How to Navigate Warehouse Capacity Planning? – It’s the End of the Week!

*Elements of the video have been paraphrased for readability. 

Jorge Espinosa:
Welcome back to another episode of “End of the Week”. This is the first episode of the podcast in Spanish. It’s also Germán’s first appearance on the podcast. How are you?

Germán Alonso:
Very good.

Jorge:
Do you want to introduce yourself?

Germán :
My name is Germán Alonso and I am one of the directors in the design area at LIDD. In fact, that’s what we’re going to talk about today.

Jorge :
We’re going to talk about design and capacity in warehouses. Because when you talk about design, that is one of the pillars of LIDD’s services, right?

Germán :
Right. But design is not as easy as saying “well, here’s a space where I can put my product and that’s it”. One of the first questions we always want to talk about it: when is it necessary to start thinking about capacity constraints? And the answer is all the time. One should not wait until there is a problem to start thinking about capacity.

The goal is to constantly review capacity, and establish indicators and monitor them regularly.

Jorge :
Don’t wait until there is a problem before you start thinking about capacity.

Germán :
And when tracking key performance indicators (KPIs), the important thing is to identify when those indicators have a negative trend. For example, when measuring the number of pallets held in inventory compared to the number of available reserve locations. The recommendation is to have at least fifteen percent of the reserve locations available. And this is to be able to facilitate the arrangement of the product and the restocking of the product in the distribution center. When that number decreases, then the indicator is trending negatively.

Another issue to consider is, for example, when we have many tasks to account for. In this case, the issue you have to think about is the number of replenishments per SKU in a given period of time you are handling. So, when replenishment tasks increase, it means that the indicator has a negative trend. The other thing that can be measured is, for example, the time between the moment the product is unloaded and the product’s placement in the distribution center. When that time increases, the indicator is having a negative trend.

Jorge :
So, as you follow your KPIs and your indicators, and you’re monitoring them continuously, but you start to see negative trends, is that when, or rather how, you start to identify that your warehouse or distribution center is reaching its maximum capacity?

Germán :
Precisely. If the indicators are having a negative trend, then there is most likely a capacity problem. If we go back to the example problem where the issue was the time between unloading and product placement, most likely the capacity problem is that the size of the docks is already insufficient for the current operation. The aisles may be very congested, or there may simply be no space to accommodate inventory. Sometimes they are not necessarily individual things. Many times there can be multiple things connected or not everything is connected but several are connected and there is a domino or cascade effect.

Jorge :
Sometimes they are not necessarily individual things. Many times there can be multiple things connected or not everything is connected but several are connected and there is a domino or cascade effect.

Germán :
Correct. This cascading effect makes problems not necessarily as obvious. In the case of product replenishment tasks, it is most likely because the pick line is getting too small. The location for the SKUs are small for the rotation that the items are having at that time. And we can see other symptoms, such as when there are picking errors in the orders. This can indicate there are capacity problems that limit the flexibility that we have in the picking line. There is a possibility that two very similar products end up next to each other. In this case, employees may make a mistake and select the wrong product, resulting in an order error.

Jorge :
In this case, employees may make a mistake and select the wrong product, resulting in an order error.

Germán :
Of course. And, sorry for interrupting you, but also if the aisles are congested then you can’t even get close to the product. That is going to create problems in order picking.

Jorge :
And if employees have a need to finish quickly, then they may make more mistakes.

Germán :
There may be errors in the assortment of orders that are related to damage to the merchandise. By losing flexibility in the picking line, there is the possibility or errors in the way the products are organized in the line. So basically, what can happen is that the customer receives the order and the bottles of water that are very heavy are on top of the chips and cookies which all arrive broken.

Jorge :
That would be damage to the merchandise.

Germán :
Yes, it does happen.

Jorge :
Completely.

Germán :
And there are other symptoms, such as having goals regarding the number of orders being processed daily and reaching a plateau in the number of orders being processed, even if more people are hired to work. And that means the aisles are congested.

Finally, it causes a reduction in productivity. When the productivity of the warehouse or distribution center decreases, it is a symptom of a capacity-related root issue.

Jorge :
It means that there is a problem very surely related to the capacity of the distribution center.

Germán :
Yes.

Jorge :
About traffic jams – we got stuck in Tijuana a little while ago and we almost couldn’t get out of there.

