15 Key Factors
That Impact Your Distribution Network Effectiveness
Taken from The Supply Chain Handbook, edited by James A. Tompkins, Ph.D. and Dale Harmelink
Distribution
professionals "see" their operations on a daily
basis. Competitive pressures, mergers, acquisitions, new product
lines and greater customer expectations are just the tip of
the change iceberg for the modern logistics leader. On the
surface, this continuum of change is just a cost of doing
business in the latest "new economy." However, for
those intimately involved in a distribution process, how these
changes are accommodated can mean the difference between survival,
burnout and/or even extinction in today's rapidly changing
supply chain. This article focuses on 15 key areas that are
the roadmap to an effective, flexible and proactively responsive
distribution operation.
1.
Centralization vs. Regionalization—In distribution
network planning, there is a well-established relationship
between the number of distribution points, transportation
costs and customer service targets. In a graphical sense,
the point at which these three entities merge is the optimum
balance of facility and transportation costs to develop a
low-cost, high service distribution network. Normally, as
distribution networks become more centralized, so do the internal
support structures such as facility management, order entry,
customer service and data processing. Depending on the degree
of centralization achieved in support staffs, it is not uncommon
to see cost savings of 50 percent or higher over decentralized
networks. However, service levels, limitations on total facility
size, risk mitigation and throughput peaks must be factored
into the decision matrix.
2.
Energy—Any significant shift in the cost of energy—electricity,
fuel, etc.—could have an impact on operating costs and, therefore,
on distribution. Many distribution projects that are otherwise
viable fail once the cost of energy becomes a factor. This
is especially true for energy-intensive facilities such as
refrigerated warehouses. For this reason, it is crucial to
work with all energy providers to determine the load that
a prospective operation would put on the local energy system
and develop solutions that conserve energy while achieving
goals. Some interesting energy solutions are:
- Abatement
programs: Many energy providers provide incentives to
users who cut back their usage during defined high load
periods. This could be as simple as running the facility
on minimal power during off-shifts or as complicated as
metering the use of the facility or using a secondary power
source (high power generator or solar power) to run normally
on a reduced energy load.
- High-efficiency
units: Many companies install high-efficiency appliances
and fixtures in a facility to conserve energy usage with
no performance penalty. There is some investment required,
but the payback is often reduced rates and/or a lower monthly
bill.
Rising
fuel costs make this a very sensitive component of distribution
costs regardless of whether transportation is handled via
third party carriers or private fleet. Some strategies to
consider mitigating this are:
- Cube
out containers: When a trailer is partially cubed out,
you are often paying to transport air. Utilizing the maximum
cube ensures that more of the shipping costs are being used
to ship product.
- Mode
assessment: Depending on service requirements, it may
be possible to move from LTL services to truckload, or from
parcel to LTL. In general, each shift will result in reduced
freight costs.
- Transportation
management systems (TMS): Poor transportation performance
often stems from poor transportation planning. A TMS can
provide more efficient route planning and load tendering,
and result in savings in the process.
- Private
fleet concerns: Private fleets can benefit from an in-house
fuel supply program to gain control over fuel costs and
usage. The investment can be offset by the elimination of
one or more fuel supply chain links, reducing operating
costs and sometimes allowing fuel blends that are more efficient
and economical.
- Regional
vs. centralized networks: The costs of delivery using
different modes of transportation, as well as service availability,
can be directly impacted when fuel costs rise. Understanding
the modes used most often, the customer expectation and
the risk associated play into the network structure decision.
3.
Flexibility—In today's unpredictable business climate,
flexibility is a key to continued success for some and survival
for others. When designing a distribution facility, specifying
versatile equipment is a critical requirement. The latest
technology may look nice at start up, but if it can't keep
pace with unpredictable events, it is simply a waste of money.
Planning for likely (and unlikely) changes in the distribution
profile should drive the warehouse design and equipment specifications.
For the majority of distribution operations, flexible equipment
is the more practical choice.
4.
Global Marketplace—In the ever-changing supply chain,
global impact must always be considered. This could be as
minor as a domestic customer wanting direct shipments to an
international location, or as major as an acquisition by a
global company or addition of a key global account. Successful
distribution operations are ready for this type of change.
Transportation systems should be designed with exports in
mind; there should be contingencies for customs documentation
and international shipping paperwork. Operations should be
designed in a manner that product re-labeling or special packaging
for international customers can be accomplished easily. Facilities
may need to accommodate inbound or outbound airfreight or
ocean freight containers. Customer service functions may need
to operate in 24-hour mode to assist customers in all time
zones. Preparedness is the critical element in a global marketplace.
If you are not a global company today, your success will drive
you into that marketplace sooner rather than later.
5.
