This post is by Jake Rheude, the Director of Business Development and Marketing for ecommerce fulfillment company Red Stag Fulfillment.
Every economic system has segments that produce products and consumers who need them. Between these segments is the distribution system.
Sometimes the distribution system is itself made up of several segments and sometimes it controls production as well. In some industries the producers have taken over the distribution of their products.
No matter how it functions, the role of the distribution system is to efficiently find consumers who need particular products and to ensure that they have access and the ability to buy them if they want.
The distribution system of an economy is never static; new technologies are causing fundamental changes in how distribution works. On the surface, such changes might mean one thing, yet when the actual mechanics play out, the results can sometimes be unexpected.
Producers, distributors, and retailers compete for market share and a bigger slice of the overall pie with unpredictable outcomes. Using innovative approaches, some companies attempt to cover the entire market segment, from production to retail. Others specialize in becoming an all-purpose intermediary. Still others try to excel in a particular niche.
Examining which new technologies are likely to roll out over the next few years and how they will impact the existing distribution system can yield clues to what the future of distribution will look like.
Distribution Yesterday and Today
A historical perspective and an overview of today’s distribution system will help put projected future developments into perspective. While the endpoints of manufacturing and consumer needs change relatively slowly, the distribution system can change overnight as companies implement disruptive new technologies. Those businesses not adapting get left behind.
Manufacturing develops new technologies as well but it takes time to change production lines, test new products and ramp up new production. Consumer needs change too but the basics remain the same. Neither applies in distribution. Processes such as shipping, warehousing, purchasing and selling can change very quickly and the only underlying requirement is to get the right product to the customer that wants it in the most efficient way possible.
Distribution and Wholesaling
Distribution as a separate function became widespread when mass production started in the 1900s. Previously local manufacturing had supplied local markets either directly or through local merchants. With mass production, large manufacturing plants could churn out large quantities of inexpensive products, but they lacked ties to a specific market. The people who owned and operated these plants were investors, technical people and workers. Sales people did not naturally fit into a manufacturing plant’s organization.
Wholesalers filled the gap. A traditional supply chain consisted of a manufacturer that produced the goods, a wholesaler that bought in bulk from the manufacturer, and retailers who bought small quantities from the wholesaler and offered the products to their customers. The savings from mass production were so great that wholesalers could often sell to retailers at double the price they paid to manufacturers and the retailers in turn doubled the price again.
Other Supply Chain Models
Some industries organized themselves slightly differently. The auto industry sold through dealers tied to a particular manufacturer and the oil industry sold gas through branded service stations. Direct marketing organizations cut out one level by buying from manufacturers and selling directly to consumers. These models had one thing in common with the wholesale model: the producers received a small percentage of the final price. The cost of bringing goods to market remained high and the alternative methods were not able to spread throughout the distribution system.
The Internet Disrupts Existing Distribution Models
With the development of the Internet, new and more compact models emerged. Disintermediation became a catchword and meant that producers would finally be able to sell directly to consumers. The value added by intermediaries would no longer be important and manufacturers would receive a larger share of overall revenue while consumer prices would drop.
This didn’t happen. Intermediaries became stronger and manufacturers had to reduce costs because new distributors controlled market access.
The Producer Approach
Disintermediation through improved technology and the Internet in fact took place, but not through the disappearance of distributing companies. Instead, new and existing companies operating in the distribution space took over a wider range of functions and increased their power.
Some companies attacked the traditional supply chain from the producer end. Dell Computers pioneered a model in which a computer manufacturer could sell directly to customers online. Tesla, the producer of electric vehicles, offers the cars it manufactures directly to consumers via its website. Many high tech product manufacturers use a hybrid model in which they sell both online and through more traditional channels.
The Retail Approach
Other companies entered the distribution channels from the retail end.
Walmart is the biggest example of a retailer taking on wholesaling functions. Retailers in the past had trouble keeping track of and paying the thousands of suppliers whose products they sell. Wholesalers did it for them. Using Internet communication and computer technology, Walmart built automated structures to carry out these tasks. As a result, Walmart was able to offer lower prices than traditional retailers.
