Designing the Perfect Warehouse

Designing the perfect warehouse is an area where even angels can fear to tread. The devil is in managing myriad details, complicated by the fact that a design made in heaven is never the same for any two facilities-even within the same organization.

While the process is exhaustively detail-laden, fortunately it can be broken down into two phases—location and design—and managed by a team hand-picked to address pertinent issues. Here’s a sinfully in-depth look.

Phase 1: Location

“Start the selection process by realizing that a facility’s location performs one main function—getting a company close to its customers,” advises Terry Harris, managing partner, Chicago Consulting. “The key performance issue for a warehouse is lead time because we are an impatient society.”

Next, companies should decide whether they need a stand-alone warehouse to serve nationwide demand, or want to complement an existing network with a new facility or a replacement for another facility.

“A company with one warehouse in Atlanta, for example, would not locate another facility in Chattanooga to serve national demand. It would choose a West Coast city, or perhaps Dallas or Chicago,” says Harris.

Companies should base location decisions on the dimensions of their customer service and cost objectives. Other overall objectives may include:

  • Providing a high-service network.
  • Operating a low-cost network.
  • Designing a network that is superior to their competitors.

“Most networks are designed to minimize costs within a given service objective,” Harris explains. “One objective might be to design a network with the lowest-possible total distribution cost while delivering 90 percent of customer orders within three days, and delivering the balance within 10 days.

“Surprisingly,” Harris continues, “warehouse network designers normally ignore competitors. Smart designers who note competitors’ warehouse locations and service levels, then design a network that provides better service, gain sales and market share as a result.”

Understand Customer Service and Costs

When designing a warehouse network, it is imperative for companies to understand what they need to serve their customers. Do they need high availability levels? Short lead times? Both? Do they need warehouses close to customers? Will they increase sales if they improve service? Will they lose sales if a competitor provides better service?

“Most warehouse network designers cannot answer these questions clearly, and many don’t even ask them,” says Harris. Not understanding the role of customer service can cause a company to over-design and over-spend on its warehouse network.

Warehouse networks control and impact four primary budget areas: inbound and outbound transportation; inventory; facility costs; and labor. These costs fluctuate depending on network design, and should be accounted for carefully.

“Transportation costs decrease as a network grows because additional warehouses increase the role of inbound freight, which is more efficient than outbound freight,” he says.

“Inventory costs, on the other hand, increase as the network grows,” Harris continues. “Companies with large networks need additional inventory to overcome out-of-stocks in each warehouse.”

Facility costs are similar to inventory costs—they depend on whether inventory is concentrated in one warehouse or dispersed in several. Lastly, labor costs are incurred at each warehouse regardless of size or throughput.

These costs are inter-dependent, further complicating the network designer’s task. Companies can compensate for out-of-stocks, for instance, with additional transportation—they can send emergency shipments, or use remote warehouses.

Network designers need to understand these costs, their dependency on the warehouse network design, and on each other, when making location decisions.

Once a company has determined the general location for a facility, it must decide between an urban or rural setting.

“Say a company selects Dallas for its second warehouse,” Harris says. “Labor costs at a location 50 miles from Dallas will be dramatically lower than labor costs 20 miles away.”

Wal-Mart, for example, often locates warehouses in rural areas where labor costs are low. “They sacrifice some transportation expense but save a great deal on labor,” Harris notes.

When it comes to choosing the specific type of location, companies have many options. “Companies with very specific requirements often find a piece of property and build to suit their needs. If they have generic needs, they can buy or lease an existing building,” says Harris.

Phase 2: Design

Collecting operations data is often the first step in designing a warehouse.

“Database development is the most important part of any warehouse sizing and design process,” says Kenneth Miesemer, senior consultant with York, Pa.-based supply chain firm St. Onge Co., and current president of the Warehousing Education and Research Council.

“From that data, companies can model actual facility throughput, based on daily shipments and production/receiving cycles,” he says.

Next, they can add a safety stock number to the throughput information in order to accommodate fluctuating inventory levels. The database development effort starts with identifying exactly what needs the warehouse must satisfy.

“Examine the volume of receipts and shipments—determine how much is inbound and outbound, and the characteristics of those shipments,” advises Donald Derewecki, president of Gross & Associates, a materials handling consultancy in Woodbridge, N.J.

Companies should also assess what percent of shipments arrive by ocean container, full truckload, less-than-truckload (LTL), and package delivery. They also should consider the amount of air freight they pick up at the terminal, and how often they need to send an LTL truck to a consolidator to pick up less-than-containerload imports, Derewecki says.

Lastly, companies should determine how often they receive orders that are palletized and ready for putaway, versus shipments that need to be sorted and re-stacked. They also need to project requirements five to seven years into the future.

“Projecting inventory levels is the most difficult task associated with sizing and designing a warehouse to meet future operating requirements,” notes Miesemer.

“In most facilities, inventory is the primary space driver—companies must consider how much inventory they need to contain, and the associated pick facings needed to handle inventory,” Derewecki says.

“Profiling projected inventory as accurately as possible is key. A 20-percent deviation on a 200,000-square-foot storage area results in a 40,000-square-foot shortfall or surplus,” he explains.

“A company’s planned number of SKUs, along with the associated cube, velocity, seasonality, and inventory handling characteristics are all critical to the design. And, companies must incorporate lot number control in projected inventory profiles.”

Keep an Eye on Inbound

Inbound shipment characteristics also play a large role in warehouse design. The ideal inbound shipment? A full palletload from a pre-certified vendor, with a single SKU ready for immediate putaway.

At the other end of the spectrum, chemical or pharmaceutical materials may require lab testing before they can be accepted for putaway into inventory. This means product must be quarantined in a separate receiving area while it awaits testing.

