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15 Key Factors That Impact Your
Distribution Network Effectiveness
Distribution professionals "see" their operations on a daily basis. Competitive pressures, mergers,
ac quisitions, new produc t lines and greater c ustomer expec tations are just the tip of the c hange ic eberg
for the modern logistic s leader. On the surfac e, this c ontinuum of c hange is just a c ost of doing business
in the latest "new ec onomy." However, for those intimately involved in a distribution proc ess, how these
c hanges are ac c ommodated c an mean the differenc e between survival, burnout and/or even extinc tion
in today's rapidly c hanging supply c hain. T his artic le foc uses on 15 key areas that are the roadmap to an
effec tive, flexible and proac tively responsive distribution operation.
1. Centralization v s. Regionalization—In distribution network planning, there is a well-established
relationship between the number of distribution points, transportation c osts and c ustomer servic e targets.
In a graphic al sense, the point at whic h these three entities merge is the optimum balanc e of fac ility
and transportation c osts to develop a low-c ost, high servic e distribution network. Normally, as distribution
networks bec ome more c entralized, so do the internal support struc tures suc h as fac ility management,
order entry, c ustomer servic e and data proc essing. Depending on the degree of c entralization ac hieved
in support staffs, it is not unc ommon to see c ost savings of 50 perc ent or higher over dec entralized
networks. However, servic e levels, limitations on total fac ility size, risk mitigation and throughput peaks
must be fac tored into the dec ision matrix.
2. Energy—Any signific ant shift in the c ost of energy—elec tric ity, fuel, etc .—c ould have an impac t on
operating c osts and, therefore, on distribution. Many distribution projec ts that are otherwise viable fail
onc e the c ost of energy bec omes a fac tor. T his is espec ially true for energy-intensive fac ilities suc h as
refrigerated warehouses. For this reason, it is c ruc ial to work with all energy providers to determine the
load that a prospec tive operation would put on the loc al energy system and develop solutions that
c onserve energy while ac hieving goals. Some interesting energy solutions are:
Abatement programs: Many energy providers provide inc entives to users who c ut bac k their usage
during defined high load periods. T his c ould be as simple as running the fac ility on minimal
power during off-shifts or as c omplic ated as metering the use of the fac ility or using a sec ondary
power sourc e (high power generator or solar power) to run normally on a reduc ed energy load.
High-efficiency units: Many c ompanies install high-effic ienc y applianc es and fixtures in a fac ility
to c onserve energy usage with no performanc e penalty. T here is some investment required, but
the paybac k is often reduc ed rates and/or a lower monthly bill.
Rising fuel c osts make this a very sensitive c omponent of distribution c osts regardless of whether
transportation is handled via third party c arriers or private fleet. Some strategies to c onsider mitigating
this are:
Cube out containers: When a trailer is partially c ubed out, you are often paying to transport air.
Utilizing the maximum c ube ensures that more of the shipping c osts are being used to ship
produc t.
Mode assessment: Depending on servic e requirements, it may be possible to move from LT L
servic es to truc kload, or from parc el to LT L. In general, eac h shift will result in reduc ed freight
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c osts.
Transportation management systems (TMS): Poor transportation performanc e often stems from poor
transportation planning. A T MS c an provide more effic ient route planning and load tendering,
and result in savings in the proc ess.
Private fleet concerns: Private fleets c an benefit from an in-house fuel supply program to gain
c ontrol over fuel c osts and usage. T he investment c an be offset by the elimination of one or more
fuel supply c hain links, reduc ing operating c osts and sometimes allowing fuel blends that are
more effic ient and ec onomic al.
Regional vs. centralized networks: T he c osts of delivery using different modes of transportation, as
well as servic e availability, c an be direc tly impac ted when fuel c osts rise. Understanding the
modes used most often, the c ustomer expec tation and the risk assoc iated play into the network
struc ture dec ision.
