Strengthening your supply chain one link at a time.

The Trend Towards Regional Distribution

When I first started working on network optimization projects back in the mid-90’s, one distribution network constraint seemed to always surface.  Building sizes can’t go over the magic threshold of one million square feet.  The thought was that inside the four walls building efficiencies start to decline at this point, mainly due to lengthy travel distances.  Certainly, there are ways to mitigate this with proper layout, process, and technology, but it was still considered a limitation, or at least a watch out.  Now, this rarely comes up because, more often than not, the optimal strategy is to regionalize before the buildings get that big anyway.

When I talk about the trend to regionalization, I am not talking about the Amazons and Wal-Marts of the world.  I’m talking about the small to mid-size companies that would have never regionalized in the past.  There are many issues that are causing these types of companies to think about this more.  I’ll start with some of the more obvious reasons to regionalize distribution:

• Outbound Transportation Costs – Being closer to your customers will reduce the number of miles travelled, and with ever rising fuel costs, this can be a big win for your network.
• Customer Service – Service levels are getting tighter causing shipments, that historically moved via ground, to be moved via air, especially in e-commerce. The avoidance of expedited air shipments has been the largest driver of regionalization in the past decade.

This battle of cost vs. service drives most of the decisions, but other factors are starting to have more of an influence in regionalizing distribution networks.  These include:

• Sustainability – Regional distribution networks can take miles out of the network, which of course lowers emissions. It can also shift transportation miles to more sustainable modes (parcel to TL/Intermodal).
• Labor – Labor availability is an ever increasing constraint for networks. Over the last few years, I have worked on many studies where a building expansion might make sense, but the inability to staff the expansion drove them to add capacity in a new market.
• Business Continuity – This was certainly always in the back of a lot of company’s minds, but seems to have come to the forefront lately. Within the last few months, companies like Amazon, Wal-Mart, QVC, etc. have lost buildings due to fires, tornados, and floods.  This is a real consideration to allow you to overlook the cost of regionalization.
• Port Diversification – If there is one lesson from the supply chain crisis, it is this. Having a second distribution center on the opposite coast provides flexibility and can allow you to shift container volume to an alternate port more easily.  If you have a single DC in Southern California, shifting Asia container volume to an east coast port is difficult and costly.

Regionalization may not make sense for everyone as there are certainly challenges to overcome come with regional distribution including building capital costs, increased safety stock, SKU stocking strategy, inventory/demand planning, and inventory deployment (inbound PO splitting).  With all this said, a network optimization can help you determine the proper network strategy for your business.
 
—John McDermott, St. Onge Company
 
 

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