Distribution and Your Supply Chain
Distribution is an interrelated mechanism of resources, facilities and transportation systems that moves goods from producers to consumers. A distribution network is the system a company uses to get products from the manufacturer to the retailer. A fast and reliable distribution network is essential to a successful business because customers must be able to get products and services when they want them.
Effectively understanding the correlation between distribution and logistics is critical to a company's bottom line. In general, logistics refers to the distribution process within the company whereas the supply chain includes multiple companies such as suppliers, manufacturers, and the retailers.
While some companies manage their own logistics, others find it more efficient to outsource processes to specialized contract logistics companies to manage their logistics for them.
Your contract logistics company becomes a part of your distribution network and a key player in the success of your supply chain.
1. Does outsourcing logistics functions offer companies competitive advantages?
2. What sort of logistics functions can a company outsource?
3. How do contract logistics companies work with my organization?
4. How can I choose the right contract logistics company for my business?
5. Doesn't outsourcing logistics functions add performance risk to our business?
1. Outsourcing logistics is one of the most efficient ways for a company to get the best value for its logistics dollar and increase performance efficiency by staying focused on its core business elements.
EXAMPLE: Billy's Vacuums, LLC makes household and commercial vacuum cleaners. Billy's processes are performed in a small well designed production facility that can produce 1000 units per month. Billy's outsources its logistics functions for storage, distribution and order fulfillment to, Vista Logistics, a local Third Party Logistics (3PL) provider. This makes Billy's able to focus on making vacuum cleaners, what they do best.
Vista picks up finished products and repair/replacement parts from Billy's on a weekly basis. Vista receives the completed vacuum units in sealed point of sale cartons. The repair/replacement parts are received in parts bins of like items in various counts ranging from 25 to 100 pieces.
The finished vacuums are the packaged by the 3 PL according to shipment requests from retail merchants. Smaller merchants may request single quantities and larger retailers may request multiple quantities to be sent to multiple store locations and big box stores may request shipments be directed to their distribution center based upon point of sale replacement information.
Repair/replacement parts, such as brushes, vacuum brushes and tools and vacuum belts, are removed from the bins and placed in point of sale packaging, and stored for fulfillment of orders from retailers or consumers as needed. Some of these orders are for retail stock and some of these orders are for warranty replacement.
Billy's Vacuums LLC would need to add a lot of cost to their vacuum if they were to perform the 3PL function on their own:
- Warehouse space for inventory storage
- Warehouse personnel
- Order processing and fulfillment services
- Packaging Department
- Warranty Claims processing services
These functions are not what Billy's Vacuums does, they make vacuum cleaners.
By outsourcing Billy's can focus on their core capabilities and not make capital investments in real estate, personnel and services that uses resources that could be better dedicated to improving vacuum cleaner production so that they can maintain or increase their market share
The 3PL that services Billy's needs is an expert in the supply chain business and can provide these functions below any cost that Billy's can achieve. 3PL outsourcing is a win-win for Billy's and Vista
2. As seen in the example above, some of the supply chain functions that are outsourced to contract logistics firms are:
- Order Processing
Outsourcing all or some of these supply chain functions may make sense for your business to keep pace with ever changing market trends, transportation regulations and resource costs.
3. Contract logistics companies should work seamlessly with your company's internal operating requirements. Contract logistics is a low cost extension of your company's capability, offering state of the art supply chain solutions that maximize your company's flexibility and ability to meet customer and market needs. Contract logistics companies offer just in time logistics solutions that increase efficiency and decrease waste by delivering goods only as needed in the production process and reducing inventory costs to manufacturers.
If your organization is able to accurately forecast demand, then a just in time inventory strategy may be right for you.
4. Choosing the right contract logistics firm for your business is as simple as understanding your own business and your customers. If you understand the market for your goods, you simply need to match the contract logistics firm to your needs. Not all logistics firms are equal. Prepare a list of requirements and interview firms to see which offers the best matching capabilities and experience to your needs. Some items to consider are:
- Volume of Inventory
- Volume of Shipments
- Customer Service Needs
- Do you require Warranty Management?
- Reverse Fulfillment (That portion of the supply chain that moves returned foods back from the customer)
- Disposal of Out of Date Inventory
5. Risk is always a consideration for any change in business processes. It is important to reduce or eliminate risk through a well thought out design of your supply chain and all of its objectives.
Making the best choice when outsourcing your supply chain needs should 1. Enhance your company's performance and 2. Improve competitiveness in the marketplace and 3. Should measurably improve its bottom line.
If your analysis meets all three of these objectives, risk will not be a consideration.
By having an efficient supply chain and proper logistical procedures, a company can cut costs and increase efficiency. On the other hand, a company with poor logistics will fail to meet customers' expectations and see its business suffer.