3. Flexibility—In today's unpredic table business c limate, flexibility is a key to c ontinued suc c ess for
some and survival for others. When designing a distribution fac ility, spec ifying versatile equipment is a
c ritic al requirement. T he latest tec hnology may look nic e at start up, but if it c an't keep pac e with
unpredic table events, it is simply a waste of money. Planning for likely (and unlikely) c hanges in the
distribution profile should drive the warehouse design and equipment spec ific ations. For the majority of
distribution operations, flexible equipment is the more prac tic al c hoic e.
4. Global Marketplace—In the ever-c hanging supply c hain, global impac t must always be c onsidered.
T his c ould be as minor as a domestic c ustomer wanting direc t shipments to an international loc ation, or
as major as an ac quisition by a global c ompany or addition of a key global ac c ount. Suc c essful
distribution operations are ready for this type of c hange. T ransportation systems should be designed with
exports in mind; there should be c ontingenc ies for c ustoms doc umentation and international shipping
paperwork. Operations should be designed in a manner that produc t re-labeling or spec ial pac kaging for
international c ustomers c an be ac c omplished easily. Fac ilities may need to ac c ommodate inbound or
outbound airfreight or oc ean freight c ontainers. Customer servic e func tions may need to operate in
24-hour mode to assist c ustomers in all time zones. Preparedness is the c ritic al element in a global
marketplac e. If you are not a global c ompany today, your suc c ess will drive you into that marketplac e
sooner rather than later.
5. Gov ernment Inv olv ement—Just as government involvement has an impac t on distribution,
distribution leadership has an obligation to be involved and aware of legislation that involves their
industry. Many dec isions are made daily at a loc al, state, and federal level that impac t distribution
operations. T axes, labor regulations, transportation restric tions and infrastruc ture dec isions are
c ontinually up for review and disc ussion at every level of government. Without proper input, uninformed
dec isions often have a dramatic effec t on the distribution c ommunity.
In addition, involvement in professional soc ieties (many of whic h c onduc t lobbying ac tivities) is an
effec tive way to trac k the pulse of legislative movement and also an ideal forum to make your c onc erns
known. For some ambitious souls, a direc t role in loc al or munic ipal government may be an effec tive
and fulfilling way to make an impac t. By being proac tive, distribution leaders c an ensure that
distribution and government entities c an c ollaborate to provide benefit to both sides without unpleasant
surprises.
6. Information Systems—In today's e-enabled world, timely and ac c urate information is a requirement.
T he days of keypunc hing in daily distribution ac tivity and nightly updates to host financ ial systems are
bec oming a distant memory for suc c essful distribution operations. T oday's reality is that distribution
exec ution systems must be:
Real-time: Customer requirements are moving toward being able to instantly trac k an order through
every step of the fulfillment proc ess to delivery. Optimally, this information is linked to an Internet
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front-end where a c ustomer c an easily log in and see the exac t status of their order. Real-time
interfac es and host system updates enable this c ustomer-foc used initiative.
Paperless: T he reality is that paper equates to errors. Language and educ ational barriers result in
paper pic k doc uments that are often misinterpreted, at best resulting in lost dollars within the
distribution operation or, worse still, lost c ustomers due to fulfillment issues that esc ape even the
best inspec tion proc esses. T he solution is paperless systems requiring operator validation that the
right steps were followed and that the c orrec t produc t was pic ked and pac ked.
Standardized: In the past, many c ompanies developed proprietary, legac y systems to manage
their distribution operations. With the high growth assoc iated with a suc c essful distribution
operation, many of these c ompanies are finding that the investment to develop and maintain an
in-house system no longer is viable. Standardized, industry-tailored software is now the rule rather
than the exc eption. Software c ompanies leverage their c lient base to c ontinually update their
produc t, adding far more base func tionality than inflexible legac y systems.
7. Modularity—As c ompanies in the distribution spac e c ome and go, their business will typic ally move
to a new distributor or distributors. T he ability to quic kly take on signific ant business volumes dic tates
that modularity is a nec essity for a thriving distribution organization. Modularity must be evident in:
Assets: Distribution assets must be modular, providing the ability to easily expand fac ilities,
c apac ities and equipment to meet inc reasing demands and diverse produc ts. Many c ompanies
design this into a fac ility, while others are c onstantly trac king alternate loc al spac e that c ould be
c losed on quic kly.
