Just How Local Will Distribution Become?

Just How Local Will Distribution Become?

In October 2016, Amazon shipped the first order from its one million square foot distribution center in Fall River, Massachusetts. East of Providence, Rhode Island, and equidistant to Boston to the north and Cape Cod to the east, Fall River is near recognizable areas of the region, but it’s unlikely to be known across the US, let alone globally.

Yet, this city, with a population of fewer than 100,000 residents, is now part of the Amazon network of “more than 70 fulfillment centers and more than 90,000 full-time employees”. Similarly, less than 15 miles away in Seekonk, Massachusetts, FedEx is currently building its own regional distribution center (DC), albeit a quarter of the size of Amazon’s.

In this small area of New England, the development of distribution assets feels hyperlocal, but as one major real estate player told the WSJ, it represents a nationwide balancing of supply with a consistent demand for space. This growing need for localized space is further echoed by our annual Future of Supply Chain data, stretching back to 2012.

 

Chart showing how companies are building smaller and more local distribution centers, split by industry.

In 2012, we simply asked respondents about their intention to build smaller distribution centers in the future, while in subsequent years, we specified the question to address how companies have responded to the demands of digital customers. Across the supply chain community the intent to build smaller DCs was evident and the responses across industries showed not just smaller sites, but also more local. Furthermore, in nearly every industry the growth from 2013 to 2016 was significant.

At one million square feet, Amazon isn’t quite going smaller, but it’s also set the table stakes for deliveries with free two-day shipping, and the growth of its network is an obvious response to the demands of its customers. Most companies are still chasing Amazon’s ability to meet the needs of any customer, anywhere, at any time, especially those with traditional brick-and-mortar retail stores. These stores may still be a viable point-of-sale outlet, but retailers’ distribution strategies are now also reassessing the role of the store, either as smaller, hyperlocal distribution centers, or eliminating them altogether in an effort to reduce their real estate exposure.

With such deep introspective examinations underway, a common concern that accompanies more local distribution, and potentially the repurposing of existing infrastructure, is how to best structure logistics and distribution organizations. As places like Fall River and Seekonk, and others around the world, increase in strategic importance, what’s the optimal balance of centralized and decentralized functions?

Chart illustrating organizational structures for supply chain, organized by function.

Data from our 2015 Future of Supply Chain survey shows that distribution is second most likely, behind manufacturing, to be decentralized. When considered alongside the intention to create more localized distribution, this makes sense because each point of response must be empowered to manage specific customer needs. However, these sites are rarely fully autonomous, especially when considering the centralization of strategy, sourcing and systems.

The need for supply chains to be as close to the customer as possible is as evident as ever, but it remains a precarious balancing act. The question as to just how local distribution can be often comes down to trade-offs of cost and control. Individualized last-mile deliveries are now available and can be cost-effective via platforms like UberRush, and drone deliveries are buzz-worthy, but it’s one thing to deliver a bottle of sunscreen or an article of clothing, and another to hand over expensive technology solutions.

As a result, much like customer or product segmentation strategies, the future of network optimization won’t have a single answer. And today’s answer may not be tomorrow’s. So, when it comes to just how local distribution will become, it depends on cost, control and, most important of all, what the customer values and what they’re willing to pay for.

Your questions and feedback are always welcome via email at [email protected], or via Twitter @pvanhull.

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Author Patrick Van Hull

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