Amazon did away with traditional retail altogether and sold a wide variety of products online. Apple is solidly situated on the retail side of distribution but pays factories it doesn’t own to build its products. Instead of producers gaining power in the new distribution field dominated by technology, new and powerful intermediaries have sprung up to control markets and dictate pricing and conditions to producers.
Approaching distribution from the retail side has made some companies extremely profitable. Businesses that control a market segment and a large client base can achieve savings on the supply side from manufacturers and charge above market prices to consumers. Margins can be substantial because these businesses have taken control not only of the distribution mechanisms but also of the profits that were formerly associated with them.
New Technologies Waiting in the Wings
There are several new technologies that have either already impacted distribution or will soon do so. The new, powerful and highly profitable companies active in the distribution space have strong incentives to introduce new technologies, both to further increase profitability and to consolidate their power. RFID tags (radio frequency identification tags) are already in use and will become a much more disruptive influence. The use of drones, driverless trucks and automated warehouses has been tested and is likely to shortly become common. Very short delivery times where orders from companies such as Amazon are delivered within the hour are probably possible but not commercially viable on a broad scale just yet.
The Synchronized Supply Chain
When a single company controls the entire supply chain, such as Walmart, Apple and Amazon do to varying degrees, it can impose procedures that greatly simplify and speed up distribution. Ideally there is a small and relatively constant number of particular products in the chain and, as a customer buys one, an additional one is placed on order from the factory. The key is to coordinate so only the number of products actually sold is produced. To achieve a synchronized supply chain, companies have to know where each product is at all times. The technology that facilitates this is the RFID tag.
RFID tags are already used in warehouses, on assembly lines and in retail. They consist of a small tag with an electronic circuit that can send identification information to a reader when the reader sends them a radio signal query. Inexpensive ones are passive and respond only to queries. The more expensive ones contain a small battery and can send identifying signals for several hundred feet. The product ID generated can be unique and can contain product-related information. In a warehouse for example, an automated reader can query a newly arrived pallet of products and receive detailed information about the products in the pallet.
Unlike bar codes, that have been fulfilling a similar function, RFID tags don’t have to be in the line of sight of the reader and can identify individual products. Bar codes for a class of product are all the same and the bar codes printed on milk cartons are all identical. RFID tags can carry out bar code functions as well but they can be programmed differently for each item.
RFID tags are more expensive than bar codes but, if they allow synchronization of a supply chain, the savings can be substantial. Items can be tagged in the factory and tracked as they move through the distribution system. Shipments can be read as they are loaded into a truck and again when they arrive at a warehouse or retail outlet. A business can aggregate the RFID readings from many sources and know exactly where the products are and how many are in the distribution channel.
When new automation technology is combined with RFID tags, warehouses can be completely automated. There is no need for inventory because businesses know in real time what is in their warehouse. Stacking and storing on shelves is relatively easy to automate, but the challenge lies in reliably retrieving a specific product. So-called picking robots can distinguish items of different shapes and sizes and pick up the one to be shipped. The problem is that picking robots are still much slower and less accurate than human workers.
The difficulties and problems robots have are being addressed and eventually the performance of such robots will surpass that of humans. The completely automated warehouse will then quickly become commonplace.
Waiting For Delivery Drones
Companies already know that drones can deliver packages – the difficulty is designing a system that makes commercial sense and doesn’t break regulations in place for unmanned aerial vehicles. Once the regulations are clear, the economics have to work. Trucks are still much cheaper for large, heavy loads or items that have to be transported for over 50 miles. For light loads and short distances, delivery drones may turn out to be less expensive.
The drones being considered for delivery applications are small and short range. Some are autonomous in that they don’t need an operator. They can deliver up to about 10 lbs. in a 10 mile radius before having their battery changed. Shorter trips are more economical because each drone can make several trips per battery charge.
In a concept that is the most advanced of the different possibilities, customers would receive a transmitter to place on a small flat area serving as a landing pad. The drones would pick up packages from a local source and automatically plot a route to the customer. They would fly to the customer’s landing pad, deposit the package and return. In one variation, the local source of the package could be a Walmart store. In another variation, a delivery van could release a flock of drones into a neighborhood for quick, simultaneous deliveries and then leave with the drones to repeat the process in a neighborhood ten miles away. Such strategies could save money by delivering more quickly and reducing truck trips or by increasing the number of deliveries a truck can make in a given time.
