Customer Service Improvement - Controlling The Costs
For any company that produces or distributes a product to the market, their distribution network is the lifeline via which their products are delivered. As a comparison, the distribution network can be likened to the body’s circulatory system. Our bodies require oxygen to survive, just as our customers require our products to maintain their business. To transport the oxygen the body has blood; the distribution network has trucks, trains and boats.
So if distribution networks are so essential to keeping businesses alive, why do so many companies neglect them? These networks are often outdated, inefficient and not cost effective. To change the network requires detailed analysis, research, planning, and some setup costs. The task is not easy; but, if we were experiencing similar physical problems, we would not take years to visit the doctor. If we did, simple curable illnesses may turn out to be much more serious, and possibly grave.
So what drives companies to examine and change their distribution networks?
Many companies realize that inadequate distribution networks result in inefficient methods of storing and shipping their products. Improving their distribution networks can be an opportunity to reduce costs, while at the same time improve service.
A manufacturer of hardware products wanted to position itself as the customer service leader within the industry. When management undertook the goal of becoming the customer service leader, they realized that their transportation costs might actually increase.
Manufacturing used multiple locations, with all customer orders shipped direct from the plants. Each plant manufactured select product lines, but most customer orders contained items manufactured from several plants. To avoid split shipments, a large number of interplant shipments were made to stock each plant warehouse, allowing each plant to distribute the full product line.
Plants are frequently located in areas that minimize manufacturing expenses. When this company decided where to locate their plants, not much consideration was given to the costs involved in distributing products to customers. This resulted in a number of plant distribution points located far from the market. The distance from the market, combined with the company policy to hold small customer orders until they could be shipped in truckload quantities, resulted in very long order cycle times—typically between 15 and 30 days.
The company had always done a very good job of controlling transportation costs. The policy of holding customer orders for consolidation resulted in almost 50 percent of the shipments occurring in full, single-stop truckloads. Another 30 percent of the shipments were delivered in multi-stop truckloads. Because customers actually ordered in small quantities, the shipments they received contained a number of their orders and took a long time to arrive. This complicated the customers’ inventory planning procedures and warehouse operations.
Changes to existing distribution networks do not have to be driven by a desire to reduce operating costs.
The existing distribution network had been created to satisfy a customer base that did not place high service demands on their suppliers. With the successful emergence of large retail home centers such as Home Depot and the trend of homeowners toward do-it-yourself home improvement, the customer base was beginning to mandate extremely demanding service levels as a requirement of doing business. The company knew that to become the customer service leader, they would have to meet these tough requirements. To understand exactly what these customers required, an extensive survey of both the distributor and retail chain customers was conducted. The results indicated that some customers wanted their orders shipped complete and delivered within two weeks, something the company was not capable of providing.
A network computer model was used to determine the optimal distribution network that would satisfy the customers’ requirements. The model considered transportation, inventory and warehousing costs, as well as the time required to pick, ship and deliver a customer’s order. The optimal network consisted of cross-dock operations located at the plants, supplemented with regional cross-dock operations in major markets. These cross-dock operations allowed customer orders to be combined into a single shipment and delivered within the two-week lead-time.
With no warehouses added to the network and with inter-facility shipments reduced, the new network actually reduced transportation costs by $3 million! The new strategy resulted in lower freight cost and faster delivery response by using better tools and processes to make efficient shipments from multiple orders.