Top 10 Distribution Concerns
By Katrina C. Arabe
Distributors must deal with declining business that may never fully recover and cost reduction pressures that continue to mount. Explore the most pressing issues in distribution today.
Distributors can look forward to a more prosperous year, say economists and industry observers, but there's a caveat. Business may not rebound with the same resiliency that it did following past economic downturns. This is because many customers of distributors have transplanted their manufacturing facilities to other countries and few will be increasing their payrolls because of skyrocketing health insurance costs.
As a result, distributors will have to continue to scrutinize their internal operations and find ways to cut costs. And that's only one of the 10 major issues they will contend with in the coming months:
1: Doing More with Less
"Companies are thinking more strategically and want to have their cost structures in place," says Fred Kimball, principal of Maine-based consultancy Distribution Design Inc. He says that both the optimistic and the more pessimistic companies are focusing on cost cutting, but for different reasons. While more positive companies are "taking steps now to lower their operating costs in preparation for a new era of economic growth," the more wary firms are controlling costs to avoid economic problems in the long run.
But Rick Duris, president of the Business Technology Group in Chicago, thinks that companies are not being strategic at all by focusing on cost reduction. By failing to invest in distribution, companies are not gaining a competitive edge from it, he says. "Executive management in the vast majority of companies has not yet truly embraced supply chain distribution and warehousing as a strategic and competitive advantage," he says. "Logistics does not show up as an asset. The perception is that it is an expense—something to be minimized or squeezed. Management doesn't understand it and the impact it can have on profits."
Duris recommends that logistics and distribution managers show executive management how to turn distribution into a competitive advantage. He acknowledges, however, that in this economy, management is more concerned with solvency than strategy. "Investment and long-term strategy is not what's on the table for discussion; survival is on the table," he says. "When you're trying to make every nickel count, you're not focused on investment—you're focused on cash flow."
2: Precious Space
One way that warehouse managers keep costs down is through better usage of warehouse space. Many facilities have sufficient square footage, but are not utilizing it effectively, says Kimball. "I think the message is getting out that warehouse space is not free and it is one of the major elements of cost," he says.
Warehouse operators are beginning to acknowledge the cost of excess and outdated inventory and starting to do something about it. "I'm seeing a greater willingness to write that inventory off and get it out of the warehouse," says Kimball.
3: Inventory Control
Inventory is demanding a lot of attention today. Warehouse managers and directors are now more responsible for improving inventory management and keeping a record of the costs of insufficient improvement of inventory. "I think this is where the impetus has to come from—a warehouse manager needs to be able to publish metrics on inventory and document what it is costing the company," says Kimball.
No one is better positioned than the warehouse manager to keep track of such costs, and executive management is more attuned to their observations than ever before, says Kimball. Indeed, more supply chain managers are tackling inventory, which has historically been the task of operations or sales and marketing, not distribution and logistics, says Terry Harris, managing partner of Chicago Consulting.
The firms that have concentrated on controlling inventory have become adept at managing it, says Geoff Sisko, vice president and partner with Gross & Associates in New Jersey, but he asserts that too many companies insist on the just-in-time (JIT) strategy, which avoids buffer stock. JIT works only if your supply chain is relatively short and dependable, says Sisko, but now "people have to rethink inventory and the whole JIT concept with the idea that, because of more and more imports, the supply chain is becoming longer and less reliable."
4: Consolidating Warehouse Networks
Several industry experts believe that companies will continue to consolidate their warehouse networks, creating fewer, bigger and more complex facilities. By combining warehouses, firms can boost the level of automation and thereby obtain more volume out of a smaller total footprint.
But companies shouldn't jump on the network consolidation bandwagon without careful consideration. "Don't just follow the trend," advises Duris from Business Technology Group. "It's not about trends, but what makes sense to your business. Make sure you analyze your operations and understand your needs."
5: M&A Activity to Rise but Not Rebound
Speaking of consolidation, merger and acquisition (M&A) activity is expected to increase this year because at the tail end of last year, several big deals took place in the distribution/manufacturing sector. But don't expect such activity to reach the highs it did in the 1990s, its heyday, when the industrial marketplace witnessed a flurry of mergers and acquisitions.
