Friday, February 5, 2010

How many warehouses or Distribution Centers (DCs) should your company have?

Dan Oster - Industrial SpecialistPosted by: Dan Oster
Industrial Specialist
775 336 4665

As a member of the Industrial Properties Group, Dan has participated in the sales and leasing of a wide variety of Industrial properties from 1,000 to 700,000 sqft in Northern Nevada. Dan's primary goal is to provide unsurpassed customer service to the clients he represents.

This seemingly simple question is not so easy to answer. There are very expensive computer models, run by even more expensive consultants who will take hundreds (even thousands) of data points on your inputs, outputs, warehouse metrics and strategic directives to arrive at an answer to that question. For the rest of us, when faced with a decision, a few simple Heuristics can help lead to a rational decision.

Two “Rules of Thumb” to consider, while opposing, together can be revealing.

First is the Square Root Law (SRL) of Inventory. This law makes sense intuitively. The more facilities you add, the more safety stock you will have spread around which will increase your inventory cost. Adding your 7th or 8th facility will have less of an impact than adding your 2nd or 3rd. To really boil it down, More facilities = Higher Inventory Cost.

For a more technical explanation click here

Still with me? Good.

Now the opposing force hasn’t become a fancy Law, but it’s still worthy of consideration. Generally speaking, inputs cost less to transport into a facility than outputs cost to transport out to your customers. Therefore, given the same level of demand, the more geographically dispersed your DCs, the lower your transportation cost will be. Add into this effect the very real possibility that Fuel prices will go up in years to come as the economy improves, consumer demand recovers and grows globally, government taxation on carbon increases, etc. This would lead you to have more, smaller, geographically dispersed DCs or a Decentralized Distribution Network. To really boil this one down, More Facilities = Lower Transportation Cost

So on one hand you should have fewer DCs to lower inventory costs on the other hand you should have more DCs to lower transportation costs. Which is it? How many warehouses or Distribution Centers (DCs) should your company have? Well, your answer depends on where you spend more – Transportation or Inventory Carry. Consider these two costs along with the many other factors those darn consultants keep bugging you to provide, and you could be much closer to the decision. If you decide Reno/Sparks might be the right place to locate, give me a call. I’d love to help you out.

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