When I have seen this in the past, such as the famous Kraft Foods "mixing centers" developed in the 1990s, the public justification has generally been around customer service: one order, shipment and invoice coming out of the mixing center, versus having a customer need to place multiple orders to the same company.
That said, and as you noted in our subsequent email exchange, such a move especially today at minimum would need to have no upward impact on total supply chain costs, and realistically actually reduce those costs as well as improving the retail customer experience.
I don't know of any "rules of thumb" or guidelines for this, meaning any generally accepted "tipping points." Would be interested in the opinion of our readers. We went out to a few experts, and didn't find much there either, other than "it depends" and "each situation is unique," which are both true statements.
The famous or most publicized examples, such as Kraft and then more recently (2008) Kimberly Clark, both involved many dozens or even hundreds of manufacturing ship sites, built up over many years, and are probably not typically of your situation and those of most companies without the scale of those companies' networks.
In general, the savings from a consolidation DC(s) come from reduced transportation costs and in some cases reduced inventory from holding inventory in fewer locations. However, you have the cost of the new DC, and the double handling (once to ship to the DC, once to the customer). You also have the transport goods to the consolidation DC.
The savings opportunity in part may come from switching expensive LTL freight out of the plant to full truckload to the DC, and in some cases total miles are reduced network wide, but this is hugely dependent on where plants, the new DC(s), and customer ship to's are.
Dr. Jim Tompkins of Tompkins Associates replied to my call for help, and noted the profile of your or any company's shipments matter a great deal, both in terms of size and what percent is being shipped direct to store versus to retail DC.
Tompkins notes that "In cases where they are shipping to a Retailer's DC it will likely always be more economical to ship to a mixing center DC. As you increase the number of manufacturing sites this just makes it more economical to ship to the DC.
"The question is when is it more economical to ship direct to store (DTS) verses setting up a consolidation center. If we are talking about shipping a couple of cases via courier from multiple sites then it is still likely cheaper and quicker to continue to ship DTS. If you are talking about LTL shipments from multiple ship locations it starts to be more economical to look at a consolidation center. The other factor is the distance from the manufacturer site to the consolidation center. If by combining all the store direct orders you can ship a Full Truckload to the consolidations center and then combine that with the freight from multiple factories it reduces the inbound freight cost and the store delivery cost which would offset the cost of a consolidation center.
"No easy formula on number of cases. It comes down to the type of shipment. Parcel versus LTL versus FTL. Another factor would be the number of deliveries per week and month though the consolidation center. You could also use an outside pooler."
Those are some good thoughts. I would add that the mixing center concept often allows for additional automation that can reduce the DC processing costs versus those of the plant warehouses, and that if you can crossdock some portion of the incoming goods that can further reduce the "double handling" costs.
Finally, sometimes the plants are dying for space, and a further justification can be had by allowing them to use the now freed warehouse space versus building another plant, or achieving operational efficiencies in materials handling to reduce manufacturing costs.
The good news is it is not that hard to model this to get a rough cut answer, and of course network design tools can generate precise answers.
We would love some more feedback on this from other readers.
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