Speaker 1: Distribution networks, one of my favorite topics and I thought this week I'd give you a little bit of a case study, coming right up. So this week I want to talk about some of the principles of distribution network design, but I'll illustrate that also with a very simple case study. So what I'm going to do is to flash up a few charts on the screen to illustrate what we're talking about. Now there are a number of things that have a very strong influence on the shape of your distribution network, how it should be designed, how many warehouses there should be, how your transport operates and so on. If you've been on the channel for a while, you may have seen a version of this video where I was actually drawing charts in the sand on the beach. Hopefully this one will be a little bit clearer. So I'm just going to glance down at the charts here while I go through them and we'll put them up on the screen. So some of the things that have a significant impact on the cost of your distribution network are, number one, the cost of storage. So if you look at this very simple chart, we've got the number of inventory points along the bottom axis, the x-axis, and we've got the cost up the y-axis. So as we get more and more inventory points or warehouses or distribution centers, the cost goes up. That's because we've got more facilities, we've got more bricks and mortar, we've got more overhead costs and so on. So the more warehouses we have in the network, obviously the more it's going to cost. So that's key number one. Number two is the inventory holding cost. And again, we've got exactly the same chart. We've got the number of inventory points or the warehouses along the bottom with the cost increasing. And you'll notice this time the cost goes up and then starts to flatten out. Why do you think that is? It's all to do with safety stock. As we are growing the number of warehouses, the amount of inventory in the network, the inventory increases quite a bit to begin with and then not quite so much because we're deploying the inventory across a greater number of warehouses. But it does still tend to increase because we've got more safety stock in the network. So don't think that just because you have one warehouse and you're going to go to ten, you'll have ten times the inventory. You won't. It's all to do with inventory deployment and safety stock. And likewise, if you go from ten warehouses to one, you're not going to cut your inventory down to 10%. So that's the impact of inventory holding cost. The next chart, then, we've got line haul cost. This gets called different things around the world. I think in the UK it's called trunking. Here in Australia we call it line haul. Comment down below if you call it something different. But it's the primary transport. It's the transport bringing product into your warehouses, into your distribution centers. Now, the more facilities you have in the network, this cost is going to increase. Why? We're basically traveling more ton kilometers. We are moving more product, pallets, tons, whatever, more kilometers. And so that cost is going to continue to increase. Number four is the customer delivery cost. This is the only one that decreases with the number of facilities that you have in the network. So more warehouses, your delivery cost, call it your final mile, whatever you want to call it, that starts to decrease. Why? Why do you think that is? It's because you're closer to the customer, basically. The more facilities you've got, by definition, you are closer to the customer. And so that secondary transport, that delivery transport, cost overall will start to decrease. Number five, we've then got the systems cost. Let's think about licenses, hardware, interfaces, all that sort of stuff. As you get more facilities in your network, so that cost will increase overall. It'll rise steeply to begin with, and then start to plateau a little bit, like the inventory holding cost. So it's a cost that increases with the more facilities you have in the network. And then the final slide, number six, you can probably think of some other things which will have a changing cost, the more facilities you have in the network. But those are the key five. Again, if you can think of other ones, comment down below. But these are the key five. And then in this last slide, I'd like to show you the total cost impact. And what we're trying to find in any distribution network is the bottom of that curve. And so perhaps as we put more facilities into the network, the cost will drop. Maybe as we get to a certain number and more and more facilities are coming into the network, the cost is going to increase. Now, one of the things that people ask me all the time is how many distribution centers should I have in the network? There is no simple answer. I'm sorry. It depends very much on your business, the types of products, the types of customers you're servicing, the sort of service offer that they want, the geography of the country you're operating in. But what does hold true is that when you're designing distribution networks, you've got to find that sort of minimum cost point in that curve. And it's going to be different for every business, for every country and so on. So let me just illustrate that with a really simple case study. So this particular one, it's from a while ago. It's been totally sanitized, but it's a supplier to a large grocery chain or grocery chains. They were servicing a lot of different retailers around the country. If you don't recognize the country, it's Australia. It's my home country. Just to give you a sense of scale, if you don't know Australia, the country you're looking at there is about the size of the USA and a similar size to Western Europe. So it's quite a big country, even though we have quite a small population. So distribution can be quite a challenge. And if you don't really understand the geography of Australia, what we're looking at here with those black dots, these are all the retail outlets that we're servicing. And you can see a lot of them are on the east coast and southeast and quite a few on the southwest. That's where most of the population lives. And so those black dots are the retail outlets. And then the red dots are the distribution centers servicing those retail outlets. And this particular chart we're showing is a model where we have estimated that they need 25 warehouses if they're going to service 95% of these retailers in the country with a four to six hour service lead time. Now, I've mentioned this before on the channel. What drives the shape of your distribution network? The customer service offer. So we've been talking on those charts about how we can impact cost, the different cost impacts. What drives the shape of it? How many warehouses you have in the network? Pretty much is determined by your customer service offer. So this is a four to six hour service time. Basically means we've got to be holding inventory within four to six hours of all of our customers in simple terms. I mean, we've got to allow a bit of time for order processing and so on. But think of it in those terms. So four to six hour service time. We need about 25 warehouses. When we're doing these studies with clients, we're always trying to sort of bracket to find the sweet spot for a distribution network. And that's kind of what I'm showing you here, because this was 25. And then what about if we extend that service level? What about if we make it next day service? So we can afford to be further away from our customers and the retail stores in this case. And again, servicing 95% of them. We can do that with eight distribution centers. 25, now down to eight. See the difference that a change in customer service policy can have. So now let's bracket it the other way. And one of the directors of this business, when I was doing this study, said, I think he said, I want a two hour service level. As supply chain people, what do you think about that? Well, here it is, a two hour service lead time. Again, reaching 95% of their customers in the country. They need 70 plus warehouses. Came at a phenomenal extra cost. Just remember those charts. You know, the more facilities you have in the network, generally all the costs go up, except one, which is the customer delivery cost. And so which kind of network would you pick for your business? Would you want the, let's just flick back through them. You know, we've got four to six hours service lead time with 25 warehouses. If we lower the service level a bit to next day, we could have eight. If we really ramp up the service and we want the absolutely best service possible, we're going to be up to 70. Think of it in terms of your distribution network, your products, your market, your country, the demographics. What do you reckon would be the right number for your country? I'd love to hear in the comments down below how many facilities you have in your network or how many you think you ought to have. So this week was just a very, very quick, simple case study just to illustrate two things. One, the impact of customer service on the shape of your distribution network. And then secondly, and we'll put that chart back up, the six charts, how different cost elements are impacted if you have fewer or more warehouses in your network. So I hope that was helpful. Now, a couple of things. If you are not subscribed to the channel, do please hit that subscribe button, which I think you'll find down there. The reason being, we're almost at 50,000 subscribers and something really cool is going to happen when we hit 50,000. The other thing is if we're not connected on LinkedIn, do please connect. So I share a lot more information on there as well. And I'll put a link down to my LinkedIn profile. And I'd love to see you over there as well. So thanks for watching and see you next week. Bye for now. Transcribed by https://otter.ai