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Pressure to improve customer service and in-stock
rates is pushing more companies to abandon the “consolidation”
model in favor of a flexible, agile network of regional
distribution centers
BY THE END
OF THE 20TH CENTURY, INVENTORY HAD become about as welcome to
most corporate comptrollers as a telecom analyst at an ethics
convention. Though acknowledged to be a necessary evil, it was
still viewed as that balancesheet line item that tied up a lot
of the corporation's cash and required a lot of expensive
space to house. To tame the inventory monster, U.S. business
went into overdrive, striving to keep inventories lean,
operating in just-in-time (JIT) mode and consolidating
distribution centers.
At least,
that's what we thought. But the reality is, well, something
completely different. Warehouse space actually stands at an
all-time high. “Today, there's more square footage of
warehouse space than at any point in U.S. history,” Ted
Scherck, president of the Colography Group, told a session at
the annual Council of Logistics Management
conference.
Scherck's
assertion is corroborated by an analysis conducted by
warehousing provider ProLogis of the 42 major markets in which
it competes. That study showed that warehousing space
increased to 3.4 billion square feet in 2002, up from some 3.1
billion two years ago. “The occupancy rate has likely declined
in the last two years,” says John Siebel, president and COO of
North America at ProLogis, “but the gross square footage has
increased.”
The hard
truth is that although inventory reduction receives a lot of
lip service, inventory levels in many industries have stayed
the same or increased over the long term. That trend is
particularly evident with finished goods. “Management has
cleaned up [its] production and ordering processes for raw
materials, but [it has] less control of finished goods,” says
Jim Ginter, professor of marketing at Ohio State University's
Max Fisher College. Ginter, who headed up a study that
examined various types of inventories across major industries
over a 20-year period ending in 1999, adds that the apparel,
grocery and medical products industries,in particular,
recorded inventory increases. By contrast, real decreases were
found in finished-goods inventories for electronics and
computers, due in large part to the supply chain model made
famous by Dell.
Also
contributing to the more-not-less inventory phenomenon may be
the proliferation of product varieties offered in recent
years. Plus, vendor-managed inventory, JIT and other drives to
improve the supply chain management process at many companies
have, as Ginter puts it, placed “power increasingly
downstream, at the retail level, nearer to the customer.” This
means inventory gets thrown back upstream. And it has to be
warehoused somewhere.
When
“pull” is the trigger
Another
development that is helping kick regional warehousing into
high gear is the growing popularity of “pull” demand chains,
whereby stock replenishment is triggered by consumer demand
(i.e.,sales) rather than, say, manufacturers' promotions. It's
pretty much a given that if this model is to succeed,
inventories need to be maintained close to their point of
sale†which typically means in regional warehouses.
One
company that has adopted this strategy is Best Buy, the
nation's largest consumer electronics retailer. Best Buy has
gone to great lengths to minimize its response time when a
need is defined at the store.“If we had a great day of sales,”
says Chas Scheiderer, Best Buy's senior vice president of
logistics,“we need to get products back on the
shelf.”
Although
it's a national retailer, Best Buy relies heavily on regional
distribution,distributing products to stores from six general
merchandise DCs (distribution centers) around the country,
with an additional East Coast facility slated to open in the
first half of this year. These facilities all support the
continually expanding roster of Best Buy stores † there were
538 at press time†as well as the Musicland group of stores,
which include Sam Goody, Suncoast and Media Play. Best Buy
distributes media such as CDs and DVDs from a dedicated
entertainment facility in the Midwest. In addition, it
operates several other DCs that are dedicated to large -
ticket items such as appliances and big - screen TVs where
deliveries are cross - docked, moving swiftly to stores or
directly to customers.
|
STOCK IN TRADE: E-TAILER AMAZON.COM USES
SOPHISTICATED MATHEMATICAL MODELING TO DETERMINE WHICH
OF ITS SIX REGIONAL WAREHOUSES SHOULD HOUSE ITEMS LIKE
THESE TRADE BOOKS. |
To
guarantee the best possible ground service, Best Buy uses a
dedicated fleet through a long - term agreement with a
truckload (TL) carrier that picks up shipments from vendors
and delivers products to the stores on a twice - weekly basis
with room to tweak deliveries as needed. It also uses contract
carriers as needed or inselect markets on a regular
basis.
Going
postal
Another high - profile
company that has become a convert to regional distribution is
Amazon.com. As a renegade dot-com startup in the mid 1990s,
Amazon.com used one Seattle-area facility to serve the country
as the first online bookseller.
Over the
last few years, however, as its business model has morphed
from that of a dot-com fulfillment company to that of a giant
retailer, Amazon.com invested in state-ofthe-art DCs and
boosted its product mix. The company now sells not only books,
but also apparel, toys, electronics and even hardware, whether
via marketing agreements, partnerships or
acquisition.
Today, six
Amazon.com DCs dot the country, including a large facility in
Nevada and two in Kentucky. (Amazon.com shuttered its Seattle
DC in early 2001.) “We try to perform mathematical modeling to
determine which are the fastestmoving products and which DCs
those products should be in,” says Carrie Peters, an
Amazon.com spokeswoman.
“All DCs
are located close to airports or transportation hubs,” Peters
adds, which allows the e-tailer to ship items within 24 hours
of order receipt. It makes no guarantees, but most items are
received by the customer within two to three days via its
carrier partners UPS and the U.S. Postal Service (or via FedEx
if the customer requests premium delivery service).
Down
the road
The shift toward regional
distribution has implications for the trucking industry as
well.An analysis by the Colography Group reveals that shippers
are pulling back on their use of long-haul less-than-truckload
(LTL) moves. Though the long-haul segment is experiencing only
moderate average annual growth and intermediate-distance moves
of 600 to 1,800 miles are actually declining, short-haul LTL
moves of 600 miles or less (in one-way movements) are seeing
high growth rates.
At the
same time, companies are moving consolidated or truckload
shipments along longer-haul routes, according to
year-over-year trend data from a study conducted annually
among several hundred large shippers by the University of
Tennessee, Georgia Southern University and Cap Gemini Ernst
& Young. Mary Holcomb, associate professor of logistics at
the University of Tennessee, suggests that improved supply
chain management, primarily stemming from the use of
transportation planning and load optimization software, is
driving the trend. Another contributing factor may well be the
increased use of third-party logistics providers (3PLs), which
are masters of load consolidation.
Ultimately, Scherck of Colography Group sees more
companies developing what he calls “an optimal mix of
strategically located inventory and short-haul distribution.”
He cites the example of a large home-products retailer that
keeps fewer windows and doors in stock than it used to. But
that doesn't mean it has cut back on its use of warehousing
space. Instead, it relies on direct shipments from its DC to
the consignee.“ It's true that efficient supply chains change
the number, location and physical layout of storage space,”
Scherck notes, “but this does not mean that storage space goes
away.”
Marcia
Jedd is a supply chain writer based in Minneapolis. Her Web
site is http://www.marciajedd.com/
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