Have hotspots outlived themselves?

Companies with a network that includes the entire European customer base will use their forecasting models to analyze the inbound and outbound traffic in order to find suitable locations for their distribution model. These analyses are based on the combination of inbound and outbound volumes and the working capital within the supply chain. The strategies for these three main elements are all very different and it is therefore not easy to incorporate them into a single overall strategy.

Inbound traffic

Inbound transportation is a very stable factor in the supply chain, because the number of stock-keeping units per shipment tends to be less than for outbound shipments, and because they can be easily managed through direct shipments from the supplier to the location. The biggest challenge lies in keeping the iron inventory at the right level, in finding the most efficient transport to minimize costs, and in having a better green strategy for the supply chain.

It is therefore very useful if river barges or a very good road infrastructure can be used to get from suppliers to the location. If we look at the European top ten hotspot locations, they all offer these features. In other place too, municipalities have decided to invest substantially in such infrastructures to attract new logistics operations to their region. This trend will enable businesses to weigh the pros and cons of more locations in Europe. The inbound traffic objectives can be achieved by creating a Central Distribution Centre (CDC).

ten-t_core_network_0Outbound traffic

The biggest challenge for every supply chain anywhere in the world is its outbound traffic. Everything depends on the geographical customer base, the number of stock-keeping units, and the customer’s spending pattern. Companies spend a lot of money to monitor and forecast these factors as they not only affect supply chain decisions, but also determine the day-to-day running of the company. The global crisis has made the network design of these outbound distribution models very fragile, and it is very hard for companies to rely on these models and look three years ahead.

At this moment it is also very difficult to predict what kind of impact green thinking on the part of the customers will have on their behaviour. Will they be looking for new markets, or will the customers merely focus on a product’s carbon footprint? This will have a major impact on the future supply chain, but how do we make the right decision at this point in time? Flexibility is needed when designing an outbound strategy if it is to cope with rapidly changing demands.

Companies with very competitive customer service models will need to use Regional Distribution Centres (RDC) to serve local markets. The total inbound transport cost will have to be reduced by combining transport between the CDC and the RDCs. Any market changes will first be felt at these RDC locations, since they are closest to the market.

A quick way of achieving the required flexibility is to shorten the lease of the RDCs. This ensures more flexibility in the future. The terms of the contract will also have to be more flexible. If a company leases 20,000 m² for a number of years, it will try to get an option for scaling up or down its operation to suit the need of the moment. Of course, companies owning real estate will not be very eager to offer such an option, since their primary concern is to create a stable cash flow for their investors.

Even so, it could start with large companies using larger CDC-RDC networks. They could look at the total number of square metres leased from a company, and work out a flexible European lease contract. It will give the supply chain flexibility on a national level so costs can be kept in line with demand, while at a European level the highs and lows in demand can more easily be managed. If human resources and the use of internal equipment are factored into this new model for outbound traffic, even more options become available.

Working capital

When the crisis struck, many companies decided to decrease their working capital in the supply chain. There was an urgent need to generate cash, and an easy way to do so was by lowering inventories at all levels of the supply chain. In doing so, these companies created an opportunity for themselves to get an impression of how the network would function if inventory levels were kept very low. Would it be possible to reduce the warehouse space in the supply chain, or to have more cross-dock centres?

This turned out to be an ideal starting point for a new logistics real estate strategy, as building up the inventory back to the original levels would take longer than the market would be willing to wait for. It is easy to lower the inventory to a level of 25 percent within three months as products near the end of their life cycle. Getting the inventory levels back up to a previous level however, for example that of a year earlier, would take at least nine months, as it would mean restarting production. This resulted in businesses adopting a new strategy, and it is now up the real estate market to adapt to these new times.

Now that we have looked at the three factors, we can conclude that hotspots are not outdated yet. Nevertheless, new times lie ahead, and companies will have to refocus on the new developments in market demand.

corredor-460x307Just keep in mind there have always been two different kinds of hotspots: Central Distribution Centres hotspots and Regional Distribution Centres hotspots.

Which one is yours?

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