Global Supply Chain Distribution

Distribution of Global Supply Chain

Distribution encompasses all of the channels, processes, and functions, including warehousing and transportation, that a product passes through on its way to the final customer (end-user). It is the actual movement of products and materials between locations.

Distribution management involves managing the handling of materials and products at receiving docks, storing products and materials, packaging, and the shipment of orders. The focus of distribution, what it accomplishes, is referred to as order fulfillment. It is the process of ensuring on-time delivery of the customer’s order.

Distribution and transportation are also often referred to as logistics. Logistics management in its broadest interpretation is similar to supply chain management. However, it is frequently more narrowly defined as being concerned with just transportation and distribution, in which case logistics is a subset of supply chain management. In this decade, total annual U.S. business logistics are over $1.4 trillion.

Speed and Quality

Distribution is not simply a matter of moving products from point A to point B. The driving force behind distribution and transportation in today’s highly competitive business environment is speed. One of the primary quality attributes on which companies compete is the speed of service.

Customers have gotten used to instant access to information, rapid Internet-based order transactions, and quick delivery of goods and services. As a result, walking next door to check on what’s in the warehouse is not nearly fast enough when customers want to buy a product now and a company has to let them know if it’s in stock.

That demands real-time inventory information. Calling a trucking firm and asking it when it will have a truck in the vicinity to pick up delivery is not nearly fast enough when a customer has come to expect delivery in a few days or overnight. That also requires real-time information about carrier location, schedules, and capacity. Thus, the key to distribution speed is information, as it has been in our discussion of other parts of the supply chain.

Distribution Centers and Warehousing

Distribution centers, which typically incorporate warehousing and storage, are buildings that are used to receive, handle, store, package, and then ship products. Some of the largest business facilities in the United States are distribution centers.

The Target Import DC in Lacey, Washington, has 2 million square feet of floor space—over 37 times bigger than the area of a football field and almost the same floor space as the Empire State Building; one of the largest Amazon fulfillment centers in Phoenix, Arizona, is over 1.6 million square feet. The annual cost of warehousing in the United States is over $470 billion.

As in other areas of supply chain management, information technology has a significant impact on distribution management. The Internet has altered how companies distribute goods by adding more frequent orders in smaller amounts and higher customer service expectations to the already difficult task of rapid response fulfillment. To fill Internet orders successfully, warehouses and distribution centers must be set up as “flow-through” facilities, using automated material-handling equipment to speed up the processing and delivery of orders.

Postponement

Postponement moves some final manufacturing steps like assembly or individual product customization into the warehouse or distribution center. Generic products or parts (like computer components) are stored at the warehouse, and then final products are built-to-order (BTO), or personalized, to meet individual customer demand. It is a response to the adage that whoever can get the desired product to the customer first gets the sale.

Postponement pulls distribution into the manufacturing process, allowing lead times to be reduced so that demand can be met more quickly. However, postponement also usually means that a distributor must stock a large number of inventory items at the warehouse to meet the final assembly or customization requirements; this can create higher inventory carrying costs. The manufacturing and distribution supply chain members must therefore work together to synchronize their demand forecasts and carefully manage inventory.

Warehouse Management Systems

To handle the new trends and demands of distribution management, companies employ sophisticated, highly automated warehouse management systems (WMS) to run the day-to-day operations of a distribution center and keep track of inventories. The WMS places an item in storage at a specific location (a putaway), locates and takes an item out of storage (a pick), packs the item, and ships it via a carrier. The WMS acknowledges that a product is available to ship, and, if it is not available, the system will determine from suppliers in real-time when it will be available.

Illustrates the features of a WMS. Orders flow into a WMS through an order management system (OMS). The OMS enables the distribution center to add, modify, or cancel orders in real-time. When the OMS receives customer order information online, it provides a snapshot of product availability from the WMS and suppliers via EDI.

If an item is not in stock, the OMS looks into the supplier’s production schedule to see when it will be available. The OMS then allocates inventory from the warehouse site to fill an order, establishes a delivery date, and passes these orders onto the transportation management system for delivery.

The transportation management system (TMS) allows the DC to track inbound and outbound shipments, consolidate and build economical loads, and select the best carrier based on cost and service. Yard management controls activities at the facility’s dock and schedules dock appointments to reduce bottlenecks. Labor management plans, manages, and reports the performance level of warehouse personnel. Warehouse optimization optimizes the warehouse placement of items, called “slotting,” based on demand, product groupings, and the physical characteristics of the item. A WMS also creates custom labeling and packaging.

WMS facilitates cross-docking, a system that Walmart originated that allows a DC to direct incoming shipments straight to a shipping dock to fill outgoing orders, eliminating costly put-away and picking operations. In a cross-docking system, products are delivered to a warehouse continually, where they are stored, repackaged, and distributed to stores without sitting in inventory. Goods “cross” from one loading dock to another, usually in 48 hours or less.

Vendor-managed Inventory

With vendor-managed inventory (VMI) (also called supplier-managed inventory or SMI), manufacturers, instead of distributors or retailers, generate orders. Under VMI, manufacturers receive data electronically via EDI or the Internet about distributors’ sales and stock levels.

Manufacturers can see which items distributors carry, as well as several years of point-of-sale data, expected growth, promotions, new and lost business, and inventory goals, and use this information to create and maintain a forecast and an inventory plan. VMI is a form of “role reversal”—usually the buyer completes the administrative tasks of ordering; with VMI the responsibility for planning shifts to the manufacturer.

VMI is usually an integral part of supply chain collaboration. The vendor has more control over the supply chain and the buyer is relieved of administrative tasks, thereby increasing supply chain efficiency. Both manufacturers and distributors benefit from increased processing speed, and fewer data entry errors occur because communications are through computer-to-computer EDI or the Internet.

Distributors have fewer stockouts; planning and ordering costs go down because responsibility is shifted to manufacturers; and service is improved because distributors have the right product at the right time. Manufacturers benefit by receiving distributors’ point-of-sale data, which makes forecasting easier. Dell perfected VMI as part of its build-to-order (BTO) production and inventory system; Walmart and Home Depot are examples of companies that also employ VMI on a large scale.

Collaborative Logistics

Rival companies are also finding ways to collaborate in distribution. They have found that by pooling their distribution resources, which can create greater economies of scale, they can reduce their costs. For example, a company may find it is paying for too many half-empty trucks so they might move to collaborative logistics.

Using the Internet as a central coordination tool among producers, carriers, and retailers, companies can share trucks and warehouse space with other companies, even competitors that are shipping to the same retail locations. At third-party logistics (3PL) providers, companies use a website to post the warehouse space they need or have available and share space, trucks, and expenses. The goal is that everyone, from suppliers to truckers to retailers, shares in the savings.

Distribution Outsourcing

Another distribution alternative is outsourcing. Just as companies outsource production to suppliers that they once performed themselves, manufacturers are increasingly outsourcing distribution activities. The reason is the same for producers as it is for suppliers: Outsourcing allows the company to focus on its core competencies. It also takes advantage of the expertise that distribution companies have developed. Outsourcing distribution activities to third-party logistics (3PL) providers tends to lower inventory levels and reduce costs for the outsourcing company, it allows companies to focus on its core competencies.