Distribution networks and the Smart DC

Paul Matthews, a former head of supply chain for fashion retail chain The Limited, once referred to old-school supply chain as “kicking boxes and licking labels”. The joke, of course, is that it’s all pretty darn simple and any idiot can do it.

In the past 20 years this caricature has largely faded away and been replaced by a new image of an all-knowing orchestrator solving problems with data coming from all directions. One of the hotbeds of innovation in this new and smarter supply chain is the once humble warehouse.

Traditionally, warehouses (more nobly referred to as “distribution centres”) were little more than roofs, walls and shelves staffed with low-skilled people, like me in my first job out of high school. Technology was not part of the story and any innovation was generally focused on fine tuning the movement of inventory into and out of the facility – in other words, kicking boxes and licking labels.

No more. Today’s distribution centre is much larger, dramatically more technically advanced and, most important, increasingly handling a wide range of tasks from light manufacturing and assembly to returns processing. A soon-to-be-released SCM World research report shows that most shippers surveyed believe that value-added supply chain services beyond simply shifting boxes are important to their companies’ competitiveness.

In a recent Bloomberg TV interview, Prologis CEO Hamid Moghadam said that most of the distribution centres his company was building were much larger than in years past and also much closer to cities. The driver, according to Moghadam, is end-customer expectation of next-day or even same-day delivery.

The trend for Prologis is apparently true across most of the 21 countries it operates in and nowhere near slowing down. This confirms SCM World research that says digital demand is changing the physical footprint of distribution networks, including where DCs are built and what they contain in terms of capital equipment. The “Smart DC” is here.

Managing complexity closer to customers

Smart DCs, which may include any or all of the value-added services identified in the chart above, allow the supply chain to say “yes” more often when the customer requests something other than a truckload or pallet’s worth of stuff. Target, for instance, has demanded exclusives with many of its big CPG suppliers, requiring them to carry unique SKUs just for Target’s shelves. Target is by no means the only retailer looking for such customised service. 7-Eleven, which occupies tiny footprint stores in dense urban areas, requires tightly timed, less-than-truckload deliveries (sometimes more than once daily). Online retailer Zappos needs to be not only fast, but also just as good at handling returns as it is at delivery. In the zero-latency world we know today, these increasingly complex demands can no longer be regarded as exceptions.

For businesses with a large digital component, including mobile phones and consumer electronics, as well as some medical devices and capital equipment, the opportunity to postpone final shipment configuration is even greater. Software, settings and other digital elements of the final as-delivered product can be added well after the item rolls off the factory line, but only if the DC is capable of handling the task. Such DCs are also a logical place to do repairs and returns, but again, only if the staff and equipment are sophisticated enough to separate the truly broken from the no-fault-found.

Smart DCs are all about handling complexity as close as possible to where it adds value, which is at the point of consumption. Old-school supply chain concentrated complexity management upstream in manufacturing where engineers could break down each step precisely to ensure high quality and low cost. Supply chain today requires that each customer’s unique needs be addressed quickly and cost effectively, lest they tweet your reputation into oblivion.

The DC of the future is likely to include print-on-demand packaging, additive manufacturing for spares, robotic picking and load building, and control tower visibility to inventory, much of which will be work in progress rather than finished goods. I’d call that a Smart DC.