Be the Calm amidst Business Storms

June 1, 2011
Distribution professionals must be ready for business expansions and contractions. The right kind of plan enables quick implementation for the present and readiness for the future.

Business is good. Business is bad. As warehousing and distribution professionals we are used to those ups and downs. We react and make a plan. We move on. The short-term plan is to add or reduce headcount. As plans go, it’s not a bad start, but what if the trend continues and you need to make further adjustments? Can your infrastructure support or adjust to a long term change?

It’s the long-term planning that sets the world-class operations apart from the norm. When you ask anyone in distribution about their plans, they’ll tell you about the wall they can blow out to add some more capacity, or they’ll tell you about some system improvement or new software that is coming online. Not many of them will have a plan to deal with downsizing an operation. Why should they? As managers we’re expected to grow the company and help it remain profitable.

But as managers, we also have to be prepared for the worst. Who planned for the dot-com bust or the 2008/2009 meltdown? What do you do when your market changes? Are you going to be stuck with having to make a system designed for parcel shipments function in a full pallet environment? How do you plan for these changes?

One way to prepare for any market fluctuation is to have a good base system. This allows you to make planned adjustments to meet an ever changing market.

The rule of thumb when designing a distribution center is to buy land for your ten-year forecast, build the building for your five-year forecast, and equip it for your three-year plan. At the end of two years, look at your market. Has it changed? Did you meet or miss your forecast? Are your products the same or have they changed? What do you need for the next two- or three-year period?

With the additional two to three years of history, you can make a better guess at how to equip or modify your system for the next three years. The economy is changing for a number of reasons and the models that worked in the past are not going to work going forward. Your crystal ball should be good for two to three years, but it will be really fuzzy when looking out ten years into the future.

Plan considerations

So, how do you maintain an efficient warehouse while working in a changing business climate? Planning for growth is fairly easy; you’ve been doing it for years. The trick is to not fall into the trap that what happened in the past is what is going to happen in the future. You need to be a part of your company’s business plan and be in tune with pending changes.

• Are you going to increase the number of product lines? If so, how will it affect the distribution center? Will you need more small part pick locations or carton pick? Are the new items similar in handling characteristics to your present product lines?

• Are you targeting a different market and moving from a B2B model to a B2C? Will this increase the number of parcel shipments and can the system handle the change?

• Are you changing your distribution model from a centralized distribution to regional distribution? This will affect storage equipment requirements, picking, packing and shipping. The depth of inventory will be reduced which will require less back-stock and secondary locations. The breadth of inventory won’t change and the number of forward pick locations should remain the same.

• Is there a merger or acquisition in the future? This opens up a whole different can of worms. Will you be gaining or losing work? Is it a new customer base or do they overlap? Do the new product lines complement each other, are they new, or do they compete? These can have a dramatic effect on space and equipment. Being brought in early in the due diligence process can result in a smoother transition. Are you “inheriting” equipment or systems as part of the merger?

Seasonal changes

Slowdowns aren’t always due to the market. A planned slowdown may be due to seasonal demands. If you are a Christmas retailer, your capacity needs vary throughout the year and by the type of capacity that you need. Early in the cycle you need space to build inventory. This can be floor bulk, drive-in, or pallet rack. Drive-in rack works well when you have large quantities of a few SKUs.

Another option is short term leased space. This option keeps you flexible from year to year and avoids equipment costs or an expansion for space that may be utilized less than 50% of the time. As the season progresses, the need for selective pallet space increases as stock orders are picked and shipped. Selective pallet rack allows full case picking of material for the initial orders.

Finally, the need shifts to forward pick locations for replenishment orders as the season comes to an end. The swing in the number of locations needed for in-season versus out-of-season can be so dramatic that entire pick modules or zones are used only for seasonal picking and sit vacant the balance of the year.

Flexible material handling

Planning for change in your distribution network is difficult in the best of times. Depending on the volatility of your market or product lines, you may opt to implement a flexible material handling system in lieu of specialized equipment. If your order and product profiles aren’t changing over time, then invest in the specialized equipment that maximizes your investment. But if your market changes from shipping hockey pucks to shipping hockey sticks, then that tilt tray sorter you are planning to put in has just become a detriment.

One way to increase flexibility in your material handling system is to invest in the tools to support your hardware. In the past, warehouse design focused on space, storage media and equipment such as lift trucks, conveyors, mezzanines, etc. Now, the application of software and other systems such as pick-to-voice can dramatically change a simple design into a dynamic operation. Rather than investing in specialized equipment to increase operating efficiency in the warehouse, consider investing in the tools to increase flexibility.

One thing is certain, and that is that change is inevitable and with the internet and constant communications, that change is happening faster all the time. Do you want a system that is very efficient in a niche market or one that is efficient and can meet the next challenge with little or no rework? The ROI on either system is similar. The high equipment cost and greater efficiency is offset by a lower investment and slightly less efficiency. The difference is in the long term if changes need to be made to meet new or changing business.

In sync with corporate

Changes that you need to plan for are not always market driven. Many of them can be due to corporate directives or plans. For example, in order to increase margins a company may decide to eliminate the non-profitable, trouble accounts and replace them with high-margin business. As part of this strategy you should review your material handling system. Does it efficiently support the market you are targeting? If not, take the initial lull in business to modify the parts that need updating. This should result in a leaner operation with increased customer satisfaction. As the customer base is once again increased, the new customers will benefit from the improvements while your operation stays lean due to your planning.

Looking forward in distribution isn’t always about growth. There are many instances that may require a reduction in capacity or footprint. Today’s distribution professionals need to be aware of both possibilities and have a plan to deal with them. The plans should be broad enough in scope and look out far enough so that the implementation can proceed quickly and in a well-thought-out manner. The worst thing that can happen is to be caught off-guard and to have to implement a reactionary plan. These plans end up being more costly to implement down the road when you have to fix them.

Take the time and look at a few what-if scenarios. It will help in the long term and you might even get an idea to implement now.

Don Kuzma is an industry analyst based in Cleveland who specializes in distribution center design and management. He can be reached at [email protected].

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