Driverless Trucks Can Speed Deliveries
Where driverless cars have to deal with many unexpected conditions and complex trip end-points, driverless trucks can move between specially designed, truck-friendly staging areas along major highways. This means such trucks are much easier to introduce than cars that have to navigate narrow roads and driveways. Combined with other new technologies, autonomous trucks can work with automated warehouses to close the loop on a fully automatic supply chain. Products would move continuously 24/7 through a fully automated system that picks up items at the factory and delivers them to local delivery points. If the customer is located near the local warehouse or store, even the last few miles of the delivery path can be left to automated delivery drones.
Autonomous trucks would keep track of what they are carrying by periodically reading RFID tags. Customers would know exactly where their ordered material was located at all times. Such trucks could follow programmed low-traffic routes, run on weekends and holidays and operate through the night. Supply chains would operate more quickly and become more predictable.
The New Distribution System
Technologies such as RFID tags are already being rolled out and used wherever their application can save money. Other new technologies such as delivery drones have been tested and will be deployed within the next few years. Ordering products will be a different experience for many consumers.
Quick Delivery of a Small, Common Product
Once an automated supply chain is in place, delivery of everyday products is likely to be quick and inexpensive. If a consumer orders a product such as a popular toy action figure, such products will probably be in local warehouses. A picking robot working in an automated warehouse that has such a figure in stock will have the order added to its list. Software will re-optimize the list so the robot makes as few trips as possible. The toy will probably be picked up and placed on a conveyor belt for automatic wrapping, boxing and addressing within the hour.
The conveyor belt will bring the box to a pickup platform where delivery drones pick up packages in sequence. Only local orders go here; the others go to an automated truck loading dock. Since the toy order is local, a drone reads the address, plots a corresponding course and takes the package to its destination. Later that day the customer comes back from work and finds the package in the designated landing area by the back door. The customer retrieves the box and the toy is ready for a child’s birthday the next day.
Ordering an Unusual Item
Often customers order items online that they can’t find locally. If a customer orders an unusual item, such as binoculars, it probably will not be in a local warehouse. When the customer places the order on line, the supplier will already know where the closest product is located and will automatically put a hold on it.
Once the customer’s payment has cleared, the supplier will place the corresponding order which may be in a warehouse 500 miles away. The packaged order is routed to the automatic truck loading dock and a driverless truck picks up the order later that day. The truck drives overnight to the urban center nearest the customer and is automatically unloaded.
The customer lives about 30 miles away so the order is automatically loaded onto a delivery van for local deliveries. These vans are similar to existing delivery vans and they still have a driver. Local road networks are too complicated and too full of obstacles for autonomous vehicles to function reliably. The driver and van leave the warehouse in the morning and eventually the driver reaches the customer’s neighborhood.
The driver finds a safe parking area and folds down the rear door of the van to create a small launch platform. The deliveries have been loaded, grouped by neighborhood and in sequence. He takes the first package, places it on the platform and places a drone over it. The drone reads the address, plots a course to the customer’s designated landing area and takes off. A few minutes later the dozen or so drones have left, the first on a delivery that is the furthest and the last on one that is close by. About five minutes later, all the drones have returned and are stowed back in the truck. The driver proceeds to the next neighborhood several miles down the road. He has completed a dozen deliveries in about one-fifth the normal time.
The customer looks out on the balcony and finds the drone has left the package in the designated landing area there. Delivery has been quick and to a secure location.
Drivers of New Distribution Technologies
Three factors are driving the adoption of new technologies in distribution. Proponents expect that these technologies will:
- Save money
- Allow more rapid deliveries
- Be more convenient for customers
The scenarios detailed above show that all three expectations could be realistic.
The technologies discussed are ready for implementation and the cost structures are known. When customers can choose suppliers that have lower costs, quicker deliveries and deliveries to designated locations on their property, they will buy from those companies. Other suppliers will have to adopt the same technologies or go out of business. The future of distribution is likely to include these technological innovations.
This post was by Jake Rheude, the Director of Business Development and Marketing for ecommerce fulfillment company Red Stag Fulfillment.
This post was originally published on the RSF blog as The Future of Distribution.
Very cool & thought-provoking article. Great read