Basic Guide to 3PL (Third Party Logistics)
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What is a distribution center? Definition and Function of Distribution
Learn about the functions and importance of distribution centers in supply chain management, including planning, layout, and technology used.
Consumers demand fast and efficient delivery of goods, and distribution centers play a crucial role in achieving that in the supply chain. A distribution center, also known as a DC warehouse or a logistics center, helps businesses optimize their operations, reduce costs, and improve customer service.
In this article, we will examine what a distribution center is, how it fits within the supply chain management process, the benefits of using a distribution center, and different types of distribution centers.
Table of Contents
Definition of a Distribution Center
A distribution center is a type of warehouse that is designed to receive, store, and distribute products to customers. Distribution centers work to manage the flow of goods from the manufacturer or supplier to the end customer or retail stores and are typically located near major transportation hubs. These include ports, airports, and railway stations, and major highways to facilitate the movement of goods.
In contrast to storage warehouses, which are used for holding long-term goods for longer periods of time, distribution centers handle the movement of large volumes of goods on a daily basis. Distribution centers are equipped with advanced technology and equipment to efficiently manage this movement. They are also staffed with trained personnel who are responsible for managing the flow of goods and ensuring that they reach their intended destination on time.
What is the largest distribution center?
At the time we are writing this article, Amazon has a distribution center of nearly 4.1 million square feet which makes it larger not only than any other distribution center in the US, but also the world. More info here.
Key Functions of a Distribution Center
A distribution center has several essential functions, which include receiving and sorting goods, managing inventory and storage, providing order fulfillment services (also known as fulfillment centers), and managing shipping and transportation.
If you plan to establish your own distribution network, we highly recommend having a good understanding of the inner workings and process involved in distribution center planning and layout. Here are some key components:
Receiving and Sorting Goods
The first step in the distribution process (and what we think is probably the most important) is the receipt of goods at the distribution center. The reason that we think it’s one of the most important steps is because a bad receiving process can lead to all kinds of problems in subsequent steps. But we also feel this is most important because of the volume of goods flowing through a distribution center.
Distribution centers are designed to receive goods in large quantities and to sort them quickly and efficiently. The receiving process involves checking the goods for damage and verifying that the correct quantity of goods has been received. Once the goods have been received, they are sorted according to their destination.
Storing and Inventory Management
Once the goods are received and sorted, they go to storage in the distribution center using a process involves organizing the goods in a way that allows for easy access and retrieval. Distribution centers use various storage systems, including pallet racks, shelving, and automated storage and retrieval systems, to optimize their storage space.
We can’t stress enough how important it is that you or whomever your distribution center partner is has a solid process for how they store your goods. The number of times we hear the stories from those who lost thousands of dollars of inventory through shrinkage with irresponsible distribution centers, is alarming. You need to find the right partner who has a solid track record and experience in distribution.
It’s a good to qualify them on things like what kind of inventory management software they use. Any reputable distribution center uses inventory management software to track the movement of goods in and out of the facility. This helps ensure that there is always enough inventory on hand to meet customer demand while minimizing the risk of overstocking which can cause storage costs to skyrocket.
Order Fulfillment
One of the primary types of distribution center is a “fulfillment center” which does a specific type of distribution: you guessed it, order fulfillment. In the eCommerce industry, once an order is placed, the nearest distribution center to the customer’s location receives the order and then staff picks the goods from the storage location and packages them for shipment.
These centers differ from standard distribution in several ways, most notably the type of storage and picking processes typically in use. Another difference is a fulfillment center may have a detailed packaging process involves ensuring that the goods are properly protected during transit and that they are labeled with the correct shipping information.
Of course standard distribution centers work may include a loosely defined type of “order fulfillment” (like the kind that we offer in our central TX warehouse fulfillment) but it may only involve picking pallets of material (more of a bulk scenario) and instead of working with eCommerce companies, they could serve retail and warehouse orders to stock store locations.
Shipping and Transportation Management
The final function of a distribution center is shipping and transportation management. Distribution centers use transportation management software to coordinate the shipment of goods to customers. This involves selecting the most efficient mode of transportation and arranging for the goods to be picked up and delivered to their destination. Distribution centers also work closely with carriers, such as trucking companies and freight forwarders, to ensure that the goods are delivered on time and in good condition.
