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First Thoughts
  By Dan Gilmore

August 4, 2005


Building a World-Class DC


As we noted back in May (, warehousing seems to be in growth mode, driven by offshoring, port congestion, and other factors.

With that in mind, I thought it was worth sharing some of the thoughts contained in “Starting Up a World-Class DC,” a book written by Hershey Foods’ Ken Meisemer and published by the Warehouse Education and Research Council (WERC) in 2001. It recounts the experiences Hershey had building a new 1.2 million square foot distribution center in Hershey, PA. I’ve had the pleasure of getting to know Ken over the last few years, and can say this is a “must read” for anyone considering a new distribution center project.

The book includes a wealth of information, including a number of templates very useful for decision-making. Here are some of the key learnings and recommendations I liked:

  • Hershey’s did a tremendous amount of upfront planning and analysis. This included not only the use of a network modeling tool to assess DC needs and the optimal location, but synching that analysis with a detailed understanding of Hershey’s overall business strategies and requirements – key for projecting actual inventory storage requirements. . On-hand inventory balances were plotted for the previous 36 months. Pallet storage requirements were modeled out a full 10 years.
  • To manage the project, Hershey set up 12 separate project teams, plus an executive steering committee. 1500 separate task items were identified, with special focus on numerous critical path items. As Meisemer notes: “The ability to meet the project timeline depends on human resource time – and that time is often limited. So it’s important to monitor resource-constrained tasks carefully.” Hershey used detailed tracking tools (spreadsheets) to keep on top of this issue.
  • Site selection took longer than expected. A key delay factor was dealing with zoning and other local approval processes. Be sure to factor this time into your plan, and get a handle early on about how cooperative and helpful local governments will be (or not).
  • After extensive planning, the actual construction of the facility was fast track, in large part to get it operational in time for the inventory build season. Hershey therefore decided to use a fixed-price contract with the construction company with incentives for early completion. For Hershey, the best financial option was a “synthetic lease,” in which a financial institution owns the lease, and Hershey then paid a fee to secure the lease and then just interest on the principal.
  • Hershey looked at four separate options for internal facility design, from highly automated to several less automated options. Ultimately, it selected a more traditional design, but did so after first receiving useful opinions from several of the third-party operators Hershey was considering to manage the DC.
  • Hershey took almost seven months to select a third-party operator. Part of this process was detailed sharing of details about Hershey’s business with potential operators – much more, I believe, than companies typically do, and to good effect. The Hershey team used a series of “case study” questions/ scenarios to ensure the candidates understand Hershey’s business and how they would respond to issues. “Requiring operator candidates to transfer their financial data into the [Hershey] standard cost model was extremely valuable,” Meisemer noted.
  • Hershey decided to select and own the warehouse management system itself rather than use one provided by the 3PL to maintain better control. It (smartly) doubled the standard number of vendor resources for training and go-live support.
  • A comprehensive list of “ramp up” metrics and goals was developed to track progress (and issues) during the first weeks and months of operation. “Make sure you create a realistic ramp-up plan and metrics,” said Meisemer.

I’m just scratching the surface, but you get the idea. One can’t help but be impressed with the rigor and discipline Hershey maintained in implementing this project – good lessons for all of us. The book can still be purchased from WERC at

What do you think are the keys to successfully building a new distribution center? Do companies typically do enough upfront planning and analysis? Do any of Ken Meisemer’s observations cited have special relevance to you?

Let us know your thoughts.


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