How Bad Can It Get? Challenges in the Distribution Industry

Manufacturers serving such retail giants as Wal-Mart or Costco are exposed to severe challenges—not only because of the economies of scale these outlets demand, but also because of the investment required in technology and capital equipment to manage the sheer volume of manufactured goods.

With a weak economy, which usually translates into weak retail sales, these organizations may feel the pinch in a number of areas:

  • Retail giants can dictate both price and terms of payment, as many of them are heavily integrated into vendor-managed inventory (VMI), also known as vendor consignment inventory programs. [Wikipedia on VMI]

  • The credit crunch in the US has placed the ability to maintain these arrangements in jeopardy—manufacturers risk reneging on the contracts as the only seeming relief to remain viable.

  • The VMI concept requires manufacturers to incur up-front costs in terms of materials and labor, with payment to come 90 to 180 days after—in other words, manufacturers rather than retail are assuming the risk.

Additional distribution industry challenges:

  • Manufacturers must deal with increasing government compliance requirements (e.g., “fetus-to-fork” traceability, and the US Bioterrorism act of 2002)

  • Fluctuating fuel costs require increased attention to route planning (ideally, using TMS software).

  • Manufacturers are also feeling pressure to reduce their environmental footprint at the distribution center. In fact, the distribution industry was one of the leading forces behind the push to have manufacturers and retailers reduce packaging. An example: recently, detergent manufacturers have reduced the amount of water in their product, in order to create a more concentrated product—leading to smaller plastic containers and thus the ability to ship more product on fewer pallets.

The point? Lean economic times certainly put pressure on big-box retailers—but on the other hand, they're in a position to transfer a portion of that pressure to the manufacturer.

So what can you do?

  • Negotiate better terms/credit extensions/flexible conditions from your suppliers (this may not always be a viable option, given the current credit crunch).

  • Manufacturers can also turn to outsourcing/off-shore subcontracting—after all, dealing with “Wal-Mart volumes” can potentially take up all your production equipment and capacity, which can make outsourcing all but an absolute necessity.

  • Manage inventory more efficiently via just-in-time (JIT) practices. Software systems that can help: warehouse management systems (WMS), advanced planning and scheduling tools, manufacturing execution systems (MES), and supply chain optimization tools.

Your turn now. If you're a manufacturer and already struggling to find ways to survive during this economic downturn, we invite you to weigh in and let us know of your concerns. Comment below, or vote, or both!

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