Academic journal article The McKinsey Quarterly

Customizing Distribution

Academic journal article The McKinsey Quarterly

Customizing Distribution

Article excerpt

In logistics, conventional wisdom can get in the way of creating customer satisfaction

Global movements toward regional market integration, such as the European single market, have prompted companies to rethink their entire logistics strategies, especially at the warehousing and distribution end. Indeed, many, especially in Europe, are already centralizing these operations at the regional level. While such an approach may be cost effective, realization is growing that it can jeopardize a company's ability to deliver products and parts to dealers -- and customers -- on time. Some businesses are now reversing their decision to centralize. Not that the centralization of logistics is always wrong; but it might not be what is needed at a given moment. This article, based on a survey of the logistics practices of 17 large companies, examines several commonly held beliefs about logistics. It suggests that "conventional wisdom" is an unreliable guide to achieving customer satisfaction -- and even cost reduction.

FOR MOST COMPANIES, selling products in large numbers of regions or countries means deploying elaborate distribution chains. Substantial amounts of effort and money are expended in these chains, which stretch from the customer via retailers and regional and central warehouses to the producer. Yet despite all the attention logistics receives, distribution costs can be high, and customer complaints about delivery are often abundant. Businesses have responded by adopting practices which have become, for many logistics managers, conventional wisdom:

* Centralizing stocks by shrinking the number of regional warehouses so as to reduce inventory cost.

* Optimizing worldwide distribution by building up a central logistics department (with ever-increasing staff).

* Classifying the product assortment according to ABC categories to identify the fast-, medium-, and slow-moving products.

* Introducing sophisticated electronic data processing (EDP) procedures to smooth demand fluctuations so that production can cope with them.

If you are tempted to follow any of these courses, however, we recommend that you think again. Some of this "conventional wisdom" may prove wrong, especially as industry focus shifts from pure cost reduction toward customer satisfaction.

"What everyone knows"

Our survey of logistics managers from leading companies in different industries showed that all of them were guided by at least one of these concerns or assumptions. Some companies worry about the number of warehouses they run; some have centralized or plan to centralize logistic decision making; few companies use any classifications other than ABC if they use a classification at all; and almost all have installed, are improving, or want to use more or less sophisticated forecasting tools. But from our experience with different logistics projects, discussions with logistics practitioners, and contacts with clients and colleagues alike, we have come to believe that these decisions or intentions need to be critically reassessed.

* "Centralizing stocks by reducing the number of regional warehouses leads to substantial cost savings."

It is common knowledge that centralizing stocks brings inventory costs down. Consequently there is heavy pressure on companies to reduce the number of their warehouses, especially in a border-less Europe. Many large European companies have been or are involved in projects to build European distribution systems. However, cutting back on warehouses may bring a company only a relatively small financial benefit, whereas it may severely handicap its ability to reach customers within a few hours.

Provided that all companies in an industry pursue this trend, everyone is better off -- except the customer, who has no choice but to accept long delivery times for those products not stocked at retail level. But at the same time, an opportunity for gaining long-term competitive advantage is lost -- an opportunity that could be seized by focusing on customer satisfaction (which means increasing the number of regional warehouses) instead of reducing costs. …

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