When I first started working on network optimization projects back in the mid-90’s, one distribution network constraint seemed to always surface. Building sizes can’t go over the magic threshold of one million square feet. The thought was that inside the four walls building efficiencies start to decline at this point, mainly due to lengthy travel distances. Certainly, there are ways to mitigate this with proper layout, process, and technology, but it was still considered a limitation, or at least a watch out. Now, this rarely comes up because, more often than not, the optimal strategy is to regionalize before the buildings get that big anyway.
When I talk about the trend to regionalization, I am not talking about the Amazons and Wal-Marts of the world. I’m talking about the small to mid-size companies that would have never regionalized in the past. There are many issues that are causing these types of companies to think about this more. I’ll start with some of the more obvious reasons to regionalize distribution:
This battle of cost vs. service drives most of the decisions, but other factors are starting to have more of an influence in regionalizing distribution networks. These include:
Regionalization may not make sense for everyone as there are certainly challenges to overcome come with regional distribution including building capital costs, increased safety stock, SKU stocking strategy, inventory/demand planning, and inventory deployment (inbound PO splitting). With all this said, a network optimization can help you determine the proper network strategy for your business.
—John McDermott, St. Onge Company
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