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A Dynamic Distribution Network
The agility with which a company handles its supply chain is becoming a mark of business excellence and a measure of advantage. The emergence of what is called a “dynamic distribution network” is a strategy that allows for a good fit in an ever-increasing global marketplace. Often, virtual facilities are the choice over bricks and mortar.
Forbes.com visited with John Fontanella, senior vice president and research director of supply chain services for Aberdeen Group. He is the author of the recently released study “Warehouse Without Walls.”
Forbes.com: What constitutes a dynamic distribution network in the context of today’s supply chain?
Fontanella: With the growth of global sourcing and worldwide markets, products are being made anywhere to be shipped anywhere. In Aberdeen Group’s recently completed study, “The Supply Chain Integration Benchmark Report,” we found that companies are seeking much more flexibility and agility to cope with this reality. It’s still very common for companies to detour their finished products thousands of miles away from the markets where they will ultimately be consumed, all in the name of control. We found, though, that some are building the capability to monitor and manage the flow of goods without having them pass through a central distribution point to match supply with demand. Instead, they are using techniques such as cross-docking and drop-shipping from supplier and service-provider locations to increase the velocity of their supply chains, allowing them the ability to delay commitment of inventory until real market demand becomes apparent.
One company we interviewed now ships directly from its manufacturing plants in Asia to the stores of its North American retail customers. Big air freight bills? Darn right, but [they are] more than offset by the money saved closing five distribution centers in the United States. We call this strategy the “dynamic distribution network.” Companies that have mastered it have seen some significant improvements. Their cash-to-cash cycles are 25% less than industry peers, and they also lead in on-time delivery performance.
In what ways does the dynamic distribution network offer an advantage over a fixed-location network?
Supply chain management, at its essence, is the management of uncertainty, whether it be failure of a supplier to perform or a sudden change in market demand. Companies historically have dealt with uncertainty by using inventory and other assets to buffer against it. That’s a good approach when the effect of uncertainty on a business is small–for instance, when the actual order from a customer is 10% more or less than forecast. When the range of that uncertainty is far greater, though, it becomes financially infeasible to use this tactic.
Companies are left with two other choices: eliminate the sources of uncertainty or be flexible enough to change business plans quickly to accommodate them. Flexibility is at the heart of the dynamic distribution network. By being able to adjust plans and deploy inventory at any point of the supply chain, companies can contend with uncertainty without building huge and expensive buffers to act as a contingency.
Most companies today still equate flexibility with a loss of control, and that’s because their supply chains lack the transparency of activities and events that would allow them to evaluate the correct course of action. The companies we have found successful in the implementation of dynamic distribution networks put a high value on information integration with partners, and they are very aware of the status of business activities anywhere in their supply chains. The awareness of status extends beyond their immediate communities, too. Many of the companies surveyed monitored activities with their supplier’s supplier and customer’s customer.
What are the differences to the end customer of a dynamic distribution network in action.
That’s easy. Dynamic distribution networks reduce customer uncertainty over availability and delivery, which makes your company more attractive to do business with. We have seen dynamic distribution networks at work in the computer industry, where products are configured to order as a standard service using a well-synchronized network of suppliers and service providers. Now, the concept is being adopted by retailers to better serve consumers in categories like consumer electronics and furniture.
We are even seeing the concept being adopted in apparel. Supply chain managers continually tell us that on-time delivery is their customers’ most important performance measurement. Being able to consistently deliver on time allows customers in a business-to-business setting to implement their own cost savings initiatives.
What kinds of strategies and organization do companies that choose dynamic over static distribution networks have?
We found that the internal operations of companies successful in the use of dynamic distribution networks are highly integrated, with common performance measures and operation norms that extend across the entire organization. You don’t see one function optimizing its own performance at the expense of others. This is important when managing an extended trading community. A company should show one face to its suppliers and service providers by setting a common expectation for performance and consistent direction. Consistency is important. We found high-performing companies possess a much greater level of process standardization than others, both inside the company as well as with its trading partners. Their use of technology also differentiates them.
Almost 90% of the high-performing companies in our survey used Electronic Data Interchange [an electronic data exchange protocol] corporate-wide, and they also were much more likely to automate processes inside and outside of the enterprise. Finally, service providers such as third-party logistics companies were selected on the basis of their technological competence as well as their operation performance.
How does a company implement a dynamic distribution network?
As I mentioned, it is important that companies show one face to their trading community. That means that they have to begin the process of collaboration internally. It is also important to have a consistent set of performance measurements that can be used to manage the trading community, and that they be monitored closely and frequently. Transparency of events and activities within the trading community is crucial–the more real-time the better. This should be the goal of an information technology strategy that seeks to create the integration of processes and data both inside and outside of the company. Finally, a company seeking the flexibility that dynamic distribution networks can yield has to have the analytical tools necessary to evaluate different courses of action and their effect on profitability and customer service.