Lowering Costs through Distribution Network Planning

By Barnes, Christopher R. | Industrial Management, September/October 1997 | Go to article overview
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Lowering Costs through Distribution Network Planning

Barnes, Christopher R., Industrial Management

Supply chain management, demand flow leadership, or value chain analysis? Whatever your philosophy, the fundamental goal of lowering costs while improving customer satisfaction and the core elements of supplying, procuring, producing, distributing, retailing, and consuming (Figure 1) basically remain the same. The case of a national beverage producer in the United States provides insight into lowering costs in the distribution network portion of the supply chain.

Business designs go through cycles from value inflow, to stability, to value outflow. Value migrates from outmoded business designs to new ones better able to satisfy customer needs. A business design is the totality of how a company selects its customers, defines and differentiates its offerings, defines the tasks it will perform and those it will outsource, configures its resources, goes to market, creates utility for customers, and captures profits.

A national beverage producer was in the midst of a value outflow transformation. Due to distribution costs escalating at a faster rate than revenues, and a cumbersome distribution network weighed down by exceptional growth and rapidly shifting market demands, the producer needed a new network plan to keep pace with the shifting market segments and maintain economical customer service levels. The company was working in a reactive mode in an effort to meet customer expectations by locating distribution facilities near each major customer as the market grew.

Their primary markets were in metropolitan areas east of the Mississippi and some smaller markets in the West. Production facilities were located in the Northeast, the Southeast, and the south central U.S. Additionally, products were subcontracted to vendors in the Northeast. At the time of the analysis, all production facilities were operating at near capacity, and there were more than 45 third-party warehouses in use throughout the country. These warehouses were used as points-of-distribution to retailers.

Through market development and product proliferation, case sales volumes were expected to double in the five-year planning horizon. Although a majority of then current sales came from the Northeast, this market segment was expected to grow only 5 percent annually, with a majority of growth coming from new products. Significant growth would be led by new marketing efforts and/or expansion into the Southeast, the Midwest, and the West. In these growth regions, distribution costs were automatically affected, since a majority of the existing points of distribution were located along the East Coast and were serving established markets.

Inventory was managed through an intensive, paperbased process that was decentralized among several points of distribution. The growth in sales had a significant impact on data processing lead times, and was reflected by inaccurate and delayed information.

Distribution network planning is one of the main areas affecting the value chain. A distribution network plan is developed to meet a specific set of requirements over a given planning horizon. A good plan will determine the optimal network to provide customers with the right goods in the right quantity, at the right place, and the right time, with minimum total distribution cost. As the number of warehouses increases, transportation costs decrease and warehouse costs increase (Figure 2). The reverse is also true. As the number of warehouses decreases, transportation costs increase. Therefore, to minimize total distribution cost, it is important to find the best balance between warehousing and transportation.

The objective of distribution network planning is to develop a plan indicating the most economical way to ship and receive product while maintaining or increasing customer service requirements-put simply: a plan to maximize profits and optimize service. Distribution network planning may address the following questions:

How many distribution centers should exist?

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