Expanding Your Fulfillment Network: 4 Experts Weigh In

Moderator:

Brian Barry, President, F. Curtis Barry & Company

Panelists:

• George Wade, Business Process Specialist, Crutchfield Corporation
• Mike Lucas, Vice President of Distribution, Cleaner’s Supply
• Adrian Grigg, Senior Vice President of Commercial, Flexe

Below is the transcript from the session. Copy has been revised for brevity and clarity.

Brian Barry:

I’d like to thank everybody for joining us today. I'm Brian Barry, President of F. Curtis Barry & Company. This year, we celebrate 34 years of working with multi-channel companies—everything from distribution strategies to layout design. Now, over to our panelists to introduce themselves.

George Wade:

Hi, I'm George Wade. I'm a Business Process Specialist with Crutchfield Corporation. If you're not familiar with us, we are a direct-to-consumer marketer of consumer electronics, pro-audio, and car audio, and we've been in business for 45 years. We manage same-day shipping and we pride ourselves on providing an outstanding customer experience.

Mike Lucas:

I'm Mike Lucas, Vice President of Distribution for Cleaner's Supply. We are the world's largest supplier of dry cleaning and tailoring products. I have two distribution centers (DCs) right now, one on the East Coast in Conklin, New York, and our satellite distribution center is in Reno, Nevada. Currently, we're contemplating a third distribution center.

Adrian Grigg:

I’m Adrian Grigg, Vice President of Business Development at Flexe. I lead our sales, client success, and account management teams. Flexe is a technology company based in Seattle, Washington. We've built the largest network of on-demand warehousing services. We’re a marketplace business, supporting retailers and warehouse providers.

Brian:

Today, we're going to talk about what factors go into a multi-distribution center strategy, the critical data aspects that George, Mike, and others look for, and then what solutions are available.

We have three panelists with three different perspectives. My background is on the consulting side. George, with Crutchfield, is contemplating whether or not multiple distribution centers are right for them. Mike, who is already using multi-distribution centers, is contemplating a third. And then, Adrian brings a totally different perspective with on-demand warehousing and fulfillment as an option.

At a high level, what's driving fulfillment network expansion? According to NRF, in January of this year, 75% of U.S. consumers expect free shipping. Meanwhile, 88% of baby boomers expect free shipping, whereas millennials are only at 61%. More and more, we're seeing retailers strive for that two-day transit timeline. In turn, that impacts where distribution centers are located and decisions about freight.

Again from NRF, 65% of consumers look up freight before adding something to their cart, and 39% expect two-day shipping to be free. These are the consumer expectations impacting logistics strategies. Roughly 29% of people have dropped a purchase because free, two-day shipping wasn't offered. These are real decisions that people are making that impact everything that we do.

As we think about DC expansion, we must ask, "What does it cost us to open another distribution center?" There's labor, there's real estate, and there's transportation analysis. On the labor side, The Bureau of Labor Statistics tells us that working population costs tend to lag on wage rate. On the real estate side, we look at LoopNet, CBRE, and JLL as broker networks to help us understand market rates in key areas. Adrian, from your perspective and helping people think through cost, Flexe provides an alternative solution.

Adrian:

Absolutely. Many of you probably know that the real estate market right now is definitely a lessor's market. At Flexe, we're tapping into capacity that's already under lease, but is underutilized. So in many ways, we can bring a new set of real estate and warehousing capacity to bear. But just like many of the clients and retailers in the room, we feel the squeeze from what’s happening in the various real estate markets. You have to consider local lease rates because it's a major factor that plays into the decision about where we stand up a DC.

Brian:

Mike, from your perspective, as Cleaner's Supply contemplates a third DC, what are the major factors and data points that you are considering?

Mike:

The number one thing we look at is sales. Looking at our sales by time in transit, we saw a significant increase in sales with one and two-day delivery optionality. The other point we looked at is freight savings. It's very expensive to open multiple DCs. You must overcome that expense with freight. So we look at how many customers are in different zones and the average weight of our orders.

Brian:

George, what are the major drivers at Crutchfield as you evaluate your options?

George:

Well, we plan to grow. And we are pushing the boundaries of our current distribution network. The landscape changed for retail last year when the Supreme Court decided that internet retailers are required to collect sales tax, even if the merchant doesn’t have a physical presence there. We can consider expanding now because we’re no longer going to break the bank paying sales tax. We're looking at more space, we're looking at shorter time in transit, and we're looking at better experiences for the customer.

