November 29, 2005
Volume 1 Issue 38

Virtual Distribution Center will Cut Costs

Small companies unable to afford expensive capital equipment, but eager to benefit from efficient distribution centers, may welcome the opportunity to consolidate logistical efforts with peer companies in large, third-party operated, shared distribution facilities.  These virtual distribution centers (VDCs) allow small companies to benefit from the economies of scale associated with large scale distribution efforts without the risk of a large capital investment. These costs are especially large when we are dealing with coolers and freezers with not only the up-front capital costs of that infrastructure, but the operating expense of electricity for these items continues to rise.

Implemented Virtual Distribution Warehouse:

1. Once the virtual warehouse is in effect, the receipt and unloading warehouse step will be performed mainly by manual laborers.  First, forklift operators will unload incoming shipments and bring them to preparers who will break down the bulk shipment into storable stock keeping units (SKU.)   Preparers remove the wrapping from the pallet, barcode each individual box, and place each SKU onto a conveyor.  To figure out how many laborers are needed, reasonable productivity rates can be calculated.

2. Once the preparer places the SKU onto the conveyor, the store process begins. This stage has a package separation and a racking storage phase.  The package separation phase serves the purpose of further separating individual SKU’s, and queues the products for storage.  The conveyor then dumps the products into the automated storage racking system, or ASRS, that will store the SKU in inventory.  After the conveyor dumps the SKU’s into a specific ASRS bin, a robot operated queuing system interfaces with the WMS to manage the flow of goods into mobile storage. 

3. Due to its highly efficient Warehouse Management System, WMS, the VDC will cut down inventory drastically. 

4. The fetch process is similar to the store process, but in reverse.

5. Once this fetch process is complete, the goods are prepped and loaded onto pallets, and then shipped.  This loading process, like the unloading process, will be manual.

The following table shows the initial costs of a start up of Virtual Distribution Center:

Costs broken down of the Actual Distribution Center:

The Distribution Center can have one or many suppliers who give them product to ship.  Usually one company is not going to cover the Total Annual VDC cost of $7,583,451.  Each company going through the virtual distribution warehouse, its' cost, is divided by the number of units they expect to pass through the VDC each year, which will determine their per unit distribution cost. 

There are many other companies contributing to the $7,583,451.  Here are two of the companies with their current costs compared against their VDC costs:

It is seen, that the two companies will only have to contribute the $639,132 and the $1,541,917 to the $7,583,451.  In both cases, the companies are saving money.  Their costs are based on usage.  The more the company sends through the Virtual Distribution Center, the lower the per unit cost becomes.  

These two tables show the significant cost savings of the VDC concept over current distribution methods.  Costs for XYZ would be 20% lower than their current distribution costs, and ABC costs would drop almost 65%.

Conclusion:

After viewing the process and these tables, you can see that a fully implemented Virtual Distribution Warehouse will positively produce additional profit by lowering your operating costs dramatically.

Although this model might seem complicated, we know of a large dairy products distributor that uses this concept and they have been able to double their company's revenue in less than 3 years. They accomplished this without adding any warehouse space or coolers because they are virtual.

CREATIVE THINKING WITH ADVANCED CONCEPTS = COST SAVINGS.

Bibliography:

White, K. Preston.  University of Virginia.  Virtual Distribution Center.  2000.

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