Benefits of Using a Distribution Center
There are several benefits of using a distribution center (or even multiple distribution centers). While distribution centers vary in their own specific strengths (especially specialized ones) almost all distribution centers tend to offer some amount of benefits in the following key areas:
Cost Savings
One of the primary benefits of using a distribution center is cost savings. Probably the largest area of savings is shipping costs which is largely due to the massive scale of the distribution center. By consolidating shipments from multiple suppliers and using economies of scale, distribution centers can reduce transportation costs and take advantage of bulk discounts. Additionally, by optimizing their storage space and inventory levels, distribution centers can minimize the cost of holding inventory.
Improved Efficiency
Another benefit of using a distribution center is improved efficiency in supply chain operations. Distribution centers are designed to handle large volumes of goods quickly and efficiently. By using advanced technology and equipment, they can automate many of the processes involved in the receipt, storage, and shipment of goods, reducing the need for manual labor and improving the accuracy of order fulfillment.
Faster Delivery Times
Distribution centers are strategically located near major transportation hubs, which allows for faster delivery times. By using a distribution center, businesses can reduce the transit time between the manufacturer or supplier and the end customer, which can lead to increased customer satisfaction and loyalty.
Better Customer Service
By using a distribution center, businesses can provide better customer service. Distribution centers are staffed with trained personnel who are responsible for managing the flow of goods and ensuring that they reach their intended destination on time. Additionally, by consolidating shipments from multiple suppliers, businesses can reduce the risk of stockouts and ensure that they always have enough inventory on hand to meet customer demand.
Different Types of Distribution Centers
We think there are a ton of reasons why distribution is a good option for lots of different types of customers. That said, even with all these benefits, there are quite a few differences in form and function from one distribution center to the next. So what is right for someone else may not be right for you.
Take a look at the following list and see if any of these seem like it might work better for your business model:
Retail Distribution Center
Retail distribution centers are used by retailers to manage the flow of goods from the manufacturer or supplier to the retail store. Retail distribution centers are typically located near major metropolitan areas, and they are designed to move large amounts of goods to multiple retail store locations. A good example of this type of DC is a Walmart Distribution center, which may serve over 50 stores from a single location.
E-commerce Distribution Center (Fulfillment Center)
E-commerce distribution centers are used by online retailers to manage the flow of goods from the manufacturer or supplier to the end customer. When you think of a large e-commerce distribution center, you probably think of Amazon, who handles incredibly large volumes of goods each day.
Manufacturing Distribution Center
Manufacturing distribution centers are used by manufacturers to manage the flow of goods from the factory to the next step in the chain. This could be industrial customers, assembly lines in various countries, or other manufacturing facilities. Manufacturing distribution centers are typically located near the factory, and they may or may not store goods for a long period of time, depending on the specific industry and objectives of each company.
Specialized Distribution Centers
A specialized distribution center is a type of distribution center that is designed to handle specific types of products or serve a particular market niche. These centers are tailored to meet the unique needs of their customers, and they often require specialized equipment and facilities. An example of a specialized distribution center is a pharmaceutical company, where special regulations and processes need to exist, or a food distributor where cold storage and other specialized processes are required.
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The Types of Storage Systems Used by Distribution Centers
There are several types of storage used in distribution centers, each with its own advantages and disadvantages. Here are some of the most common types of storage:
- Pallet Racking: Pallet racking is a system of storage racks that use pallets to store products vertically. This is one of the most common types of storage used in distribution centers because it allows for efficient use of vertical space, making it ideal for facilities with high ceilings. Pallet racking can be configured in many different ways to accommodate a variety of pallet sizes and product types.
- Shelving: Shelving is a type of storage that uses shelves to store products horizontally. This type of storage is typically used for smaller items, such as boxes, tools, or parts. Shelving can be adjusted to accommodate different sizes of products and can be used in conjunction with other types of storage, such as pallet racking or bin storage.
- Mezzanine Storage: Mezzanine storage is a type of storage that utilizes an elevated platform to provide additional storage space above the ground level. This type of storage is often used in facilities with limited floor space, allowing for more efficient use of the available area. Mezzanine storage can be configured in many different ways, such as shelving, pallet racking, or bin storage.
- Bin Storage: Bin storage is a type of storage that uses bins or containers to store products. This type of storage is typically used for smaller items, such as parts or components, and allows for easy organization and retrieval of products. Bin storage can be configured in many different ways, such as using mobile carts, static racks, or gravity flow systems.
- Automated Storage and Retrieval Systems (AS/RS): AS/RS is a type of storage system that uses automated equipment such as cranes, conveyors, and robots to retrieve and store products. This type of storage system is often used in high-density facilities where space is at a premium and speed and accuracy are critical. AS/RS can be configured in many different ways, such as using mini-load cranes, shuttle systems, or vertical carousels.