Brian:

Mike, as you consider opening a third DC, what are some examples of internal pushback or resistance to the expansion?

Mike:

The pushback usually comes from the bean counters. They analyze all the costs and the shipping. Honestly, we're over capacity in both of our DCs so pushback has not been high.

Brian:

George, where do you experience resistance internally?

George:

We build all of our software internally. It's the way the company started 40 years ago and we've continued that tradition. Our warehouse management system (WMS) does not accommodate multiple warehouses at this point. So it's a major IT project and an added dimension of cost that other companies might not have to consider when contemplating a second distribution center. The pushback is both financial and, from an IT resource standpoint, how can we expand AND keep the rest of the company running?

Brian:

Mike, can you talk about your team’s transportation analysis and what to think about from a carrier perspective?

Mike:

We looked at the last 12 months of our shipping data by order—the weight, the cost, and the service level. Then, we look at the positive impact of potential locations and ask:

• What are our freight savings?
• What is our time in transit by customer now?
• What's our potential for increased sales?
• What percentage of our customers are served by each distribution center?
• How much capacity can we move without having to expand our current distribution centers?

Again, capacity is a big deciding factor for us right now.

Brian:

Adrian, when you work through distribution center strategies with Flexe clients, where do you see the biggest challenges in multi-DC environments?

Adrian:

We recognize that when our clients expand from one to two or more warehouses, it's a huge leap. There are a number of factors to weigh. In addition to inventory and systems being a challenge, execution is also difficult because it's a massive fixed cost. Whether you do it yourself—which is probably the most capital- and time-intensive way to do it—or you go to a 3PL, there's still a large CapEx burden that changes the fundamental economic construct of opening a new facility. Also, it alters the unit economics of their goods and sales.

Brian:

Right, not everybody has the right systems in place to support multi-DCs. George hit on that a little bit earlier at Crutchfield, a major part of the decision involved staffing. One of my clients works with three staffing agencies, and for every 20 or so temporary agents they bring in, maybe one person will still be there at the end of the week. So when they had a sudden need to hire 25 people at one time to staff a new DC, they struggled to find enough eligible candidates.

Then there’s inventory management. When people move from that first DC to a second DC, there's typically 30-40% more inventory because of carrying cost related to safety stock. It's not just simply "I carve out 30% of the transactions, therefore, 30% of the inventory goes with it." How many people actually took that attempt and found out the hard way that it doesn't work? A few, yeah. Inventory management is a significant challenge. It's not uncommon for us to see people that have 25% of their inventory dollars as excess or significantly aged. That just chews up space. That's carrying costs. There are so many different problems with that. But when you move to a multiple-DC model, that situation is further exasperated. You need good systems and good people, and you also need to account for purchasing swings.

Adrian, that relates to Flexe's business and how you work with clients that need flexible space due to seasonality.

Adrian:

Yes, we call that use case a supply chain disruption. It could be an advantageous buy that drives inventory swing, an inventory spike, seasonality, or that the outbound demand side isn't talking to the merchandising and purchasing side. There are a number of different reasons that might drive a company to have too much inventory at any period of time, which might create inventory overflow.

Brian:

Mike, from a staffing perspective, how did you maintain the Cleaner's Supply culture at both New York and Reno and address the related staffing challenges?

Mike:

It can be a nightmare, especially where we are across the country on the West Coast in Reno. The employment pool is so lean right now. As far as keeping the culture, it's important that you have somebody in place in your company that is able to travel to your various locations and spend time working side-by-side with the managers and hourly workers—your replenishers and receivers. I spend 4-6 weeks in Reno every year just reinforcing our culture. It can be challenging, especially in the beginning, but you have to invest the time.

Brian:

You make a good point—finding the right individual that will manage that facility with the company's culture in mind can be tough. I think people try to hire someone to get the operation up and running for a month or two and learn the culture along the way. But it’s difficult to learn any culture in 60 days. Other people try to develop internally and think that they can transition that person to the new location. But there are a fair number of times where people really struggle to make that happen. You can have the best systems in place, the best purchasing, the best facility, and you can go to ProMat this week and buy any type of robotics you want. But if you don’t have the right people, the rest won’t matter.

A client once told me, "Fulfillment is easy. It's people that screw it up." Having really good leadership is critical. Adrian, is labor something that impacts your business at Flexe?