Government Involvement—Just as government involvement
has an impact on distribution, distribution leadership has
an obligation to be involved and aware of legislation that
involves their industry. Many decisions are made daily at
a local, state, and federal level that impact distribution
operations. Taxes, labor regulations, transportation restrictions
and infrastructure decisions are continually up for review
and discussion at every level of government. Without proper
input, uninformed decisions often have a dramatic effect on
the distribution community.
In addition,
involvement in professional societies (many of which conduct
lobbying activities) is an effective way to track the pulse
of legislative movement and also an ideal forum to make your
concerns known. For some ambitious souls, a direct role in
local or municipal government may be an effective and fulfilling
way to make an impact. By being proactive, distribution leaders
can ensure that distribution and government entities can collaborate
to provide benefit to both sides without unpleasant surprises.
6.
Information Systems—In today's e-enabled world, timely
and accurate information is a requirement. The days of keypunching
in daily distribution activity and nightly updates to host
financial systems are becoming a distant memory for successful
distribution operations. Today's reality is that distribution
execution systems must be:
- Real-time:
Customer requirements are moving toward being able to instantly
track an order through every step of the fulfillment process
to delivery. Optimally, this information is linked to an
Internet front-end where a customer can easily log in and
see the exact status of their order. Real-time interfaces
and host system updates enable this customer-focused initiative.
- Paperless:
The reality is that paper equates to errors. Language and
educational barriers result in paper pick documents that
are often misinterpreted, at best resulting in lost dollars
within the distribution operation or, worse still, lost
customers due to fulfillment issues that escape even the
best inspection processes. The solution is paperless systems
requiring operator validation that the right steps were
followed and that the correct product was picked and packed.
- Standardized:
In the past, many companies developed proprietary, legacy
systems to manage their distribution operations. With the
high growth associated with a successful distribution operation,
many of these companies are finding that the investment
to develop and maintain an in-house system no longer is
viable. Standardized, industry-tailored software is now
the rule rather than the exception. Software companies leverage
their client base to continually update their product, adding
far more base functionality than inflexible legacy systems.
7.
Modularity—As companies in the distribution space
come and go, their business will typically move to a new distributor
or distributors. The ability to quickly take on significant
business volumes dictates that modularity is a necessity for
a thriving distribution organization. Modularity must be evident
in:
- Assets:
Distribution assets must be modular, providing the ability
to easily expand facilities, capacities and equipment to
meet increasing demands and diverse products. Many companies
design this into a facility, while others are constantly
tracking alternate local space that could be closed on quickly.
- Work
assignments: The workforce must be able to handle new work
assignments and transfer knowledge to new employees effectively.
This is a key to a successful start-up of a new operation
or an addition to an existing operation.
- Labor
management systems: These systems must be able to handle
the addition of new operations quickly and economically
so that performance can be measured and costs kept under
control.
8.
Off-Highway Vehicles—In the United States, issues
regarding the environment and air quality continue to be under
scrutiny. The push for more stringent air-quality regulations
will impact the warehouse. Electric vehicles will take over
as the preferred models in the warehouse, displacing non-electric
vehicles in the process. As this evolution occurs, manufacturers
of electric rolling stock will respond with higher power,
higher efficiency vehicles to facilitate this process.
9.
Pace—Anyone with access to an e-tailer web site can
now order product, specify their service requirements, pay
for their order on-line, and track the order right to their
doorstep. For distributors, this means that the pace of distribution
must increase significantly to account for the reduced lead
times, shorter product lives, increased inventory turnover
and greater customer expectations that is considered standard
in the modern business-to-business and business-to-consumer
marketplace. If a customer places an order today with next-day
delivery, a company that picks and ships the order the next
day won't be competitive for long. The entire supply chain
needs to keep pace, from vendor compliance to information
and execution systems in order to support the new economy
that the Internet has enabled.
10.
People—Success demands a team-based, participatory
organizational culture and a total dedication to customer
satisfaction. There are many ways to achieve this, ranging
from simple solutions such as employee celebration days, employee
suggestion programs, and other simple programs to more structured
approaches such as revised organizational designs, compensation/incentive/bonus
plans, and other processes that directly tie the distribution
associates on the floor to satisfied customers.
11.
Price—While service and quality are key factors in
selecting a distribution partner, for many companies, decisions
still comes down to price. Successful past relationships are
no longer a good indicator of the future. Modern free enterprise
demands efficient, effective and low-cost distribution. Competition
is fierce and many low-cost providers will not be here tomorrow
as they undercut the market to get short-term volumes at an
operating loss. The goal of a successful distribution operation
should be to operate within their core values at the lowest
cost possible. The path to competitive pricing is to operate
efficiently and flexibly at low cost—to offer low prices any
other way is inviting failure.
