If you’ve never taken a cold hard look at your Distribution Network, do it soon!
Because the wrong network in terms of facility numbers, sizes and locations could be increasing your Supply Chain costs by as much as 16%!
I’ll explain why in this 16 minute video, which summarises the key elements I talked about in a recent 3 hour seminar. Yes it’s a big topic…
Why Your Logistics Network can make or break your Business
You know I’ve been lucky enough to be involved in I think about 1,400 assignments now across 23 countries and one of the challenges that I often see with organisations is the misaligned distribution network – by that I mean the network or facilities that is actually there to support the delivery of service to customers. You might wonder why that is an issue?
A company never look at their network and in any sort of analytical sense or perhaps they haven’t modeled it for maybe 5 years or more.
I’d suggest that it’s probably not the appropriate network for the organisation. And typically what happens is that you end up with Inventory issues, you might have inventory padding through the network, you might have high inventory levels, you may have inventory that is not balanced correctly, and so once you got a lot of inventory, you’re not actually delivering the right service levels.
You can also end up with a network that is very inflexible but most of all you’ll end up with a network that has a much higher operating cost than really you want to have.
So having a network that isn’t really suited to the organisation, never an intentional thing; these things just happened over time and very often the sort of things that can happen is that maybe the organisation has changed their sourcing strategies that may change then the physical structure of the network.
Maybe the network has just grown up historically – you know, the organisation may have acquired other organisations and so this sort of long history of where facilities were located maybe isn’t appropriate now, maybe the network was never actually design in the first place.
I’ve actually worked with organisations who really just drive around the place and look for suitable places to put warehouses. And I said ‘”What is the cost of land and building got to do with the efficiency of your network?” and I’ll explain that in a bit in a moment.
You can also end up with an organisation where the product range has grown or you can contract it – that can drive a very different requirement from the network, perhaps regulatory issues have changed. So there’s many reasons why a distribution network that was perfectly okay 5 or 10 years ago is not really suitable now.
So just a sort of summarise the key consequences of inappropriate network and I’ve got a few things here on the slide, sort of like on a seesaw. We’re going to see excess cost in terms of the facility and labors certainly. In terms of the equipment; transport because the distances to customers and from suppliers is not going to be optimal.
We can see excess system costs and certainly a lot of additional inventory cost. On the other side of the seesaw, we can see things like a lot of product damage, this inability to flex to changing requirements, there’s inability to adapt, we can see poor inventory availability and service lead time to customers.
And ultimately you can actually end up with a very poor market penetration particularly if a network has grown up over time and really hasn’t kept pace with the needs of customer and of the products.
You know I often ask, what are the typical savings from studying a network, from analysing it in depth and trying to realign it.
And it can be very significant, I actually pull some numbers from about a hundred network redesign projects that we’ve done over the years and the average saving was about 9.6% on Supply Chain cost. You can see on the graph behind me, there is highest 16% and the lowest was 4%.
And I think, in fact the company that was the lowest figure saved something like $20M a year, so that’s 4% is actually was quite a lot of money as well. So I’d be saying to anybody who has never really modelled their network properly or hasn’t done it for a long time, it’s a very worthwhile thing for you to do.
It’s probably worthwhile just explaining some of the terminology that gets used in different facilities in a distribution network because this can be confusing to people.
A distribution network isn’t necessarily just full of warehouses; there’s a number of facility types that can be used. You might have heard of a term the ‘flow through’, where basically the product comes in in one side of the facility is basically checked and flows straight out to the other side of the facility.
This is typically in an environment where product is coming through store ready, so you can imagine cartons coming through with the store barcodes on them already. You can then get ‘a cross out facility’ this tends to be more where products are more coming in in a bulk quantity and then it’s being broken down on floor at the cross out facility into orders and goes out in the other side. You can have a traditional warehouse where something is coming in into the building that’s being stored and maybe some processes has been going on such as bundling.
A distribution centre, it’s pretty much the same thing, certainly in my mind it’s generally a large operation, there may be a degree of complexity there in terms of bringing different orders together. In a lot of industrial environments you’ll hear the term ‘depot’ that is really more of a longer term storage facility, so if you think of a power distribution or something like that, very often there will be transformers and cables and so on that are there which may not be used for years but it’s a secured storage environment.
