January 2005 | Commentary | Viewpoint

Distribution Takes Center Stage

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A paradigm shift has occurred within the supply chain, and distribution is taking center stage. In the midst of a total revival from its undistinguished past, distribution is now more instrumental than ever to an organization's success.

Traditionally, distribution took a back seat to manufacturing and other supply chain activities—not surprising given its historical perception as a back-end process.

Nobody notices an NFL offensive lineman until something goes awry and the quarterback is sacked. The same goes for distribution. Distribution does not receive considerable attention until a big-box supplier assesses a significant chargeback, or an unmet delivery date automatically cancels an order.

Focus on Manufacturing

Historically, companies have tried and applied nearly every improvement initiative available for manufacturing. Faced with shrinking margins, rising customer expectations, and stiff competition, companies scrambled to find an edge.

Many focused on extracting value from their supply chains, with manufacturing as the primary focus. Lean manufacturing, Six Sigma, and just-in-time manufacturing are a few manufacturing-related initiatives promoted in recent years.

As recently as five years ago, distribution was a total afterthought. The advent of just-in-time and lean manufacturing brought to the mainstream the idea that manufacturing processes would better permit product to flow off the production line and out the door. With companies laser-focused on manufacturing, warehousing and distribution took a back seat.

Although these manufacturing initiatives have merit and provide value, they should not have decreased the relevance of distribution. And in fact, the opposite has occurred. They have elevated the importance of distribution.

The Paradigm Shift

What forces have created this paradigm shift? Many factors play a role, but there are four primary drivers of this trend:

1. Extracting value through distribution. With few untapped value-added services remaining in the manufacturing sector, supply chain executives now look to distribution strategies for a competitive advantage.

But world-class distribution operations have never been more strategic, or more challenging to achieve. Organizations must streamline their distribution processes and become not just lean, but flexible, scalable, and agile. Distribution centers (DCs) need to respond quickly to fluctuations in demand, pricing, supply, and customer preferences.

Because companies cannot escape market pressures, migrating to dynamic distribution models that adapt quickly to changes in demand and customer expectations is essential. In return, organizations become better equipped to respond—in near real time—to changes in demand, rather than waste time and money with a static distribution model.

Furthermore, dynamic distribution models can withstand a multitude of unpredictable threats. Successful distribution models master process synchronization—from software and infrastructure to labor.

2. The on-demand era. The advent of the on-demand economy is the second and most important force creating this paradigm shift. As a result, distribution is increasingly recognized as a vital and influential component of the supply chain.

Customers want products when, where, and how they choose, with an unprecedented level of compliance. If an organization cannot adapt and respond to demand fluctuations with speed, then customers will quickly go elsewhere.

Unstoppable forces have created the on-demand marketplace. Problems are compounded for companies hampered by conventional, ingrained distribution philosophies.

And this competitive environment is growing more intense. Markets dictate increased pricing pressure, as customers stipulate more for less. Many DCs have evolved beyond their originally intended use, and are in desperate need of upgrades, reengineering, and system improvements.

In some cases, a thorough review of the distribution network is necessary, and a consolidation of DCs, or a new, greenfield facility is required.

Most improvement initiatives have focused on manufacturing, but now sudden risks—rooted in the new on-demand era—are looming within distribution. In response, companies are accelerating innovation within distribution operations.

Bringing product to market in the most efficient way helps companies create the market standard, lock in brand loyalty, and drive down costs. When organizations find competitive advantages difficult to sustain, they need to respond more dynamically to market changes. Deliver faster, better, cheaper, and on demand is the mantra.

This environment, where competition is intense, change is constant, and economic pressures are unrelenting, facilitates the paradigm shift that puts distribution in the spotlight.

3. A mindset shift has occurred. Executives now view distribution centers not as glorified warehouses, but rather as value-added light manufacturing centers.

As organizations focus on distribution as a means to differentiate, light manufacturing processes and value-added service operations are moving into the DC.

Modern-day DCs have adopted new order fulfillment processes such as postponement. This means final assembly—and/or kitting—is conducted in the DC once an order is received.

In other instances, the DC effectively becomes a service operation, conducting a host of value-adds such as gift wrapping, packaging, tagging, ticketing, and other customization tasks.

Postponement advocates view the DC as a "postponement manufacturing center."

Years ago the DC was considered a glorified warehouse. Now, light manufacturing processes and value-added services are conducted there to meet demand and deliver uniquely configured products.

4. The rise of offshore manufacturing. Ironically, the fourth driving force creating a new approach to distribution is a manufacturing initiative: offshore manufacturing.

From a bottom-line perspective, the cost benefits of offshore manufacturing are easily understood. The pros and cons from a jobs-lost perspective are debatable, but one thing remains clear. If manufacturing heads overseas, distribution has to originate from within the United States.

It is impractical to ship product from China to U.S. customers in priority express boxes. Product still has to come to the United States in a container, go into a warehouse, and through the distribution channel.

A Frontline Business Strategy

Distribution's stock is rising within the supply chain. C-level executives are starting to view distribution as a frontline business strategy—and rightly so.

Distribution can make or break any business plan. Delivery of product is the moment of truth for any organization. Ultimately, it has taken the on-demand environment to give distribution its due respect.

Managing a modern-day supply chain is complex. To succeed, supply chain executives target distribution as a key differentiator to reduce costs, improve service, and build brands. If positioned correctly and given proper attention, distribution will accelerate business performance.

Although the importance of manufacturing has not diminished, its value depends on accurate delivery of the right product, at the right time, to the right place, at the lowest cost.

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