It is important that you have a realization that your own warehouses and distribution centres aren,t the only places where stock can be located. Your supplier’s warehouses and distribution centres can become a legitimate part of your network.
Being able to utilize their stocking capability depends more than anything on the relationship your company has with the supplier and the amount of trust you have in them. Let’s take a look at a couple of examples of poor warehouse networks.
In Thailand – A company had a network of warehouses nationwide, through which they distributed products. They felt that they needed the network to service all the customers who were in more remote areas.
However, their customers were only ordering in small quantities, causing the distribution centre costs to be high. In addition, many orders were expedited directly from Bangkok at high costs.
To reduce costs, the warehouses in the outlying areas were closed up, relying instead on distributors for those regions. Instead of shipping small quantities of stock to these outlying areas, bulk truckload shipments were made to the distributors, reducing transportation costs.
The distributors then serviced the local customers in their area. The price reduction to the distributors was more than offset by the reduced warehouse and transportation costs. Their new, smaller network is operating very well and the savings are higher than forecasted. In addition, customer service has improved, bringing in more sales.
In Australia – A company which distributed fast-moving consumer goods (FMCG) grew to a point of having a network of over 40 warehouses. This, they felt necessary to provide the high level of customer service required in their industry.
By modelling their distribution through specialised tools, it was determined that the same level of service could be provided through 20 regional distribution centres, reducing inventory and operating costs.
In both these examples, essentially the same key action steps were made to get from where they were, before analysing and optimizing their network, to where they needed to be:
The 6 Key Action Steps to Improvement
1. Establish customer service offer or offers
- Customer locations
- Customer service expectations
- Delivery lead times (outbound)
2. Establish supply points
- Supply lead times (inbound)
3. Identify current network performance
- Facility costs (this must include all pertinent costs)
- Inventory costs
- Inbound transportation costs
- Outbound transportation costs
- Service performance
4. Test and quantify lowest cost network(s)
5. Compare test costs to current costs
6. If benefit is large enough, consider network transformation.
To begin this process, we have to start with the first two key action steps. These are fixed, and we cannot move them. However, we must be sure that we fully understand them. Are our promised delivery times truly meeting the customers’ needs and expectations or are they a waste of money?
How realistic are our expectations of our suppliers? Can they regularly meet those expectations? For expert advice on how to answer these questions, please contact one of our supply chain consultants.