It’s a recognised fact that distribution has been rigorously honed and streamlined over the years. Not perhaps everywhere; there are always plenty of exceptions, but most people who are active practitioners in the industry know that they need to make the most efficient use of their assets, balance their transport flows effectively, and achieve the best cost/service trade-off for their business model.
Where this doesn’t happen, management generally knows its distribution shortcomings but perhaps just hasn’t got round to putting in a ‘fix’ as yet. This is a clear management failing, not a lack of overall understanding.
In the last two to three years we have gone through a recession, and no one can say for certain when we will come out of it. Margins have reduced, cost pressures have risen, cost of goods is climbing and there are ongoing pressures on manufacturing. Cash has become even more important for businesses to hold onto, which in turn puts the spotlight more vividly onto stock levels and under-utilised assets. Service level requirements haven’t diminished, though, as companies vie for every ounce of competitive advantage.
So where does distribution go next to improve its game? Companies need to look to today, not to where distribution might be in 15 years’ time. But what should management be doing immediately to ensure distribution works better for their business? The first prerequisite is to put the basics in place. This includes optimising the distribution network so there is the right amount of capacity in the right areas, balancing transport flows and taking intelligent decisions as to where and when to outsource to the right partners.
Beyond these points there are many other important considerations, and focusing on the need for ‘distribution’ to act seamlessly as part of an end-to-end supply chain is crucial; it is widely recognised that the rest of the supply chain probably has more of an influence on competitive advantage than distribution alone.
Businesses with elongated or ‘long’ supply chains have issues that are exacerbated by current market conditions. Long order lead times, long transit times, large batch sizes and relatively inflexible manufacturing systems lead to high stock commitments and strains on the physical and financial resources of all the partners in a supply chain. Immediate and decisive action is needed, but many companies fail to fully deliver, instead just focusing on attempting minor fixes such as changing payment terms around the transport element, which won’t provide a long-term solution.
Distribution cost is rarely the crucial element of total supply chain cost and if companies are looking at more fundamental changes to their supply chains to survive, they also need to consider how they will drive profits as business starts to recover.
It is crucially important to not only look back down the supply chain to ensure a better fit with procurement and manufacturing, but to also look forward in the supply chain and indeed look at the customer proposition itself. In this way distribution can see if there are more efficient ways to serve customers.
Making a step change in delivery costs is not always about doing things ‘more efficiently’ – sometimes the step change can be achieved through doing something completely different. This was the case for one of our clients, Avon Cosmetics. Historically, Avon has always delivered all orders to its representatives directly. This had the advantage of allowing it to achieve some fantastic delivery economics. Representatives – the people who do the selling and delivery to the consumers – were scheduled in such a way that the delivery company delivered to all representatives in an area on the same day. So, how could Avon improve an already efficient delivery set up? And, whilst doing this, how could they improve the proposition to representatives?
The answer was to segment representatives; some would continue with the milk-round deliveries and others would move to picking up product themselves, when they needed it, from a pick-up location. This was a big change to the customer offering, giving the opportunity to dramatically reduce the time a consumer has to wait before delivery.
This presented a challenge; reducing volume through a distribution network typically has an adverse impact on costs. This would be true if ‘average’ representatives were transferred to a pick-up solution. However, the breakthrough came when the relative costs of serving ‘large’ and ‘small’ representative orders was analysed. While the ‘average cost per representative’ was cheaper than comparable pick-up costs, the costs of serving ‘small’ representative orders (one or two cases) was more than the pick-up costs. Knowing this allows Avon to segment its delivery options and offer a better service whilst reducing cost; the end-to-end supply chain has been considered, and this has generated a step-change improvement for distribution.
Changes to a distribution function must only be implemented once a full sanity check has been completed. Benchmarking and best practice are key to improvement, as is the team’s desire to deliver ongoing improvements. Benchmarking can be broken down into two stages. The first stage is the basic benchmarking of internal processes to ensure the warehouse or distribution operations are moving towards best practice. The second stage is where the step-change occurs, however, as even the best performance at the first stage only takes the business to a medium level of performance overall. Operating your warehouse or distribution perfectly is not enough nowadays; best practice for distribution must include distribution planning, network design and optimisation of the distribution parameters, all done in an end-to-end business context.
Our recent work with a global pharmaceutical giant is an example. In one of their operations in Belgium a powerful process improvement approach was employed to deliver changes to the internal workings of a troublesome Distribution Centre (DC). The internal DC issues were recognised and plans put in place to quickly improve performance. The biggest wins, however, were seen as the identification of challenges in other parts of the supply chain. These challenges were particularly around how the demand signal was received and how supply signals were sent. Neither was under the direct control of the DC, but both of them dramatically affected the DC’s capacity and ability to fulfil its service requirements. This triggered a comprehensive review of the wider supply chain, which benefited not just the DC but the business as a whole. The changes are now forecast to dramatically reduce stock levels and, more importantly in this sector, improve customer fulfilment.
In summary, streamlining your distribution function means thinking beyond what distribution has meant for your business to date. Done the right way, benchmarking and striving for best practice can enable businesses to prosper and survive in these current turbulent market conditions, but this has to be done in an end-to-end supply chain context. ‘Perfect’ individual operations are only the first step; all elements of the supply chain then need to work together to deliver real, lasting competitive advantage.Richard Powell
Richard Powell is managing director of Crimson & Co. He has 20 years’ experience of designing, managing and delivering complex supply chain and business turnaround programmes. His typical project examples include business turnaround, supply chain strategy and implementation, cost reduction and performance improvement, all delivering demonstrable business benefit.Crimson & Co
Established in 2003, Crimson & Co has grown steadily and consistently to become the UK’s fastest-growing independent supply chain consultancy with a strong reputation for developing and implementing end-to-end supply chain solutions across the globe. Crimson assists client companies in identifying their key business needs and designs their supply chains accordingly. It identifies performance weaknesses and prioritises improvements, preparing the ground for major IT implementations or acquisitions and driving longer-term continuous improvements.
For further information, visit: www.crimsonandco.com.