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Cliff Holste

Supply Chain Digest
Material Handling Editor

Logistics News - Sorting It Out

Cliff Holste is Supply Chain Digest's Material Handling Editor. With more than 30 years experience in designing and implementing material handling and order picking systems in distribution, Holste has worked with dozens of large and smaller companies to improve distribution performance.

June 7, 2017

Sorting It Out : DC Capacity Planning

Properly Sizing a DC for Future Shipping Capacity can be Problematic


On May 24, 2017 we published a “Sorting it Out” article on Avoiding ROI Pitfalls. In that article we suggested that failing to meet the forecasted sales projections, for whatever reasons, can extend the payback period beyond what the company’s business mangers consider acceptable. Below we further elaborate on the impact forecasting can have on system design and project justification.

Holste Says...

It’s important to note that capacity and throughput have a cost, and beyond a point, over-specifying can impact ROI, or your ability to justify the cost.

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Making growth factor projections is somewhat problematic. Most companies have some type of strategic plan that can be used as the basis, but how accurate is that forecast? And will metrics that are meaningful to the DC design, such as the number of cases or order lines per sales dollar, going to remain constant or change over time? Therefore, it’s a good idea for logistics executives at companies expanding DC capacity, or adding a DC, to make sure that there is consensus among the executive management team regarding the level of expected growth over the specified period.

When designing a new distribution center or automating an existing one, a critical factor is determining future sales volume that the facility should be capable of supporting. Determining future capacity requirements is not an easy or even a very clear exercise. Few “best practices” or even industry guidelines exist.

Consider a materials handling automation system, such as batch order picking with downstream sortation – what capacity number should be used as the design target? A good approach may be to establish criteria for a theoretical “design day”based on an average day during the peak order processing period in a better than average sales year, plus a growth factor projection “bump-up” to get to the design year (usually 3 to 5 years into the future). This method reduces the “guess work” to establishing a growth factor which could be based on a blend of industry and government projections. 

While most companies are growing somewhere in the single-digits range annually, “hyper-growth” companies that are expanding volumes by double digits currently present really tough challenges when it comes to capacity sizing. You have to project when that growth is likely to taper off, and also to be thinking about when additional facilities will be required. Master planning is especially critical for those fast growth companies. But projected volumes aren’t enough either. You have to also factor in order profiles, estimates of SKU expansion or reduction, and a number of other factors. 

It’s important to note that capacity and throughput have a cost, and beyond a point, over-specifying can impact ROI, or your ability to justify the cost. Also, don’t want equipment that is underutilized. 

Flexible Design – and Operating Models- are Key

Forecasts are by definition likely to be wrong, especially the further out you go. So, the best plan is usually to build flexibility into the DC expansion or design. For example, most companies should design the new picking system to be easily expanded by adding additional “pick modules” in later years. The cost and operational challenges from adding that capacity later on are much lower if you design-in that expansion potential upfront, versus having to shoe-horn it in later. 

It often makes sense to oversize the facility, but leave part of it “empty” awaiting expansion in volumes, delaying the investment in racking and related equipment. In some cases, especially for hyper-growth companies, the smart decision may be to over-buy the real estate, but then only build on a portion of that land, leaving room for expansion if the rapid growth continues to materialize. If not, the real estate can be sold off. 

It is also important to understand what portions of a system can be expanded by adding labor and what portions can’t. With sortation systems, the sorters maximum capacity is not easily expandable. For example, if the “design day” shipping volume, including growth factor, is within 10-20% of the maximum capacity of a particular type of sorter, it would usually be appropriate to select the next higher capacity sorter. If you undersize a sorter and need to replace it, the effort is complex, expensive, and highly disruptive to current operations. Therefore, it would be smarter to upsize the sorter and be more conservative in spending on more easily scalable subsystems like pallet racking and pick modules.

If robotic picking technology is being considered, make sure that the system is easily scalable up or down. While adding additional robots may be the oblivious solution, adding manual labor into a picking system configured for robots may not be possible. It is also important to understand how the automated picking system will be replenished both daily and as shipping volume increases.

Final Thoughts

In the final analysis, the company itself needs to determine its own comfort level with regard to initial investment versus ability to process future volumes. You have to say; here is alternative 1, and the costs and ability to meet expected and/or unexpected volume growth; here is alternative 2, etc. Different companies have different access to capital, different expected ROIs on a project, and different thinking about financial risk versus operational risk.

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