Tried and true approach to planning distribution center requirements

If you’re in a supply chain leadership position, these are only some of the more important questions you’ve probably asked yourself at some point in your career – or many times over.

Now, when it comes to requirement planning, whether for a greenfield build, a brownfield activation or even an expansion, these questions are a constant – at least they should be.

While the questions are usually always the same, when you choose to answer them and what information or data you have at your disposal when it comes time to answer them is really where the challenges are.

Before I discuss different approaches – the good, the bad, and the ugly – I want to first talk about our definition of success when it comes to the proper activation of a new site or expansion. Although you should always focus on the process, not the prize, you still need to define the prize. This is how we define success.

1. On time activation
2. On budget activation
3. Fully optimized for safety, space utilization and labor productivity and future growth

While it may seem lofty – or even greedy – to want all three of these things. With the right requirement planning process and the right tools at your disposal, I don’t see why it shouldn’t be the standard.

So, before we get into Syncontext’s approach to achieving not one, not two, but all three of the above goals, I want to quickly view some of the more common approaches to requirement planning and where they fall short.

The build-it-and-they-will-come approach.

This is when you “eyeball” it. Not necessarily a back-of-the-napkin calculation but it might as well be.

This is where you look at what you currently have and simply oversize it to try and ensure that there will be enough room for growth.

Here’s the problem: overestimating needs is not only a very efficient way to allocate precious capital but similar to Parkinson’s Law, the inventory will likely expand to fill the available space.

This is also assuming that you’ve sized the site properly for today. If you missed the mark on your existing requirements, it’s anyone’s guess how much room there is left for future growth. With warehousing space becoming more and more scarce and expensive, this arbitrary approach typically leads to a site that will not only operate inefficiently from day one, but there’s also little hope of it reaching its expected lifetime.

You may have saved a bit of money on the site itself, and maybe on the equipment, but you’ll sacrifice it all back (exponentially) over the lifetime of the building.

This approach may have worked for Kevin Costner in Field of Dreams, but steer clear when it comes to distribution center planning.

The extrapolation of requirements approach.

This is when you look at the expected sales growth – say it’s 15% – and you apply it to your available space to increase it in the same proportion.

This approach provides a more reasonable rationale; however it ignores what’s really driving the need for additional space. Is sales growth averaged out evenly over the year? Are you accounting for peaks and lulls? Is this sales increase impacting some items more than others or is it from a new variety of SKUs altogether?

As you start getting into the details and asking more questions, the approach begins to quickly break down and assumptions begin to creep in.

This overreliance on averages and assumptions could (and likely will) lead to unexpected outcomes and unwanted surprises (be it too much space or, worse, still not enough).

Tired of the unwanted surprises, delays and contentious budget meetings? Better yet, are you ready to start feeling excited about your new site activations or expansions? Use an operational data-driven approach.

Here are the fundamental steps:

Create a baseline model that is a virtual representation of your operation.

A baseline model is typically a weekly summary of active SKUs, outbound movement, inbound movement, and inventory on hand, broken down into the warehouse areas that you’re wanting to model. Ideally, you will be working with about 12 months of operational data in order to be able to evaluate the effects of seasonality on your operation and be able to plan your eventual design accordingly. Although you may need a specialized tool to help you model this data and carry it through the correct process, this raw data should be easily accessible for those with even the most rudimentary or home grown management systems.

Factor in seasonality, SKU variety growth and volume growth.

If you’re working with a full 12-months of operational data for your site, or from a representative site, you should be able to model seasonality quite easily. The benefit of working with data at this scale is ensuring that your operation can handle your seasonal peaks but also not be oversized 11 months out of the year. There’s a balance in seasonality that should not be overlooked. In addition to seasonality, having granular data at your disposal also allows you to view growth in different silos. The reality is that your SKUs don’t all grow at the same pace, and your variety is not going to be the same, even 2-3 months after the initial activation, let alone 2-3 years.

Determine your requirements by SKU based on activity, product type and optimal material handling system.

When it comes to ensuring every SKU is optimally slotted from day one, there are a lot of variables that need to be accounted for outside of just shipping volume. Storage requirements, zoning and ergonomic considerations all have to be taken into account before deciding on the most productive (or viable) material handling system. Without the right tools, this isn’t overly feasible, which is why it’s often the biggest failure point. When you don’t have data to back up what is optimal and what isn’t, experience and preference tend to lead the way – to the detriment of the design.

Aggregate the results, and compare them to your existing space (you may not need as much as you thought, or you may need more)

This is a critical step if you are planning requirements with an existing space in mind, which is often the case. In fairness, you’re not always going to find the perfect footprint for your requirements. The important thing is that you optimize within your constraints instead of letting your constraints dictate your design. Our approach is to always look at the best-case-scenario and scale back until it’s feasible. You might be surprised with the results, and how many obstacles you can overcome armed with data, experience, and a bit of creativity.

Run alternative scenarios with different types of material handling equipment and technology.

Don’t settle for the single-scenario approach. The reality is, no one uses the very first scenario they come up with unless it’s not feasible to explore more. To quote an old cliché in carpentry: measure twice, cut once. Except don’t stop at just twice, measure until you find the scenario that fits your ultimate goal, whatever that may be.

When you can model different scenarios and quantify the expected results of each, you can model the effects of different material handling options on:

1. Implementation complexity
2. Process complexity
3. Overall capital expenditure
4. Labor productivity – inbound / outbound, etc.
5. Capacity utilization
6. Growth

Not to mention being able to finally answer those previously hypothetical what if questions:

1. What’s the expected return of adding an ASRS?
2. Can we get rid of those case flow racks and still have enough pick fronts?
3. Can we add another year onto our building if we get a bit creative?

Execute your final design based on your conceptual work

Last, but certainly not least, it’s critical to ensure that you’re final design and eventually implementation is based fully – and backed up by – your conceptual requirement planning work. This sounds like an obvious step but we need to call it out because, unfortunately, it’s often either fully missed or abbreviated to the point where the conceptual work is watered down or irrelevant by the time it makes it through to the implementation.

We’ll say it once again, having the right tools in your toolbox is a must, especially at this stage where if you don’t execute properly, not only will your implementation be flawed but you will have wasted all the requirement planning time and resources over the previous year – these things are not planned over night.

This is why relevant data and consistency in your planning process is paramount. Any assumptions or guestimates made during the planning process will come out when the rubber hits the road (or, more appropriately, when you items hit the racks.

I’ve mentioned it once already and I’ll mention it again, focus on the process instead of the prize.

Aside from this tried and tested process, we’d be lying if we said we didn’t have a secret weapon at our disposal when we carry our requirement planning and implementation projects. The good news is, if you’re more of a DIY type of leader, you can add this secret weapon to your repertoire as well.

Ask us for a demo of our fulfillment optimization system – SKUStream – today!

No expansions or site activations on the immediate horizon, but want to make sure your existing sites are optimized and waste free? A no-obligation Strategic Opportunity Assessment is a great place to start.

Take the lead!