Storefront Distribution for Industrial Products
Like manufacturers, service organizations find operational economies of scale in investments in fixed facilities, inventories, and transportation. It’s generally advantageous to centralize these operations, as in the following cases.
Often, however, the incentive to centralize the logistics function contradicts the incentives of the rest of the organization. To be close to customers and potential customers, marketing and sales, for example, may want a large number of customer contact points.
In many companies, each service establishment is a full-service unit representing all functions of the organization. An outlet may include a marketing and sales office, it may stock merchandise, it may deliver merchandise to customers, and it may house a service arm. This arrangement is convenient, but it creates tension between the marketing and operational sides of the business, one seeking decentralization and the other pushing for centralization.
From this tension comes a different twist in service entities, the storefront. It’s an outgrowth of the notion of separating the marketing and operations functions into two distinct establishments. Let’s see what Union Carbide Corporation made of the storefront idea for its packaged gas business.
Carbide makes and delivers packaged gases through regional distributors around the country, subsidiaries of its Linde Division. Customers also can obtain “hard goods”—supplies for use with the gases, like welding rods. Linde ships nitrogen, oxygen, and other gases from central points to branch locations in large tank cars as well as in smaller steel cylinders loaded on tractor-trailers. These cylinders are then put on trucks and delivered to customer sites.
At one time, the branches were full-service establishments with operational, marketing, and administrative duties. A few years ago, Carbide was looking for ways to consolidate parts of its gas-filling business. In a bold move, Carbide executives proposed curtailing some full-service outlets. In particular, they wanted the branches to distribute cylinders to their customers from central sites, and they designated some branches “storefronts”—locations that would only take orders, initiate customer contacts, and maintain inventories of gas cylinders and spare parts for the walk-in trade.
Linde would deliver packaged gases from the central plants, thereby saving both the costs of maintaining inventory and hauling cylinders and the fixed-facilities costs arising from maintenance of secondary inventory. Storefront operating costs would be low, as would the costs of carrying a moderate amount of cylinder and hard goods inventory.
Customers would still get the same service; delivery would just be from a different location. Of course, Carbide could have eliminated all its branches and installed an 800 number in their place, since routine transactions were usually carried out over the telephone. But such a move would have meant a loss of contacts for the sales force. Moreover, a customer occasionally found it necessary to come into a branch office to inspect a new product or converse with a salesperson.
Subsidiary executives worried about possible meddling by the corporation. The validity of the storefront idea depended on meeting the service and marketing needs from less-than-full-function branches and, more important, on allaying the concerns of subsidiary management. The experiment slated for two of the subsidiaries drew a good deal of attention throughout the division.
Obviously, the key to the different approach was the economics of centralized delivery. Centralization reduced some of the logistics, double handling, and inventory levels at the branches. The stepped-up movement of vehicles back and forth from the central site, however, increased drivers’ travel time and lowered their productivity.
In deciding what branches to designate storefronts, Linde looked at branch size and proximity to the primary location. In addition, managers analyzed the costs of:
1. Filling and storing cylinders at the central point.
2. Storing spare parts.
3. Loading cylinders and parts on tractor-trailers and delivering them to secondary locations.
4. Unloading and storing cylinders and hard goods at the storefronts.
5. Warehousing and handling activities at the storefronts.
6. Loading goods on route trucks and delivering them to customers.
By converting the branch into a storefront or even eliminating it, the subsidiaries would save most of cost categories 3, 4, and 5. Category 6, however, would grow because of the initial and final travel time. With eight hours available and an hour’s driving time to reach a customer zone, for example, six hours would be available for service calls and time between stops. This situation is 75% as efficient as the old one, in which a branch is located at the center of a particular driver’s customer zone. Hence the new arrangement would require more drivers.
The savings would depend on the distance of the branch from the central point and the sales volume it covered. As volume rises, of course, the amount of inventory necessary to support a unit of sales declines. For the packaged gas operation, the larger the branch office, the more efficient its required cylinder and spare parts inventory would be.
Branch efficiency came down to this: the closer one was to a central site and the lower its sales volume, the more desirable its conversion to a storefront. Carbide constructed a set of trade-off curves to help in the decision making. (See the accompanying exhibit for an example.)
Storefront or Full-Service Branch?
The company operated some branches within 50 miles of the central sites, and these units were costing a surprising 6% extra in distribution outlays. Consequently, they were targeted for conversion. Some much more distant branches also turned out to be good candidates for conversion because they were small and weren’t realizing any economies of scale. In the two subsidiaries that first tried the storefront idea, three branches got the nod for immediate conversion.
The experiment in the two Linde subsidiaries was a success, so Carbide launched a national program of storefront conversion. To help managers identify branches most eligible for a switch, the company even installed a program to train them in the analysis technique. In the industrial gas business, control of distribution costs is a major competitive factor, and Union Carbide was able to squeeze large savings out of its storefront approach.
In several industries and types of business, there are many opportunities to gain efficiencies through limiting branch or office functions. Telephone companies are one case in point, with their fleets of fully equipped service vehicles manned by highly trained technicians. The companies deal with different customer types and thus separate the service functions accordingly. Technicians who service business sites, for example, usually do so exclusively; the same goes for residences and public telephones. In addition to service technicians, telephone company facilities often house engineering and construction personnel.
At one of the Bell operating companies undergoing consolidation after the breakup of AT&T, big differences in scale economies turned up in analyses of service facility functions. The company, while not adhering strictly to a storefront concept, did centralize certain functions and restrict some units to residential service.
The U.S. Postal Service has been reassessing the need for its mail delivery units, the local facilities from which mail is delivered along nearby routes. Centralization would permit efficiencies in routing mail, leaving the way open to operate some units strictly as retail outlets.
In theory, at least, the functions of an automobile dealership—maintaining an inventory of cars, servicing vehicles, and providing a place for sales activity—can be separated. A dealer could operate as a service center and sales point, while new car inventory for all area dealerships could be lodged in a single location elsewhere. A customer would go to the dealer to test-drive a car, but the car actually purchased would be on a lot perhaps 10 or 15 miles away.
The auto companies have thought seriously about this type of proposal. General Motors has even suggested setting up Saturn sales contact points at such places as suburban shopping malls. A buyer would select a customized version of the auto at the mall and would get delivery of the custom-produced car shortly afterward.
As elsewhere, this storefront idea is attractive in affording considerable economies of scale. A car, however, isn’t like so many cylinders of oxygen; the potential buyer wants to look, touch, and test-drive. The arrangement would ignore the big emotional quotient in buying a car.
But in many cases, the storefront idea has merit, even if it only means limiting the number of functions in far-flung offices or units according to cost-effectiveness criteria. Many service operations have adhered to a traditional structure as they’ve developed, combining marketing and operational activities at full-service branches. Separating these functions, with some operations centralized and marketing decentralized, can yield economies with no decline in service. Actually, by permitting more low-cost branch locations, the procedure may bring a service advantage as well.
Donald B. Rosenfield is a senior lecturer at MIT’s Sloan School of Management and program manager of the Leaders for Manufacturing Program, a joint degree-granting program with the institute’s School of Engineering. Formerly he spent 12 years consulting in logistics at Arthur D. Little, Inc.
Storefront Distribution for Industrial Products
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