Bob Trebilcock

Conversations with a CEO: The future of distribution
June 24, 2008

“The distribution model we’ve used in this country for the past fifty years is dead!”

Or so proclaimed the CEO of a company with nearly $20 billion in annual sales. I wanted to know more.

I’m not a fan of anonymous sources. But now and then, my personal life and my professional life intersect and I come across a story that can’t be told without hiding an identity.

That was the case the other night. I happened to be at a function here in New England that brought together regional community leaders, academics and business leaders. My new friend introduced himself by name, not title, but I recognized him as heading up one of those companies that considers warehousing and logistics a core competency and a competitive differentiator. So much so, that he was able to talk about voice recognition technology, automated storage and retrieval systems and cross-docking at the level of detail you’d expect from a shift supervisor, not a CEO.

After an hour of chatting about materials handling technology and logistics, his wife joked that he finally had someone to talk to who was actually interested in the same things as him. Somewhere in that hour, he declared distribution as we know it dead on arrival.

Now, in my position as a writer, vendors, analysts and consultants talk to me all the time about where they think industry is going. What distinguished this conversation is that I was hearing it from a guy who is investing real money to remake his supply chain because he believes the world has permanently changed and he intends to stay one step ahead of the game.

I was not a reporter that night, just one guy talking shop with another guy. And that’s the reason I’m recounting this anonymously. Here’s what he sees happening in the marketplace.

“For the past fifty years,” he told me, “we’ve all been building big warehouses with 30-foot ceilings in the middle of nowhere. We did it because land was cheap, we could get labor and it didn’t cost much to ship product from a central DC to a regional DC. Those days are over.”

The most obvious change threatening that model is $5 a gallon diesel. “We think you’re going to need to be about 350 miles from your customers,” he said. “That means more centrally-located warehouses.”

The second change is the competition for labor, which has been exacerbated by a crack-down on illegal immigration. “First, every time a major company puts up a DC somewhere, it becomes a hub,” he said. “We all end up competing for the same pool of labor. That drives up labor costs. Besides that, very few people want to work in warehouses today, even at $15 an hour plus benefits. It’s viewed as a dead-end job.” But the most important change, he believes, is the crackdown on illegal immigrants in the workplace. He said that was brought home to every CEO after the government raided a few manufacturing plants in Massachusetts and Iowa last year. The message was received in his executive office suite. “It’s always been illegal to hire illegal aliens,” he said. “But no one knew what the consequences were because it was never enforced.” That led to a “don’t ask, don’t tell” policy that enabled factories and warehouses to find a pool of willing workers. Now, the consequences are real.

How will those changes play out in warehousing and distribution? He outlined several strategies he believes companies will have to employ to remain competitive.

Get closer to your customers: Locating a DC within 350 miles, or a 6- to 7-hour drive, means you’re close enough to replenish a small distribution center or ship mixed pallets directly to a store. And, expect more direct-to-store shipments.

Get bigger by going vertical: Building closer to the market translates into higher land costs. At the same time, he believes DC’s will need to get bigger to be more efficient. To do that, he believes more DC’s will adopt the European model and go vertical, employing automated storage and retrieval (AS/RS) technology and carousels to build taller warehouses. “By going up 120 feet with an AS/RS you turn a 250,000 sq ft facility into a 1 million sq ft facility,” he told me.

Use more automation: “In Germany, labor is expensive because once you hire someone, you’ve basically hired them for life,” he said. “They use more automation in the warehouse than we do. That lets them employ a combination of highly-skilled full-time workers who are expensive, and a pool of temporary workers, often from eastern Europe, that they can flex as they need to.” The result: He expects to see more automation in the US, including automated picking, to alleviate the labor shortage.

I don’t know if that’s one man’s vision, or whether his competitors are watching his moves in order to copy them for their own supply chains. What I know is that he made a compelling case for rethinking the way we handle and distribute products in our supply chains in a global economy marked by high energy costs and stiff competition for labor.

Let me know what you think by posting a comment below or writing me at Robert.Trebilcock@verizon.net

Posted by Bob Trebilcock on June 24, 2008 | Comments (0)