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Is new built a solution of last resort?
December 2008 - by Patrick Colpaert
HERENT – With the exception of the “antique” business, nobody is getting better by storing goods for longer times than necessary. Even logistic service providers, exception excluded, do not make their shareholders happy with “Buffer”. Following, new built as an increase to existing capacity may be an inferior solution. Only flow, moves, extra handling is creating value.
Altough it looks like a devil to optimization,
sufficient space is a prerequisite to a lean
organization thereby avoiding other types of waste.
More than prestige
Luckily enough in most of the cases prestige is only one of the last factors that determines the decision whether or not new built is the preferred solution. This does not mean that prestige should never be a decision element. Specifically for service providers and companies having difficulties in attracting or retaining skilled labor a new building could provide with a more attractive image. In this case a new built is not a part of a Supply Chain decision process but an integrated part of the HR policy.
The wrong criteria
A part from prestige a number of other, what we consider “ wrong” criteria are often used to justify a new built. Many times it’s the so called opportunity that, triggered by real estate organizations, makes entrepreneurs think that they should move into that direction. From the moment the acquisition of land is not driven by a strategic fit with the companies mission, it will always be a wrong decision. Although prices may look attractive and although land is scarce (especially in our regions) making prices rise every year, a decision process should never be driven by it.
Too many times the current operation is taken as an simple extrapolation point to determine the future needs for space. The current operation is not sufficiently questioned and challenged on its efficiency. It is obvious that a decision is wrong if based on the wrong starting points. The same goes for short term market evolutions. By the time the new built has been thoroughly discussed, agreed and constructed the market trend is outdated.
Another evenly wrong criterion lies in watching competition. A part from the fact it could be considered as an act of intellectual weakness, it is seldom a good idea since only fragments are known about the competitors strategy. We believe only as an element of a full picture a decision on a new built can be taken.
A more appropriate decision process
As with all strategic decisions, and a new built is a strategic decision, it should start from the companies vision, strategic challenges and long term market trends.
Some of the questions that should be raised in this strategic phase are:
- Will we continue to serve the same markets?
- Will our product portfolio and thereby cost structure remain the same in the foreseeable future?
- Will our market position as a niche or volume player continue?
- Will we maintain our positioning towards our customers: price versus service?
- Physically, will our supply or customer base move?
Once this commercial strategy is clear and agreed upon, a number of scenario’s can be worked out and checked on sensitivities.
Next the current operation should be closely looked at. What are the current weaknesses of our operation and is a new built a solution. This analysis should not be underestimated. Here the saying: “garbage in garbage out” is more than true. It is an illusion to think that a new warehouse will solve operational problems. With our experience we always see the opposite, they enhance the problems to make them really insurmountable.
Much more appropriate is applying the lean-principle, scan the waste (extra handling, extra shuttles, extra transport distances to your market,…) and see if you do so.
Another obvious element is: Do we need an own warehouse? Maybe, maybe not, outsourcing could be the answer. And last but not least, do we have to (re)build our own warehouse?
The correct answer to this last question will be found in the outcome of the study and reflections around the former stated key principles;
- What is creating value in the company’s business?
- How lean can we be?
- How do we use the company’s money for further deployment?
Still some important elements to take note of;
- Space, or having enough space is a key element in the lean principle meaning that having not enough space is leading towards (extra) waste in optimization of the flows
- Space is not the most important cost factor in the total cost of ownership for the supply chain; the yearly cost of 1K m2 is less than the yearly cost of 1 extra FTE (the standard ratio for a conventional warehouse is >3 FTE per 1000 m2)
- The outsourcing of the warehouse activities could be a valid or better option as far as 1) the company has the supply chain processes fully under control and transparent 2) the full supply chain stays as lean as possible.
A simple question in some difficult times can lead to some revealing answers. Only when all these options have been thoroughly considered and the solution still points at a new built, one could say that this new built was the best, although last, resort.
