My boss at the consumer goods corporation in the Philippines where I worked a long time ago told me the company didn’t need warehouses in the provinces. A central warehouse in the national capital, Manila, would be enough.
The field salespeople in the provinces disagreed. Having provincial depots assured on-hand inventories of finished products for the salespeople to sell to customers.
My boss argued that the central warehouse could ship directly to the company’s distributors, who in turn could serve customers in their respective territories. Depots, therefore, would be redundant.
The salespeople countered that their customers would resent being served by distributors instead of by the company. Customers would fear that they would lose the low-price deals they had grown accustomed to getting from the company.
The company’s executives favoured my boss’s argument and within a year, the provincial depots were gone. A new central warehouse shipped to distributors, who saw their businesses expand tenfold. Product distribution, however, was iffy, as some provinces reported lower market shares for some brands due to chronic delays in deliveries.
The Philippines is an archipelago of 7,107 islands. Transportation relied on inter-island shipping and aircraft to ferry passengers and cargo to provinces. It seemed sensible to set up warehouses in provinces as it took freight carriers about one to two weeks to transport merchandise.
The consumer goods company, however, had distributors covering just about every province. The distributors were willing to put in more capital to serve customers like supermarkets in their respective areas. The company’s executives saw the logic in shipping products directly to the distributors, which would make the provincial depots unnecessary.
A few years after the transition to the centralised warehouse set-up, the distributors saw their businesses grow. They, however, complained that their orders, especially for best-selling fast-moving products, were rarely served completely and on time due mainly to the long transit times from the central warehouse to the provinces.
Meanwhile, savings the company got from eliminating provincial depots were partly offset from higher lease payments for the additional space the central warehouse required. And because the central warehouse was located not too near to the company’s manufacturing facilities, the company had to shoulder expenses shuttling products between sites.
All in all, not much really changed in terms of expenses and customer service for the company. The distributors, on the other hand, turned out to be the big winners from the wealth they got from added business.
Straightforward strategies don’t necessarily translate to straightforward benefits. My boss thought a central warehouse would lead to real savings and more efficient distribution of products. It didn’t.
Many executives tend to ‘shoot first and ask questions later,’ that is, they get a seemingly bright idea which they in turn implement via delegating the task to subordinates. They stick to their beliefs that their good ideas will lead to significant business improvement. They don’t first define what problems they’re trying to solve nor do they analyse the costs & benefits of their ideas.
My boss and his superiors didn’t clearly define what they wanted to accomplish by eliminating depots and centralising outbound logistics at a large Manila warehouse. There was no formal report or study outlining what their objectives were. Everyone thought it was a good idea consistent with the company’s thrust to reduce costs without sacrificing shipments or customer services.
How many depots did the company need? That was the question which the company’s failed to ask and answer.
Subsequent questions which my boss and executives also failed to ask and answer were:
- How would the company make available products to consumers (not customers who were distributors or supermarkets but the final end-users) in the centralised warehouse scenario?
- How would the company restructure the transportation of products to preserve, if not improve, productivity and customer service?
- How would the company receive and serve orders from distributors, especially the ones who will see their territories expand and their selling volumes increase?
- What changes in systems, procedures, and resources would be needed to transition from a multiple depot structure to that of a centralised warehouse?
The transition the company went through from the multiple depot structure to a centralised warehouse was rough. Facilities and equipment were lacking the first few weeks after the central warehouse opened. Truckers did not know where to go and got lost finding the warehouse. It took a while for the warehouse’s local area network (LAN) to be set up which led to delays in the processing of orders.
My boss still boasted the central warehouse was a success; never mind he wasn’t around those first few tough days to experience the transition. And never mind that the company didn’t realise much in savings or productivity improvements.
On hindsight, I believed the company would have saved more money and have become more productive if my boss and the executives thought their ideas through before jumping hastily into a centralised warehouse scheme.
But as this anecdote is much in the past, it’s become a case study I’ve used repeatedly in training supply chain managers in thinking how to improve their distribution systems & structures.
And avoid the pitfall of implementing seemingly straightforward solutions to seemingly straightforward problems.
Ellery's Essays 