Americas Women-Owned Hardware
International (AWHOi): Capacity Plan of
Logistics and Distribution Centers
Report prepared for the AWOHi Corporation
by Orange Advanced Logistics Consulting, S.A.,
Santiago, Chile
August 16, 2013
Oi
Shop more AWH
stores now in the US and
Expanding
boutique
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Mexico!
Utilizing premium artisan materials
in the traditions of centuries of
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“…hooks, bobs, gadgets, hinges,
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rest. Elegant boutique hardware
accessorizing the modern home and
garden.”
Presentation Outline
•
•
•
•
Background
Purpose and scope
Methods and results
Recommendations
Background
Background
Purpose and Scope
Purpose and Scope
Revise an existing capacity plan for the network of
AWOHi distribution centers in each of the US region,
Mexico region, and US-Mexico combined region:
• Locations and capacities of existing and new DCs
• Implications for existing and new DCs in throughput,
inventories, storage, and service regions
• Transit times
• Costs
• Network inventories
• Returns on investment from capacity expansions
Methods
How Can We Improve the Supply
Chain Management?
Goal: To deliver the right product to the right place at the right time for the right
price, while minimizing system-wide costs and satisfying service requirements.
(Source: Ron Askin, PASI, 2013)
Can the US Dist. Network Handle
Growth?
• Capacity: 6,190 Stores
YES!
– 2012 Store Count: 4,617
– 2018 Store Count: 5,661
Current Sourcing
Tested Scenarios
Scenario:
2018
OR
FL
NC
KS
OR-FL
OR-NC
FL-NC
OR-NC-FL1
OR-NC-FL2
California
X
X
X
X
X
X
X
X
X
X
Georgia
X
X
X
X
X
X
X
X
Pennsylvania
X
X
X
X
X
X
X
X
X
X
Tennessee
X
X
X
X
X
X
X
X
X
X
Illinois
X
X
X
X
X
X
X
X
X
X
Texas
X
X
X
X
X
X
X
X
X
X
Arizona
X
X
X
X
X
X
X
X
X
X
Ohio
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
10
10
10
11
Oregon (Portland)
X
Florida (Ocala)
X
North Carolina (Durham)
X
X
Kansas (Olathe)
DCs Opened:
X
X
8
9
9
9
9
10
Methodology
• A Optimization/Heuristic Algorithm to allocate
DCs to Stores and determine tour lengths
– Assign stores to DCs
• Assignment Optimization Problem (solved with CPLEX)
– Generate vehicle routing tours
• 4 Stops/Tour
• Nearest neighbor heuristic
– Local search algorithm
• Use dual values of Assignment Problem
Assignment/Tour Results
11 DCs
10 DCs
Euclidean
Results
Rectilinear
Results
9 DCs
Store Assignments
• Opening DCs in Oregon & Florida
Store Assignments
• Opening Oregon, Florida, North Carolina and closing Georgia
DC Distance to Store Distribution
Average Distance:
197.02 miles
St. Dev:
167.81 miles
DC-to-Store Distances
Average Distance:
197 miles
Standard Deviation:
167 miles
Upon Initial Analysis:
Open DCs in
Oregon & Florida by 2018
How Should Imports be Handled?
• 2012
– Each DC receives
~371 import truckloads
per year in full FEUs
• 2018
– Number of stores expected to increase by 22%
– Fraction of imports will increase from 5% to 12%
– Each DC will receive ~1,085 import truckloads per year in
full FEUs
Almost 3-fold increase in volume of imports by 2018
Should we add one or more Import DCs?
Import DCs
• Operations
– Unload shipping containers
– Often re-palletize products
– Ship pallets to DCs
• Location
– Usually near container ports or inland ports
• “Lumpy” demand
– Shipments are large and relatively infrequent
• Layout/Design
– Large pallet storage areas
– Large drop yards for container storage
• One Import DC may serve many DCs
• Can be combined with order fulfillment in
one facility (current situation in case study)
Importers Serviced by Port of Savannah
20+ Savannah-area import DCs, 200+ more within 5 hours
Source: Georgia Port Authority Presentation,
Curtis Foltz, Oct 1, 2007
21
Sq. Ft.
Academy Sports
1,000,000
Advance Auto Parts
380,000
Bass Pro Shops
600,000
Best Buy
748,000
Citi Trends Fashion
155,000
Dollar Tree
800,000
Farmer’s Furniture
250,000
Fred’s
600,000
Hugo Boss
165,000
Icon H & F
600,000
IKEA
1,700,000
Kmart-Sears
2,200,000
Kohl’s
600,000
Lowe’s
1,250,000
Midwest Air Technologies
150,000
Noritake
105,000
Oneida
500,000
Paper Tigers
115,000
Pier 1 Imports
783,000
Target
2,100,000
The Home Depot
1,400,000
Tire Rack
250,000
Wal-Mart (2)
3,300,000
Large Retail Distribution Network
Should we have Import DCs?