Work assignments: T he workforc e must be able to handle new work assignments and transfer
knowledge to new employees effec tively. T his is a key to a suc c essful start-up of a new operation
or an addition to an existing operation.
Labor management systems: T hese systems must be able to handle the addition of new operations
quic kly and ec onomic ally so that performanc e c an be measured and c osts kept under c ontrol.
8. Off-Highw ay Vehicles—In the United States, issues regarding the environment and air quality
c ontinue to be under sc rutiny. T he push for more stringent air-quality regulations will impac t the
warehouse. Elec tric vehic les will take over as the preferred models in the warehouse, displac ing
non-elec tric vehic les in the proc ess. As this evolution oc c urs, manufac turers of elec tric rolling stoc k will
respond with higher power, higher effic ienc y vehic les to fac ilitate this proc ess.
9. Pace—Anyone with ac c ess to an e-tailer web site c an now order produc t, spec ify their servic e
requirements, pay for their order on-line, and trac k the order right to their doorstep. For distributors, this
means that the pac e of distribution must inc rease signific antly to ac c ount for the reduc ed lead times,
shorter produc t lives, inc reased inventory turnover and greater c ustomer expec tations that is c onsidered
standard in the modern business-to-business and business-to-c onsumer marketplac e. If a c ustomer plac es
an order today with next-day delivery, a c ompany that pic ks and ships the order the next day won't be
c ompetitive for long. T he entire supply c hain needs to keep pac e, from vendor c omplianc e to
information and exec ution systems in order to support the new ec onomy that the Internet has enabled.
10. People—Suc c ess demands a team-based, partic ipatory organizational c ulture and a total
dedic ation to c ustomer satisfac tion. T here are many ways to ac hieve this, ranging from simple solutions
suc h as employee c elebration days, employee suggestion programs, and other simple programs to more
struc tured approac hes suc h as revised organizational designs, c ompensation/inc entive/bonus plans, and
other proc esses that direc tly tie the distribution assoc iates on the floor to satisfied c ustomers.
11. Price—While servic e and quality are key fac tors in selec ting a distribution partner, for many
c ompanies, dec isions still c omes down to pric e. Suc c essful past relationships are no longer a good
indic ator of the future. Modern free enterprise demands effic ient, effec tive and low-c ost distribution.
Competition is fierc e and many low-c ost providers will not be here tomorrow as they underc ut the market
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to get short-term volumes at an operating loss. T he goal of a suc c essful distribution operation should be
to operate within their c ore values at the lowest c ost possible. T he path to c ompetitive pric ing is to
operate effic iently and flexibly at low c ost—to offer low pric es any other way is inviting failure.
12. Accountability—A suc c essful distribution operation must have ac c ountability. Ac c ountability is
made possible by effec tive leadership, c lear c ommunic ations and effic ient systems and equipment to
enable produc tive operations and a fulfilling work environment. Ac c ountability requires that leadership
make diffic ult dec isions while maintaining the c ommitment of the organization. Ac c ountability requires
establishing standards, identifying improvement opportunities and measuring performanc e. Also required
is some form of a reward proc ess that answers the inevitable question, "What's in this for me?" Care must
be taken that any rewards are tied to something that c an be quantified as a true benefit to the
organization; rewards without a basis will result in lac k of c redibility and a proc ess that will ultimately
fail.
13. Rev erse Logistics—How to handle the produc ts that are c oming bac k into the operation as well as
any returnable pac kaging that must be ac c ounted for on a regular basis is a c hallenge. T he dec ision on
whether to ac c ept the produc t, whether a refused shipment, an authorized c ustomer return, or an
unexpec ted return must be planned for and c ommunic ated with the distribution operation as well as the
rec eiving and handling proc ess for the produc t or c haos will likely ensue.
