2011 Warehouse/DC Operations Survey

Just when we thought things were finally looking up, the results of the Supply Chain Group’s 6th annual “Warehouse and Distribution Center Operations Survey” show that there might be some slowdown ahead. Playing out in front of the backdrop of a shaky global economy, this year’s findings reveal that inventory turns are not improving, more DCs are closing rather than opening, and many companies are opting to be more cautious, leveraging cost reduction measures that require little or no investment.

Designed to gauge activities and trends in warehousing and distribution center management, the annual survey reveals the current state of warehouse and DC operations. In September 2011, a survey was sent by email invitation to Supply Chain Group subscribers. A total of 598 qualified responses (a jump up from 521 in 2010) were received from mid-level, upper-level, and senior-level managers who are personally involved in decisions regarding their company’s warehouse and DC operations.

Most participating companies came from manufacturing (36%), followed by distributors (26%), third party providers (15%), and retailers (13%). A broad assortment of products handled in the DC was once again well represented, with food and grocery leading the pack at 14%, followed by building materials/construction at 8%, and general merchandise, electronics, apparel, paper/packaging and parts, all tied for third at 7% each.

Norm Saenz, senior vice president and principal of TranSystems, a supply chain consulting firm and our research partner for this survey, sums up this year’s findings in four words: “More done with less.”

“In fact, most companies are trying to do more with fewer people, fewer buildings and less automation investment,” he adds. As a result, they’re operating with a reduced staff, consolidating facilities, and taking the more conventional route in terms of storage and picking.

“Much of this stems from top management pressuring distribution to reduce costs,” notes Don Derewecki, senior business consultant with research partner TranSystems. “But this comes with a catch for warehouse and DC management. Top brass wants a reduction in costs without reducing service to customers in an effort to stay cost-competitive in the marketplace,” he adds.

This year, portions of the survey were updated to capture these and other emerging trends, while critical measures of warehousing activities were continued as in years past. Over the next few pages, we present in greater detail how the nation’s warehouses and DCs have fared during the past 12 months. And with another year of results locked into our database, definitive trends in warehousing and supply chain management are also identified.

Clear trends and conclusions
One finding that immediately leaps out is that after years of decrease, there are more respondents operating single facility networks this year than the past year—from 30% in 2010 to 35% in 2011.

We also noticed slight decreases in networks with multiple facilities. Saenz believes that this is proof of managers trying to do more with less, trying to operate with fewer facilities. “Companies are clearly consolidating their distribution networks to reduce facility costs,” says Saenz.

Derewecki agrees, “From what we’re seeing right now, companies for the most part have been trying to reduce the number of buildings that they’re in.” However, companies are not just consolidating; they’re also actively trying out other options. To lower operating costs, over 75% of respondents are improving warehousing processes, 60% are improving inventory control, while nearly half have changed racks as well as their layouts. When compared to last year’s results, significantly more companies are reducing staff—43% compared to last year’s 36%—yet another testament of how companies are doing more with fewer people.

There was also a 7% increase in companies renegotiating their leases to lower operating costs. Derewecki notes how this move makes perfect sense given the continuing glut of available space in the industrial real estate market that’s putting downward pressure on rents. And to lower transportation costs, most (62%) continue to renegotiate their freight rates, followed by shifting their mix of common/contract carriers (31%). The bottom line: Not many people are sitting back and doing nothing. In fact, 95% are actively taking steps to reduce operating costs, while 87% are keeping a lid on volatile transportation costs.

The bottom line: Not many people are sitting back and doing nothing. In fact, 95% are actively taking steps to reduce operating costs, while 87% are keeping a lid on volatile transportation costs.

While the recurring theme is one of cost reduction, there’s also an overall reluctance by respondents to invest in automation and mechanization. There are sharp increases in conventional methods of storage and replenishment with statistically zero change in the use of automation or mechanization.

“One of the reasons you put in automated storage methods is to reduce your footprint and reduce your occupancy cost,” says Derewecki. “But when the developers and landlords have excess space, occupancy cost goes down, and there’s less motivation to go to more sophisticated dense storage methods.”

However, Saenz cautions against being too conservative with investment inside your four walls. “You can only get so much throughput from conventional materials handling systems. Companies looking to get more out of their existing facilities will at some point need to consider automation,” says Saenz.

Another clear trend is the continued “leaning and greening” of distribution facilities. The implementation of lean improvements to the supply chain has grown significantly over the years, from just 30% in 2007 to 46% in 2011—growth of more than 50%. Saenz attributes lean’s continued popularity to its low-investment nature while getting the most out of existing facilities.

