You need to power down the DNS-323, insert your new HDD, and restart the unit. the DNS-323 should prompt you to format the new HDD. Since you already have a drive in slot 1 (of a different size) you should format as a "Standard Volume".
There is no need to move your existing HDD from slot 1 to slot 2. Using the on-board software you can schedule a backup between the two HDDs (from slot 2 to slot 1 or visa versa).