DISTRIBUTION & MANUFACTURING

---

Manufacturing and distribution goes hand in hand to deliver the best products to the hands of consumers as quick as possible with the most cost efficient method. The e-Commerce industry has revolutionized the distribution channel to same-day or next-day delivery. This covers not only dry goods, but also includes fresh produce and other non-durable items using cold chain logistics. Strategically locating the next distribution center and deciding to outsource or self-operate your 3PL are several of the key questions that our client has asked DPO&Co to help.

CASE EXAMPLE

6-Week Project: Developed a robust Total Cost of Ownership (TCO) model for a ~$6B grocery wholesaler, evaluating NPV of several scenarios to support rapid sales growth

• Client was a leading food distribution company, providing national and independent grocery stores with various food & beverage products including fresh produce, dairy, dry and frozen items
• The client was experiencing rapid growth >10% YoY in their niche organic frozen and cold storage categories in several regions
• The client struggled to create a fact base to quantify the pros / cons of existing DC expansion vs. building a new DC in nearby regions
• The client requested a regional optimization tool of existing DCs in the most urgent region, but that could be reconfigured to evaluate other regional DCs in in the future
• Client hired DPO&Co to develop a regional optimization model that encompassed end to end supply chain cost in managing DC options for projected storage space growth while minimizing the TCO

• Conducted key stakeholders interviews and established cost assumptions by collecting:

1. 3 years’ sales projection & growth rate for perpetual / terminal value 
2. Historical inbound / outbound trans rates and nodes for heat mapping
3. Warehouse / DC labor, asset, and other operational costs
4. Inventory allocation by product type, turnover, customer locations, etc.

• Built a robust and flexible total cost model covering:

1. DC operational cost (incl. labor, utilities, construction cost, etc.)
2. Inventory holding cost
3. Inbound / outbound trans cost

• Built sensitivity analysis on spaces required and TCO by multiple factors to facilitate decision making: 

1. Inv. turnover & storage to cube rate
2. Organic turn improvement
3. Inflation rate & perpetual growth rate
4. # of FTE & labor hourly rate

• Developed an interactive and refreshable TCO model based on Net Present Value (NPV) for the largest region ($1B+ revenue) that can be adapted for other DC locations:

1. Quantified each cost component and difference among scenarios
2. Ability to easily change assumptions by a toggle, e.g. % labor based on space or sales. Inbound based on x-dock or direct shipment
3. Ability to easily adjust model parameters, e.g. sales growth, labor yearly ramp-up, capital overhang duration, etc. with automatic flow through 28 tabs of the model
4. Simple to use“Owners Manual” for how to get the most value possible from the model

• Determined the most cost effective solution for regional optimization by using the model output to drive strategic recommendations, which options varied ~$95M-$150M in NPV
• Highlighted qualitative and service level improvements involved in each scenario 
• Developed distribution strategy with ~3,500 destinationscovered and 7 different scenarios