Retrofit or Build New? Balancing Short-term and Long-term Objectives - Part 1

At one time or another, everyone in business has joked about the dog catching the car analogy. Day after day, the canine persistently and tirelessly chases the car. Finally securing his quarry, the question urgently becomes: Now what?

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This is the first in a series of blog posts from FORTE exploring the topic of retrofiting an existing facility or building a new one entirely.

Don't Panic

At one time or another, everyone in business has joked about the dog catching the car analogy. Day after day, the canine persistently and tirelessly chases the car. Finally securing his quarry, the question urgently becomes: Now what?

We face the same dilemma when our sales plans succeed wildly beyond our expectations, a new product hits it out of the park, a competitor's failure opens a new door, or we've finally landed on that "disruptive" idea that makes us the darling of the marketplace. What are we going to do now? How are we going to deliver the goods?

As the executive responsible for your company's distribution and fulfillment, it's decision time. Should you: Expand in your current location to add reserve storage capacity and more pick locations; upgrade through technology and automation; build new in an existing brownfield facility; embark on a greenfield project; or engage the services of a third-party logistics (3PL) provider? Perhaps the urgency is such that we choose one of these or another option as a stopgap while we seek a more permanent and cost-effective solution.

Arriving at the best "immediate" solution begins with a thorough grasp of your company's strategies, goals, market projections for growth, etc. And I mean a thoroughly clear, precise understanding. Then you can proceed with an evaluation of your current situation with all its pressures and constraints. A good place to start is an analysis of the data and metrics generated by your WMS and/or WCS systems. But answer this question honestly: Do you have the analytical tools, knowledge and experience to turn this information into effective problem-solving actions? If not, swallow that ego and engage a trustworthy consultant who can not only assist with this immediate DC assessment and temporary fix but can guide you through the longer term planning needed to effectively support the upsurge in business volume, whether that involves a supply chain network optimization, or a distribution center design, or both.

Okay, so now you've patched together a short-term response to your urgent DC fulfillment problem. But it's a Band-Aid, not a cure. You still need to find a "best-in-class" solution to your current DC needs with the inherent flexibility to adequately and cost-effectively address future capability/capacity requirements. Now what?

In a series of subsequent blogs, we'll review the steps you must take on the path to achieving this long-term goal. Next up: "To Retrofit or Build New? Balancing Short-term and Long-term Objectives." When land, real estate, existing vacant facilities and capital are relatively cheap as they are now, a brownfield or greenfield implementation is tempting. Expansion of a current facility or its retrofit, however, may be the perfect solution.

Impact of Multi-Channel Distribution

But there is something else to consider in the "retrofit or build new" equation: The impact of multi-channel distribution and its consequences not only for retailers, but also for distributors and manufacturers.

A FORTE-sponsored study by Peerless Research Group on behalf of Modern Materials Handling (June 2013) neatly summarized the multi-channel distribution phenomenon:

"The market is moving to a buy from anywhere/ship from anywhere/deliver to anywhere distribution model. Customers can buy an item in a retail store, over the Internet from a PC or laptop in their home or office, from their smart phone or their tablet or do it the old fashioned way and ring up a call center. That order can be filled from the distribution center, a 3PL, a retail store or shipped from a manufacturer or vendor. And it can be shipped to the customer's residence or business; picked up at a store or delivered for pickup at a third party location."

The ramifications of multi-channel distribution are immensely significant - even game-changing. It is imperative to evaluate its potential impact on your company's business model and factor it into not only your DC operations plans but in your marketing distribution strategies as well.

When deciding whether to retrofit or build new, the most important consideration is this: How long can the current DC support projected growth? Sometimes an existing warehouse can be retrofitted and/or expanded to adapt to current and forecasted business levels. To determine if this is the right approach, several factors should be examined.

First, evaluate the existing structure and its location. Upon confirmation of the additional square footage required, a series of questions must be answered:

  • Is the property landlocked?
  • Is there room on the property to permit building expansion in at least one direction?
  • Are load-bearing walls, offices or key mechanical junctions impediments to expansion?
  • Can the roof be raised to create additional cube?

Next, thoroughly examine the MHE and associated systems to determine:

  • Had they been designed for future expansion?
  • Can these current MHE systems be expanded in the same direction as the physical building?
  • Were the building and equipment within originally designed as separate projects without consideration of potential future flexibility?

Finally, consider total cost. Overcoming the physical obstacles and civil expense of a retrofit/expansion may easily exceed the cost of building new. Your cost analysis should also include a calculation for lost efficiency while operating out of a DC under construction. Then there are the negative "opportunity costs" associated with disruption to customer service that may result in unsatisfied customers or worse, lost customers.

For these reasons, many companies undertake a retrofit as a short-term stopgap, making small changes to achieve incremental improvements in existing operations while a new facility is being designed and built. Installing new MHE which could later be relocated to a new facility; implementing new, more efficient workflow processes and practices; or layout and organization changes are often enough to yield more economical and accurate distribution performance in the short term.

A properly executed retrofit can give you the necessary time to plan, design and implement a new scalable and flexible facility to meet long-term operational goals, including optimized operations, maximum utilization of labor, and provisions to accommodate future growth.

The next two blogs will examine the procedures of the planning phase. Subsequently we'll discuss the design, testing and implementation phases. 

This blog previously appeared as a blog on FORTE. To view the original, or for more information, please visit www.forte-industries.com.

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