What is ‘Distribution Network Design’ and why is it the key area for potential cost saving?
When we talk about this network, we’re referring to the physical network of stock holding and distribution facilities that are used to get products from the point of supply to the customer. While this is usually required for a business to operate, with the advent of e-commerce and online business, there are sizable companies around who don’t hold any stock of inventory. Rather, they depend upon their suppliers to drop ship directly to the customer.
It is important to realize that your own warehouses and distribution centre aren’t the only places where stock can be located. Your suppliers’ warehouses and distribution centres can become a legitimate part of your network. All stocking capability depends upon the relationship and the amount of trust placed on the supplier.
If the suppliers are one end of the supply chain and the customers are the other, we can take them as two end points of one thread. Longer the thread run, more is the time taken for a product to reach its customer. This means that the product is handled way too many times and moved too many locations.
We recognize that the service we offer our customers and the location of those customers is a major factor in determining the stocking locations. Yet, the location of our suppliers is often overlooked. The further the suppliers are from the stocking point, the more inventory is needed on hand to meet customer needs. Likewise, Suppliers who are unreliable in meeting their deliveries, force a higher stocking level, to ensure that inventory doesn’t run out.
So, how do you know if your network has problems?:
- When you have too many stock locations;
- Poor distribution centre utilisation;
- Multiple handling of same material;
- High Distribution cost;
- Inappropriate customer service
I bring to you one case study:
Company had a nationwide network of warehouses through which they distributed the products. The intention behind having multiple warehouses was the “Network” which they felt they need to service the customers who were in more remote areas.
It was seen that, customers were ordering in small quantities causing distribution and warehousing costs to be high. Company wanted to reduce the cost but design a network that would provide service to these customers.
What did they do?
They closed up the warehouses in those outlying areas and instead they relied on the distributors for those region.
Instead of shipping small quantities stock and warehousing them, they shipped truckload of products to the distributor reducing the transportation and warehousing cost. The distributors then serviced the local customers there. Their new, small network is operating very well and the savings are higher than forecasted. Customer service has improved bringing in new sales.
What can be your key action steps for network transformation?
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