• Advantages
– Reduced overseas transportation
costs
– More efficient management of
inventory and product flow
– Lower overall inventory levels
– Reduced operating costs, space
usage at DCs
• Disadvantages
– Capital investment and fixed costs
of opening a new facility
– Increased transportation/handling
cost to supply DCs
Should we have Import DCs?
• Do we have sufficient volume to justify a dedicated facility?
– Almost 3-fold increase in import volume, avg = 3 containers/day
– 10 DCs
• Benchmarking
– Target: 1,788 US stores, ~30 DCs, 4 Import DCs*
– Walmart: 4,500+ stores, 158 DCs (42 regional DCs), 5 Import DCs**
• How many Import DCs?
– One: West Coast
– Two: West and East Coast
– Four: West, Gulf and East Coasts, Mexico
– Impact of multiple Import DCs
• Reduced transportation costs to supply DCs
• Reduced risk from natural disasters, labor strikes, etc.
Consolidate Import Routes
How to Improve Warehouse Operations?
• “SKU proliferation causing issues within the DC in terms
of slotting and inventory carrying”
• Investigation needed
– Review of inventory management system to eliminate wasted
storage capacity and obsolete SKUs
– Address WH layout and operations – particularly for new DCs
• DC-to-Store
– Pallets
– Cases
– Pieces
Warehouse Layout and Operations
• Reserve area
– High storage density
• Forward area
– Fast-moving items (0, 1 or all rule)
• Picking activities
– Pick-to-light
– Pick-to-voice
– Bucket-brigades
• Technology exploration
– Person-to-goods
– Goods-to-person
How to Respond to Growth in Mexico?
•
•
•
•
330 retail stores
US and imported products enter Mexico through Laredo, TX
DC in Monterrey, with capacity of 360 stores
Crossdocks located in Mexicali, Mexico City (transfer operation)
and serviced from Monterrey
1
2012 Current Sourcing
Expected Growth in Mexico
• Growth of 196 stores
– 150 in Mexico (113 in Mexico City)
– 46 in Central America
Mexico/CA Growth
600
500
Stores
400
300
200
100
0
FY12
FY13
FY14
CA
Mexico
330
370
410
FY15
FY16
FY17
FY18
7
11
15
46
440
460
480
480
Estimated Increase in Transp Costs
Assuming $1.23/kilometer and current network
Throughput
Laredo to
Monterrey
Monterrey to
Mexicali
Monterrey to
Mexico City
2012
2018
330
524
Distance (km)
220
Annual total
Cost to
Monterrey
$427,500
$678,818
Throughput
40
46
Distance (km)
2173
Annual Cost
$713,900
$841,721
Throughput
70
228
Distance (km)
914
Annual Cost
$538,760
$1,754,792
Total Costs
$1,680,160
$3,157,632
Is Current Capacity Sufficient?
• No!
• Either increase capacity of current system or
add DC
Capacity at
Monterrey DC
2012
2018
Stores Served
330
524
Current Capacity
360
360
Is Current Capacity Sufficient?
• Currently the crossdock has very limited storage
capacity
• Locating a DC in Mexico City seems desirable
1
2012 Current Sourcing
+113
Stores
+46
Stores
Recommendations
•
Open a DC in Mexico City
–
–
•
Increase responsiveness to stores
Closer to Central America to service 46 new stores
Reallocate Southern Mexican stores from
Monterrey to DC in Mexico City
1
2012 Current Sourcing
Changes to Monterrey DC
• Continue to serve 40 stores via Mexicali
crossdock
• Re-evaluate the stores served directly and
allocate to Mexico City DC
• Incur a net reduction in capacity and size
Integration of US/Mexico Supply Chains?
• Slow-downs at border crossings
– Although there are 3PL companies who provide
distribution services for cross-border replenishment
–
–
http://www.joc.com/exel-builds-new-distribution-center-support-usmexico-cross-border-supply-chains-laredo-texas
http://www.inboundlogistics.com/cms/article/us-mexico-trade-two-way-traffic/
What is the Return on Investment for
Adding DCs
Goals
Typical Savings
Example savings with Plan A
DC-to-store
efficiency gains
20% for affected
stores
$8M annual recurring transportation savings
Inventory
savings
10% inventory
reduction
$100,000 annual carrying cost reduction;
$500,000 one-time capital savings
Improve
customer
satisfaction
1% customer
retention in
affected stores
$1M annual recurring benefits
Improve net
fixed asset
utilization
5% savings by
shrinking other
distribution
centers
$1.5M one-time reduction in unneeded
capacities at existing distribution centers
⁞
⁞
⁞
Return on Investment (cont.)
Bottom-Line for Expansion Plan:
An investment of $11 million over one year in an additional DC would
deliver net present value of over $29 million in cumulative net benefits,
an ROI (calculated as net benefits/total costs) of 280% (for every dollar
spent on the new DC, the AWOHi will receive their original $1 back, and
an additional $2.80 in incremental benefits), with five-year horizon
(including 12 months of development, construction, systems integration
and deployment).
