A West Coast DC Proposal at a Single-DC Distributor
A distributor ships from one DC in Columbus, Ohio, on $180M revenue, with freight at 7.8% of sales. Sixty-eight percent of orders go East, 22% West, 10% elsewhere; the top 200 accounts are promised next-day delivery. A 3PL offers a West Coast DC for $1.4M a year in fixed and committed costs. West shipments are estimated to carry about 30% of total freight spend because of distance. Inventory is $22M at a 25% carrying cost, and roughly 60% of supply is sourced from Asia into Columbus. The COO wants a go/no-go within a month.
1. Build the cost case for and against the West Coast DC.
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Against today's baseline:
- Total freight: $180M × 7.8% = $14.04M; West share ≈ 30% = $4.2M.
- A local West DC typically removes 35–45% of delivered cost on that lane (line-haul replaced by inbound consolidation plus short local delivery) → savings of roughly $1.5M–$1.9M.
Costs added:
- 3PL fixed and committed: $1.4M.
- Inbound: 60% of supply arrives in Columbus from Asia. Serving a West DC means either splitting the inbound or transloading - realistically little or no inbound saving, and possibly a new inbound leg. Add $0.1M–$0.2M.
- Inventory: total $22M; West share maybe 25% ≈ $5.5M. Two DCs forecast independently, so safety stock rises ~25–35% on that portion → +$1.4M–$1.9M of inventory × 25% carrying = $0.35M–$0.5M per year, plus duplicated obsolescence risk.
Net: roughly break-even - between −$0.4M and +$0.2M, well inside model error. The honest conclusion is that the cost case alone does not decide this; anyone presenting a clean positive number is choosing favourable assumptions.
2. What else moves that is not in that arithmetic, and how should it be weighed?
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The proposal is really a service investment wearing a cost-case costume - so evaluate it that way.
- Service: a West DC converts 2–3 day ground service into next-day for West accounts, which is the actual basis of the top-200 promise. Quantify the revenue at risk in West accounts that are currently served slower than promised, and the win rate on West prospects. If that number is well above $0.5M of annual gross margin, the case is positive even at break-even freight.
- The promise itself: with one DC, next-day to the West is either being met by premium air (invisible in the 7.8% average) or quietly missed. Check the actual service performance by region before assuming the baseline is honest.
- Order behaviour and mix: shorter lead time usually shifts order patterns to smaller, more frequent orders - which raises pick/pack cost and can erode part of the freight saving.
- Complexity and risk: two inventory positions, double the SKU-location forecasting problem, duplicated cycle counting, split customer service, and a new single point of failure on the West Coast. These are real costs even when unquantified.
- Fixed commitment risk: a three-year $1.4M commitment is a bet on a demand forecast for a region you do not currently serve well.
3. What do you recommend to the COO, and what cheaper alternatives should be tested first?
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Recommend: do not sign the three-year commitment on the current analysis; approve a 90-day test of a variable-cost West presence and return with a service-and-revenue case.
Cheaper intermediates to test in parallel:
- Zone-skipping or a pool point (e.g., Reno or a West carrier hub) - trailer-load from Columbus to the pool point, local delivery from there. Captures much of the line-haul saving with no fixed DC.
- Cross-dock with a 2-day ground promise for West accounts, sold honestly rather than discounted by expedite spend.
- Carrier and mode mix review - the 30% West share of freight may reflect a parcel-heavy mix that a regional carrier or consolidated LTL lane would price better than a new facility.
- A 3PL with variable commitment and a 12-month exit rather than a three-year fixed deal, so the demand assumption can be validated.
Decision rule to give the COO: proceed with the fixed West DC only if (a) West service gaps are demonstrably costing more than $0.5M of annual gross margin, and (b) a single shared forecast across both locations is in place so the inventory duplication is bounded. Otherwise take the pool-point route and revisit in twelve months.