AutoZone's push for more distribution centers: When does expanding your DC network have diminishing returns?

AutoZone has recently made headlines with its aggressive construction of new distribution centers (DCs) referred to as “mega hubs.” These mega hubs are designed to replenish nearby stores more efficiently and enhance inventory availability, and the retailer intends to build 200 of them over the next few years. While expanding a distribution network offers numerous benefits, it also raises the question: When does this expansion start to yield diminishing returns?

Benefits of expanding distribution centers

  • Improved delivery speed: By having more DCs closer to retail locations and their end users, AutoZone can reduce delivery times, leading to faster replenishment and order fulfillment, with higher customer satisfaction.
  • Increased inventory availability: Single, large locations can afford to stock a longer “tail” of lower-volume items, allowing each AutoZone store to offer a broader selection of products.
  • Sales growth: As delivery speed and availability improve in new geographic markets, there is almost always a corresponding increase in sales.

Downsides of expansion

  • Operational costs: As the number of DCs increase, so do the operational costs, particularly internal freight costs as material is shuttled between hub locations and retail stores. Each new DC also requires investment in infrastructure, staffing, and various carrying costs. All of these costs can be very hard to quantify.
  • Inventory management complexity: Managing inventory across a larger network of DCs becomes increasingly complex. For each location, for example, supply chain planners must decide whether or not each supplier should replenish directly into a facility, or use a hub- and- spoke system. This complexity can lead to inefficiencies and higher costs.
  • Market saturation: There is a point at which adding more DCs does not significantly improve market coverage. Beyond this point, the additional benefits of new DCs are minimal.
  • Complexity in demand routing:  If a customer places a multi-line order and one item is out of stock at the nearest shipping location, the order may need to be split and shipped from different locations. This increases outbound transit costs and affects the customer experience, as parts of the order may arrive on different days.

Global vs local fill rates

Many companies focus on their network-wide or “global” fill rate. For example, if a customer in California orders a product that is out of stock at a nearby DC but has availability in a DC across the country, you might think that you have successfully filled that order from stock. However, the customer experience (having to wait several days for a separate shipment) and the financial implications (an added shipment, with a high transit time or zone count) likely mean that the order didn’t add much to your bottomline.

Moreover, some sales channels, such as Amazon, won’t even display a product to customers (or will significantly downgrade its ranking) if it isn’t available at a location that can deliver within a target timeframe.

Keeping a focus on local in-stock rates is critical — and as those rates rise, network-wide in-stock rates will naturally increase as well.

Hub-and-spoke vs direct replenishment

With multiple facilities, you now have the option to replenish one location from another, larger location, rather than the supplier. Such a hub-and-spoke relationship can create substantial savings, especially for suppliers with high order minimums or incentive requirements. 

However, internal freight and labor costs will increase, and the marginal change in these costs due to hub-and-spoke replenishment can be tough to isolate. Furthermore, high order or free freight minimums can make it impractical to use this model for some suppliers/facilities. 

Ideally, you constantly monitor these factors and update your direct buy vs hub-and-spoke settings for each supplier in each facility.

 

Testing the waters

Before committing to a new facility, it may make more sense to use a 3PL or other non-owned infrastructure to test the impact of stocking products in new locations. If the program is successful, a more substantial investment (in inventory, facilities, staff, etc.) can be scaled up over time.

Conclusion

A strategic, data-driven approach is essential for distributors looking to optimize their distribution networks. Hydrian has several tools to assist in network planning, transition into new facilities, and ongoing operation and replenishment.

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