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The Virtual Warehouse
When will the Virtual Warehouse Emerge?
What's the first thing you see when you come in the back door of your warehouse?
- Racks full floor to ceiling
- Trucks at the dock unloading more inventory
- Slots with "dead" inventory
- People, pallet trucks, staging areas, expense, expense, expense
And, you know your friends in other states are looking at the same thing, day after day after day.
Does it need to be this way? The Distributor Board thinks that, in the future, "Virtual Warehouses" will emerge as "the" process for successful distributors. What do we mean by Virtual Warehouses?
Let's take a look at the question, is inventory a benefit or a burden?
Inventory is a benefit when...
- your supplier or customer owns it
- it turns quickly
- it requires limited warehouse space
- it is sold to multiple customers
- it arrives when needed
- it allows for drop ship/cross docking
- there is exclusivity and demand
Inventory is a burden when...
- it turns too slowly
- it requires expensive warehouse space
- it is obsolete
- you purchased too much
- it arrives too early or too late
- it requires too much handling
- you have too many "D" items
Why do you need to own inventory? Consider the question, what sense does it make for a distributor in one city to own the same brand, color and size of a product as non-competitive distributors in adjacent markets? Could all of them pick from the same inventory? Could ownership, occupancy and management costs be significantly reduced?
Communications and shipping systems today allow for the picking, packing, shipping product and getting it to the customer in the same time frame from almost anywhere in the country. Why have four warehouses doing the same things as one?
Distributors today and more so in the future, may become marketing and sales agents. Having the inventory out back is not and will not be a point of competitive advantage, since there are very few exclusives anymore in the world today. Having the technology resources to easily and quickly communicate with and get the customer what they need is a competitive advantage. Having an organization that spends time on serving and growing the customer base is a competitive advantage. Having the financial resources to manage in a rapidly changing market is another competitive advantage. Owning and managing inventory is a requirement in today's distribution world, not a competitive advantage, as it may have been in the past.
How does inventory impact the "value" of your business? As distributors are realizing, cash flow will drive value in the future, both in terms of enterprise value and the availability of credit. Assets on the other hand, will be of less importance. Two distributors in the same business will be valued much differently as a function of their cash flow vs. their asset base. In a recent article we wrote, one banker said "assets are worthless, if a business defaults, how am I going to sell the assets?"
The future "Virtual Warehouse" offers a new way to think about a distribution business. We're not talking about public warehousing; we're talking about co-operative warehousing. Virtual warehousing involves several distributors co-owning a facility, jointly owning inventory, sharing the costs of systems, employees, and operations.
How does the Virtual Warehouse happen? First, distributors who serve similar customers in different markets need to agree to collaborate. They must put a plan together to evolve out of their current facilities and join together in a state of the art centrally-located facility that is capable of expansion. Yes, there is a lot of work in putting this together, however, when the economics are analyzed and the expanded product and service capabilities are realized, the competitive advantages for everyone will emerge.
When will the Virtual Warehouse emerge? When distributors understand and stop believing that "it is not real unless I can see it in the back room;" as costs continue to erode the "value" of the business; as customer pricing pressures increase; and as manufacturers continue to seek fewer, larger distribution points. How soon will the virtual warehouse happen in your industry? Will you be first to make it work? When will the Virtual Warehouse happen? Soon!
If you think the Virtual Warehouse makes sense, The Distributor Board can help you make it happen. Give us a call.