When companies rapidly grow, their distribution network can become overly complex, leading to costly inefficiencies. Rob Ruffin, an expert vice president with Bain's Performance Improvement practice, describes the three guidelines for building smaller, more strategic and well-designed distribution and transportation networks that can reduce costs.
Read the Bain Brief: Are Your Distribution and Transportation Costs Out of Control?
Read the transcript below.
ROB RUFFIN: As companies grow, they tend to build or acquire manufacturing facilities, warehouses and distribution centers. Oftentimes these facilities are not well designed, nor are they optimally located. The results of these inefficiencies are very large, where distribution and transportation costs can reach 10%, 15% or possibly more than 20% of revenues, which make it a strategic issue.
Companies with inefficient networks have a huge strategic opportunity. They can lower cost up to 25% while still delighting their customers. Our point of view is a smaller, well-designed network often performs better than a larger one that wasn't designed with an overarching strategy in mind.
We believe there are three keys to help leaders design a world-class distribution and transportation network. The first is to get an overarching strategy that sets you up for long-term success. The second is to invest in digital tools that delight the customers, but avoid falling into the trap of digitizing poor processes that are often inefficient.
Finally, you have to constantly balance and monitor the network's performance, constantly balancing the cost, service levels and the investment required to be successful. Companies that get any of those three key guidelines wrong are oftentimes disappointed with their customer service and their cost structures, even after investing tens of millions of dollars into the network.
The leaders who get this right have an overarching strategy that links to the business strategy and sets them up for long-term competitive advantage with lower costs and better service levels. And they're able to avert large investments of capital that's not required.