Facility Consolidation:

What You Need to Know Before You Get Started

A Special Report by Tompkins Associates

If you're even considering consolidating your company's distribution or manufacturing operation, you know that it's no small undertaking. Consolidation affects everyone—customers, employees and supply chain partners are impacted by a decision to combine geographic locations or even different divisions of the same operation.

Consolidating different divisions of the same company means potentially bringing a product mix of unique lines under one roof. For example, if you're a company that makes hospital supplies, you may have one division that makes your medical instruments and another that makes disposable products such as gowns and booties. For this company, consolidating the two divisions into one facility could mean the opportunity to achieve significant cost savings by taking advantage of one consolidated shipment to its customers rather than multiple shipments. The customer would benefit from fewer shipments as well as the reduced effort needed to place orders. Consolidating divisions into one facility or distribution center (DC) would also allow consolidation of functions such as order management, purchasing and inventory, leading to greater operational efficiencies.

Consolidating the same operation or division for geographic reasons adds capacity but not necessarily a different product mix. The supply chain benefits from this type of consolidation are achieved through costs savings derived from increased volumes. These benefits include reduced space by increasing storage density, reduced safety stock inventory by consolidating stock, more efficient methods and equipment to manage the increased volume, as well as reduced overhead and redundant management costs. When consolidating facilities geographically, it is necessary to ensure that the cost efficiencies gained through operational consolidation will not decrease your current service levels to customers or increase transportation costs to maintain those service levels more than the savings generate.

Regardless of why you are considering facility consolidation, the drivers behind consolidation are generally simple—to reduce costs and/or improve customer service levels. Period. But despite the compelling big-picture argument that can be made in favor of consolidation, there are significant issues that you will need to consider before you decide it's the right thing to do.

Is Consolidation Right for You?

Determining if a consolidation is right for your organization requires consideration of many issues: labor, logistics and transportation, technology and automation and customer service are primary concerns.

Labor

Labor is one of the key issues to consider, especially if you're consolidating union and non-union operations or moving to an area dominated by unions and you are non-union. How you structure wage rates, incentive pay, how you will use temporary and part-time labor, as well as the labor wage rates, will be impacted by this choice. Most importantly, consider the existing labor pool today and for employees in the different locations:

• What are your existing labor contracts and how much will potentially unfulfilled contracts cost you?
• How will a consolidation and possible relocation impact your current and future workforce?
• What positions will be eliminated or will you need more labor?
• Will you be able to find a skilled workforce in the new location? You will not want to choose space savings over availability of a labor pool with the right level of technical skill unless you plan to make a substantial investment in your training budget.

Logistics and Transportation

Logistics and transportation issues are equally important because they directly impact when, how and in what condition customers receive your shipments. Customer service is one of the primary issues to consider about a new geographic location. Will the new location provide the same level of service for your customer base as the existing locations? The site you choose should make sense for the majority of your customers, but is critical to your key clients. Questions to ask yourself include:

• Will the new location be able to provide the same or better level of service to your customers? Are any major customers negatively impacted?
• Will customers who are used to same-day service still be able to get it without extra cost?
• Will your logistics model provide the same or better access to your necessary modes of transportation—truckload, LTL, parcel, rail, ocean and air?
• How will the new traffic patterns impact the lead-time for your shipments?

Technology and Automation

When considering a consolidation, it's important to consider the amount of technology and automation in each of the present facilities and then decide what will be the best mix of automation and technology to support the consolidated business model. Review your material handling equipment, compare it against the product mix that you'll handle in a consolidated facility(ies) and look for gaps in product handling capability, throughput limitations and in tracking capabilities. Next, investigate whether the systems in the various locations are compatible or whether will you need new/additional equipment and technology to achieve your goals? For example, if the bulk of your system needs a tilt tray or carousels but one division that you'll be consolidating works best with a large gravity feed conveyor, which will you choose? Will you use both systems or will you sacrifice one to save space? Or is there a single system that will meet all needs?

A review of your primary information management systems should be completed first—business/order entry, warehouse management systems (WMS) and transportation management systems (TMS)—to determine how compatible they are. If your systems are not compatible, you must weigh the advantages of interfacing them using middleware or the cost of replacing them with a new solution. A good guide to follow is to look at each facility you're consolidating, focus on the best (and usually latest) technology, and then lose the rest. Next, compare the costs of reconfiguring and relocating your material handling equipment against the cost of purchasing and implementing new equipment and its benefits. With material handling equipment as well as systems such as WMS, the efficiency of the operators, throughput limitations, expandability and maintenance costs must be part of the equation.

Many companies may initially think that more automation is the way to go because of the savings it can offer in space and labor. But automation may not be the best option. Automation must work in concert with the product and your workforce to be successful. Too much automation can keep your system from being easily adaptable to changing marketplace requirements, as automation is not necessarily flexible. You will need to assess your current and future needs to determine how much or how little automation you need.

Customer Satisfaction

Perhaps the most important consideration is whether your customers will directly feel the benefit of the consolidation. If you're consolidating different divisions, this may offer your customers the opportunity to accept fewer, larger shipments. Some customers may like that they are able to get all their freight from a supplier on the same day, while others may continue to insist that they receive separate shipments, therefore not generating the transportation efficiencies for which you'd hoped.

