How to design a cost-effective DC

May 5, 2005
Warehouses and distribution centers are caught in a squeeze between customer service demands and cost drivers. Creating a network that can deliver on

Warehouses and distribution centers are caught in a squeeze between customer service demands and cost drivers. Creating a network that can deliver on customer demands while keeping costs in line — or lowering them— is the number one challenge facing supply chain executives, according to a recent study by ProLogis Global Solutions.

Supply chain design projects were a huge undertaking until recently, says Mike Peters, first vice president with ProLogis, a provider of distribution facilities and services. But the tools have come down in price, the usability has gotten much easier and so more companies are going through the process every couple of years instead of every five to seven years, he points out. It's not that they are making wholesale changes, but they are checking to ensure their network is the most cost-efficient for the service level they want to provide.

There is a relationship between the number of distribution points, transportation costs and customer service targets, says Mike Prince, director of supply chain consulting firm Tompkins Associates. Peters adds that network design has been driven by improvements in the transportation network. Carriers can provide better service over a larger service area.

Still, as Prince points out, any significant shift in the cost of energy affects operating costs and, especially, transportation costs. His recommendations for offsetting some of those costs include reviewing transportation arrangements.

Loading patterns should be reexamined to find ways to cube out containers and trailers. Review mode choices. Is it possible to consolidate shipments to move from parcel to less-than-truckload (LTL)? Can some current LTL shipments be combined to make greater use of truckload? Or, can more over-the-road shipments move by rail/intermodal?

In addition to efficient loading, can routing be improved? Using a transportation management system to plot distribution volumes and patterns helps by providing more dynamic routing options that respond to changing needs.

Private fleets can benefit from fuel supply programs that help control fuel cost and usage.

Efficiency inside the four walls of the distribution center (DC) has also improved, notes ProLogis' Peters. Going back just a few years, Peters points out, you wouldn't build a 300,000-squarefoot warehouse because you wouldn't be able to operate it. Now, companies can operate a million square feet or more because of improved warehouse management systems.

This, combined with the improved transportation networks, allows companies to consolidate the operations of multiple facilities into one larger distribution center. When you do the math, he continues, the trade off of inventory cost, rent, manpower and transportation for a given service level points to fewer, larger facilities.

Information systems are vital to the larger DCs, and one requirement Peters sees is increased cabling to support them. The move to more data terminals in a DC and more access via radio frequency terminals (handheld and vehicle mounted) is only one aspect of the data revolution in DCs.

Increasingly, the companies who first looked at compliance with radio frequency identification (RFID) initiatives for retail giants Wal-Mart Stores Inc. and Target Corp. are asking how they can push the benefits of greater visibility back up their own supply chain. Those firms are asking, "How do I couple that with my existing systems and my existing devices within my packaging and application environment," says Romen Kuloor, vice president of Blue Vector Systems, a provider of RFID solutions. With razorthin margins, some companies that took their first step into "slap and ship" compliance are finding they are actually losing money on each RFIDenabled shipment.

More and more stock-keeping units (SKUs) are moving under the RFID umbrella, Kuloor continues. Many of the less automated firms are going outside for RFID profiling. Larger firms face different issues since much of their process is automated — including production lines, packaging lines, etc. And some are seeing initiatives like RFID move forward at different speeds in different business units, requiring them to decide how they will deal with the RFID and other IT issues as a corporation and bridge that gap.

Kuloor identifies a problem that is larger than RFID compliance and it often shows up through the DC. Organizations implement solutions when they are driven to address certain pain points, he says. The first thing they do is dump information into a database of some kind. These databases have traditionally been structured to feed a number of different systems, but that's not a long-term architectural solution. They are losing some of the value that RFID provides in terms of real-time visibility by operating with a system designed for bar coding which collects the data and stores it in a database which they periodically draw on.

The focus of the last year and a half has been on the physical layer, says Kuloor. By that, he means the physics of RFID, understanding the environment, ambient electromagnetic noise and how it affects read rate and other characteristics of the technology.

"Companies are not deploying RFID because they like to play with readers and tags and the physical layer," he says. They need to ask, "How can I drive my own mandate and my own issues to ensure I get the data in a way that I can best use it?"

That's down the road, but in the meantime, RFID has to be addressed at the physical level in the DC, but with an eye to its place in the larger scheme of supply chain management. RFID is not at the same point as warehouse management systems, says Kuloor, where suppliers can come in and tell the user it will provide an 8% return by improving productivity in this area or that and offer a money-back guarantee, he concludes. There just aren't enough documented case histories to be able to be that specific.

One paradigm shift that is needed from the compliance mindset is to look at what RFID can do for your own internal business. For that, the DC environment, systems and processes have to come together, and experience indicates that takes top-down support, not just a bottom-up initiative.


Blue Vector Systems
ProLogis Global Solutions
Tompkins Associates
Target Corp.
Wal-Mart Stores Inc.

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