In my "A Business Tip on Choosing the Right Storing Facility", I discussed how the storing concept affects marketing strategy, and the difference between using a private warehouse and a public warehouse. This may have led some to ask if storing is really needed.
Discrepancies of assortment or quantity between one channel level and another are often adjusted at the place where goods are stored. It reduces handling costs to regroup and store at the same place – if both functions are required. But sometimes regrouping is required when storing isn’t.
So what is a distribution center? What is its function in relation to the storing concept?
A distribution center is a special kind of warehouse designed to speed the flow of goods and avoid unnecessary storing costs. Anchor Hocking moves over a million pounds of its housewares products through its distribution center each day. Faster inventory turnover and easier bulk-breaking reduce the cost of carrying inventory. This is important. These costs may run as high as 35 percent of the value of the average inventory a year. The lower costs and faster turnover lead to bigger profits.
Today, the distribution center concept is widely used by firms at all channel levels. But the basic benefits of this approach are still the same as they were over 30 years ago when the idea was pioneered. In fact, a good way to see how the distribution center works is to consider an early application.
Pillsbury – the manufacturer of baking products – used to ship in carload quantities directly from its factories to large middlemen. Initially, plants were as close to customers as possible, and each plant produced the whole Pillsbury line. As lines expanded, however, no single plant could produce all the various products. When customers began to ask for mixed carload shipments and faster delivery, Pillsbury added warehouse space – and started hauling goods from plant to plant. Over time, Pillsbury set up 100 branch warehouses – controlled by 33 sales offices. Accounting, credit, and other processing operations were duplicated in each sales office. Physical distribution costs were high, but the customer service level was still a problem. It took Pillsbury a week just to process an order. And the company had no effective control over its inventories. Pillsbury needed a change to distribution centers.
Pillsbury first specialized production at each plant to a few product lines. Then Pillsbury sent carload shipments directly to the distribution centers – almost eliminating storing at the factories. The distribution centers were controlled by four regional data processing centers, which quickly determined where and when goods were to be shipped. Centralized accounting got invoices to customers faster – resulting in quicker payment. Because each distribution center always had adequate inventory, it could ship orders the most economical way. And because the field sales organization no longer handled physical distribution or inventory, it could focus on sales. Pillsbury could guarantee customers delivery within three days.
There are many variations of the distribution center. The Pillsbury example shows it within an integrated operation. But public warehouses offer similar services.