Payback period is approximately one year after the 12-month
construction phase.
Risk Management
What are the effects
of uncertainties on
the performance
objectives of the DCs
network, and what
can be done?
Risk Management
Sources of uncertainty
Impacts
Mitigations
• Demand for
throughput rises or
falls from market
forces
Utilization,
customer
satisfaction
Monitoring and replanning the DC
capacities and routes
• Transportation DC-tostore costs rise or fall
Costs and
efficiencies
Monitoring and replanning the DC-tostore routes
• Inventory carrying
costs rise or fall
Costs and
efficiencies
Monitoring and replanning the
warehouse efficiencies
• Loss of a DC or other
inventory or capacity
to natural hazards
Reduced
Update emergency response planning,
network capacity reconfiguration of DCs
• Supply is interrupted
Costs and
efficiencies
Monitoring and replanning to address
customer satisfaction
…
Risk Management (cont.)
…
Sources of uncertainty
Impacts
Mitigations
• Seasonal variances of
demand and supply
Utilization,
customer
satisfaction, costs
Monitoring and replanning
• DC-to-store route
efficiencies
Route lengths
Adapt the route lengths from 4 to 8
to others
• Vendor-to-DC costs rise Transportation
costs
Monitoring and replanning of
international transportation
• Mexico and US border
regulations
Costs and
efficiencies
Monitoring and replanning the
transborder shipments
• Seasonality induces
variances of cost
Costs and
efficiencies
Monitoring and replanning with
attention to cash flow and route
adaptation
Recommendations
Recommendations
• Proceed with the construction of a new Florida DC in one
year with 400,000 sf
• Proceed with construction of a new pacific northwest DC
in two years with 300,000 sf
• Monitor to assure DC-to-store travel times by 5% overall
• Re-integrate the import DCs to realize 20% savings on
transoceanic transportation
• Reconfigure the DC-to-store network including to double
the tour lengths from four to eight stores and gain 10%
savings in transportation
• Continue to realize DC network efficiency gains through
advanced technologies including RFID and warehousescience efficiencies, “shrinking the distribution chain”
Recommendations (cont.)
• Adapt the DC network continuously with attention to reducing
transportation, inventory, labor, and facility costs toward growing
customer value and ROI on incremental investments
• Track the actual growths, throughputs, inventories, etc., relative to
the forecasts of 22% growth to 2018
• Realize additional savings through lease agreements and laborsharing agreements with other shippers
• Continue to emphasize a quality metrics program for the DC-tostore network to identify anomalies and reduce variance through
adjusting tour lengths, DC-to-store relationships, etc.
• Continue to realize efficiencies through integrating the Mexico and
US networks in vendor-to-DC transportation with import DCs,
freight forwarders etc.
• Add 50% capacity to the existing Mexico DC to address the new 46
stores, and monitor the situation for additional DCs into the future
past the 2018 horizon
Acknowledgments
• Dave Wheeler, Principal,
Supply Chain Strategy, St.
Onge Company, York, PA
• Participants of the PanAmerican Advanced
Studies Institute on
Logistics on Simulation
and Optimization of
Globalized Physical
Distribution Systems
• Pontificia Universidad
Catolica, Santiago, Chile
Orange Advanced Logistics Team
Pres. Osvaldo de la Fuente of1969@gmail.com
Ing. Brittany Green brg73@pitt.edu
Ing. James Lambert lambert@virginia.edu
Ing. Tish Pohl lpohl@uark.edu
Ing. Christopher Wishon cwishon@asu.edu
AWOHi gets bigger-Network of distribution centers
addresses 22% growth to 2018
i
H
W
AO
Questions?
Issues we need to address
• Growth in number of stores, allocation of stores to DCs
• SKU proliferation causing issues within the DC in terms of
slotting and inventory carrying
– Address with WH layout and operations
– Highly skewed demand implies a need for both reserve and forward
areas
– Technology be employed to increase throughput
• Growth in imported products
• “Competition migrating to highly responsive supply chain”
– Implies more DCs, not fewer?
– More frequent trips to retail stores? Investigate routes with > 4 stores
per route, but more frequent? How would this impact configuration of
network?
– Develop online sales and start doing order fulfillment at DCs?
• Increasing fuel costs
Make sure these issues are
addressed…
• Given the migration to incremental import product
– How will inventory be impacted if current direct to DC
approach is continued
– What alternative import methodologies should be
considered
– For each methodology considered, determine the:
• impact to inventory
• impact to facility costs
• impact to freight
• impact to store service
Make sure these issues are
addressed…
• Determine if the current DC network is appropriate given
the future store growth, DC capacities, increasing fuel costs
• If additional DCs are needed, determine the:
– appropriate location and relative size of each additional DC
– impact on the current DCs throughput, inventory, and service
area
– impact to DC to store freight
– impact to transit time to stores
– impact to DC costs (fixed and variable)
– the impact to network inventory
– if the changes to the network financially justified based on a
reasonable return-on-investment (ROI)