Americas Women-Owned Hardware International (AWHOi): Capacity Plan of Logistics and Distribution Centers

Report prepared for the AWOHi Corporationby Orange Advanced Logistics Consulting, S.A.,

Santiago, ChileAugust 16, 2013

Utilizing premium artisan materials in the traditions of centuries of

american and european design and quality.

Shop more AWHOi stores now in the US and

Mexico!

Expanding boutique

hardware and concierge

services for the modern home

and garden

“…hooks, bobs, gadgets, hinges, rivets, racks, pins, polishes, and the

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 ScopeRevise 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– 2012 Store Count: 4,617 – 2018 Store Count: 5,661YES!Current Sourcing

Scenario: 2018 OR FL NC KS OR-FL OR-NC FL-NC OR-NC-FL1 OR-NC-FL2California X X X X X X X X X X

Georgia X 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 XOhio X X X X X X X X X X

Oregon (Portland) X X X X XFlorida (Ocala) X X X X X

North Carolina (Durham) X X X X XKansas (Olathe) X

DCs Opened: 8 9 9 9 9 10 10 10 10 11

Tested Scenarios

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

EuclideanResults

RectilinearResults9 DCs

10 DCs

11 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 milesSt. Dev: 167.81 miles

DC-to-Store Distances

Average Distance: 197 milesStandard 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 2018Should 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)

21

Sq. Ft.1,000,000

380,000600,000748,000155,000800,000250,000600,000165,000600,000

1,700,0002,200,000

600,000 1,250,000

150,000 105,000

500,000115,000783,000

2,100,0001,400,000 250,000

3,300,000

Academy SportsAdvance Auto PartsBass Pro ShopsBest BuyCiti Trends FashionDollar TreeFarmer’s FurnitureFred’sHugo BossIcon H & FIKEAKmart-SearsKohl’sLowe’sMidwest Air TechnologiesNoritakeOneidaPaper TigersPier 1 ImportsTargetThe Home DepotTire RackWal-Mart (2)

Source: Georgia Port Authority Presentation, Curtis Foltz, Oct 1, 2007

Importers Serviced by Port of Savannah 20+ Savannah-area import DCs, 200+ more within 5 hours

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

12012 Current Sourcing

Expected Growth in Mexico

• Growth of 196 stores– 150 in Mexico (113 in Mexico City)– 46 in Central America

FY12 FY13 FY14 FY15 FY16 FY17 FY18

CA 7 11 15 46

Mexico 330 370 410 440 460 480 480

0

100

200

300

400

500

600

Stor

es

Mexico/CA Growth

Estimated Increase in Transp CostsAssuming $1.23/kilometer and current network

2012 2018

Laredo to Monterrey

Throughput 330 524

Distance (km) 220

Annual total Cost to Monterrey

$427,500 $678,818

Monterrey to Mexicali

Throughput 40 46

Distance (km) 2173

Annual Cost $713,900 $841,721

Monterrey to Mexico City

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 2012 2018

Capacity at Monterrey DC

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

12012 Current Sourcing

+46 Stores

+113 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

12012 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 ADC-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 ManagementSources 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-to-store costs rise or fall

Costs and efficiencies

Monitoring and replanning the DC-to-store 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 network capacity

Update emergency response planning, 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 supplyUtilization, 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 warehouse-science 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 labor-sharing agreements with other shippers

• Continue to emphasize a quality metrics program for the DC-to-store 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 Pan-American 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.comIng. Brittany Green brg73@pitt.eduIng. James Lambert lambert@virginia.eduIng. Tish Pohl lpohl@uark.eduIng. Christopher Wishon cwishon@asu.edu

AWOHi

AWOHi gets bigger-- Network of distribution centers addresses 22% growth to 2018

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)