Outsourced E-Distribution Reduces Traditional Distribution Costs

Whether you’re business is small or large, sunk costs in warehousing facilities, inventory management, order assembly, employee training, and in-house fulfillment may not be your most cost-effective business model. An alternative is utilizing outsourced e-distribution that is specifically tailored to your products.

This model offers six key competitive advantages.

1. Reduced Overhead. Investing in warehouse facilities, personnel, IT management systems, and equipment is very expensive. Outsourced fulfillment totally eliminates these internal costs.

2. Economies of Scale. Fulfillment companies provide the same services for thousands of companies. This provides economies of scale you would never be able to achieve by yourself, and you can immediately tap into these greater efficiencies. This represents a huge saving for your business.

3. Safety and Associated Costs. Using a separate fulfillment provider eliminates certain safety concerns and liabilities. Safety training, certifications, warehousing automation, and regulatory compliance measures are all outsourced.

4. Reduced Shipping Costs. Most fulfillment centers have deep shipping discounts because of their high volume. In addition to these cost savings, fulfillment providers use intelligent logistics, which eliminates the headache of coordinating distribution and identifying the lowest-cost shipping option. Leave product distribution to the experts in product distribution.

5. Automation and Kitting. Advanced fulfillment centers offer full automation (integrated bar code and scanning systems), expediting your shipments at the lowest possible cost. Product bundling and kitting provides you with greater flexibility and a more cost-effective method to ship multiple components to your buyers.

6. Fixed Labor Costs. Market demand for most products tends to fluctuate. This makes hiring your own warehousing and fulfillment staff difficult to manage. Sometimes you need more labor, sometimes you have too much. In addition, unique skills are required. Fulfillment service providers eliminate this variability and introduce a pay-per-order model in which costs are easier to predict and control.

Numerous additional benefits can be achieved using outsourced e-distribution model. These include:

• E-invoicing that uses an automated system to automatically bill clients based on payment terms, saving time and money.
• Orders archived in a database that is easily accessed online 24/7 from anywhere in the world.
• Availability of advanced analytics for accounts, products, and sales.
• Robust report development enabled with complete account history with less paperwork.
• Autonotification providing automated inventory threshold alerts and this helps optimize inventory levels and avoid backorders.
• A streamlined system that minimizes distribution errors and lowers costs.

Several cases have been made proving the benefits of e-distribution.

Case 1: Pratt & Whitney

Pratt & Whitney is a United Technologies Corp. company, a designer, manufacturer, and supporter of commercial and military aircraft engines. The company outsourced its spare parts distribution, which included quality inspection, kitting, and shipping spare parts to its global customer base. This helped the company better focus on its core competencies.

Today 25,000 Pratt & Whitney parts are tracked electronically and 1,400 complex orders fulfilled daily with accuracy rates that increased considerably and now hover around 99.98 percent.

Case 2: Philips Healthcare

Philips Healthcare, part of Royal Philips, provides hospitals and clinics around the world with diagnostic and imaging systems. Growth through acquisition resulted in a fragmented supply chain with more than 40 service providers and transportation carriers and a patchwork quilt of IT systems.

“Our core competency is not warehousing and distribution,” said John Schlanger, vice president for service parts supply chain.

The company now outsources distribution with centralized facilities in the Netherlands, Kentucky, and Singapore. This strategy has yielded cost savings of 14 percent and helped Philips reduce inventory by 10 percent.

Case 3: Universal Music Group

Moving from an in-house to an outsourced distribution model allowed Universal Music Group to achieve all of the goals it was seeking, including lower distribution costs and upgraded delivery service.

The company improved order processing accuracy by more than 15 percent and pick performance by more than 20 percent. In addition, delivered cost-per-unit savings were 25 percent, and freight costs dropped 66 percent within six months. Overall, the company’s per-unit freight costs were cut to $0.21 from $1.18 over a five-year period. This saving in freight cost contributed between 5 and 10 percent to corporate profitability.

Case 4: LEGO

When it found itself struggling financially a few years ago, LEGO Group decided it needed to cut 20 percent of its logistics costs.

A key step in achieving that objective was consolidating most of its European warehouses and distribution centers into one facility located in the Czech Republic. Outsourcing, and the move to a single distribution center, yielded a 20 percent reduction in distribution costs and improved the toymaker’s bottom line. In 2008 the company recorded a nearly 19 percent jump in annual revenue to US$1.8 billion with a profit margin of 21 percent.

The company now receives inbound loads from manufacturing plants and prepares them for shipment to customers much faster than it could in the past. Moreover, the move exceeded its original 20 percent savings goal and has now reached the 40 percent mark.

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