“The lean movement is largely process improvements that don’t cost anything for the most part,” says Saenz. “These kinds of process improvements are generally smart and eliminate waste, without necessarily investing in technology, equipment, and software.”

We also found this year that more companies continue to go “green,” with sustainability initiatives rising steadily from 89% in 2008 to 93% in 2011. Recycling remains the top initiative implemented, while the use of “fans to circulate cool or warm air” gained the most momentum during this past year.

Saenz points out that while the installation of fans is a great way to reduce utility costs, energy-efficient lighting is still more popular. “Lighting may be showing a decline only because so many companies have already improved their lighting over the past few years,” he adds.

Catastrophe and network planning
Whether it’s earthquakes, tsunamis, hurricanes, system hackers or labor strikes, so many catastrophic events seem to keep grabbing headlines these days that we decided to add it to this year’s survey and investigate the impact on warehouse and DC operations.

When asked whether any part of their supply chain experienced a catastrophic event in the past two years, almost 30% answered in the affirmative. “This underscores the need for contingency planning,” says Derewecki. “When the tsunami struck Japan, a lot of people got a wake-up call. We had plants in this country that shut down because they couldn’t get parts from that region of Japan.”

When asked what actions they’ve taken to protect against supply chain disruptions, one respondent—a paper and printed goods manufacturer— offered the following response: “We continually implement our business continuity plan, build redundancy networks within our DC infrastructure, and require our suppliers to maintain business continuity plans that we approve to ensure that they have multiple sources to obtain materials within their supply chain.” Others have installed off-site back-up/cloud computing systems, added buffer inventory in a separate facility, and added more providers and carriers.

We also added a series of questions to investigate distribution networks and how often organizations study them. Our survey shows a significant number, 72%, of respondents undertook these studies. Of that percent, 38% execute them periodically, ranging from annually to every five years, while the remaining 34% do them only when necessary.

“The volatility of the global supply chain environment, competitive pressures, and the fluctuations in the price of fuel have caused more companies to use these studies to improve their supply chain networks,” says Derewecki. “In fact, in six months we found this to be an area of high interest among the more aggressive, market-leading companies.”

What’s been done as a result of these network studies? Fifty-five percent are moving inventory among warehouses. Not a surprise, says Saenz. “If you put an investment number next to most of these options, moving inventory around doesn’t really cost anything, yet it can improve service and potentially lower your space needs as well so that you don’t have to invest in any physical expansion.”

However, 33% have consolidated and/or closed warehouses—giving credence to how many are trying to drive costs down in their new networks. By closing warehouses, there’s a reduction in manpower resulting in much needed labor savings. And by combining inventory into fewer facilities, there’s less inventory duplication, spurring a decrease in inventory costs. Saenz believes this again ties in with the previous finding of how companies are still “doing more with less.”

2011 DC network
While the number of buildings within networks may have decreased, other properties of the distribution network have stayed essentially the same. This year, we found that the typical size of all DCs in a distribution network remains in the range between 100,000 square feet and 249,999 square feet with clear heights of 20 feet to 29 feet. In 2010, 21% had total networks with areas of 100,000 square feet to 249,000 square feet, while this year 25% had networks with the same square footage.

This year, inventory turns have remained steady, even decreasing ever so slightly from a mean of 8.4 in 2010 to 8.2 in 2011. Derewecki speculates that, to some extent, many companies increased their inventory position in anticipation of 2011 being a better year. “But it clearly didn’t turn out to be that much better,” he adds.

The use of the DC for value-added services continues to be a common occurrence, with most respondents (81%) reporting some kind of special labeling (56%) and promotional packing (31%) being done inside the four walls.

RF tagging—as a value-added service—continues to spiral downward from 17% in 2010 to just 9% this year. “RFID is not really gaining any traction,” says Derewecki. Why? One explanation can be gleaned from the fact that most of this year’s respondents clearly favored more conventional routes in storage, picking and replenishment. As such, there is less interest in using technology, specifically RFID technology.

Despite the overall slowdown, however, at least we’re still moving up in terms of future plans for expansion. Those planning to expand their operations in the next 12 months continue to increase—up to 40% this year from a survey low of 33% in 2009. Most are planning to increase the square footage of their existing buildings (61%), followed by expanding the number of SKUs they plan to offer (58%). But, again, it looks like not as many new DCs will be opening up, as fewer respondents are planning to expand the number of buildings in their network this year.