Warehouses as Distribution Centres
Supply chain management is all about flow, be it the flow of goods from the producer to the consumer or flow of information from the consumer to the producer. Warehouses play a critical link in this process and have in Africa historically set up as inventory buffer points along this supply chain so that any issues within this network could be ironed out. However, the need to reduce the service response time and contain inventory cost has necessitated the progression of warehouses from storage points to distribution centres. Additionally, the advent of technology with real-time information exchange and IT systems such as Warehouse Management Systems (WMS) have made it possible to operate modern designed warehouses more efficiently than the typical 'godown' basic storage unit.
The need to improve efficiency of warehouses has led to the evolution of various distribution models such as cross-docking, milk runs and hub and spoke models among others. Each of these strategies requires some sort of customisation of the warehouse. Factors such as location, design, infrastructure, built-up area and the amount of automation required are determined by the end purpose for which the warehouse is to be used. We expect usage of the following distribution models in Africa to become more widespread thereby increasing the importance of warehouses in the supply chain network.
Conventional Warehousing System
Hub and Spoke Model
Increasing demand from consumers for better service levels is forcing companies to locate their warehouses as close to the consumers as possible. Such a strategy entails operating multiple smaller sized warehouses catering to each region. In Sub-Saharan Africa these are usually 'go-down' type buildings. The cost of maintaining multiple warehouses is not only prohibitive but also inefficient in terms of transportation. This has led to the hub and spoke model of distribution in the supply chain management.
In the hub and spoke model, the distribution hub is the location that holds inventory for a large region, with each spoke leading to smaller distribution centres that house inventory for a smaller region. The main driver of the hub and spoke model is the proximity to the customer, with the goal being supply to a maximum number of customers in minimum time. Since the number of warehouses reduces significantly, massive cost savings in terms of rent, utility, operational and administrative expenses is achieved. Additionally economies of scale bring down the inventory cost for the company.
The hub and spoke model can bring immense cost savings to companies operating in Africa where the consumption centres are geographically spread out over a large area. However, despite various advantages, the model has not been widely implanted across Africa due to the lack of actual modern distribution centers that can be leased.
In a conventional warehousing system, all inbound good are stored in the warehouse and retrieved as and when the outbound shipping order is received. This system runs efficiently as long as there is a lag between the in-bound and out-bound goods. However, in case the goods have to be immediately sent out for delivery, the conventional system falls short in efficiency as the time involved in storing the goods and immediately retrieving them leads to unnecessary duplication of work.
Cross-docking Warehousing System
Cross docking system removes the shortcomings as it involves receiving the merchandise at the inbound docks and then shipping it out shortly after without the need to stock it at the warehouse. It eliminates the intermediate disposition, storage and order fulfilment tasks in the warehouse thereby saving resources in terms of about, space, time and equipment. Additionally, as the inventory moves directly from the receiving to shipping docks, there is no storage at the warehouses for the cross-docked items resulting in lower inventory holding costs.
Cross docking is more commonly used in the retail industry where multiple Stock Keeping Units (SKUs) are to be delivered to stores in small quantities at regular intervals. Since the supplier of each SKU sends the merchandise in large packages, it has to be broken down at the distribution centre into smaller packages and consolidated with multiple SKUs as required by each store. Cross docking not only saves a lot of time and resources in such cases but also facilitates in providing value added services such as labelling, kitting, shrink wrapping and tagging among others.
Transportation cost accounts for the largest component of a supply chain and any inefficiency in this can lead to serious escalation in the total cost of a product. This becomes critical when sourcing has to be done through a large number of vendors which again has to be distributed among equal number of stores.
Usually the amount of cargo to be sourced from each vendor is not sufficient for a Full Truck Load (FTL) shipment resulting in under-utilisation of trucks. Since shipments from each vendor are Less Than Truck Load (LTL), the impact of this on the total transport cost is significant. Milk run strategy in the supply chain has evolved as a solution to this and is widely used by manufacturers as well as retailers to increase efficiency in logistics management.
Milk Run Operation
Milk run is the combination of shipments from multiple vendors in close geographic proximity into one shipment received by the customer. In other words, the same truck can visit multiple vendors picking up consignments on its route instead of separate trucks delivering shipments from each vendor. This ensures better utilisation and lowers total cost of the transportation. Additionally, it reduces the inventory requirement as multiple pick-ups of smaller quantity become feasible thereby bringing down the inventory holding cost. This model works well in the case of distribution centres too, where consignments are to be sent to individual stores spread across a city. Regional distribution centres catering to multiple outlets in a city can benefit immensely from such a strategy. Hence, the location of such a centre becomes imperative in the supply chain network of companies.