It was hardly a surprise that when the grocery chain Albertson's announced plans to shut down a DC in Northern California, executives declined to comment on how much money they expected to save. Asked what the grocer hoped to accomplish, spokesmen neatly sidestepped any mention of dollars and cents. "We're doing this to improve our efficiencies and to make sure we remain competitive in an increasingly competitive marketplace," said Quyen Ha, spokeswoman for Albertson's. "There are a lot of opportunities for streamlining and cost reduction."
It's possible that publicly traded Albertson's is leery of releasing too much financial information to its competitors. But industry analysts offer a different explanation: They maintain that many times, executives simply have no idea how much money their supply chain cost-cutting measures will really save.
It's not that billion dollar conglomerates neglect the due diligence. Most spend months, if not years, conducting research and poring over models. It's far more likely, say supply chain consultants and analysts, that they're simply unable to gauge the effect that any given distribution-related decision will have on operations elsewhere along the supply chain. "The assumption is that Albertson's is a pretty sophisticated company and that they understand what they're doing," says Neil Stern, a partner in the Chicago retail strategy firm McMillan-Doolittle. However, "it's really difficult to get to the heart of some of the costs in this area."
George Bishop agrees. "The main issue we see is that people are trying to reduce costs but they don't understand what their cost structure is to begin with," says Bishop, who is senior vice president at LxLi, an industrial engineering consulting firm that specializes in distribution center operations. "If you don't understand your specific costs, you can't make a good decision."
Take Albertson's decision to shutter its San Leandro, Calif., DC in 2006. Once it closes the 439,703-square-foot facility, the grocer will serve 172 stores in Northern California from warehouses in Vacaville and Roseville, northeast of Sacramento. But that's not just a matter of rerouting deliveries and sitting back to watch the savings roll in. The company will need to hire more drivers to cover the expanded territory. And with drivers in short supply, that could prove both difficult and expensive.
Albertson's will also have to expand its 440,000-square-foot Roseville DC by 120,000 square feet to accommodate the added volume. And although Roseville is a full-line warehouse, storing dry goods, produce, deli foods and meat, its refrigeration capacity is limited, so Albertson's will have to add expensive refrigeration equipment at the site.
Then there's the likelihood of labor complications. The San Leandro shutdown isn't scheduled until 2006. But odds are the operation will find itself short-handed in the intervening months as workers decamp for more secure situations.
Penny wise, pound foolish
When it comes to cutting supply chain costs,U.S. industry's track record is a spotty one. Although they're not eager to talk about it, a surprising number of major companies have been burned by ill-conceived supply chain decisions.
Some have fallen victim to poorly thought-out warehouse management system installations. Others have watched the "savings" achieved by installing used equipment evaporate due to high retrofitting costs. "If you're talking about consolidating DCs, it's tempting to use the equipment you already have at another DC," says Bob Babel, vice president of engineering at systems integrator Forte."You need to proceed very cautiously with that. The equipment was bought for one application at a particular DC, and trying to force it into the new DC requires some expertise."
Another common pitfall is failure to plan for the future. Today, for example, many DCs are starting to perform more "value-added" tasks—putting shirts on hangers or adding store-specific labels—before shipping items to retail customers. Because it's not a big part of the business right now, says Babel, DC managers might be tempted to consign these jobs to some dusty corner of the warehouse. But that could prove to be a big mistake. "Providing value-added services might only be 10 percent of your business today," says Babel, "but it could grow to 60 percent in two years. You need to step back and think through the process, and figure out how to perform value-added services within your current workflow. In the end, you'll be able to perform those services better, and service more clients."
Living in a silo
Then there's the very real danger of underestimating the impact a decision made in one part of the company will have on another part of the supply chain."Many companies have created silos where one manager controls a budget for distribution, another guy manages the transportation budget, and somebody else oversees manufacturing," says Bishop. "At the end of the day, the goal is to make budget, and therefore a lot of options aren't looked at very seriously."
Bishop outlines the following scenarios as examples of ways in which silo decisions can have unintended consequences:
- The procurement department cuts a deal with a vendor to change packaging from corrugated cardboard to a cheaper alternative, plastic. But it fails to consult with the logistics team about the move. Only when the items arrive does the company discover that the DC's highly automated conveyor system can't transport the plastic-encased product. The company is forced to remove the fast-moving item from the conveyor system and assign workers to pick it manually, incurring logistics costs that may well offset any savings from the packaging changes.
- In an attempt to cut inventory costs, a buyer decides to place more frequent orders for smaller quantities. Within weeks, the central stock operations report that efficiency in the receiving and putaway process has plummeted as a result.
- Executives at the retail level decide to order split-case quantities in order to hold down store-level inventories. They're dumfounded when complaints start pouring in about soaring replenishment and pick costs at the DC.
- In a crusade to end stockouts, a retailer decides to maintain central stock at each of its five distribution centers. What it doesn't stop to consider is whether the improvement in service levels will justify the resulting increase in holding and operational costs.
"Even if you're just looking for a short-term fix, you need to look several years down the road so that the changes you make now won't mess you up later," warns Babel. "You don't want to do something in manufacturing that adversely impacts distribution. You don't want to discover in the end that all you've done is push work from one place to another. The manufacturing side may look better, but the DC can't do the work so you end up losing."
So you've determined that retrofitting your existing distribution center will be cheaper than building a new one. Fair enough, but your work's only half done. Before updating a DC, you need to model the revamped process, analyzing the new workflow and layout. That means you'll need to classify all of the products that move through the site as either fast movers or slow movers, and determine exactly how each type will be stored. You'll also need to find out how many of each kind of product you have in inventory, and calculate their volume and weight.
Many experts say that modeling and slotting should be done at least once a year. But Tom Flock, senior project manager at distribution/logistics systems integrator Fortna, argues that an annual checkup is not enough. He urges managers to perform these exercises every six months or even more frequently if the business experiences seasonal peaks and valleys in demand.
Gartner, Inc.