Smart shippers need every ounce of help in today’s rising rate environment. Choosing the right warehouse network keeps you in the game and beats the competition.
Warehouse networks are collections of physical buildings that hold inventory while distributing products to and from customers. In the past these buildings had a large “storage” role, with substantial piles of inventory. Today’s distribution warehouses are much leaner, focusing on item velocity, throughput, and customer service.
All warehouses need a mission or guiding purpose. Some common purposes can be delivering customer orders, supplying other warehouses, supporting specific sales channels, performing emergency roles, handling returns, or combinations of the above. Involving key stakeholders (sales, marketing, finance, operations) early in the process determines what’s in and out of scope.
Warehouses networks range physically in size from million-plus square foot facilities down to smaller retail stores. Warehouses can be operated by a third party (3PL), leased, or owned. At a minimum, you need at least one. Having more than one location allows for diversification, customization, decreased transit time, and reduced cost.
Your warehouse network is the most important decision you have control over. It establishes a value proposition to customers based on the service you provide and the associated cost structure.
Service to customers is defined by the time from when the customer orders to when the order is delivered complete. It can range from minutes to months.
Lack of internal understanding of the role service plays in your business is dangerous when designing warehouse networks. If your service time is too long, customers will shop elsewhere. Conversely, over- servicing your customers may make you uneconomical in a competitively priced environment.
Cost is another important dimension to consider. While everyone wants to drive costs to zero, it is important to understand the competitive landscape you operate in. Talk internally with stakeholders to understand the level of customer service needed to capture new customers and retain existing ones.
Warehouse networks control four primary costs. The magnitude of these costs from largest (1) to smallest (4) are:
1. Transportation Costs – Inbound and Outbound
2. Warehouse Labor and Supervision
3. Inventory Costs
4. Warehouse Facility Costs
Large (20%-40%) total cost opportunities exist between companies that have optimized their warehouse networks and those who have let their networks grow haphazardly.
When to Design a Warehouse Network
Warehouse networks are dynamic creatures that flex with the environment they serve. Letting your warehouse network stagnate deteriorates performance to key customers and fails to provide cost containment in the marketplace.
At a minimum, you should evaluate your warehouse network annually. This planning process often coincides or follows shortly after budget planning, key sales meetings, and notifications of carrier price increases.
There are also other urgent events (Fig 1) that may force you to evaluate your network on a more ad-hoc basis.
Annual Sales Meeting
New Large Customer(s)
• Decrease Cost
• Improve Service
How to Design a Warehouse Network
Designing a warehouse network starts with the big picture and the long term. There are key questions that need answering to arrive at an optimal solution. These include:
· How many warehouses to have
· Where they should be located
· How big they should be
· What should be stored in them
· What is their Mission (central, regional, returns, slow-moving, and so on)
· What Cost and Service is expected
There is no one-size fits all network. Warehouses networks need personalization in two dimensions: The baseline (shipment profile and costs) pattern you incorporate to model your business and the ensuing management discussion (what should we do) around the analysis.
All warehouse networks designs start with a shipment pattern. This pattern can be where your historical shipments were delivered to, your expected forecasted shipments, demographic patterns (US population, high income zips, etc.) or combinations of the above. Using this shipment pattern in the model allows optimization around the time it takes to deliver a package to customers.
Adding in the costs of the current network allows savings benchmarking of a proposed network versus the current. Costs typically include inbound and outbound transportation, costs to process the order, and warehouse overhead costs.
Costs depend greatly on the network design and should be accounted for carefully. Adding in cost elements often changes the locations of warehouses and the resulting territories.
It is impossible to separate a warehouse network from its transportation partners. Having tens of warehouses in strategic locations means nothing if product can’t be quickly transported to end customers. Likewise, it is expensive to ship parcels via air from a single warehouse to satisfy time-definite customers. Knowing your carrier capabilities and costs is a crucial first step.
Transportation costs typically decrease as the network adds more warehouses. This is because there is more efficient inbound freight (via Container, LTL, or TL) and decreased distance travelled for expensive parcel freight.
Labor costs (workers actually handling the orders) tends to be constant function of a company’s total throughput. Fewer warehouses mean more employees at each facility while increased warehouses mean fewer employees. One caveat is that larger facilities may be able to justify increased automation that reduces headcount, but this is offset by the associated spend on technology.
Inventory and facility costs, on the other hand, increase as the network grows. Typically, supervision and management costs are incurred at each warehouse regardless of its size or throughput.
To complicate the network designer’s task, these costs are interdependent. Low inventory availability, causing out-of-stocks, can be compensated for with additional emergency shipments from more remote warehouses.
Adding together transportation, inventory, labor, and facility costs allows us to understand the total cost of a proposed network. This allows an apples-to-apples comparison of possible choices. The network designer needs to understand and optimize this total cost, not just one component.
Network Modeling requires analytics to evaluate alternatives and arrive at the optimal solution. There are two fundamental differences in systems that design warehouse networks. Some are “cost calculators” and some are “optimizers.” Cost calculators merely report the results of an alternative that you input. Optimizers find the best alternative among many.
For instance, if you wanted to test placing five warehouses in 100 possible cities, you’d have to make 75,287,520 evaluations. This is difficult in a cost calculator but can performed by a good optimizer in seconds.
The final and most valuable part of a warehouse network analysis is the discussion around what to do. Once you have established a cost and service baseline, it is time to let the optimization begin. This is a participatory step where many different options should be evaluated quickly, prioritized, and presented for discussion. Done properly, this step should spur additional “what if” runs and scenarios.
Each network option should summarize important metrics. Some common ones include: total cost (inbound, outbound, inventory, etc.) detail and summary, weighted average zone, percentage of packages delivered (same-day, 1-day, 2-Day, etc.), facility throughput, and logical geographic territories.
Finalist networks should be portrayed graphically with key customer locations identified. Changes in routing should have the impact (savings or cost, service times) identified. This allows sales the opportunity to identify any critical messaging that needs to be done.
By involving key stakeholders (sales, marketing, finance, and operations) in a quantified process, you have built credible buy-in that the eventual solution is personalized enough to handle the rigors of the business and balances important tradeoffs between cost and service. You now have your best warehouse network.
Jeff Haushalter is a Partner at Chicago Consulting. He designs supply chains for manufacturers, distributors, and retailers that reduce cost and improve service. His e-mail is email@example.com.
This article originally appeared in the November/December, 2022 issue of PARCEL.