For example, a T ompkins Assoc iates c lient in the direc t-to-c onsumer home goods industry was having a
horrible experienc e with returns. An item would be returned and graded 'return to stoc k.' An order would
c ome in for the same item and the returned item (whic h was first quality) would be shipped. Onc e the
c ustomer rec eived the item, they would return it with the c omment that it appeared not to be new. T he
solution was to establish a vendor-quality pac kaging initiative that looked very similar to the original
vendor pac kaging. By implementing the new pac kaging for returns, the c lient was able to realize a 75
perc ent dec rease in sec ond-pass returns, saving over $5 million annually in returns freight and reduc ing
the size of their returns department.
Another opportunity in reverse distribution is returnable pac kaging, either pallets or c ontainers.
Another T ompkins c lient moved from disposable c orrugate c ontainers in their retail store replenishment
operations to returnable c ontainers and used the freight bac khaul to return the empty c ontainers to the
distribution c enter. Operations in the DC were far more effic ient as the plastic totes were muc h more
reliable and were more easily c onveyed and stored than their c orrugate predec essors, and the retail
stores did not have to break down and dispose of thousands of c orrugate boxes every year.
14. Third Party Logistics (3PL)—A growing number of c ompanies are turning to 3PL organizations to
handle the c ustomer fulfillment portion of their supply c hain. Companies that are ac c ustomed to true
partnering with c ustomers and suppliers have less trouble migrating to the 3PL world and ac hieving the
potential c ost savings. T he key steps are to c onduc t a c omprehensive searc h for the right 3PL vendor,
thoroughly review c ost proposals and c ontrac ts to ensure there is financ ial benefit, and work with the 3PL
to make their operation is a seamless extension of your c ompany. T his may involve shared management,
integrated exec ution systems and a unified appearanc e to partners and c ustomers.
15. Variety—Spec ial pac kaging, unitizing, pric ing, labeling, kitting and delivery requirements are
bec oming the norm and must be addressed in any distribution plan. T hese tasks should be designed into
the operation, not "tac ked on" as a reac tive afterthought. Many c ompanies invest large amounts of
c apital setting up spec ialized pac king or value-added servic es (VAS) lines with the mandate to gain
c ompetitive advantages and in hindsight gain little exc ept inc reased c osts and headac hes. A few key
questions need to be answered when setting up these operations:
What is the benefit of the proc ess?
How will we rec oup our investment?
Can we c harge the c ustomer for these servic es?
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Is it better to outsourc e this operation?
A simple review proc ess c an often provide justific ation to move forward and establish key design
parameters to ensure that any "extra" requirements are integrated into the operation responsibly.
Properly planned, these servic es c an be a profit c enter, providing differentiation in a c ompetitive
marketplac e while boosting the bottom line at the same time.
Making the Most of It
T here are several steps you should take to make the most of these keys to distribution network planning.
Assessment: T ake eac h of the 15 points and sc ore your operation using a sc ale that makes sense
to you. An honest assessment is c ritic al in this step.
Prioritization: T ake the areas with the three best sc ores and those with the three worst sc ores and
foc us on them. It's important to not solely foc us on defic ienc ies. If you lose foc us on your
strengths, you c ould lose the momentum that made you suc c essful in the first plac e. Improving
strengths should always c oinc ide with fixing weaknesses.
Action: Use the power of your organization to attac k these issues, unleashing the intelligenc e of
your resourc es to solve problems. Often, the answers are right on the warehouse floor—you simply
need to look.
Look Outside: Sometimes, it will not be prac tic al or possible to make improvements from the
inside. Do not be afraid to seek help from outside entities (c onsultanc ies, voc ational or university
programs, professional soc ieties, etc .). Sometimes a push from someone with new or different
ideas is all you need to get the proc ess moving.
Enjoyment: Make sure there is a defined goal. When you ac hieve it, take the time to enjoy the
suc c ess and maintain the energy and momentum for the next level of c hange.
Some operations may experienc e only a few of these fac tors every year, while others fac e them all daily.
However, planning and following the above methodology c an c onfigure your distribution network to be
both effic ient today and flexible tomorrow to handle ever-c hanging requirements.
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