Another factor to consider is how returns will be consolidated and handled in the new facility that is providing service to the customer. Some questions include:

• Where will you house the returns?
• How do you track them?
• How much time will be needed to process them?
• If you are serving customers from different geographic areas, what returns policies are these customers accustomed to?

Best Practices in Consolidation

Once you decide to consolidate, getting started requires that you develop a strategy that covers every aspect of the project.

1. Have the expertise on hand to do the job. DC consolidation is no small venture. You need an experienced team to cover all the bases, and even more important, strong, effective full-time project management to get the job done. Build your project team with an experienced set of project managers to cover every aspect of the consolidation—analysis, design, implementation, start-up, training and beyond. Your project team should have representation from each of the following areas: warehouse design, freight and transportation, inventory control and management, technology (WMS, TMS, etc.), customer service (to determine service levels), sales and marketing (to provide growth projections—where growth will be and for which products, etc.) as well as finance and administration.

A project leader should be assigned to communicate with each of the areas so your consolidation team is working together and communicating with one another through every step of the project. Leadership is of utmost importance with a project of this magnitude. It's leadership's responsibility to set clear expectations and to manage the entire process. This includes establishing clear communications with customers and suppliers, managing the cultural problems that could crop up, and keeping everyone focused on the end goals.

2. Ensure that you have a sound justification for every step of the project. Remember your two goals of increasing service and reducing costs—a consolidation should ideally improve customer service levels and keep costs down. You should be able to justify the consolidation at every turn.

• Analysis: Quality inputs are necessary to make an intelligent decision for every aspect of the project. Make sure that your analysis of sales figures, SKUs and labor is the best possible. These figures will help you determine how much space, labor, equipment and technology that you'll really need. If you're considering consolidating into an existing facility, you'll need to know whether that facility can really handle the consolidation volume. You will need a detailed analysis of facility space (storage areas, receiving dock, order processing area, returns area, shipping, etc.), methods of storage (single pallet, two- or three-deep push back, bulk floor, etc.), inbound product volume (trailers and pallets per day, etc.), order profile, outbound order volume, order processing methods, peak volumes, seasonality, etc.
• Design: How should the new facility be designed to meet its objectives? What is the best layout? What technology, automation and labor will you need? What will your labor be doing? There is likely automation and technology already in place in the facilities being consolidated—which of this existing technology is the best and can be retrofitted in the new facility? Are there different systems in place at each facility and if so, are they compatible or would a completely new system be a better choice? Where to start the design is also key. It is always better to design around the process and equipment than to fit it into a footprint, but if an existing facility is chosen, the design must leverage its limitations into benefits rather than build in obstacles for the future operations.

3. Set clear goals and a realistic schedule for the consolidation in order to measure its success. One of the most common mistakes made is in setting an unrealistic schedule to meet an arbitrarily set date. Schedules should first and foremost allow for proper set-up of systems and equipment to be in installed and tested prior to start-up. Next, an orderly transition plan backed up by a detailed contingency plan should be followed. If these two steps are taken and the proper project management time is dedicated, the transition will generally run fairly smooth. Another trick to meeting deadlines is by establishing key performance indicators (KPIs) up front, and then monitoring them post start-up. Most people are surprised that it takes three to six months to reach productive levels in a new DC operation and much longer if performance measures are not monitored and acted upon. These are just a few of the items that should be established as KPIs:

• Labor per unit received/picked/packed/loaded (key items to see if the new process is working or not).
• Order cycle time (time from order received to shipped) will be less than X.
• Inventory turns (how long product "sits" in the warehouse) will be greater than X.
• Damages: inventory write-off due to damages will be less than X %.
• Returns: customer returns will be less than X%.
• Lost-time accidents: there will no worker who is absent from work due to injury suffered while on the job.
• Inventory accuracy: will be greater than X%. Space utilization (how much space do I have vs. how much am I using) will be less than X%.
• Order accuracy: (what did the customer order vs. what did I ship) will be at least X%.
• Order fill rate: (for every customer order, how many times did it take me to ship this customer the entire order) will be greater than X%.
• Employee satisfaction: employees will report that they love to work here and turnover will be reduced.

4. Buy-in and support to make it all happen. Consolidations will often mean that jobs will be lost, old processes will change and new processes will begin. Therefore, the plan for consolidation could be met with resistance from the workforce. Effective communication with the workforce will be needed to garner the necessary support and to make the difficult transition (if jobs are to be lost) go as smoothly as possible. Managing this process effectively includes regular meetings on the status on the project so that everyone is aware of both the goals and the challenges you expect to face. Meeting these together and head-on will be good for long-term morale.

Effective communication with business partners and customers will also be necessary to ensure their important support in the transition to the new facility. Developing a transition plan and a communication strategy will ensure that all parties are aware of important milestones in the process. For example, there could be delays in ramping up to previously established volumes and service levels, which could cause problems for your customers. Formal communication to customers and vendors/suppliers will help calm any fears and solidify relationships in the event that things do not go exactly according to plan.

The Consolidation Challenge

There are significant operational and logistics savings associated with consolidating an operation. In addition, it presents the organization with the opportunity to improve throughput capacity, improve employee safety, ergonomics and working conditions. Even with the negatives of accepting change, altering customer expectations, closing of old operations and the pain associated with the transition, it generally is the right decision for organizations around the globe. The key is to plan, dedicate the right resources, leverage outside experts and to do your homework up front both with employees and customers.