The Three Phases of Distribution Center Optimization

By Richard Koch | Associate Director, Logistics Growth is good for a business. But growth can severely strain any distribution center (DC), so much so that it...

Distribution-Center


By Richard Koch | Associate Director, Logistics


Growth is good for a business. But growth can severely strain any distribution center (DC), so much so that it quickly becomes outmoded. There are many ways a company can go about optimizing an existing or future DC. After all, this is a necessary step for any growing business that is stretching to meet growing fulfillment obligations.

For many companies, the DC optimization process begins with recognition that their business is facing one or more of these four challenges. But after this realization is made, what are the next steps?

Over the course of my 25-year consulting career, I’ve found the following three-phased DC optimization approach is best suited to meet a growing business’ long term demands

PHASE 1: DATA, DATA, DATA 

During the Planning/Concept Design Phase — typically 12-16 weeks in duration–a consultant is often brought in to develop possible DC optimization scenarios.

The success of this phase rests on establishing key performance indicators (KPIs) that are directly tied to the organization’s overarching supply chain goals. These KPIs can be used to benchmark any progress made with the chosen solution.

I generally recommend that clients use the following KPIs to benchmark progress.

Three-Phases-Distribution-Center-Optimization

 

After a client reaches consensus on the KPIs, a thorough analysis of operational data should follow to help to determine the optimal product flow through the proposed facility. As each functional area is explored, this should be done in combination with product and order characteristics to better establish future distribution projections and requirements.

An examination of processes and functional areas–including receiving, put-away, reserve storage, replenishment, picking and value-added services—also helps to gauge if changes like pre-labeling or advance shipping notifications would improve short-term efficiencies.

Other considerations can also include assessing the potential use of third-party logistics (3PL) provider, facilities consolidation, transition planning and compliance programs, and full network analysis.

This initial planning phase’s success rests firmly on collecting accurate data that truly reflects the facility’s historical and current operations and performance.

The following operational data should be collected and evaluated.

  • Item information for each SKU handled (e.g., item numbers, descriptions, grouping information, special handling requirements, dimensions and weight per unit, per case, and per pallet)
  • Order history information for past year and peak season (e.g., order numbers, shipment ID numbers, order dates, ship dates, customer numbers, carrier code and service level)
  • Forecast demand details (e.g., for each SKU and projected SKUs typically over a 5 year period)
  • Order details (e.g., order and line numbers, units of measure, quantity ordered and shipped)
  • Location in warehouse (e.g., internal location identifier, zone, aisle, bay, level and position, quantities and type of storage location)
  • Inbound receipt details (e.g., purchase order and item numbers, number of items ordered, quantity received, and receipt dates)
  • Customer data (e.g., customer number identifier, name, type, billing and shipping address)

It is important to keep in mind that any data collection shortcuts, estimates or assumptions will almost certainly result in a less than optimal facility design, potentially costing the business more in the long run.

Conversely, accurate data means your team can develop a fact-based model of throughput, storage requirements and costs to help establish the distribution capacity requirements over the short and longer terms. It can also be used to determine optimal equipment and space requirements for each area of a new facility.

During this model-building phase, ideally each functional area should be analyzed independently and up to four handling approaches should be outlined per location in terms of design, cost and efficiency and then ranked according to the initial KPIs.

With a fact-based model now in place, it’s time to create a conceptual facility layout to help visualize whether the ideal solution for one particular area will work well when combined with the others.

Looking at the sum of all of these parts is always the most effective way to ascertain the best possible solutions.

PHASE 2: THE DEVIL IS IN THE DETAILS

During the second optimization phase, The Detailed Design Phase, the top three conceptual facility layouts can now be refined with consideration to future growth projections.

I recommend taking the following scenarios into consideration.

  • Potential acquisitions under consideration that may affect future growth and handling capabilities
  • Any planned new product introductions or ecommerce offerings that will change fulfillment requirements
  • Additional business or operational changes that have occurred that might impact the design concept you ultimately proceed with

Once the final design concept is selected, it’s time to actually design the new facility including hardware and software plans, the physical footprint, detailed equipment layout and plans etc. Some facility designs also include staged technology upgrades or other initiatives that take several years to achieve full implementation.

Ultimately, this detailed design phase should result in providing clear insights into the feasibility and potential costs of each conceptual facility design concept.