12.
Accountability—A successful distribution operation
must have accountability. Accountability is made possible
by effective leadership, clear communications and efficient
systems and equipment to enable productive operations and
a fulfilling work environment. Accountability requires that
leadership make difficult decisions while maintaining the
commitment of the organization. Accountability requires establishing
standards, identifying improvement opportunities and measuring
performance. Also required is some form of a reward process
that answers the inevitable question, "What's in this
for me?" Care must be taken that any rewards are tied
to something that can be quantified as a true benefit to the
organization; rewards without a basis will result in lack
of credibility and a process that will ultimately fail.
13.
Reverse Logistics—How to handle the products that
are coming back into the operation as well as any returnable
packaging that must be accounted for on a regular basis is
a challenge. The decision on whether to accept the product,
whether a refused shipment, an authorized customer return,
or an unexpected return must be planned for and communicated
with the distribution operation as well as the receiving and
handling process for the product or chaos will likely ensue.
For example,
a Tompkins Associates client in the direct-to-consumer home
goods industry was having a horrible experience with returns.
An item would be returned and graded 'return to stock.' An
order would come in for the same item and the returned item
(which was first quality) would be shipped. Once the customer
received the item, they would return it with the comment that
it appeared not to be new. The solution was to establish a
vendor-quality packaging initiative that looked very similar
to the original vendor packaging. By implementing the new
packaging for returns, the client was able to realize a 75
percent decrease in second-pass returns, saving over $5 million
annually in returns freight and reducing the size of their
returns department.
Another opportunity in reverse distribution is returnable
packaging, either pallets or containers.
Another
Tompkins client moved from disposable corrugate containers
in their retail store replenishment operations to returnable
containers and used the freight backhaul to return the empty
containers to the distribution center. Operations in the DC
were far more efficient as the plastic totes were much more
reliable and were more easily conveyed and stored than their
corrugate predecessors, and the retail stores did not have
to break down and dispose of thousands of corrugate boxes
every year.
14.
Third Party Logistics (3PL)—A growing number of companies
are turning to 3PL organizations to handle the customer fulfillment
portion of their supply chain. Companies that are accustomed
to true partnering with customers and suppliers have less
trouble migrating to the 3PL world and achieving the potential
cost savings. The key steps are to conduct a comprehensive
search for the right 3PL vendor, thoroughly review cost proposals
and contracts to ensure there is financial benefit, and work
with the 3PL to make their operation is a seamless extension
of your company. This may involve shared management, integrated
execution systems and a unified appearance to partners and
customers.
15.
Variety—Special packaging, unitizing, pricing, labeling,
kitting and delivery requirements are becoming the norm and
must be addressed in any distribution plan. These tasks should
be designed into the operation, not "tacked on"
as a reactive afterthought. Many companies invest large amounts
of capital setting up specialized packing or value-added services
(VAS) lines with the mandate to gain competitive advantages
and in hindsight gain little except increased costs and headaches.
A few key questions need to be answered when setting up these
operations:
- What
is the benefit of the process?
- How
will we recoup our investment?
- Can
we charge the customer for these services?
- Is
it better to outsource this operation?
A simple
review process can often provide justification to move forward
and establish key design parameters to ensure that any "extra"
requirements are integrated into the operation responsibly.
Properly planned, these services can be a profit center, providing
differentiation in a competitive marketplace while boosting
the bottom line at the same time.
Making the Most
of It
There
are several steps you should take to make the most of these
keys to distribution network planning.
- Assessment:
Take each of the 15 points and score your operation using
a scale that makes sense to you. An honest assessment is
critical in this step.
- Prioritization:
Take the areas with the three best scores and those
with the three worst scores and focus on them. It's important
to not solely focus on deficiencies. If you lose focus on
your strengths, you could lose the momentum that made you
successful in the first place. Improving strengths should
always coincide with fixing weaknesses.
- Action:
Use the power of your organization to attack these issues,
unleashing the intelligence of your resources to solve problems.
Often, the answers are right on the warehouse floor—you
simply need to look.
- Look
Outside: Sometimes, it will not be practical or possible
to make improvements from the inside. Do not be afraid to
seek help from outside entities (consultancies, vocational
or university programs, professional societies, etc.). Sometimes
a push from someone with new or different ideas is all you
need to get the process moving.
- Enjoyment:
Make sure there is a defined goal. When you achieve
it, take the time to enjoy the success and maintain the
energy and momentum for the next level of change.
Some
operations may experience only a few of these factors every
year, while others face them all daily. However, planning
and following the above methodology can configure your distribution
network to be both efficient today and flexible tomorrow to
handle ever-changing requirements.
For more information about topics impacting today's supply chains, refer to The Supply Chain Handbook. |
