Charles Kantz, a supply chain consultant, posted the following questions on LinkedIn today:

Are DC/Whses going to disappear?

If there is so much effort put into planning and improving lead times while reducing inventory along with planning out the supply chain, why is there a need for warehouse and DC’s here in the US?

Shouldn’t it be a fraction of the current space you have within your operation?

Shouldn’t goods flow based on the models and therefore emulating a direct distribution or a JIT process?

I thought these are great questions, and they deserved more attention than what I could reasonably cover in a comment to his post. So I promised this blog post in reply.

As I said in a brief initial response to Mr. Kantz’s first, most basic question, no – DCs and warehouses will not be going away. For one thing, many companies use them as their basic retail fulfillment centers (think Amazon). Additionally, they remain a critical and irreplaceable piece of the supply chain for most other firms.

That being said, there are certainly some – perhaps many – DCs that can and should go away. Mr. Kantz’s other questions really frame up the opportunities well. Better general supply chain science and huge leaps in technological and digital solutions offer a multitude of ways to optimize inventories. Unfortunately, though, there’s a popular Lean notion that “inventory is waste” that’s led many leaders to launch slash-and-burn inventory reduction efforts without fully understanding the impacts to the business, and without investing in concrete improvements that are needed to underpin those reductions. (I coined the phrase I used in my initial comment, “Inventory is waste – until it isn’t” as a sardonic push-back against this glib notion. Insurance is also “waste,” yet we all have it nonetheless.)

One of Mr. Kantz’s other commenters, Operations & Supply Chain Manager Stephen Battle, mentioned the word strategy. He hit the nail on the head; it’s vital to make your supply chain an integral part of your business strategy, and as part of doing so, to design it to optimize its efficiency while ensuring proper support for what makes you money. Inventory levels – and therefore the need for warehouse space – should be determined by a thorough, end-to-end assessment that considers all of the following:

• Sales volume ranges and seasonality
• Growth potential
• Production capacities and lead times
• Transportation time
• Existing infrastructure
• Existing procedures and technologies for supply chain management
• Total costs
• Opportunity cost and working capital cost of inventory
• Inventory carrying costs
• Potential disruptions to supply (and costs of lost sales that those imply)

That last point is critical. Who foresaw the Japanese nuclear catastrophe? The lost sales from that event would have paid for plenty of working capital for plenty of years. No, you can’t carry enough inventory to counter any possible disruption, nor would that make economic sense – but you should make an assessment of predictable lost sales from weather events, economic problems, and even political strife, to determine how much safety stock makes good economic sense.

And again, once you’ve used good data and good analysis to set your inventory levels, they shouldn’t change unless the business fundamentals themselves change, or you’ve invested in improvements in one or more of the areas mentioned above that would then justify modifying your inventory positions. Otherwise, leave those warehouses alone.