Strategic Master Planning: A Distribution Imperative

by James A. Tompkins, Ph.D., and Dale A. Harmelink

Distribution strategic master planning allows a company to determine the effectiveness of various warehouse
sites without making a capital expenditure. It is an important tool for creating an integrated distribution strategy,
reducing costs and improving customer service.
Dr. James A. Tompkins is founder tion reveals the necessary traits of a consists of the following seven-step ap-
and president of Tompkins Associates good distribution strategic master plan. proach:
Inc., a Raleigh, N.C.-based engineer- A good distribution strategic master 1. Document the existing distribution
ing consulting firm specializing in mate- plan relies upon a defined set of re- network.
rial handling, facilities planning, quirements. It should not be composed
warehousing and integrated manufac- 2. Define future distribution require-
simply of ideas, thoughts or possibili- ments.
turing. Dale A. Harmelink is an engi- ties that have not been researched as
neering manager with Tompkins to their validity. Possible requirements 3. Define alternative distribution net-
Associates. should be defined, analyzed and evalu- works.
To implement improvements in ware- ated and should result in the develop- 4. Evaluate alternative distribution net-
houses that have been given an incor- ment of a specific set of strategic works.
rect mission will only result in doing requirements. Common logistics re- 5. Conduct an economic analysis of al-
the wrong things efficiently. With the quirements are: restraints on delivery ternative networks.
tremendous changes taking place in time, sales forecast, and the terms and
transportation costs, inventory carrying conditions of an order. 6. Select and specify the recom-
costs, customer requirements and mended plan.
A good distribution strategic master
product diversification, it is indeed na- plan is also action- oriented and time- 7. Update the distribution strategic
ive to believe that the missions that phased. Where possible, the plan master plan.
have evolved for warehouses are the should set forth very specific actions to The first step involves the documenta-
proper missions for today. It is clearly be taken to meet requirements rather tion of various statistics about the pre-
time to establish a distribution strategic than simply stating the alternative ac- sent distribution network. For
master plan by answering the following tions available to meet those require- simplicity, this information is classified
questions: ments. The distribution strategic under three main categories: customer
1. How many warehouses should ex- master plan is based upon a set of and vendor requirements, transporta-
ist? premises concerning future sales vol- tion requirements and policy require-
2. Where should the warehouses be lo- umes, inventory levels, transportation ments. The breakdown of the
cated? costs and warehouse costs. A formally information required is shown below.
written plan and maps should accom- A. Customer and vendor require-
3. What transportation strategies pany the recommended action to de-
should be applied? ments include:
scribe and illustrate how the logistics
4. What should be the mission of each network will be implemented and oper- 1. location of customers and vendors;
warehouse? ated. 2. number of customers and vendors;
Qualities of a Distribution Strate- Finally, a good distribution strategic 3. variety of goods ordered;
gic Master Plan master plan should encompass a 4. lead time for delivering orders;
specified planning horizon. It should
A distribution strategic master plan is 5. facility equipment and design;
have a definite ending point. Normally,
developed to meet a specific set of re-
the planning horizon is stated in terms 6. distribution of labor force and labor
quirements over a given planning hori-
of years. A five-year distribution strate- costs;
zon. A good plan will determine the
gic master plan is typical. 7. inventory levels and inventory carry-
optimal logistics network that will pro-
vide customers with the right quantity Developing the Distribution Stra- ing costs; and
of goods at the right place at the right tegic Master Plan 8. annual sales volume.
time and minimize the total distribution The general methodology for develop- B. Transportation requirements in-
costs. Closer examination of this defini- ing a distribution strategic master plan clude:
1. size and type of load;

