How Big Should I Build My Distribution Center?

By Steve Johnson, Johnson Stephens Consulting, Inc.

The vice president of distribution calls and the first question asked of the distribution center design consultant is: “Can you help me layout my new 200,000 square foot distribution center?” The design consultant (if he is doing his homework properly!) replies with: “Only if you tell me how you decided it should be that size!!” Why, you ask?

The answer lies in what should truly be the first question in planning for a new distribution facility. That question should be “Can you help me: a.) determine what size distribution center I need for my business planning horizon, and b.) help me layout out the center after you determine the appropriate size?” If you have been sizing your distribution centers based upon broad business benchmarks (i.e. square feet per million sales volume, etc.), please read further for there is a much better way!

In performing distribution center planning, design, and implementation efforts, the most common mistake centers around how to size and build the appropriate distribution center square footage. Many companies do not take the time and effort to truly assess what their strategy should be with regards to the required capacity that drives the amount of facility square footage. This up-front planning can cost millions in terms of needless capital investment and result in poorly sized facilities that don’t match the business requirements. Material Handling Equipment (MHE) systems such as conveyor and storage rack requirements must be calculated carefully. For example, when planning for Inventory storage rack capacity, the following process should be followed:

Strategize – Conduct an effort to review or develop a five year distribution operating plan. This plan should start with projected company sales (or units, if a company does not wish to divulge its sales) by year and by major sales channel (i.e. fulfillment vs. stores, etc.). When planning storage capacity, the projected peak distribution center inventory in dollars, units, and cartons by category should then be developed. A monthly average inventory plan with annual inventory turns is next. All of the above items must be grown for the five year horizon. Remember that inventory will probably not grow “1 for 1” with sales (it should grow at a lower rate; if not, you have other problems!).

Plan – Using the strategic information above, develop a detailed space requirements analysis for the facility. This analysis will take peak storage units, cartons and convert them into linear feet or pallet positions. Based upon the types of storage racking needed, space projections can then be developed using the linear feet or pallet positions required. The five year space plan will assist in assessing what your initial space build needs to be (i.e. you may want to build out through year 3 of the plan and hedge the final two years of the plan if you have some uncertain growth in the out-years of the plan).

Steve Johnson is a founding Principal of Johnson Stephens Consulting, Inc. and a frequent contributor to publications from top supply chain operations trade organizations such as the Material Handling Industry of America. He is the 2009-2010 President of the Association of Professional Material Handling Consultants (APMHC), a Professional Society of the Material Handling Industry of America.

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