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7 Ways to Customize & Reduce the Cost of Your Distribution Network


From the October 2000 edition of Managing Logistics

To balance customers' demands with the need for profitable growth, most supply chain managers have moved aggressively to improve their distribution networks. Based on analysis by Andersen Consulting (404-880-9100) of more than 100 manufacturers, distributors, and retailers, they are doing it successfully by combining the following seven ideas into their strategies.

1. Segment customers based on the service needs of distinct groups and adapt the supply chain to serve these segments profitably. This equips a company to develop a portfolio of services tailored to various segments. For instance, one manufacturer of home improvement and building products told surveyors that it bases segmentation on sales and merchandising needs and order fulfillment requirements.

You can also determine the services valued by all customers versus those valued by certain segments and create segment-specific service packages that combine basic services for everyone. Segmentation is meant to maximize profits. Analyze the profitability of segments, plus the costs and benefits of alternate service packages, to ensure a reasonable return on investment.

2. Customize the logistics network to the service requirements and profitability of customer segments. This can be a source of differentiation in industries where the actual products are largely undifferentiated.

For example, one paper company found radically different customer service demands in two key segments█large publishers with long lead times and small, regional printers needing delivery within 24 hours. To serve both segments well and achieve profitable growth, the manufacturer designed a multilevel logistics network with three full-stocking distribution centers and 46 quick response cross docks, stocking only fast- moving items located near the regional printers. Return on assets and revenues improved substantially thanks to the new inventory deployment strategy.

3. Listen to market signals and align demand planning accordingly across the supply chain, ensuring consistent forecasts and optimal resource allocation.

A photographic imaging manufacturer re-counts how it had to cope with a production operation that stuck to a stable schedule, while the revenue-focused sales force routinely triggered cyclical demand by offering deep discounts at the end of each quarter. The manufacturer realized the need to implement a cross-functional planning process supported by demand planning software.

At first, the results were dismaying. Sales volume dropped sharply, as excess inventory had to be consumed by the marketplace. But today, the company enjoys lower inventory and warehousing costs and a greater ability to maintain price levels and limit discounting.

Channel-wide supply chain planning can detect early warning signals of customer demand. This made all the difference to a laboratory products manufacturer. Uneven distributor demand unsynchronized with actual end-user demand made real inventory needs impossible to predict and forced high inventory stocks. Distributors began sharing information on actual demand with the manufacturer and the manufacturer began managing inventory for the distributors. This coordination of manufacturing scheduling and inventory deployment decisions paid off, improving fill rates, asset turns, and cost metrics for all concerned.

4. Differentiate product closer to the customer and speed conversion across the supply chain. Manufacturers striving to meet individual customer needs through mass customization have discovered the value of postponement. They delay product differentiation to the last possible moment.

This can help overcome the problem of SKU proliferation that is common in fulfilling customer requirements. A hardware manufacturer determined the point at which a standard bracket turned into multiple SKUs, which was when the bracket had to be packaged 16 ways to meet particular customer requests.

The manufacturer further concluded that over-all demand for the brackets is easy to forecast, while demand for the 16 SKUs is more volatile. The solution was to make brackets in the factory but package them at the distribution center, within the customer order cycle. This improved asset utilization by cutting inventory levels by more than 50%.

According to the surveyors, the key to just-in-time product differentiation is to locate the leverage point in the manufacturing process where the product is unalterably configured to meet a single requirement. In addition, challenge cycle times: Can the leverage point be pushed closer to actual demand to maximize the flexibility in responding to the demand?

5. Manage sources of supply strategically to reduce the total cost of owning materials and services. Excellent supply chain management requires an enlightened mindset, such as gain-sharing arrangements where everyone that contributes to greater profitability is rewarded.

To do this, you need a knowledge of all commodity costs, not only on direct materials but also for maintenance, repair and operating supplies, plus the money spent on temps, travel, utilities, and everything else. Only then can you approach suppliers in the most efficient way█ soliciting short-term competitive bids or entering long-tern contracts.

The savings that result can fund other initiatives. Consider how creating a data warehouse to store vast amounts of transactional and decision support data in annual negotiations consolidated across six divisions cut one manufacturer's operating costs. In one year they were able to pay for a redesigned distribution network and a new order management system.

6. Develop a supply chain-wide technology strategy that supports multiple levels of decision making and gives a clear view of the flow of products, services and information. Today's enterprise-wide systems must share information across the supply chain so that all partners can attain mutual success.

A leading beer manufacturer did not do this and learned a lesson the hard way. Tracking performance from plant to warehouse, the manufacturer was pleased 98% fill rate to the retailer's warehouse. But looking all the way across the supply chain, the manufacturer saw a different picture. Consumers in some key retail chains found this company's beer out of stock more than 20% of the time due to poor store-level replenishment and forecasting. The manufacturer is now scrambling to implement real-time information technology to gain store-specific performance data, which is essential to improving customer service.

7. Adopt channel-spanning performance measures to gauge collective success in reaching the end user effectively and efficiently. This is done by first measuring service in terms of the perfect order, as viewed by the entire supply chain, including the customer.

Second, excellent supply chain managers determine their true profitability of service by identifying the actual costs and revenues of the activities required to serve an account.

To facilitate channel-spanning performance measurement, many companies are developing common report cards. These help keep partners working toward the same goals by building a deep understanding of what each company brings to the partnership and showing how to leverage their assets and skills to the alliance's greatest advantage.

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