Network Optimization After An Acquisition
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 These networks are often outdated, inefficient and not cost effective.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.
Planning a distribution strategy is essential in planning for new businesses, or the expansion of existing business into new market areas. This point was evident when a large manufacturer of consumer goods (Company A) acquired another established manufacturer (Company B), with a customer base located predominately in the eastern half of the country.
Company A had plans to increase the market presence of Company B on the West Coast. While increasing the West Coast market share, the company also wanted to improve the service levels provided to all of Company B’s customers. Customer orders were currently being shipped directly from the plant (about 80 percent of the volume) and from three regional distribution centers. The initial order profile indicated that almost all of the volume was shipped in truckload quantities. While the direct truckload shipments from the plant were cost-effective, they could not meet the company’s goals for cycle time. Short, reliable cycle times were seen as essential to penetrating a market dominated by competitors. When establishing the strategy for the West Coast expansion, service requirements were defined as follows:
- To account for “emergency” orders, 10 percent of the volume being shipped into the five or six most important market areas had to be delivered the next day.
- Non-emergency delivery time to these target market areas was established at three days.
- The remaining regions would be delivered to in no more than five days.
If the projected sales goals were met, additional manufacturing capacity would be required. This additional plant would be used as a shipping point for a substantial percentage of customer shipments, so it was important to consider proximity to markets when selecting the location for the new plant. The other important factor to consider in determining the location for the new plant was the cost for transporting inbound raw materials. All of these materials were available domestically, with vendors located in the Midwest, Southwest and West Coast.
Since California was a major source of raw materials, as well as one of the major markets which required next-day delivery, the model located the new plant in central California. This solution had the added benefit of allowing the closure of the West Coast distribution center. This plant’s production capabilities and proximity to major markets would establish the foundation for penetrating the West Coast market.
To meet the second goal of improving overall service times, the computer model indicated that the Midwest plant should be moved several hundred miles east. This would allow both the Midwest and East Coast markets to be served within required service levels without the addition of another distribution center.
Improving the distribution network is not an easy task that can be implemented overnight. There are many information and material flows that must be considered. Many companies can act in haste, altering the network to save costs quickly, but in the long run they wind up increasing costs and aggravating customers. To carefully analyze, plan and implement a new distribution network can take many months, sometimes as long as a year. So what are the steps that need to be taken?
1. Talk to customers to find out what service they require. Don’t rely on internal management to dictate what the customer wants. Many times they might not know! When a clear service requirement has been established, the current distribution network can be designed and measured against this standard. Remember, there can be differentiated service levels established for segments of the customer base. The distribution network must be established to satisfy each one efficiently
2. Gather detailed data on the current operations. Reviewing and understanding the detailed transactions that occur over a significant time frame (at least one year) is key to understanding how the current distribution network is actually working. By analyzing the detailed transaction data, many myths about how the operations are working are often disproved. There are several key pieces of data that should be reviewed including:
- Transportation Rates
- Shipment Sizes
- Inventory Levels
- Ordering Patterns
- Warehouse Handling and Storage Practices
3. Use sophisticated computer models to optimize your network. These tools allow the analyst to determine how changes in the network, such as moving or closing facilities, will impact costs, service and material flow. The company can compare hundreds of alternatives before deciding on which network best suits their business.
4. Before taking action, develop an implementation plan! This is the step where many companies fall short. After a new distribution network has been agreed upon, there are still many things to consider and plan. Do we own or lease our current buildings? How easy will it be to sell any company-owned facilities? When do leases expire, and what are the penalties for terminating a lease before the expiration date? Are there existing facilities available in the desired new locations? Do we have to build? How will we move the product from the existing facilities to the new locations? How will this impact customers during the changeover?
These are a few of the many questions that must be addressed before changing your distribution network. But why undergo such a daunting task? Companies that have not reviewed their distribution networks in the last five years typically see a reduction in logistics costs between 10 and 20 percent, while improving the service to customers. This generally translates to millions of dollars added to the bottom line, and much happier customers. We recommend that companies review their distribution networks on regular three- to four-year intervals.