Census of Distribution: Onward and Upward

Faster order fulfillment. More accurate shipments. Better inventory management. Lower costs. Benchmarking—the process of learning about, sharing and adopting best practices—helps achieve these goals first by opening up people’s minds to new possibilities. These can take the form of new material handling processes, software, technology or equipment. Once managers become aware of the possibilities, they can identify the opportunities that offer the greatest potential for their operations.

A successful benchmarking effort begins with an understanding of an facility’s current performance using common performance metrics. To help our readers find out how they are doing in comparison to their peers, MHM joined forces with The MPI Group (Cleveland) and Industry Insights (Columbus, Ohio), two industry and market research firms. This past summer we launched the Annual Census of Distribution to identify current performance levels and how widely various technology and processes—from radio-frequency identification (RFID) to Six Sigma—are being used today. In this first installment in a series of articles reporting the results of this joint research effort, MHM presents a general profile of distribution facilities in the United States, and managers’ top concerns for 2006. (See Methodology.)

In the parable of the three blind men and the elephant, each man describes the whole elephant based on the body part that he feels with his hands—trunk like a snake, leg like a tree, tail like a brush—and then they argue about what an elephant is really like. Distribution center and warehouse managers’ can be just as nearsighted about their operations, and just as contentious about what makes their facility unique and different. Yes, every distribution operation faces unique challenges—high SKU count, rapid sales growth, low local unemployment, high seasonal demand fluctuations, public company ownership—but the basic activities of receiving, put-away, storage, picking and shipping remain the same. What follows below offers a profile of the typical distribution facility today. (Questions appear as they were asked on the survey; "N=" refers to the number of respondents for a particular question.)

Source: 2005 MHM Census of Distribution

Most distribution facilities in the United States are privately owned (74% private, 26% public). An almost equal proportion of distribution facilities are independently owned and operated (48%) or part of a larger company (52%). Wholesale facilities are much more likely to be privately owned (91%) than facilities that serve a retail supply chain (65%). Following along these lines, only one out of four wholesale facilities (24%), compared to over two-thirds (68%) of retail distribution centers, is part of a larger company.

Source: 2005 MHM Census of Distribution

Most buildings are owned (58%) rather than leased (42%). As anyone who knows the industry might guess, third-party logistics providers (3PLs) are more likely to lease their facilities (57%) compared to manufacturers (41%) or retailers (30%).

Source: 2005 MHM Census of Distribution

Source: 2005 MHM Census of Distribution

Almost half (47%) of distribution facilities in the United States have been under current ownership for more than 10 years. A significant proportion (22%) have been under current ownership for more than 25 years. Wholesale facilities tend to be the oldest; over half have been around under one owner or another for 18 years or more. In contrast, most retail facilities are 9 years old or younger, and over one third (37%) are less than 5 years old.

Source: 2005 MHM Census of Distribution

Source: 2005 MHM Census of Distribution

Well over half of distribution facilities (58%) handle $50 million or less in sales volume every year. At the other extreme, one out of 10 handles more than $500 million in sales volume per year. The sites that handle the higher sales volumes tend to serve retail outlets. They are also much more likely to be part of a publicly owned company, and be located in the South than in the Northeast, West or Midwest.

Source: 2005 MHM Census of Distribution

Three out of five distribution site managers (60%) report that they have to manage some degree of seasonality in their markets. Nine out of 10 of those running retail-oriented locations say they have to manage seasonal fluctuations.

Source: 2005 MHM Census of Distribution

Looking at the number of parts and materials that have to be handled, over half (54%) of distribution facilities manage 5,000 or fewer stock-keeping units (SKUs). One out of five locations has to keep track of more than 25,000 SKUs. Of those sites handling the highest product variety, the greatest percentage (37%) are distributors. In general, manufacturers report that they have to manage fewer SKUs, with most managing 2,500 SKUs or less.

Source: 2005 MHM Census of Distribution

On a per-item basis, two-thirds of the SKUs handled cost customers $100 or less, one-fifth cost between $100 and $1,000, and the remainder cost over $1,000. Manufacturers, distributors and 3PLs tend to handle higher value items. Most of the products handled by wholesalers (55%) and retail distribution facilities (60%) have a sale price between $10 and $100.

Source: 2005 MHM Census of Distribution

Another indicator of operating complexity, employees at one out of five (20%) locations have to keep track of goods arriving at the receiving dock from 200 or more suppliers. In contrast, the majority of distribution facilities (58%) manage incoming shipments from 50 suppliers or less. By supply chain, much fewer manufacturers (11%) report that they have to manage 200 or more suppliers when compared to retailers (33%), wholesalers (33%) and distributors (32%). Most 3PLs (57%) are only handling incoming goods from 25 suppliers or less.

Challenges and expectations

When asked to indicate what external factors had the biggest negative impact on operations over the past 12 months, more than three-quarters (78%) of distribution center managers singled out healthcare costs.

Source: 2005 MHM Census of Distribution

It’s small comfort but everyone’s in the same boat. Healthcare was the top issue for manufacturers, distributors, wholesalers, retailers and 3PLs, for private and publicly owned companies, and for facilities located in the Northeast, South, Midwest and South. Other factors having a negative impact on operations included customer pricing pressures (68%), the economy in general (55%) and government regulations (44%).

Source: 2005 MHM Census of Distribution

On the other side of the coin, managers reported that process improvements (80%) followed by information technology (61%) and new capital equipment (49%) had a positive impact on distribution facility activities over the past 12 months. Site managers at one out of four locations (26%) even reported that they had benefited in the current economy. This may have contributed to the generally bullish expectations of survey respondents. Almost two-thirds (63%) say they believe their facility will have to expand over the next three years, and relatively few managers expect their operations to be sold (6%) or downsized (6%) in the near future.

Methodology

We designed the 2005 Census of Distribution to collect operational and business metrics and practices at warehouse and distribution facilities. A four-page questionnaire with more than 100 questions—jointly developed by Material Handling Management, The MPI Group, and Industry Insights—was sent to subscribers of MHM along with the June 2005 issue of the publication. An online questionnaire also was publicized by MHM. As an incentive, each respondent could receive an Executive Summary of the survey results and a custom benchmark report. As of early September 2005, we received 457 valid, completed survey forms. All responses were anonymous. Data was entered into a database, edited, and cleansed to ensure that answers were plausible.

More Metrics

This is the first article in a series in which MHM will report the results of the 2005 MHM Census of Distribution. In January MHM will look at operational performance metrics.