Outsourcing Your Distribution Centre
Outsourcing your Distribution Centre
When a manufacturer wants to expand into a new market, the question is often asked whether it is necessary to open a distribution centre (DC) in that new market. This can be a chicken and egg conundrum. Do you need the local distribution centre in order to drive the sales in that market or once you get the sales, only then should you open a distribution centre.
7 Rs of Logistics
There is no right answer as every company is different. However, all companies must consider the 7 Rs of Logistics.
The right product & quantity must be delivered to the client in the right condition. There is no point in using a cheaper transport company if you have a high value of complaints about the condition of your products. The products must be delivered to the right place. Some of your customers may have many different delivery addresses. If you have confirmed that your products will arrive on Monday before noon, then they need to arrive before noon and you need to be able to trust your logistic partner to deliver on time. That the right customer gets the right products. Finally, all of this needs to be done at a cost that still gives you a good margin.
Having a local distribution centre can depend on the product. Is the product perishable? Are your customers willing to wait for your products or can they buy them easier from your competitor? Do you have so many SKUs that it becomes quite difficult to hold the correct stock?
Your decision to outsource or open a distribution centre in your new market can also depend on where you are located. If you are located outside the EU, it may make a lot of sense to have DC in the EU.
Should I have a DC in my new market?
However, the conundrum about the chicken and egg remains. The choice to open a DC as you enter the market can be beneficial but you must be to invest a significant amount of cash whose ROI you may not see immediately. If you decide to have a DC in a new market, you must have a very detailed entry strategy that is also back-up by significant investment. My recommendations would generally be to get some sales in a new market before looking at a local distribution centre, however, some prospects may demand local distribution and if the quantities can justify it and the customer will contractually commit to at least annual quantities, a distribution centre may be necessary.
Reasons for a DC
When considering a distribution centre in a new market, look at your reasons for this DC. In my opinion, it does need to drive sales, improve customer experience with quicker deliveries and more frequent deliveries. However, for each company, the reasons may differ.
Outsourcing
Most SMEs will choose to use a 3rd Party logistic (3PL) company as the distribution partner in a new market. Why outsource your distribution? You can take advantage of the best in class operations. Distribution is what these companies do as their core business. It allows you to focus on growing the market and letting them focus on the distribution. Outsourcing your DC allows you to quickly scale up as your business grows in that new market. Outsourcing allows you to use their capacity to easily and quickly add short or long-term capabilities, the ability to respond to strategic business changes quickly with minimal or no capital expense – i.e. change providers or networks or regions. Before engaging with 3PL companies ensure that you know exactly what are your requirements. When choosing a 3PL research them well and go visit them. Make sure that they understand and want your business.
Location
The location of the DC will depend on the location of your customers and if you are shipping by sea, it should be near a port. You need to consider the infrastructure of the location to your customers. If there is bad infrastructure, it can take longer to deliver to your customers. This can add cost. Labour cost is another consideration, although it should not be the deciding factor as whilst it may mean that the warehousing costs less, it may mean that the transport costs more. Make sure that you look at the whole picture and when you are making any decision regarding the DC and that the customer is central to these decisions.
Cost-Benefit Analysis
Once you have done your research on the location and logistics’ providers, do a cost-benefit analysis. This analysis should look at all the costs – direct, indirect costs, intangible and lost opportunity costs and the benefits – direct and indirect benefits, intangible and competitive benefits. Do several cost-benefit analyses with different scenarios. This is a great tool to help you make the correct decision.
Conclusion
The decision to open a DC in a new market is a big decision and considerable research needs to be done before a company decides to set-up a DC in a new market (using a 3rd party logistic provider). Focus on getting the sales in that new market and supporting them from there, although it may become necessary to open a DC in a new market to grow it. Whatever the reasons for opening a DC, spend a lot of time on your requirements, on the location and on the 3rd party logistics provider. This time will pay dividends in the end.