Document # 50980 Industrial Development, December, 1991

Copyright © by Conway Data, Inc. No part of this document may be reproduced without express written permission from the publisher.
2. number of deliveries; for the XYZ company, we must use handled directly from a central ware-
3. frequency of deliveries; various shipment sizes. house, but all larger orders are han-
4. delivery times; In collecting policy information it is nec- dled by required warehouses.
essary to verify that the present net- Evaluate Alternative Distribution
5. functional description of delivery op- work actually meets its own Networks
erations; and requirements. A good way to check
To logically evaluate alternative net-
6. condition of the delivery route; whether or not the present network is
works it is usually necessary to de-
C. Policy requirements incldue: meeting delivery requirements is to
velop or purchase a computer model
send out prepaid survey cards with ran-
1. time available for delivery; to simulate different distribution net-
dom shipments to various geographic
works. Illogical distribution scenarios
2. vehicle capacities; and locations.
should be eliminated even when using
3. terms of order. Defining Future Distribution Re- a computer. This will eliminate many
For our purposes, a customer or ven- quirements combinations and decrease the com-
dor will be classified as a geographic Future requirements are based on pre- puter run time.
point where products are either trans- dictions concerning sales forecasts, in- The optimal distribution network will
ferred, manufactured, stored or ventory turn rates and delivery times. minimize transportation costs and in-
shipped. These points are usually ven- Any future policy changes should be ventory carrying costs while meeting
dors, consolidation centers, ports, fac- analyzed for their feasibility before be- the requirements placed on the net-
tories, field warehouses, break-bulk ing selected as a requirement. For ex- work. Figure 1 illustrates the relation-
centers or users. When collecting infor- ample, a change in delivery policies ship between inventory carrying costs
mation relevant to customers and ven- from three days to six days could dras- and transportation costs. Generally
dors, it is important to identify each tically alter the distribution network and speaking, when the number of regional
customer and vendor by its geographic cost. Many intangible factors such as warehouses increases and becomes
location. An excellent way to stand- customer acceptance and shelf life closer to market areas, transportation
ardize and simplify locations for model- must be considered before a delivery costs decrease while inventory carry-
ing is to use the first three digits of a period is changed. ing costs and customer services in-
zip code. It is also important to gather crease. The opposite is also true. As
statistics related to cost, ordering hab-
Defining Alternative Distribution
the regional warehouses are removed
its and maximum storage and through- Networks
from market areas, transportation
put capacities for each customer and It is important that alternatives are well- costs will increase while inventory
vendor. thought-out ideas backed up with costs and customer services de-
Transportation data should be col- facts. Alternative sites may be identi- crease. Consequently, the optimal net-
lected not only to identify the size and fied by grouping customer zip codes work balances transportation costs
frequency of loads shipped but also geographically. This will help pinpoint and inventory carrying costs and
the variations of order sizes. For exam- strong market areas. Logical sites are meets customer service requirements.
ple, company XYZ manufactures retail usually near interstates, highways or The least cost network is not always
charcoal grills. Shipments to a cus- major freight terminals. the network that should be imple-
tomer in Michigan will be small in the Alternative sites should be researched mented. The cost to implement the
winter months when the demand is low and all the information that was gath- least-cost alternative may outweigh
and large in the spring and summer ered for an existing customer and ven- the savings it generates.
when the demand is high. By identify- dor should be collected for alternative Conduct Economic Analysis and
ing this variation, a model can be de- sites. Accurate information must be Select Plan
veloped that will accurately represent gathered to fairly evaluate an alterna-
actual transportation costs. Applying tive and not create bias to any one site The next step is to utilize an economic
this to our example, we see that large over another. analysis to compare alternative distri-
shipments of grills in the summer bution networks. This step determines
A critical set of alternatives that are which network should be pursued by
would cost more than small shipments often overlooked are hybrid alterna-
in winter; however, the cost per pound tives. For example, all warehouses comparing the cost of rearranging the
or cube would be lower with the sum- present network into the optimal net-
stock ‘‘A’’ inventory items, but ‘‘B’’ and work. All the costs associated with relo-
mer shipments. Therefore, to accu- ‘‘C’’ inventory items are handled by a
rately model the transportation costs cating a facility must be identified and
central warehouse, or all orders less economically compared to the savings
than 100 pounds (45 kilograms) are

Document # 50980 Industrial Development, December, 1991

that the optimal network will generate. 1 Day, L. Linn. ‘‘Facilities’ Role in Stra-
This step is no small task since there tegic Planning,’’ Industrial Develop-
are various factors that require consid- ment, March/April 1988, vol. 157, no.
eration when relocating facilities. Items 2, pp. 12-16.
such as layoffs, training new employ- 2 De Meirleir, Marcel. ‘‘Strategic Facil-
ees, stock relocation, employee reloca- ity Location Analysis,’’ Industrial Devel-
tion and governmental support must opment, January/February 1990, vol.
be considered. Once all factors for relo- 159, no. 1, pp. 1-4.
cating have been captured, an eco-
nomic analysis and a qualitative 3 MacDermott, Richard C. ‘‘Recent
analysis can be performed to select Trends in Location Analysis,’’ Industrial
the recommended strategic logistics Development, September/October
plan. The next step, once the plan is 1986, vol. 155, no. 5, pp. 21-22.
chosen, is to specify the procedure to 4 Mount, Sharon K. ‘‘Strategic Facili-
implement and recommend the plan. ties Planning as a Component of the
Update the Distribution Strategic Business Plan,’’ Industrial Develop-
ment, July/August 1990, vol. 159, no.
Master Plan
4, pp. 1-4.
The first six steps of this procedure will
5 Wilson, Reese C. ‘‘Strategic Position-
result in a distribution strategic master
ing and Facilities Planning: Reviewing
plan, but the strategic planning proc-
Business Plans and Facilities Strate-
ess will not be finished. In fact, it will
gies,’’ Industrial Development,
never be finished because strategic
March/April 1991, vol. 160, no. 2, pp.
distribution planning is a continuous ac-
26-30.
tivity. The seventh step in the process
is updating the distribution plan. By its ID INDEX
very nature, a distribution strategic CORPORATE MANAGEMENT
master plan is inaccurate. The plan is
TOMPKINS, JAMES A. AND DALE A.
based to a large extent on predictions
HARMELINK
of the future and will require updating
as better information concerning the fu- ‘‘Strategic Master Planning: A Distribu-
ture is obtained. Consequently, it tion Imperative,’’ Industrial Develop-
should never be used as a precise tool ment, November/December 1992, vol.
but only as a valuable guideline for 161, no. 6, pp. 12-14.
planning future distribution operations. 1 Distribution strategic master planning
Conclusion 2 Distribution facility planning
There is no time like the present to initi-
ate distribution planning. It is better to
tackle long-range planning now to gain
foresight into the future than to use
hindsight when the future arrives. Us-
ing distribution strategic master plan-
ning as a tool allows a company to test
various sites to determine their effec-
tiveness for the customer without a
capital expenditure. The bottom line is
that distribution strategic master plan-
ning is an important tool to create an
integrated distribution strategy, reduce
costs and improve customer service.
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Document # 50980 Industrial Development, December, 1991