And then lastly, a lot of people talked about ‘branches in the network’, and a branch typically is where you have a sales function there as well as a storage function. And this raises a really interesting question because a lot of companies that I talked to say ‘we have to have a network of stock locations across the country to service our customer and we have a network of branches because we need to interact with customers, we need sales staff to interact with customers, and I think this a common areas where you don’t need sales staff and product together.
The fact that you need sales staff in a particular location doesn’t mean necessarily you need stock in the same location – that’s a little bit of a trap that people have been falling to. Don’t think of branches that having to be stock locations as well.
When you’re thinking about your own distribution network it’s quite useful to try and get your head around some of the key cost relationships. And if we look at this chart, we’ll see that there’s really 5 Key Costs:
The Cost of Storage, these charts all basically the same along the bottom there were just saying that the number of inventory points or the numbers of facilities is increasing left to right. So if we have more facilities, we’ve got more cost because we’ve got the cost of facilities themselves and we’ve got more labor and so on.
The next graph then says that our Inventory Holding Cost goes up because the more facilities we have the more inventory we have. If we go from one distribution centre down to ten, it doesn’t mean that each distribution centre then has 10% of the original stock holding. Because of safety stock you will end up a lot more 10x than the original stock.
We then have linehaul or trunking cost that’s the vehicle replenishing all stock locations, the more locations we have – the more product kilometers we’re travelling and so that cost will go up. The only one that comes down is actually the customer delivery cost and this is quite logical.
If you think, whatever country you’re in, if you have one distribution centre you’ll going to be a long way from a lot of your customers, and so that customer delivery cost is going to be expensive, the more facilities you have, you are then by definition closer to your customers and therefore that final leg of delivery will be a lower cost. Of course the other end of the Supply Chain, your trunking or linehaul cost into the facilities will go up.
You’ve then got Systems Cost, obviously the more facilities you have the greater the facility or the system cost because we’ve got more systems, more maintenance, more hardware and so on.
So really and there’s no single answer for any particular industry or country, it’s really a modelling exercise, looking at the cost benefit and service implications to come up with the lowest point on the curve taking into account all of these different factors. Like I said for different countries and industries it’s going to be a different answer.
So depending on the service level you’re delivering to customers and the replenishment cost, where the suppliers are, you are looking for that lowest point of the curve. And that’s why to do justice to this sort of analysis, you really do need a quite good specialist tools.
Whenever here at Logistics Bureau, we’re doing Network Modelling studies for clients, we always step the clients through this very simple sort of graph in terms of the first cut and I call this ‘Taking a Clean Sheet’ approach, so regardless of how many facilities you have in your network currently, just think through this flow process.
What’s your suppliers lead time? You know if you’ve got overseas suppliers, it could be 6 weeks, it could be 6 months. Where are those suppliers located? And then, what’s the time and distance associated with getting product into your market from the suppliers. So that’s one end of the Supply Chain, one book end – I’d like to call it.
Let’s now flip to the other end and we’ll do the same thing with customers. So what’s the customer service offer? Are you offering your products within 2 hours, the same day service, the next day service, within a week. That’s going to dictate very clearly the shape and structure of your Distribution Network.
And again where are those customers’ locations, in terms of distance, what’s the time and distance got to be then from the stock. So we’re not saying, ‘this is where the warehouses are’; we’re saying ‘how many do we need and where should they be? Here are our customers, let’s just take a very simple example’.
Our customer needs a 1 hour delivery service, if we can drive to our customer at 60km an hour, the maximum that we can be is 60km from our customers and hopefully it a simplistic view of the world but that’s how really you should model it. So what’s the service offer? How far we can afford to be away from our customers?
And then at the bottom of that chart you’ll see, when then talked about different transport modes and the inventory required across the network to support that service level. But it helps to start first just thinking where are your suppliers are and where your customers are and the service into and out of your Supply Chain.
