Executive Briefings

Giant Steps Needed for Distribution Footprint Optimization

Analyst Insight: Suppliers competing in a global market grapple with several factors that are pushing them to redesign their distribution footprints. A boom in mergers and acquisitions, increasing delivery demands, and a shift in the locations of supply sources are all converging, requiring reconfigurations of the single or multi-echelon networks of warehouses and cross-docks used to "hub and spoke" products in a cost-effective manner to customers while ensuring the appropriate level of required customer responsiveness. - Michael Albritton, Director, AlixPartners

Giant Steps Needed for Distribution Footprint Optimization

Distribution footprint optimization creates a warehouse network structure that delivers the lowest possible total distribution costs that meet customers' required service levels. Inbound and outbound transportation, distribution center operational costs, inventory, and cross-country / state duties all add to total costs. Many internal and external factors make it difficult to strike a balance between competing cost and service requirements. The external factors cited above play a major role in this ongoing industry challenge.

Consolidation trends across many industries with distribution networks continue to create overlapping footprints, posing challenges but creating opportunities to reduce costs. Whether networks are achieving many small overlaps through small targeted acquisitions or through large mergers such as Halliburton and Baker Hughes, they require considerable effort to strike the cost and service balance. Companies that accomplish this successfully stand out in their respective industries.

In conjunction with growing merger activity, customer expectations of suppliers regarding delivery frequency and capability are changing the type of footprint that successfully meets these demands. Big-box retailers have pressured suppliers to continually reduce their turns, thus requiring a more distributed supplier distribution center network to support their businesses. This phenomenon is not confined to retailers, and affects other industries as well, including oil and gas, foods, packaging products, and auto parts, to name a few.

Geographic sourcing shifts are a third factor elevating the importance of distribution footprint redesign. Product across many industries moved to low-cost countries in Asia several decades ago, leaving North American suppliers to move product from domestic locations to domestic customers through hub-and-spoke networks at a cost disadvantage. Port strategies became highly relevant. Los Angeles, Houston, and the Port of New York gained appeal over Reno, Kansas City, and Central Pennsylvania. More recently, the balance between China and other Asian wage arbitrages versus shipping costs from Asia to North America has shifted. This has encouraged a fundamental hybrid shift back to a “nearshoring strategy” that emphasizes Mexico and low-cost US locations.

Companies addressing new distribution footprint requirements should:

• Define current distribution cost and service “baselines” by analyzing major requirements, constraints, and current-state flows;

• Create viable scenarios “anchored” in the present configuration and with an eye to future needs such as demand shifts and service requirement changes;

• Test key scenarios on the basis of ongoing costs, balance sheet impact, customer service, risks and time frames to implementation;

• Agree on go forward footprints;

• Develop detailed implementation and transition plans;

• Execute transition plans and monitor financial targets;

• And track the achievement of benefits and service performance. 

The Outlook

In 2016 and beyond, expect the number of required distribution realignments to increase as companies consolidate, respond to customers’ increasing service delivery requirements, and rethink geographic sourcing options and duty impacts. Companies that develop early proactive visions of their new footprints will have a decided advantage over competitors on both costs and service.

Distribution footprint optimization creates a warehouse network structure that delivers the lowest possible total distribution costs that meet customers' required service levels. Inbound and outbound transportation, distribution center operational costs, inventory, and cross-country / state duties all add to total costs. Many internal and external factors make it difficult to strike a balance between competing cost and service requirements. The external factors cited above play a major role in this ongoing industry challenge.

Consolidation trends across many industries with distribution networks continue to create overlapping footprints, posing challenges but creating opportunities to reduce costs. Whether networks are achieving many small overlaps through small targeted acquisitions or through large mergers such as Halliburton and Baker Hughes, they require considerable effort to strike the cost and service balance. Companies that accomplish this successfully stand out in their respective industries.

In conjunction with growing merger activity, customer expectations of suppliers regarding delivery frequency and capability are changing the type of footprint that successfully meets these demands. Big-box retailers have pressured suppliers to continually reduce their turns, thus requiring a more distributed supplier distribution center network to support their businesses. This phenomenon is not confined to retailers, and affects other industries as well, including oil and gas, foods, packaging products, and auto parts, to name a few.

Geographic sourcing shifts are a third factor elevating the importance of distribution footprint redesign. Product across many industries moved to low-cost countries in Asia several decades ago, leaving North American suppliers to move product from domestic locations to domestic customers through hub-and-spoke networks at a cost disadvantage. Port strategies became highly relevant. Los Angeles, Houston, and the Port of New York gained appeal over Reno, Kansas City, and Central Pennsylvania. More recently, the balance between China and other Asian wage arbitrages versus shipping costs from Asia to North America has shifted. This has encouraged a fundamental hybrid shift back to a “nearshoring strategy” that emphasizes Mexico and low-cost US locations.

Companies addressing new distribution footprint requirements should:

• Define current distribution cost and service “baselines” by analyzing major requirements, constraints, and current-state flows;

• Create viable scenarios “anchored” in the present configuration and with an eye to future needs such as demand shifts and service requirement changes;

• Test key scenarios on the basis of ongoing costs, balance sheet impact, customer service, risks and time frames to implementation;

• Agree on go forward footprints;

• Develop detailed implementation and transition plans;

• Execute transition plans and monitor financial targets;

• And track the achievement of benefits and service performance. 

The Outlook

In 2016 and beyond, expect the number of required distribution realignments to increase as companies consolidate, respond to customers’ increasing service delivery requirements, and rethink geographic sourcing options and duty impacts. Companies that develop early proactive visions of their new footprints will have a decided advantage over competitors on both costs and service.

Giant Steps Needed for Distribution Footprint Optimization