The need to support increasing shipping demands is a pressing one. Often it creates a sense of urgency that convinces a company to invest quickly in the infrastructure needed to do so. But taking the time to figure out where and how to invest in adding capacity is important and prevents premature decisions that threaten to morph into budget black holes.
Let’s start with the basics.
The Basics of DC Capacity
Distribution center (DC) capacity can be broken into two categories: storage capacity and throughput capacity. Storage requirements are based on the breadth of the product line (the number of unique stock-keeping units or SKUs) and the volume of inventory stored in units, cartons or pallets. Throughput requirement is usually measured in units or orders shipped per day or week.
Evaluating Existing Capacity
The first question to consider is whether your capacity limitation is either storage, throughput or both. From there you can determine how best to improve your current operations to meet peak storage or throughput requirements. Although supply chain management can’t typically dictate the number of SKUs available for shipping, the amount of inventory to be stored or the daily/weekly shipping profiles, they can take advantage of the opportunities by choosing how they respond to these factors. Below are some questions to ask when evaluating whether your current operations can be improved.
- Is your storage equipment space sufficient? Can it be made more efficient?
- Do you utilize the full height of your facilities?
- Do you have the right mix of storage types?
- Are slow-moving, dated SKUs moved out of the main storage areas to provide capacity for current items?
- Is off-site storage a feasible option?
- Does your weekly/daily shift schedule and staffing approach provide enough capacity?
- Can the shift schedule or labor staffing approach be changed to provide the needed capacity?
- Are the operations productive enough and does product flow efficiently through the facility?
- Can new processes, equipment or technologies add the necessary capacity and if so, would these be prudent investments in your current operations?
- Can a mezzanine be added or expanded to provide needed processing space?
When You Outgrow Existing Capacity
If your business is growing beyond your ability to improve existing capacity, then the question becomes “How do I handle growth?” If your current facilities can be expanded, should you do so? Or do you add a new facility? If neither of those sounds feasible to do on your own, you also have the option of bypassing your facilities with a portion of your merchandise or outsourcing to a 3PL.
Related: 9 Questions to Ask When Planning a New Distribution Center
Bypassing Your Facilities
Common tactics for bypassing facilities include having a business partner to drop-ship some of the product lines that they provide or to have some shipments (usually container-load quantities) bypass your network altogether and flow directly to your customer. Depending on the breadth of your product mix, it may make sense to displace the slow-moving items in the product mix to a centralized location, while keeping core inventory items in distributed regional locations.
Outsourcing to a 3PL
If your best option is to add another distribution center but you aren’t currently capable of operating yourself, it could make sense to outsource to a 3PL instead. You have many considerations to weigh regarding a 3PL, but the decision often boils down to a trade-off between operating costs, capital costs, speed of implementation and degree of control.
Most business must decide whether it is worth paying a premium (in terms of cost per unit, cost per order, per pallet, etc.) for a 3PL to operate a portion of their network as compared to the capital investment, startup effort, labor management and risk that would incur to provide the needed capacity as quickly and in the same location that a third party could.
Typically a large company with a strong supply chain team will opt to run their own distribution operations in-house. However, there can be compelling reasons to utilize a 3PL, either to a large or small extent. Common reasons for leveraging a 3PL include: fast startup needed in a new region, starting up an operation in a different country without local management expertise, off-loading select volume to ease capacity constraints or running a temporary operation to supplement peak season capacity.
Whatever route you go in as you celebrate your business growth, remember, this is a good problem to have!
Although business growth and resulting capacity issues can be difficult to figure out, we know that it only represents a small slice of everything in your network strategy pie that keeps the whole operation running. When it comes to the overall network strategy, you have so many different data points to consider.
To help with each of those, we recently put together an eBook examining and explaining a few of the common scenarios that businesses face when considering network strategy. Plus, each scenario is followed up by advice and real-world examples of how you can optimize your network within the given scenario. To learn more, download the resource.