the project is failure to plan adequately. Depending on a business’ industry group, the distribution center may be a company’s biggest capital investment. Regardless of the type of business, keep in mind that the operations in the distribution center will be the last physical contact with the product before it gets to the customer.

Securing a facility for the new distribution center typically is the first step because of the long lead-time involved, especially when new construction is needed. Coordination among several departments including real estate, legal, finance, and human resources is necessary.

The available occupancy date of the new facility is the milestone date for planning equipment delivery and installation and other critical path project tasks. A project scheduling program will be essential to ensure the proper documentation and control of the project. The time invested in developing and maintaining the plan will be well worth the investment. It also will give management a higher level of comfort than a “back of the envelope” plan.

Performance specifications must be written for the required equipment and information systems. Bids must be evaluated and vendors selected. Coordination with vendors during the detail design and development phases of both equipment and software will be necessary.

The effort and energy required for the last step of actual startup and debugging is inversely proportional to the quality of the planning. The better the plan, the less time will have to be devoted to putting out fires and making last-minute field adjustments.