Five Key Elements for a Successful Distribution Strategy
Having a distribution strategy is essential for any company aiming to stand out from its competitors in the market. Ensuring products reach their destination efficiently and on time is a challenge for all companies, and their distribution strategy must be tailored to each company’s particular situation.
This article explores five key elements for a successful distribution strategy: a clear objective, an efficient flow matrix, evaluation metrics, collaboration with strategic partners or third parties, and the support of technologies.
- Defining a Clear Objective
When considering how to define a company’s distribution strategy, it might seem like there is a formula or set of «rules» to ensure the «best» possible strategy. However, as the name implies, the strategy must be defined strategically to address the specific needs of each case. It should not be generic but specific and tailored to the current situation and the vision for the future.
Defining a clear objective is crucial because it provides the direction and purpose needed to make sound strategic decisions. The objective should answer questions like: What do we want to achieve with our distribution? Are we aiming for cost efficiency, maximizing customer service, greater flexibility to adapt to demand, or geographical expansion? This focus helps align all actions and resources toward a specific goal.
For example, a company prioritizing fast deliveries will make different decisions than one seeking to minimize distribution costs. Having a clear objective also facilitates measuring success through aligned key performance indicators (KPIs) like on-time deliveries (OTD) or complete orders (OTIF), allowing adjustments to the strategy as results are obtained.
- Optimal Flow Matrix
The flow matrix in a supply chain refers to the entire route that a company’s products must follow to reach customers or end consumers. This route may involve various chain links, including suppliers for raw material acquisition, manufacturing plants where products are fabricated or processed, primary and secondary distribution centers where products are stored and/or transformed, and final sales points where customers purchase their products.
Defining the flow matrix should consider three major factors: the geographical location of the links, the costs of moving products throughout the entire flow, and the installed capacities of each link. The geographical location of the links is crucial as it determines the distances products will travel. This directly impacts transportation costs and depends on vehicle capacities and movement frequencies. Additionally, each link must have sufficient capacity across all its processes (receiving, storage, picking, loading, locking, distribution, line capacity, etc.) to meet the demand required to satisfy market needs.
An optimal flow matrix will efficiently cover the chain’s required capacities with its distribution and other logistical costs to meet market requirements with a high service level. Therefore, each company faces the significant challenge of defining where to produce its products, in which lines, what percentage of total expected market demand each location will handle, which distribution centers products should go to, in what quantities, the size of warehouses, and the vehicles used for distribution.
- Evaluation Metrics
Evaluation metrics are another key element to ensure the success of the distribution strategy, as they provide visibility into the performance of the various processes involved. When metrics align with the strategy’s objective, strengths and areas of opportunity can be identified, as well as distinguishing practices that contribute to efficient operations from those that hinder them.
Common indicators can be grouped into three major categories: operational efficiency, customer service, and costs.
For operational efficiency, metrics include on-time deliveries (OTD), order cycle time, inventory turnover, and supplier lead time. These measure process efficiency and indicate where delays may occur. For instance, if order preparation hinders punctual deliveries, the warehouse area can review material distribution and space organization to streamline picking or consider extending staff to balance workloads. If the issue lies in delivery, route optimization, a change in shipping methods, or corrective measures for transporter productivity may be necessary.
For customer service, metrics include service level, order error rate, response time to requests, and customer satisfaction index (NPS). These assess how the distribution strategy impacts customer experience. For example, if the order error rate is high, reviewing preparation and validation processes in the warehouse may be needed, ensuring quality control systems are effective and staff is properly trained. If response time to customer inquiries is problematic, analyzing the customer service team structure or implementing technological tools to manage inquiries more efficiently could be pertinent.
Cost-related metrics include cost per delivered order, transportation costs, storage costs, and costs associated with stockouts. These evaluate the financial efficiency of the distribution strategy. For instance, if transportation costs account for a significant budget portion, route optimization, using higher-capacity vehicles, or shipment consolidation to reduce unnecessary trips could be analyzed. If storage costs are high, assessing warehouse occupancy density, implementing an inventory management system (WMS), or outsourcing some operations to a 3PL could be evaluated. For stockouts, significant losses due to lack of inventory would warrant reviewing demand planning and replenishment processes to ensure inventory levels are adequate to meet market needs without incurring excessive costs from overstocking.
- Collaboration with Strategic Partners or Third Parties
Collaborating with strategic partners enables companies to avoid relying solely on their internal resources by outsourcing operations such as storage, transportation, and certain operational processes. The decision to outsource these functions aligns with internal objectives, allowing the company to focus on its primary responsibilities and competencies. Meanwhile, strategic partners provide specialized knowledge and resources, such as technological tools, to optimize operations and enhance efficiency and flexibility.
Collaboration with third parties allows companies to align their operations with strategic objectives. Benefits include reducing fixed costs by converting them to variable costs, offering greater financial flexibility. Additionally, it provides access to specialized knowledge and technologies, like a WMS, which improve operational efficiency. For transportation and storage operations, the company can enhance delivery times and customer service. Besides financial flexibility, this also facilitates scalability, enabling adjustments to operations based on demand and focusing on core activities and objectives.
Strategic third-party partnerships bring tangible benefits that improve daily operations, complementing the achievement of strategic objectives. For instance, outsourcing transportation services through a specialized logistics partner (3PL) provides companies with a broader transportation network, shortens delivery times, optimizes routes, and reduces costs. In inventory management, outsourcing allows for handling inventory fluctuations, ensuring appropriate production capacity and maintaining optimal inventory levels without significant infrastructure investments. Additionally, third parties support key processes like returns, product customization, and packaging, enhancing operational efficiency and response times. Ultimately, these partners’ technological solutions facilitate better decision-making and process optimization, helping companies remain agile and flexible in a dynamic environment.
Strategic partnerships are fundamental for a successful distribution strategy. Outsourcing operational, transportation, and storage processes allows companies to reduce costs and improve their ability to respond quickly to market demands. As supply chains grow more complex, collaboration with specialized partners will be essential for competitiveness and sustainable growth.
- Support of Technologies
Leveraging appropriate technologies is critical to achieving defined business objectives and optimizing established metrics. Technological tools should be selected based on current needs and the overall strategy. Various technological tools can be instrumental in achieving distribution strategy objectives, and identifying current needs and opportunities is essential to selecting the most suitable tools, potentially with the help of strategic partners.
For instance, if cost reduction is the goal, Transportation Management Systems (TMS) can evaluate different shipping methods based on rates and distances to choose the best possible option. This could also mitigate environmental impact by optimizing routes and vehicle load capacities.
On the other hand, if the goal is to improve indicators like service levels, Warehouse Management Systems (WMS) are available. These not only enable meticulous control of goods’ inbound and outbound flows but also, through demand forecasting based on predictive analysis, help restock inventories on time. They can even contribute to reducing delivery times, an increasingly relevant factor for customers. This is achieved through optimal material placement in distribution centers, maximizing space utilization, and reducing picking time. Additionally, transportation monitoring systems improve customer experience by providing information on order status, location, and estimated delivery times. They also track transporter performance, prevent traffic violations, optimize fuel consumption, and promote productivity for on-time deliveries.
When the goal involves geographical expansion or entering new markets, process complexity increases, necessitating a system that enables comprehensive supply chain management (SCM). This simplifies the planning and monitoring required from supplier selection, material purchasing, production supervision, order processing, to delivery and returns monitoring.
By integrating these technologies, companies can strengthen their distribution strategy, ensuring alignment with strategic objectives and contributing to the continuous improvement of processes.