“Warehouses may also have to handle small quantities with special lot or serial number control requirements,” Derewecki says. “One SKU containing 100 units—each with individual serial numbers—is, in effect, 100 SKUs to control. Companies in this situation must have information management systems capable of supporting that level of detail.

“The simplest outbound operations,” he adds, “may do the converse—receive a full pallet and ship a full pallet. But if shipments involve repacking into assortments, deferred customization, kitting, or other value-added services, companies will devote a lot of time to understanding those outbound requirements.”

Dock operation is another critical warehouse design factor. Dock capacity shortfalls can significantly constrain warehousing operations.

Key elements to determining the required number of docks and associated operating space include: arrival times of receiving and shipping vehicles; wait times; unloading and loading times; the number of SKUs handled; and breakdown and handling requirements.

Projected order statistics must also be factored into design.

“Because almost all business segments are experiencing a shift to small, frequent orders, projections for the number of orders per day, lines per order, and pieces per line must be calculated,” Derewecki explains.

He advises coordinating these projections with the marketing staff to account for anticipated customer needs.

Lastly, companies cannot forget security’s impact on warehouse handling and storage issues. Even if a company is not mandated by a regulatory agency to possess tight control of certain inventory, doing so is good business practice, particularly for high-value items.

Weapons manufacturers, for example, must observe tight material control requirements.

Seeing Green

One new trend impacting warehouse design is the desire to maintain environmentally friendly facilities.

“A lot of companies are interested in ‘green’ or sustainable warehouse design,” reports John Patelski, executive managing director and president, engineering and construction, for global architecture firm A. Epstein and Sons International Inc.

“Companies are considering site locations that employees can reach by public transportation and carpooling, for example,” he says.

“Other green requests include reducing the use of artificial light through skylights and clerestory windows; specifying white reflective roof material to reduce heat gain; and bringing outside air into the facility to improve indoor air quality.”

Overall, says Patelski, businesses want to make their buildings highly flexible.

“Facilities need to be easily adaptable for future requirements,” he explains. “They must have a lot size suitable for the current building footprint plus expansion. One option is to use ‘knock-out’ panels in the exterior wall to accommodate future dock positions.

Also, utility service should be sized to handle future growth, and the site should offer sufficient ground for expanded trailer parking.”

“Once companies determine their needs for a specific location, they can move on to their ‘wants,'” Derewecki explains. A public company, for example, may be willing to spend more on aesthetics to impress financial analysts and/or potential investors.

“Some firms will invest in high-tech features because they want the facility to showcase their technology and operations to customers,” he notes.

Armed with both wants and needs, companies can move to the next step: creating a process flow diagram to guide the development of potential designs. These designs must meet throughput and productivity objectives, provide the appropriate technology, and address expansion needs.

More specifically, the designs should address material flows, picking and storage modules, materials handling equipment, information systems support, building configurations, and layout.

Specifics to Consider

“Evaluate these designs to make sure they are sensible before moving on to a more detailed analysis,” Derewecki recommends. “A quick evaluation should examine ROI, or other investment criteria, as well as practicality.”

Companies may also want to develop an evaluation matrix that compares the capital and operating cost requirements associated with each layout and storage alternative.

The detailed analysis of each design possibility should consider both quantitative and qualitative aspects.

To conduct an effective quantitative analysis, a company must possess sufficient details about its operating methods and the resultant layouts. For sophisticated warehouse designs, this process may require computer simulation to evaluate productivity and throughput capacity.

If a company opts not to use simulation, thorough static testing can help determine which design best meets requirements and falls within corporate financial guidelines.

At minimum, Derewecki notes, quantitative analysis should assess these elements:

Flows. How well do materials move into, within, and out of the facility? Do bottlenecks exist in the process or layout that restrict movement or throughput?

Picking and storage modules. Do the picking modules hold enough inventory to avoid excessive replenishment? Are the storage modules appropriately sized? Special consideration must be given when lot number control is an issue.

Mobile equipment. What are the right mobile equipment types and capacities for various functional requirements? Will the equipment handle peak requirements?

Conveying and sortation equipment. Does each zone have the right equipment and capacity? Will the system satisfy design requirements?

Staffing. How many people will be required to run the operation?

Capital budgets. Does the capital budget include facility-related costs, equipment, and information systems software and hardware?

Comparative annual operating budgets. Does the operating budget include staffing, maintenance, utilities, and information systems costs?

Elements to consider when conducting a qualitative analysis include:

  • Is the design flexible? How well will the facility adapt to changing operations requirements?
  • How well does the warehouse management system work with mechanized and/or automated materials handling system components? Can those components be upgraded and/or modified at reasonable expense?
  • How difficult will the design be to implement and maintain?
  • How much training will be required at startup? Ongoing training?
  • Are the information and materials handling system components user-friendly?

Sometimes, after doing both quantitative and qualitative analyses, two alternative designs may look equally appealing on paper. But after a computer simulation, one design may emerge as the favorite.

“A computer model will illustrate a typical day in the warehouse,” Derewecki explains. “It can simulate peak activity, or run an above-peak capacity model until something breaks down, illustrating the design’s weak spots.”

Finally, he advises, companies should document the rationale for choosing one design over another. When seeking funding, it helps to have a more specific justification than “Bob and I thought it was a good idea.”

Going for the Goal

Ultimately, companies build new distribution centers for three key reasons: to increase productivity, to reduce operating costs, and/or to enhance customer service levels.

The technical and physical aspects of warehouse design vary, but one factor always rings true: a well-designed, well-operated warehouse can and should be a competitive asset—serving today and tomorrow’s distribution needs.

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