Distribution Center Stage

What we offer is now more important than ever. Promote it to your customers as a front-line business strategy.

By Louie Hollmeyer

There has been a paradigm shift within the supply chain, and distribution has taken center stage. In the midst of a total renewal from its undistinguished past, never before has distribution been more instrumental to an organization's success.

Traditionally, distribution has taken a back seat to manufacturing and other supply chain activities, which isn't surprising given its historical perception as a back-end process. Nobody ever notices an NFL offensive lineman until something goes awry and the quarterback gets sacked. The same goes for distribution. Distribution does not receive considerable attention until a big-box supplier assesses a significant chargeback, or an unmet delivery date automatically cancels an order.

The Paradigm Shift
Four forces have created this paradigm shift. First, companies have tried and applied just about every improvement initiative available for manufacturing. Faced with shrinking margins, rising customer expectations and stiff competition, companies scrambled to find an edge. Many focused on extracting value from their supply chains. Of course, the primary focus has been on manufacturing.

Think of all the manufacturing-related initiatives: Six Sigma, Lean Manufacturing, and Just-In-Time (JIT) Manufacturing, to name a few. As recently as five years ago, distribution was a total afterthought. With the advent of JIT and Lean Manufacturing, it was a widely held theory that manufacturing processes would permit product to flow off the production line and out the door, minimizing the importance of warehousing and distribution.

Even though these manufacturing initiatives have merit and provide value, they have not decreased the relevance of distribution. In fact, the opposite has occurred.

Extracting Value through Distribution
Having exhausted all avenues for value creation within manufacturing, supply chain executives are finally turning to distribution as a means to differentiate.

World-class distribution operations have never been more strategic or more challenging to achieve. Organizations must streamline their distribution processes and become not just lean, but flexible, scalable and agile. They need to respond quickly to fluctuations in demand, pricing, supply and customer preferences.

Since companies cannot escape market pressures, it is essential to migrate to dynamic distribution models that can adapt quickly to changes in demand and customer expectations. In return, organizations become far better equipped to respond—closest to real time—to changes in demand, rather than wasting time and money saddled with a static distribution model. Furthermore, dynamic distribution models can withstand a multitude of unpredictable threats. Successful distribution models master process synchronization, from software and infrastructure to labor.

The On-Demand Era
The second and most important force creating the paradigm shift, the on-demand economy, has greatly advanced this change where distribution is increasingly recognized as a vital and influential component of the supply chain. Customers want product where, when and how they choose with an unprecedented level of compliance. If an organization cannot adapt and respond to demand fluctuations with speed, then customers will go elsewhere.

Unstoppable drivers have created the on-demand marketplace. For those hampered by conventional, ingrained distribution philosophies, problems are not only imminent, but they will be compounded.

This competitive environment is becoming even more intense. Markets are dictating increased pricing pressure as customers stipulate more for less. Many distribution centers have evolved beyond their originally intended use and are in desperate need of reengineering, upgrades and improved systems. In some cases, a thorough review of the distribution network is necessary, and a consolidation of distribution centers or a new, greenfield facility is required.

The most important initiatives have focused on manufacturing, but now sudden risks, rooted in the new on-demand era, are looming within distribution. In response, companies need to accelerate innovation within distribution operations. If embraced, this environment provokes an opportunity for distribution to realize unprecedented levels of distinction within the supply chain.

Being most efficient-to-market with a product results in creating the standard, locking in brand loyalty, and driving down the cost curve. As organizations find competitive advantages are difficult to sustain, they will need to respond to market changes more dynamically than in the past. Deliver faster, better, cheaper—on demand.

This environment, where competition is intense, change is constant and economic pressures are unrelenting, has facilitated the paradigm shift that has put the spotlight on distribution.

Manufacturing Moves into the Distribution Center
Third, as organizations focus on distribution as a means to differentiate, light manufacturing processes and value-added service operations are moving into the distribution center. In the modern day distribution center, new order fulfillment processes, such as postponement, have been adopted. Postponement leaves final assembly and/or kitting of an item to be conducted in the distribution center once an order is received.

In other instances, the distribution center has effectively become a value-added service operation, conducting a host of value-added services, including gift wrapping, packaging, tagging, ticketing and other customization tasks. Postponement advocates view the distribution center as a “postponement manufacturing center.”

Years ago the distribution center was considered a glorified warehouse. Now it is conducting light manufacturing processes and value-added services to meet demand and deliver uniquely configured products.

Off-Shore Manufacturing
The fourth driving force creating a whole new approach to distribution is, ironically, a manufacturing initiative: offshore manufacturing.

From a bottom-line perspective, we all understand the cost benefits of offshore manufacturing. And we can debate the pros and cons from a jobs-lost perspective, but one thing remains clear: If manufacturing heads overseas, distribution still has to originate from within the United States.

It is impractical to ship product to customers in a bunch of FedEx boxes from China. It still has to come to the United States in a container, go into a warehouse and be distributed.

A Frontline Business Strategy
Not only is distribution's stock rising within the supply chain, but C-level executives are now beginning to view distribution as a frontline business strategy, and rightly so. Ultimately, it's taken the on-demand environment to finally give distribution its due respect. Distribution can make or break any business plan. Delivery of product is the moment of truth for any organization.

Managing a modern day supply chain is complex. To succeed, supply chain executives are targeting distribution as a key differentiator to lower costs, improve service and build brands. If positioned properly and given proper attention, distribution will accelerate business performance.

Distribution has traditionally been a subordinate supply chain discipline to manufacturing. Although the importance of manufacturing has not diminished, its value is dependent upon accurate delivery of the right product, at the right time, to the right place, at the least cost.

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The MHEDA Journal • Fourth Quarter 2004 • Volume 33, No. 4 • Contents are Copyright © Data Key Communications, Inc.
All rights reserved. • Nothing may be reproduced in whole or part without written permission of the publisher.