Changing a distribution network need not involve complex processes and high costs, according to Rob O’Byrne of the Logistics Bureau.“These channels are frequently overlooked as a source of performance enhancement in the supply chain. But if you think outside the box, huge savings can be made by simply evaluating the channel and implementing alternative strategies.”More often than not changes to a distribution network are associated with complexity and are considered costly.Not so, says O’Byrne, who saved one company more than 18% annually by simply making a few changes to its distribution network.“One of the most important factors to consider when evaluating any distribution channel is the cost to serve. Once you have a clear indication of that cost it becomes far easier to come up with alternative distribution strategies.”Sharing a recent case study of a company operating in the building product space, O’Byrne highlighted how a change in strategy saved the company tens of thousands of dollars.“This particular company was moving millions of tons of cargo through its distribution network, utilising 12 warehouses and 1500 vehicles. The challenge, however, was that they had a very low-margin product and were operating in a very competitive industry. Needless to say, they were struggling and wanted to save money in distribution, but were convinced it would cost a lot of money to change their system.”According to O’Byrne, after an analysis of the distribution network it was clear that the company had a very heavy cost-to-serve component. “Many of their customers were situated in rural areas and were ordering small volumes of product less frequently. The cost to serve them was incredibly high. Hardly any profit was being made, while in many instances they were actually operating at a loss distributing to these regional customers.”In a traditional cost-to-serve approach, the goal would have been to improve the economy of scale by getting the customers to not only increase volumes, but also do so more frequently. “This would have been an extremely costly exercise and maybe even not possible. The solution that was finally found was far simpler.”The company closed ten of its regional warehouses and opted to keep only two main warehouses in two metro centres.“It then outsourced all the distribution in the regional rural areas to smaller service providers that were already distributing a range of products to these areas.”He said whilst the decision to outsource was not immediately embraced by the company, the benefit in terms of savings was soon realised.“Our first meeting with the sales director did not go down well when we proposed selling in bulk to small distributors in the regional areas at discounted rates. “It took some convincing as it would mean smaller margins, but the savings in distribution made up for it and within six months they have seen profits skyrocket.”One of the most important factors to consider when evaluating any distribution channel is the cost to serve.– Rob O’Byrne
