Consolidation Of Product Lines From Many Production Sites Into Fewer Shipments
For any company that produces or distributes a product to the market, their distribution network is the lifeline via which their products are delivered. As a comparison, the distribution network can be likened to the body’s circulatory system. Our bodies require oxygen to survive, just as our customers require our products to maintain their business. To transport the oxygen the body has blood; the distribution network has trucks, trains and boats.
So if distribution networks are so essential to keeping businesses alive, why do so many companies neglect them? These networks are often outdated, inefficient and not cost effective. To change the network requires detailed analysis, research, planning, and some setup costs. The task is not easy; but, if we were experiencing similar physical problems, we would not take years to visit the doctor. If we did, simple curable illnesses may turn out to be much more serious, and possibly grave.
So what drives companies to examine and change their distribution networks?
Many companies realize that inadequate distribution networks result in inefficient methods of storing and shipping their products. Improving their distribution networks can be an opportunity to reduce costs, while at the same time improve service.
A major supplier of consumer hard goods maintained a system of nine regional distribution centers, in addition to six plants, to meet their goal of delivering to 95 percent of the country within one day of order placement. Although the capability to deliver in one day existed, the actual service provided was unclear because:
- Customers received 35 percent of their weight directly from the plants in full truckloads. Cycle times could be as long as five days.
- Poor inventory positioning often resulted in shipments originating from alternate facilities, resulting in longer cycle times.
- Actual cycle times were not tracked, even with the ambitious goal of shipping to customers in one day.
- Many facilities had overlapping service areas, which made the decision of choosing the primary shipping point less clear.
A more realistic goal for order cycle time was required. An extensive survey of customers concluded that there were indeed two separate requirements for order delivery: five days for full truckload orders (the same as currently provided) and two to three days for all other orders (one to two days longer than currently provided).
At the same time, logistics costs were high, especially warehousing and inventory carrying costs. A primary factor was that a high percentage of volume shipped during the last three days of each month, resulting in underutilized warehouse labor and stagnant inventory during the early part of the month. Any changes made to the number of facilities in the network would have a significant effect on inventory levels and warehouse overhead costs.
In the face of ever-increasing pressure to reduce delivery times, it can be very difficult for suppliers to keep up with customers. In response to this market pressure, companies can overcompensate.
Thirty-five percent of the business was currently shipping direct from the point of manufacture to customers in full truckload quantities. This portion of the business was already meeting customer requirements for cycle time in a very cost-efficient manner. Therefore, a computer model was developed placing a heavy emphasis on LTL delivery times, LTL rates and potential break bulk locations.
The addition of one to two extra days in available LTL transit time opened up many possibilities for closing or moving facilities. The final network was based on using six regional facilities, reduced from nine, to serve the LTL orders. This network met or exceeded the customers’ service requirements at a savings of $1.3 million in transportation and warehousing costs. In addition, inventory carrying costs were projected to be $9 million lower with the new distribution network.
There are many factors that drive a company to examine their distribution network. Changing business, cost constraints and consolidating markets may all be reasons for a company to consider changing their distribution network. In many cases, the driving forces may be specific to a certain industry.