"Merger activity in industrial distribution will slowly gather momentum in the next 18 months, although we won't see a return to the late 90s anytime soon," says Adam Fein of Pembroke Consulting, which keeps track of merger and acquisition activity in the distribution sector.
Although 2003 is expected to be a slightly busier year for consolidation activity than 2002, the long-term trend has been one of decline. Industrial Distribution's 56th Annual Survey of Distributor Operations revealed that the number of mergers and acquisitions has been consistently inching downward since 1998. In late 2001 and early 2002, the study showed that a mere 4% of distributors were involved in a merger or acquisition.
6: Customer Service to Improve
Customer service will also continue to be a focal point as companies enhance customer offerings to set themselves apart from competitors. For example, Kimball cites one direct marketer, which recently offered free shipping on all orders and watched orders jump by 17% in the test areas. The company is now thinking about extending the service.
As major direct marketers bolster customer service, consumers will start to demand more, says Kimball. This will further intensify the pressure to reduce costs and to speed up order processing times in the distribution center. And from the procurement standpoint, large box retailers and original equipment manufacturers will expect suppliers to be more accommodating with prices and services, says Harris.
7: Technologies Heat Up
Radio frequency identification (RFID) will rapidly reach "a critical mass and become more applicable and more useful," says Sisko. Barcodes will hang on tight however, he says, because they have become so ubiquitous and helpful, severely limiting situations in which RFID can be utilized throughout the entire supply chain.
Another technology that is coming of age is the voice-directed system, reports Kimball, noting that vendors have straightened out many of the operational kinks in the systems and predicting that such systems will break into the mainstream soon. Duris agrees that voice will make itself heard but points to obstacles that have yet to be overcome, most significantly its high price tag.
Several technologies are also poised to make gains in upcoming months. They include 2.4-GHz WiFi radio frequency applications, e-commerce order fulfillment and Web-based inventory accuracy. The Internet may even supplant electronic data interchange (EDI) for data transfer, says Sisko, a switch that will allow companies to avoid paying for EDI access. "I wouldn't be surprised if EDI disappears and the Internet takes over because I think EDI's main service was providing the transmission lines," he says.
8: Third-Party Logistics Providers Still Rolling
The trend of companies turning to third-party logistics providers (3PLs) has been widespread and robust because firms are acknowledging that they are better off concentrating on their core competencies and letting experts handle warehousing and distribution, says Harris. Although the 3PL movement lost steam in the last year or two, he says, its future growth will be steady, conservative and enduring.
Sisko agrees, predicting more business for 3PLs, especially from companies that are emphasizing marketing and sales and would rather not handle their own distribution. The 3PL industry will enjoy continued growth, even though it may not be as explosive as in the past, says Sisko. Also, the use of 3PLs is often viewed as a cost reduction measure so its appeal should last.
9: Labor Market Tests Recruit & Recruiter
The labor market today has improved from a few years ago, says Kimball, but not every employer is benefiting from it. In some areas where distribution facilities abound, companies are struggling to recruit employees and finding skill levels inadequate, says Sisko. Kimball also adds that companies should address the need for bilingual supervisors or lead workers because temporary laborers often aren't fluent in English.
As with many other areas, companies are trying to cut costs in labor, says Harris. Many are downsizing or maintaining their workforces and handling demand swings with outside labor. In fact, in many cases 50% of a facility's workers are temporary. "An organization can attract all the good labor that it wants to if it is willing to pay enough, but the tug and pull is the cost of the labor versus its quality," says Harris. "It's an issue that will never go away."
10: It's a Team Effort
Job functions are becoming less clear-cut as employees in distribution and manufacturing are now expected to gain skills in more than one area of expertise. The inside sales and outside sales staff or marketing departments are increasingly sharing responsibilities. In fact, in order to succeed, many distributors have taken a team approach to customer service in the past few years, and this trend is expected to continue.
Every distribution employee must recognize how his or her position affects the entire operational process. "That's not part of my job description" will soon become an obsolete excuse, industry observers believe. In fact, the key to dealing with all the major trends in distribution today may lie in training employees to adapt to the rapidly changing business environment.