This granular level of detail allows the identification of any required structural modifications and related operational or cost savings (e.g., expanding an existing facility by reinforcing the ceiling for equipment suspension vs. anchoring it to the floor—a move that could adversely impact future facility layouts). A plan for integrating automation systems, process and material handling engineering and meeting compliance requirements and objective vendor selection should also be factored in.

A thorough comparison of the cost/benefit differences of each of your chosen design concepts will help you determine your final design choice.

These three outputs should be solidified before proceeding to the final implementation phase.

  • Firm, fixed price for the implementation
  • Detailed project completion schedule
  • Budget detailing the initial system as designed and the anticipated cost of projected future enhancements and expansions.

A good design consultant can ascertain the actual cost differences and future value of each option to help narrow the selection for the ultimate design concept.

PHASE 3: THE IMPLEMENTATION 

The expanded or new facility comes to life in this final Implementation Phase, with detailed installation blueprints, equipment, electronic controls and system software.

At this point it is crucial to monitor the seamless integration of new or revised automation systems and your enterprise resource planning (ERP) system, paying particular attention to relating the new system functionality to updated business practices.

An effective training program can further support and ensure the new facility’s rapid productivity. Training should be planned for in advance and commence during installation via a combination of hands-on and classroom approaches. This training program should encompass all operator and maintenance employees and cover extensive systems training including operations and maintenance training for supervisory roles.

Once the physical implementation is completed and the new system is extensively tested, it’s go-live time.

During the implementation, it is critical to continually review the KPIs established in the planning/concept design phase to ensure you receive the maximum return on the investment you have made.

As you build expertise and experience with your new or updated DC configuration, monitoring and reviewing actual results against established KPIs, will allow the isolation of trends and the ability to react quickly to any changes or unforeseen growth to ensure that your DC continues to meet your operational, supply chain, and business goals throughout its lifetime.

Take a look at some of these DC optimization success story examples.

National Furniture Retailers Consolidate Warehousing for Operational Efficiency

Challenge: Two successful furniture retailers sought to integrate the warehousing and distribution operations at shared facilities in Sydney and Melbourne. Operations had been sub-optimal and both businesses suffered from high labor costs, low productivity, inefficient manual operating processes, low capacity utilization and inefficient material-handling methods.

Solution: To develop concept warehouse designs and built a business case for integrating warehousing and distribution operations at existing sites, the company identified the short-, medium- and long-term changes required to meet business requirements and chose facility redesigns with best practice design criteria, infrastructure and technology improvements.

Results: By employing a $900,000 capital investment and staging cost-effective solutions over a three-year period—including higher density furniture storage and handling solutions—the company increased overall capacity utilization in both facilities by 50 percent, reduced the required footprint by 40 percent and gained operating cost savings of up to $2.2 million.

Multinational Milk Producer Consolidates Cool Rooms for Improved Productivity

Challenge: A large milk producer was faced with volume expansion, lack of appropriate systems, inefficient material flows and entrenched work practices that contributed to high operating costs and low productivity levels at their major production and distribution site for a range of milk and soft dairy products.

Solution: After considering several optimization options, the company established its optimal DC layout, configuration and maximum capacity; determined which stocks could be consolidated into a main cool room; evaluated the suitability of a racking solution; established an alternative fit-for-purpose material handling option to deliver a scalable, flexible solution; and established capital requirements to achieve the optimal materials handling plan.

Results: The firm’s DC optimization approach improved one existing Robot Palletiser’s operating efficiency, increased product flows into the facility, helped determine the ongoing viability of existing drive-in racking for re-use in the reconfigured facility, and helped increase the capacity utilization of the main cool room and consolidation of soft dairy products into the facility. Operating cost savings funded $4 million in capital for the firm’s new materials handling solutions.

Chainalytics has undertaken numerous DC optimization engagements with companies spanning the consumer packaged goods (CPG), healthcare and food industries, to name a few. If you need more information on how to make your distribution center work harder for you, simply contact us using the form below.


Richard Koch is Associate Director for Chainalytics’ Logistics practice, where he supports the firm’s continued growth in the Asia-Pacific region. Richard has over 25 years of supply chain consulting experience, including facility design and engineering, outsourcing and third-party logistics and supply chain network optimization. He is also highly experienced with software evaluation and selection as well as operations management, with particular emphasis on freight and transport optimization.

 

 

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