Germán :
That was a good drive huh?

Jorge :
Okay let’s move on. Since you were talking about these symptoms, what are they? In other words, you are seeing symptoms of a problem, and obviously you have to act, right? What are the consequences of you not acting today or doing nothing?

Germán :
Well, doing nothing is obviously not the solution to the problem.

Jorge :
It’s not going to solve itself.

Germán :
Exactly. There are definitely going to be issues with the productivity of the distribution center. Continuous decline in productivity will lead to its deterioration. Additionally, there will be problems related to expenses. These issues will also impact customer satisfaction and even company revenue.

Operational expenses will increase because most likely there is a need to pay employees overtime. Or maybe, since I don’t have enough capacity it is necessary to rent a nearby warehouse to be able to store excess inventory. Customer satisfaction can be affected because the customer will start receiving orders late or will receive them with errors or more defects. And the income will be affected because, most likely, sales opportunities are lost. In an extreme case, they also begin to lose customers.

Jorge :
That’s when all the alarms are ringing, right? That’s when other departments raise their hands and say we have a problem and operations are the ones to blame.

Germán :
Yes that happens very often. But, for this and many other things, the ideal is not to wait until the warehouse no longer has space right? I mean, you’re not going to wait until you’re stuck in water to say, maybe…

Jorge :
I should swim.

Germán :
Exactly. The worst scenario is waiting until there is no more capacity. In fact, it is impossible to wait until the capacity is completely exhausted. That’s like being sick and not going to the doctor until it’s too late.

The goal is to constantly monitor the established indicators and identify when those indicators have a negative trend to be able to say: “I have to do something”. And obviously when the indicators have a negative trend, you know there is a problem.

Jorge :
How do you solve this problem?

Germán :
The first option is to call LIDD. Apart from leveraging our expertise, there are different alternatives. The equipment in the distribution center can be reconfigured. Improvements can be made to operational processes. You can also change the strategy in terms of inventory management.

Jorge :
And these are alternatives that are definitely going to improve capacity.

Germán :
They are going to increase the capacity of the distribution center. However, that increase may not be enough. When you take into account what the future needs are, that capacity may not be enough. And so we have to start thinking about, most likely, doing an expansion of the building, or the need to move to a new building, a bigger building.

Jorge :
Almost always those are the three options that are talked about. Reconfiguring, moving, or expanding. But just now you mentioned future needs. How far into the future?

Germán :
The recommendation is between five to seven years. In reality, when small very frequent investments are made it creates a bad feeling with your employees. Employees think that significant changes are constantly being made in the warehouse and that’s a negative. The opposite is making very large and infrequent investments.

Jorge :
The problem with that is not achieving the return on investment that is planned.

Germán :
So, that’s why the recommendation is between five or seven years. It is the prudent thing to do.

Jorge :
So, we’ve talked about tracking KPIs, planning in advance, but once you have all of those elements, that’s when the important step comes. To solve the problem. How do you solve the problem? How do you do it in the best way?

Germán :
The important thing, again, is to monitor the indicators. Identify what are the capacity requirements that you have and find a balance between the physical and technological infrastructure that you have in the warehouse.

And basically, there are three steps you have to follow. The first is to calculate the capacity requirements, from the perspective of storage, picking line, and throughput. The second is to project these capacity requirements into the future based on the business plans and based on the sales projections that the sales & marketing department has. The third step is to design and evaluate solutions or alternatives to find that balance between future needs and the physical and technological infrastructure that is available.

We are actually finishing a book which talks precisely about the capacity of a warehouse or distribution center. Our contact info should appear on the screen again now. For those who write or call us, we can send you a drink…

Jorge :
A copy.

Germán :
A copy, not a drink.

Jorge :
We’re not drinking yet!

Germán :
A copy of the book to learn more about capacity.

Jorge :
Well, we’ve reached the weekend.

Germán :
There are still some good summer days here in Montreal.

Jorge :
We have to keep taking advantage of them. Let’s see if it rains again. Do you have any plans?

Germán :
No, just organize myself for next week but there is no particular plan. Maybe go for a walk and take advantage of the good weather.

Jorge :
Very good. Well Germán, thank you!

Germán :
See you later, until the next episode in Spanish!