Rising fuel costs have an impact that is felt throughout the supply chain, says Nemeth. "At the end of the day, it's fuel and oil that drive our industry and the decisions that are made [by manufacturers]. With oil costs as they are today, every decision is made around freight and transportation charges."
Approximately two-thirds of the total cost of distribution is in transportation, with the rest coming from warehousing and related activities. As a result, Nemeth says, companies are highly motivated to find cheaper ways of getting product to customers.
One big target for cost-cutting is the distribution network, where companies must balance the need for centralizing inventories with the expense of moving product over longer distances. The ideal setup today, says Nemeth, is designed around five to seven distribution centers, strategically located around the country. As fuel costs rise, companies could find themselves increasing the number of DCs to minimize driving distance. The trick lies in keeping inventory carrying costs below the level of fuel expense.
In actuality, says Nemeth, inventories are getting smaller. Distributors are focused on increasing turns, as they seek to boost sales without loading down their balance sheets with unneeded product.
Regional distribution networks have a significant edge today, Nemeth believes. In addition to reducing fuel costs, they represent "a commitment to the community." Third-party logistics providers, meanwhile, have been able to take advantage of falling real-estate prices to set up warehouse operations at multiple points.
Still, there are challenges to be addressed in setting up a network of regional DCs. Chief among them is the difficulty of finding enough labor in second-tier markets. "The industry isn't what it was 30 years ago," Nemeth says, adding that logistics is no longer a profession of choice for many workers. Employers need to respond by improving their treatment of workers, while focusing on information-technology skills.
