Part 3 of the five-part series “Designing Resilient Distribution Networks“
The two key criteria that determine your supply chain’s effectiveness are time and inventory. Time determines the ability of goods to move quickly enough through the supply chain to generate cash as soon as possible, and inventory determines the turnover of goods into cash. The strategy you choose during the planning phase should also align with the best practices you are planning to implement.
Theoretically, inventory and time are inversely proportional to each other; i.e., more inventory levels mean a faster time to the customer; this is the challenge a resilient supply chain tries to address.
Most analysts give significant weight to the inventory-turnover ratio when determining the best-performing supply chains. For example, the Gartner Supply Chain Top 25 for 2019 assigns 10% weight to inventory turnover in its evaluation. The higher the inventory turnover, the better, because a higher turnover means you can convert your inventory to cash more quickly. Demand-driven supply chains have higher inventory turnover compared to forecast-driven supply chains. This is one of the reasons a large percentage of the top 25 global supply chains are demand-driven.
Let’s look at some of the best practices enterprises should consider in their quest to develop a resilient distribution network.
Crossdocking refers to docking products from distribution. This means when inventory arrives at a distribution center, it is not stocked; instead, it is immediately dispatched to customers – possibly after performing value-adding activities. For example, produce from a manufacturing unit arrives at a centrally located distribution center and is packed according to the specifications of individual customers (the value-adding step) before being dispatched to their respective destinations.
This not only moves non-core activities away from the manufacturing facility but also avoids stocking inventory. It also saves money because, rather than sending multiple trucks from the manufacturing unit to various customers, a common truck carries the inventory to the distribution center immediately after manufacturing, thus reducing inventory hold-up. Also, because the inventory is not stocked at the distribution center, time to customer also decreases. Crossdocking can either be planned or situational, which means either a type of product is always cross-docked, or it is cross-docked depending upon the situation.
Kitting is the process of shipping a set of products used for one application together. For example, an enterprise that assembles, stocks, and distributes personal computers can stock and distribute the components as a kit rather than individually. In simpler terms, rather than stocking and dispatching memory chips, displays, and hard drives separately, the enterprise creates a kit of the components required to put the computer together. This generally improves the time attribute.
Segmentation refers to the process of moving away from the one-size-fits-all approach. Products are segmented by various parameters (e.g., type of customers, shelf life) and the appropriate distribution strategy is determined for each. For example, fast-moving products with a higher inventory ratio have a higher stock level, while niche, high-value products have a lower inventory level.
Layout-oriented storage control
Principally, this means that your warehouse and distribution centers should have a layout that enables efficient storage as well as efficient movement. Goods should move out of the warehouse and distribution centers as soon as possible, so the layout of the storage environment should be designed to enable quick retrieval and efficient dispatch.
There are several other best practices that can be considered while designing a resilient distribution network. Crossdocking, kitting, segmentation, and layout-oriented storage control are the most common, and therefore are the focus of this article.
This five-part series, “Designing Resilient Distribution Networks,” focuses on five key aspects that are essential for modern distribution networks to incorporate. Bookmark the series page to catch up on any blogs you may have missed and watch for new installments.