The Value of Flexibility in DC Networks

In the past I have written about the value of flexibility as a driver for what type of material handling you select for your warehouse. I’ve pointed out that companies that implement highly-automated warehouses are very focused on driving down fulfillment costs to the maximum extent possible, although the payback period is often five years or longer. These solutions also present higher risks. Companies often have to make multi-year assumptions about volume growth and order profiles.

Further, in the case of a retailer with highly-automated distribution centers (DCs), each DC replenishes a number of stores. However, stores are always closing and opening, mergers are common, and shifting demand patterns – too many stores in a DC service area, or too few – can lead warehouse cost savings from automation to be eaten up by increasing costs in other areas.

Based on these facts, I’ve argued that a new generation of more flexible automation offers a lower risk profile. These flexible solutions now include things like robots that bring goods to a worker station, much more intelligent Automatic Guided Vehicles, and forklifts with real time location systems that do not need drivers.

Historically, Third Party Logistics (3PLs) companies did not purchase expensive automation unless a customer was willing to commit to a multi-year deal. For highly-automated warehouses, a commitment of ten years or more might be needed. Now, with more flexible automation systems, which can be put in a truck and moved to another location at the end of a deal, it makes sense for 3PLs to begin investing in these newer forms of automation. Quiet Logistics is a startup whose e-fulfillment warehousing is premised on goods-to-man robots. Ryder, an ARC client, uses voice picking technologies. And GENCO has publicly touted its work with forklifts equipped with real-time location systems.

But this idea of flexibility is more broadly applicable to DCs. I recently read a white paper from Ryder titled “Outsourcing Distribution Centers Offers More Flexibility, Less Risk.” Companies that are engaged in global sourcing may find that the optimum location to source from – e.g., China versus Vietnam versus Mexico – may change every few years based on a nation’s wage inflation, the cost of fuel, and political risks.

Further, as previously mentioned, the optimal location of DCs is premised on where demand comes from, and regional demand can shift over time. Finally, port logic needs to play into this as well. The Panama Canal is undergoing an expansion project that is expected to be completed in 2014. This will allow much larger ships to move through its locks, and a significantly larger percentage of freight is forecasted to move from Asia to the East Coast via the Panama Canal.

So, let’s say you are a retailer doing $250 million worth of business in North America. You operate two distribution centers, one of them in southern California that receives freight from the port of Guangzhou in China and serves the West Coast. Your other DC is in Chicago and it receives freight via intermodal from the West Coast but serves the East Coast.

What if rising wages in south coastal China lead to more costly goods and you wants to start sourcing from inland, northern China and thus ship out of the port of Tianjin? Your southern California DC is no longer optimally located to reduce transportation costs. Perhaps having a DC near Tacoma, Washington becomes a better option.

Then the Panama Canal opens. It might now be more optimal to have a DC closer to the East Coast instead of Chicago.

Plausible future scenarios that could affect optimal DC placement include: it becomes cheaper to source from Vietnam than any location in China; global warming makes the Northwest Passage feasible in the warm months; surging fuel prices make near-sourcing in Mexico desirable; or the opposite, increasing drug violence in Mexico makes near-sourcing too dangerous; and, of course, many other scenarios that no one is prescient enough to even consider today.

Flexibility matters more for smaller companies. A company with 15 DCs across the US has less to worry about than a company with only 2 DCs. There is enough regional coverage in a big network that these kinds of changes have a smaller impact.

But for many companies, outsourcing warehousing to a competent 3PL will be the path to achieving flexibility. And increasingly, low-cost warehousing will depend on increased usage of flexible material handling.

In the age of global outsourcing, flexibility is strategic.

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