So here’s a simple example on the map and we’ve got our customers plotted on the map of Australia and if we have a service level of ‘next day delivery’, we can then work out how many stock location we might need.
Little that hard to do on a spread sheet, you really need a specific model tools to do it but I can tell you the answer for Australia is probably between 4 and 6 Distribution Centres.
Always on this exercises, that’s for a ‘next day service’, always on this exercises you have to consider, are you’re going to deliver a 100% service? So that’s quite difficult to do on a geography like Australia for example because getting up to the far North of Queensland is going to be quite difficult and it’s been a long time for Sydney or Brisbane and so typically you would say we’re going to reach 95% of customers in a certain service time or maybe it’s 97%.
To reach 100% you’ll probably going to need more stock locations in the network than you would rather prefer to have.
So if you already have a Distribution Network with a number of stock locations, what could you actually do to reduce the cost? Here are a few things to think about: don’t offer a 100% service as I have mentioned, you can actually offer a 95% service level within a certain time frame.
Maybe you can differentiate the service by product, are there products that your customer needs quite quickly and some they’re willing to wait for. Can you differentiate the service by customer type, everybody has a customers that are very demanding in terms of service levels and usually for good reason. But there’s also – normally a segment of customers who are quite happy and willing to wait a little bit longer for the product or service.
So those are very simple ways of just thinking initially about how you might be able to reduce the numbers of stock locations.
You know, one of the things that I see people make mistakes on consistently is really over estimating the impact of land cost when they are picking warehouse locations and distribution centres.
So just look at this chart behind me for a moment and this is very, very simple illustration but what typically happens is a property department within the organisation will hunt around for cheap land and in this particular example here is they found some cheap land, 40km out from the central business district of Sydney.
And that’s not a bad location for a distribution centre but a lot of their customers as you can see by the yellow circles on the map are actually within the CBD or within 20kms of the CBD. So in this case by going a little bit closer to the central gravity of their customers and paying more for the land and building, the savings were significant in the transport cost backwards and forwards to their customers.
So you really do need to just think back a little bit to that earlier chart, you do need to think about the balance of all of these costs – inbound transport, outbound transport and building and don’t just get totally focus on the land and building cost.
So here, we’re looking at the overall design process for our Distribution Network and simplistically this is how we always go about it, so I’ll just talk you through this. First, we do need to look at the customer base and understand where they are and the demand profile.
We obviously have to look at the customer service offer because that really dictates how far away we can be. We then look at the supply base and basically do the same thing, so we can understand the supplier lead times. We’ve got the suppliers on one end of the Supply Chain and the customers on the other end; we’ve got certain lean times involved and that starts to tell us where our inventory and facilities need to be.
We can then start to look at developing some solutions, modelling those solutions in terms of the cost benefit and then challenge those some refinement. That’s in a simple way pretty much of the process that we go through and if you like you’re going to do this by yourself and that I would recommend.
So we could talked for hours quite literally about Distribution Network design and some of the things to take into account and different approaches that you could adopt in trying to realign your network but let me just leave you with some thoughts. ‘If you haven’t looked at your Distribution Network in any detail and by that or in modelling your service, and the cost, and the inventory it could be a very big issue for you.
You certainly going to have a misbalance of inventory, you’ll going to have customer service issues, you’ll going to have cost that are much higher than they need to be. ‘
And so then the summary, the way to look at your Distribution Network:
- Look at the customers, the customer service location and the service offer you’re giving them. That really does dictate where you’re going to put your inventory.
- Then look at suppliers and the location and their lead times into replenish year and then that is going to drive the location that you need the inventory and the amount of inventory and you can start there to model that and minimise cost. So those are really the 3 key pillars of getting the Distribution Network right. Your customers, your suppliers and balancing the inventory in the appropriate location.
So hopefully that will give you a little bit of hand and help you make sense of Distribution Network Design and of course if you need any help in modelling your own Distribution Network or trying to assess whether it’s still appropriate, we’ll be more than happy to talk to you.
If you’d like any further information about designing distribution networks, or indeed ‘checking’ your own network to see if you have the potential for big savings, just contact me directly.
For further information on how we design distribution networks, check this out: Distribution Network Design
