A look at what’s driving direct-to-store supply chains and offshore distribution centers

Why retailers are storing merchandise overseas – and you should too.

Many of the companies that moved manufacturing overseas to cut costs in the 80s and 90s are shifting major pieces of their supply chains offshore for the same reason: to save on labor and rent.

For three decades, production and sourcing have gravitated from developed markets to emerging markets – often in Asia – where labor and materials were cheaper. Storage, consolidation and distribution remained close to end markets near points of sale in the Americas and Europe.

Now many companies are storing their goods at origin until it’s time to move them to stores. They avoid the high cost of storage at destination distribution centers. Meantime, at origin, they prepare store-ready shipments with the best mix of sizes, styles or models.

What’s behind the shift:

  • Global 3PLs now provide status tracking and inventory management remotely through connected systems, even in low-cost countries.
  • Just-in-time shipping is reliable, predictable and easy because of carrier connectivity and tools that offer visibility into shipping.

The opportunity for savings runs deeper than just cheap labor and rent. A properly designed logistics network optimizes costs in other ways.

For low-value goods, shipping costs on a per-item basis can top the cost of production. Storing those goods at origin saves on warehousing and defers the cost of shipping until closer to the moment of sale. This “pull” style of inventory management at origin allows companies to ship fewer unsold or unwanted items.

Kitting and value-added services that were once hard to find in Asia and other manufacturing hubs are now more widely available and less expensive at origin. The result is that destination facilities can operate more efficiently, serving as cross-docks for direct-to-store deliveries.

Consolidation of product at origin can directly reduce overall freight costs. Combining multiple Purchase Orders (POs) means smaller shipments that might have moved on a more expensive LCL basis (Less than Container Load) can ship as FCL freight (Full Container Load).

Good modelling and data analysis can point the way.

Putting these ideas into practice is not as simple as it sounds. They require the right vendor partnerships and technology to work. It’s understandable that companies have reservations about shifting pieces of their supply chain overseas.

One concern is dealing with tighter lead times, which require a high level of coordination and performance by suppliers and logistics services providers. Transit times from Asian markets are longer and often more unpredictable than the comparatively simple in-country moves that supply chain planners are accustomed to.

Coordinating PO’s to increase shipment size requires good planning, as well. Companies often need improved execution in order to get multiple suppliers to give them time to combine orders for more efficient FCL shipments.

The first step is to look at production locations and supply chain costs as part of total cost. To strike the right balance – and lower total cost – it sometimes makes sense to move production from least-cost providers to other producers whose location helps lower transportation costs. Good modelling and data analysis can point the way.

Another critical element: performance management of suppliers. Where companies can work with suppliers to quickly identify and fix supply chain disruptions in real time, they can prevent costly inventory gaps and bulges. Often, they turn to third-party logistics providers (3PLs) that offer the expertise to create seamless warehousing, materials management and shipping.

How to build an origin-based supply chain

1. Take a task-force approach. Team members should bring knowledge of origin facilities and options, shipping options, the ability to forecast and model freight and shipping costs, and knowledge of destination shipping options.

2. Conduct deep data analysis of your demand patterns, inventory utilization and supplier reliability.

3. Consider all alternatives, including sourcing from a different country that can provide lowest cost for the entire supply chain – raw materials/component sourcing, manufacture, inventory management, consolidation, shipping – not just lowest per item manufacturing cost.

4. Build in risk management based on your historical inventory outages. Factor in an expediting component you can rely on when things go wrong. Work with a 3PL that has a balanced ocean and air freight delivery mechanism.

5. Construct models of all alternative supply chains that have the potential to lower overall costs.

6. Establish long-term partnerships with supply chain providers at origin and destinations.

For more information about Agility’s retail logistics services click here