In a culture where many people won’t order goods online unless they can be delivered the next or even the same day, distribution companies are under constant pressure to do things quicker.
And it’s not just last-mile consumer markets that this applies to. Across B2B supply chains, time is of the essence. As a distribution company, you quite literally trade on speed.
There are many strategies for reducing lead times. But they each come with their own cost implications, and they all impact finances in different ways. Before investing in any measure to optimise lead times, it’s important to weigh up the risks and rewards, and make an informed choice that aligns with your business goals.
Here are three ways to improve the efficiency (and speed) of distribution, assessed for their financial implications.
Investing in Warehousing and Fulfillment Centers
One of the best ways to get inventory to its required destination faster is have it travelling shorter distances. And that means having more warehousing and fulfillment centres spread across key strategic locations.
It’s an effective solution to reducing lead times. But it costs. Purchasing, leasing or building/outfitting additional warehousing facilities doesn’t come cheap, and operational costs go up, too, as you need more people, consume more energy, run a larger fleet of vehicles etc.
On the flipside, shorter distances to travel mean lower transportation costs. One way to make this approach more cost-effective is to explore microfulfillment, which involves the use of small-scale non-traditional warehousing spaces, or even partnering with retailers and other wholesalers. This is particularly effective for reducing last-mile lead times.
Optimizing Route Planning
Transportation costs typically account for around half of all logistics costs, but are known to be a significant variable. The wisdom is, if you can get your transportation costs down, you can unlock significant cost efficiencies. But can you do this while also reducing lead times?
The simple answer is yes, and explains why there is so much interest in route optimisation technology. Especially with AI, it’s becoming much easier to solve the fiendishly difficult puzzle of working out the most efficient route between multiple points.
There are costs involved in purchasing access to route optimisation software. But that is more than offset by the 10 – 15% reductions you can expect in fuel and other costs. Route optimisation won’t turn next-day delivery into same-day delivery. But it can help to boost customer satisfaction by making delivery times more predictable.
Collaborating on Inventory Management
Finally, one novel approach to reducing lead times is to deliver inventory before the client even knows they need it. Ok, that’s a slight stretch. But it does underline the key benefit of Vendor-Managed Inventory (VMI) – an approach where suppliers have access to inventory data from their customers, and use that to proactively fill gaps. It means the end customer isn’t waiting on goods, so lead times are in one sense eliminated.
VMI requires a strong working relationship with your customers, plus purchase of/upgrade to ERP systems on both sides so you can access inventory data safely and securely. But the cost benefits include being able to adopt a ‘just-in time’ approach, i.e. being able to hold only the stock necessary for the short term because you can accurately forecast demand, which reduces the need for warehousing space (or frees it up for other inventory).
Conclusion: Balancing Speed and Financial Sustainability
Reducing lead times is a primary objective of most distribution companies as they look to maintain competitive advantage and keep clients happy. But how you achieve that needs to be based on a careful risk-reward analysis that focuses on what you want to achieve, the nature of your business and its objectives, and what the different strategies available are likely to deliver.
Get in touch with our specialist Transport & Logistics financial advisors to find out more.
