June 2010 | Case Studies | DC Solutions

Mapping Distribution to Demand

Tags: Warehousing

For a fictional company looking to expand its franchise nationally, DC network optimization is a measure of real success.

Proximity to demand is a priority for any warehouse network. But it's not the only consideration. "The X-factor is cost, in terms of transportation, warehousing, and inventory," says Terry Harris, managing partner, Chicago Consulting, a supply chain strategy company located in the Windy City.

As businesses grow and contract, responding to internal demand pulses and external market impulses, distribution networks need to flex. Strategies can be reactive, consolidating redundant facilities; or they may be aggressive, targeting new areas to grow into. For businesses large and small, DC network optimization is a constant evaluation process, exploring opportunities to invest in new facilities and partner with third-party logistics providers to scale capacity with fluctuating demand.

"IMAGINING" DC PROBABILITY

When Beans and Brews—a fictional company—decides to expand its franchise presence nationally, it considers how it might adapt its existing distribution footprint.

The company has a unique brand. It makes and sells its own burrito and coffee products. Beans and Brews began with two small mom-and-pop shops in Albuquerque, N.M., then nurtured a cult following by opening burrito cafes in Dallas and Minneapolis. Today it's the local's Chipotle—with less chrome, more charm, and a double shot of caffeine to go with its special green chile recipe. The company wants to leverage that appeal, and an expanding U.S. Latino population, to grow its national footprint eastward.

Beans and Brews' business is a good example of a demand pattern and distribution dynamic that is different than the total population, explains Harris. Its existing DC network includes three small, leased warehouses in Albuquerque, Dallas, and Minneapolis—each supporting restaurants in those cities.

The company has a regional presence but sees an opportunity to grow sales nationally. It's looking to open franchises in the Northeast and Southeast and expand from there. Success will be partly contingent on re-working its distribution network, re-tasking facilities, and making sure its supply chain can support franchise expansion.

DIGGING INTO SITE SELECTION DECISIONS

Beans and Brews' predicament is not an uncommon scenario for U.S. businesses. Warehouse network optimization is a fluid process that mimics shifts in supply and consumption, as well as changes in distribution strategies. New questions and criteria arise, especially for smaller enterprises that grow up conservatively and keep operations close to the vest.

The first consideration is looking at the existing network and discerning how many facilities and where, says Harris. Once companies make these determinations, they can begin looking at a facility's function, mission, specific locations, and more granular level detail that includes outsourcing, leasing, and ownership options.

"The normal progression is design the network first, then tackle 3PL/ownership details," he says.

To meet its growth objectives, Beans and Brews identifies Chicago as a possible alternative to Minneapolis if it decides to relocate. Northern New Jersey could serve as an ideal stepping-stone into the Northeast; and in the south, Atlanta is a gateway into a booming consumer region.

Identifying primary areas where it might like to locate new franchises opens up the decision-making process. Beans and Brews can begin to hone in on specific localities that are better fits, as well as the types of warehouses it wants to operate.

"The first cut is location analysis, looking at places within a 50-mile radius of Chicago, Atlanta, and New Jersey," says Harris. "Within that circle is a labor cost gradient. Companies may go rural to save on labor, sacrificing on transportation. Walmart is a good example of a company that uses this strategy."

For example, in the Northeast, New Jersey is a tough area to do business, says Harris. Congestion and cost are issues. But eastern Pennsylvania and the Lehigh Valley—which has a strong presence in the dry goods sector—is a good alternative. Beans and Brews makes that rural/suburban determination, opting to locate near Scranton. The company decides to work with a developer to build a DC, own it, and lease out additional space. This gives the chain real estate equity and flexibility to expand.

In the Midwest, Beans and Brews decides to move its Minneapolis distribution facility to Chicago. It re-tasks the facility to manage frozen food inventory in the network. Because this requires more investment than a dry box operation, as well as transportation coordination among its hub-and-spoke network of DCs and franchises, it outsources management of the new facility to a third-party logistics provider located along Route 55 in Bollingbrook, Ill.

Locating facilities that can support satisfactory lead times and are still close to the consuming population is important. Sales can dictate the need for opening a new warehouse; but an optimal location can also produce sales. Beans and Brews recognizes this potential in the Atlanta market. The area is so sensitive to demand, and the resources are there to be equally responsive, that it decides to lease a facility in Gainesville with excess capacity, anticipating that business in the region will support future growth.

"You may be able to generate more sales in a warehouse that also saves you money. Adding sales at the gross margin level, rather than the net margin level, is huge," says Harris.

Back home in Albuquerque, Beans and Brews plans to preserve its operational and administrative presence. But because its business is increasingly population-driven, and the Las Vegas area is one of the fastest growing areas in the United States, it moves its DC there to support expected growth.

OPTIMIZING BEYOND THE BOX

As with any network optimization project, large or small, strategic planning helps facilitate the phased roll-out. Companies have an abundance of resources to leverage, from supply chain design experts such as Chicago Consulting to local 3PLs, carriers, and customers. Perspective is important, as is due diligence.

And optimization doesn't remain static. Once the network is redesigned, Beans and Brews can begin looking at how to drive greater transport efficiency and economy, leveraging third-party partnerships, pooling shipments, and consolidating LTL moves.

Beans and Brews' storied growth may be a figment of the imagination. But the challenges companies tackle as they adapt their DC networks are real.