Adrian:

Certainly, there are always market dynamics in play. It depends on where in the world you're contemplating standing up the facility, what the current dynamics of that labor market are, and how demanding the nature of your projects and your business is. We tend to buffer our clients from the impacts of labor constraints by virtue of our commercial model, so the pricing is purely transactional. As a client, you're shielded from those dynamics and the onus of managing labor falls on the operator that you employ to manage a project for your business.

But, there’s another variable to weigh in the decision-making process. For example, if you're trying to stand up a DC in Reno in Q4, that's extremely challenging. It's one of the tightest labor markets in the country, and it’s peak season. It's a challenge we’ve tackled in the past for our clients and another benefit of the on-demand warehousing model.

Brian:

Yes, I think it takes careful coordination between marketing, purchasing, and fulfillment. Mike, your team is responsible for where you put the inventory. Purchasing might make their own independent decisions, and that can lead to overcapacity in your facilities, right?

Mike:

We're definitely familiar with the purchaser swing at Crutchfield.

Brian:

When you talk about a “purchasing surprise”, how much inventory are we factoring in? One or two tractor loads?

Mike:

It's more like, here are 1,000, 55-inch TVs that we didn't know were coming, and by the way they're already on the dock. That's an exaggeration, but you get my point. We generally have a pretty good idea of what's coming in, but it could be only a week before it arrives. So it's a big surprise, and then the team has to strategize how to move existing pallets and where to place the new inventory.

Brian:

Part of the challenge is managing inventory across two different buildings. How do you manage slotting, staffing, and inventory management at both locations?

Mike:

It’s important to have redundant managers. At one point, I only had two managers—one was on vacation and the other one caught the flu. We literally had to shut the doors in the DC for the day because we didn’t have a backup manager. It's very important to have redundancy.

Slotting often depends on the team’s culture. For example, in Conklin, we have a ton of resources, so our slotting is always kept up to date. However, our Reno distribution center doesn’t operate the same way. Resources can make tasks like slotting challenging, especially when I’m trying to communicate a process from 3,000 miles away. It’s just another consideration to think through when operating multiple DCs.

Brian:

Good point. Staffing and culture define how you operate as a business. Multi-DC is not the right answer for everybody. For some companies, it just doesn’t make sense. It doesn't matter if you have the best systems. Systems can be purchased, quality people can't.

Back to Adrian's point about execution—it’s critical. Multi-DC expansions are career builders and career enders. You want to be on the right side of that equation. You also must consider the risk of not opening a DC on time and negatively impacting the customer base. That's a career-ender for a lot of people. People oftentimes underestimate the cost of new facilities, 3PL services, or on-demand services because they underestimate the inventory.

Two of the most common challenges are:

1. Finding the right facility
2. Opening it on time

As Mike knows, real estate in Reno is competitive and, Adrian, you see competitive markets across the country. Sure, you may be able to find the square footage needed for your project, but a majority of buildings may not fit the specific needs of your project—whether that’s cold storage, racking, or, kit assembly services and capabilities.

Mike, what are some of the biggest risks you are weighing when considering opening a third distribution center?

Mike:

The number one risk is choosing the right size and location of the distribution center. We've been looking at data for months now and we're still not confident in our decision.

Inventory management is another biggest risk. There's so much redundant labor now—replenishers, receivers. What keeps me up at night is staffing in the distribution centers, especially management staffing. It can be difficult to find good managers that you can trust to run your DCs— from maintaining company culture to anticipating startup costs and decreased profit margins. Recruiting quality managers is key.

It sounds like a lot of negatives, but there’s an upside too. Opening a second distribution center on the West Coast when we're on the East Coast was a slam dunk for us. Our freight savings went through the roof.

Brian:

As people grow, they get into categories of products and they have different MOQs— these all have impacts. Is that a risk you see, George?

George:

We'd love to have the perfect crystal ball to tell us, "Okay, we're going to sell this many TVs next month". We do pretty well with forecasting, but we seem to have stepwise growth—meaning, we never know quite when the step will happen, and all of a sudden demand is increased by 8-10%. It's completely unexpected and now we have to accommodate. We take that volatility and figure, "Do we want to place a bet on that growth with three huge capital expenditures?" One for a facility, one for the inventory, and one for the systems.

Brian:

Right. How many people have outgrown a facility years faster than anybody in management ever thought would happen? You just moved into a building that two years later isn’t big enough, and then you're stuck. How many have walked into a building and said, "We will never outgrow this space, we will be here forever.” Without good data, you are going to struggle to determine how much space you need.

Ultimately, we want good planning, but management doesn't know exactly what's going to happen. Mike might get nervous when he’s continually asked, "Well how much space do you need?" That’s a pretty murky crystal ball. Ultimately, you need to make a decision and stand by it.

