Consolidating Two Regional DCs into One Central Hub
Northline Home Goods operates two distribution centers: Memphis (410,000 sq ft) serving 230 eastern stores and Reno (240,000 sq ft) serving 150 western stores. Annual transportation spend is $41M outbound and $18M inbound. A consultant proposes a single 750,000 sq ft DC near Kansas City, projecting 9% lower inbound freight and a $3.4M reduction in inventory (from $28M to $24.6M) through consolidation. The model also shows outbound freight rising 14% because average distance to stores increases, and western store lead times stretching from two days to five. Western stores generate 22% of revenue at a 4-point higher gross margin. Current in-stock is 96.2% against a 95% target. The CFO wants a decision before the peak-season contract window closes in eight weeks. The COO is concerned about service during peak, when western volume doubles.
1. Quantify the annual financial impact of the single-DC proposal using the data given. State any assumption you make about inventory carrying cost, and identify at least three factors the cost model omits.
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Outbound: $41.0M x 1.14 = $46.74M, an increase of $5.74M. Inbound: $18.0M x 0.91 = $16.38M, a saving of $1.62M. Inventory: $28.0M - $24.6M = $3.4M lower; at a 22% carrying cost, that is $0.75M per year. Net recurring change = +$5.74M - $1.62M - $0.75M = +$3.37M per year, so the single DC costs more, not less.
The model omits: (1) margin and lifetime value at risk from western stores if lead time goes from 2 to 5 days; 22% of revenue at higher margin can dwarf $3.4M; (2) peak-season capacity, overtime, and congestion in a single building; (3) one-time relocation, severance, and system changes; (4) whether inbound consolidation survives carrier rate changes; (5) property tax, incentives, and labor availability; (6) returns and expedite costs. The $3.4M inventory reduction may also be overstated if safety stock must rise to protect longer western replenishment.
2. Recommend a network configuration and a decision process. Your answer should address the western service risk and the eight-week deadline.
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Recommend against full consolidation on the current numbers. Use a cost-to-serve view: calculate profit per store cluster after freight, lead time, and lost-sales risk, not average freight per unit. A viable counter-design is a central Kansas City DC for slow and medium movers plus a smaller Reno forward DC or cross-dock for fast-moving western SKUs; this captures most inbound and inventory savings while holding western lead time at 2-3 days. Alternatively, keep both DCs and pool only slow movers centrally.
Because the peak contract closes in eight weeks, do not attempt a full network change now. Negotiate a short peak-season extension with current carriers, run a 90-day pilot on 10-15% of western SKUs through the central DC, and measure fill rate, delivery days, and cost per order. Set stage gates: proceed only if western in-stock stays at or above 95% and net cost falls. This preserves the CFO's timeline while avoiding an irreversible service bet. Also separate the decision into reversible freight contracts and irreversible building leases.