Many small sized businesses grow until they reach a point where they need to seriously consider how their distribution network can be better optimized to keep their customers satisfied without going to any unnecessary expense.
When considering the design of a distribution network, you need to evaluate its performance according to two factors. Namely, are your customer’s needs being met? And how much does it cost to do so?
An efficient distribution network ensures that you meet the following criteria:
- Response time
- Product variety
- Product availability
- Customer experience
- Order visibility
If your customers demand a reduced response time, then your company needs outlets located closer to its customers. If however, customers are satisfied with response times, your facilities can be more centralized.
When you alter your distribution network, the costs of Inventory, Transportation, Facilities and Handling, and Information Systems will all be affected. For example, as you increase the number of facilities in your supply chain, so the costs of inventory increase. The most famous online retailer, Amazon.com Inc., operates with a relatively small number of distribution facilities and is therefore able to clear through its inventory around once a month. Whereas the now defunct Borders Group, Inc. operated in excess of 400 facilities, which means it only cleared its inventory twice a year.
So long as transportation costs to your warehouses remain the same, you will see a decrease in the cost of transportation when you increase the number of facilities you operate. However, you must be careful not to build too many facilities as this will result in a loss of economies of scale (for example, trucks won’t be driving with full loads) and this has the effect of increasing transportation costs.
As such, distribution networks with multiple warehouses will initially reduce transportation costs when compared to a network that operates with a single warehouse. The logistics costs can be calculated as a sum of inventory, transport costs, and facility costs. However, as the number of warehouses increases beyond a certain point, logistics costs will later increase. As such, you need to find the right balance between the number of facilities so as to minimize these costs.
Generally, companies will build new facilities in strategic locations as customer demand increases, but managers should take care to only go beyond the cost-minimizing point if they are confident that revenues will increase as a result of their company being more responsive.
About the author: Pall-Pack is one of Scandinavia’s largest provider of fully automatic packaging machines. For more information, see www.pallpack.se.