Mike:

Given that volatility, we’re constantly asking ourselves:

• “Is this the best way to do it?”
• “Are there other options?”
• “Is there some way we can do it incrementally?”
• “Can we just move our freight somewhere else?”
• “Can we take our conveyor belts and move them somewhere else?”

This is our first, serious look at a second distribution center, so all of these questions are on the table for us.

Brian:

There are many customers that want to expand nationally with a bestseller and they try to replicate the operation of their existing DC in a new facility on the opposite coast. This works for some people, and it doesn’t for others. It’s not an exact science.

Adrian, it’s in these instances that companies like Flexe are able to provide some different alternatives, right?

Adrian:

We try to offer our customers a different perspective. Replicating inventory is one of the biggest challenges when an organization is ready to take that leap. It’s a huge capital burden that has ripple effects upstream and downstream in the supply chain.

We ask our customers slightly different questions “Say you transfer fast movers or knock conveyors out, will that give you the benefit of the transportation savings you’re trying to achieve?” Often, when companies expand their DC network, they’ll have to split orders and in doing so they’ll lose all the benefits of the additional location. We encourage Flexe customers to think of different strategies that they can deploy—a crawl-walk-run approach to expanding their network.

Brian:

Mike, you mentioned savings earlier. The savings could be seen on paper. Part of the process is evaluating and planning for those potential gains. 3PLs provide a unique option and a strong advantage. They aren’t a fit for every company. There are good times to use them and there are really bad times to use them.

George:

The trial balloon aspect of the 3PL is something that is really attractive to us. We've learned a lot. Even if it's something that we don't decide to continue long-term, we have the ability to learn a lot about what it means to have a second distribution center in terms of real operational decisions.

Brian:

And to see whether or not the lift in sales came without committing capital and signing long-term leases. Another option is the on-demand warehousing model. Adrian, can you walk us through what that looks like?

Adrian:

Sure, I'll try to do this in a way that doesn't come off like a sales pitch. Brian, you did a great job articulating the challenges companies face when expanding their DC networks. These are the same challenges that we talk about with our customers.

They need to remain competitive amidst the changing retail environment and rising customer expectations. For example, the Amazon story is one that everybody knows— they set the table stakes for eCommerce and what consumers expect, including quick delivery and free shipping.

The major culprit in all of this is the warehouse. If you think about the fundamental construct of the warehousing industry, warehouses tend to come in big, fixed chunks. That means long-term leases, long-term commitments, and fixed costs. However, businesses are seasonal and dynamic. So the question becomes, how do you solve for that when your number one input is a fixed asset? That’s the baseline challenge we start with when we think about different ways to build out distribution networks.

The number one tenet of on-demand warehousing is a variable-cost model. We eliminated the fixed-cost burden associated with standing up new infrastructure. The variable-cost model combined with a massive network of warehouse providers gives companies access to massive scale. What’s more, the entire distribution network is connected through a single software platform. With Flexe, the implementation is quick and we do it for free without any fixed costs. Next, we address the cultural element and the challenge of staffing facilities. We have a team that’s dedicated to supporting the business and its projects on an ongoing basis.

We’re seeing companies embrace the on-demand warehousing model. They’re leveraging the service to support eCommerce fulfillment, retail and wholesale distribution, seasonal overflow, and supply chain disruptions.

Brian:

Okay. As we wrap today’s panel, I want to ask what final advice would you offer to people that are currently evaluating fulfillment network expansion?

George:

As first-timers evaluating a multi-distribution center strategy, it's really helpful to recruit input from experts in this space. There are questions that we wouldn't have known to ask that we learned from an outside consultation. It changed our perspective and made us think about our planning in a different way.

Mike:

First, I agree with George. Definitely have professional help. Second, carefully review your systems and make sure you have all the resources necessary to collect data about your DC. If you don’t have the data to do the analysis now, I would recommend implementing a system first. The data will ultimately drive your decision. Make sure you have the numbers.

Adrian:

One thing I’ll add. We talked about 3PLs as an option when thinking about how difficult it is for individual companies to expand their DC network. Oftentimes, we see customers try to jam in a DC network expansion just before an upcoming peak season. However, one of the most difficult parts of doing so is the implementation and execution strategy. Delays and unanticipated hiccups during the implementation process have the potential to hinder your fulfillment network during a critical time for your business. Take the time to gather your data, evaluate your options, and properly plan for what’s to come.

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