- Shipping Containers: Shipping containers are another type of storage that can be used in distribution centers, especially for temporary or mobile storage needs. Shipping containers are typically made of steel and are designed to be stacked and transported by ship, truck, or train.
By utilizing a combination of these storage types, distribution centers can optimize their storage capacity and efficiency, while also accommodating the specific needs of their products and operations.
The Significance That Location Has on Distribution Centers
The slogan “location, location, location” has reigned true in the real-estate industry. It turns out, that the slogan reigns true in the supply chain and distribution segment as well.
At AMS, we believe that the location of a distribution center plays a significant role in the success of its operations. This is one of the reasons why we feel our central Texas positioning can be a strong positive indicator in our service level. It can impact the speed, efficiency, and cost of moving goods through the supply chain. A distribution center’s location should consider several factors, including proximity to suppliers and customers, transportation infrastructure, availability of labor, and local regulations and taxes.
Proximity to suppliers and customers can reduce transportation costs and improve customer satisfaction. Transportation infrastructure like highways, railways, ports, and airports can help to speed up the movement of goods. For this reason, many eCommerce brands utilize multiple distribution centers for their strategy.
Availability of labor and local regulations and taxes also impact the cost and complexity of operating the facility. By considering all of these factors, a well situated distribution center can optimize streamline its supply chain operations, and if it’s a third party solution, grow a wider customer base.
Challenges Faced by Distribution Centers
Despite their many benefits, distribution centers face several challenges in the modern business environment. These include labor shortages and high turnover rates, increasing demand for speed and accuracy, and the adoption of new technology and automation.
Labor Shortages and High Turnover Rates
One of the primary challenges faced by distribution centers is labor shortages and high turnover rates. The rapid growth of e-commerce has led to an increase in demand for labor in the distribution industry, but many companies are struggling to find qualified workers to fill these positions. Additionally, turnover rates in the industry are often high, which can lead to disruptions in operations and reduced efficiency.
To address these challenges, many distribution centers invest in employee training and development programs to improve retention rates and attract new talent. They are also implementing technology and automation solutions to reduce the need for manual labor and increase productivity.
From our experience, good employees make or break a warehousing operation. So if you are running a distribution center, or thinking about partnering with one, this is certainly a qualification you should not overlooked. We recommend visiting and asking your options about their employee programs and what their average tenure is.
Increasing Demand for Speed and Accuracy
Another challenge faced by distribution centers is the increasing demand for speed and accuracy. As customers expect faster delivery times and greater order accuracy, distribution centers must find ways to optimize their processes and reduce the risk of errors.
To meet these demands, many distribution centers are investing in advanced technology solutions such as automated sorting systems and robotics. These technologies can help to streamline processes and improve accuracy, while also reducing the risk of human error.
Adoption of New Technology and Automation
The adoption of new technology and automation is another challenge facing distribution centers. As technology advances, companies must constantly evaluate and update their systems to remain competitive and meet customer demands.
To address this challenge, many distribution centers (including us) are investing in advanced technology solutions such as warehouse management systems (WMS) and transportation management systems (TMS). These systems can help to improve visibility and control over inventory, shipments, and delivery times, while also reducing costs and improving efficiency.
Conclusion: What is a distribution center?
In this article, we’ve learned that a distribution center is a critical component of the modern supply chain. It serves as a hub for the movement and storage of goods, and it plays a vital role in ensuring that products reach their intended destination on time and in good condition.
By using a distribution center, businesses can benefit from cost savings, improved efficiency, faster delivery times, and better customer service. However, distribution centers also face challenges such as labor shortages, high turnover rates, increasing demand for speed and accuracy, and the adoption of new technology and automation.
To remain competitive in the modern business environment, distribution centers must continue to adapt and evolve. This requires a commitment to ongoing training and development, the adoption of advanced technology solutions, and a focus on delivering exceptional customer service.
Overall, a well-designed and efficiently run distribution center can help businesses to streamline their supply chain operations, reduce costs, and improve customer satisfaction. As such, it is an essential component of any successful business that relies on the movement of goods.
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Distribution Center FAQs
Yes, a distribution center is a warehouse. But that is a bit like saying a farm is where plants grow. While yes, a farm does grow plants, that is an overly simplistic definition and not the only function of a farm. The same is true with a warehouse and distribution center: a component of what a distribution center does is warehousing, but there is a lot more such as multiple stages of processing at a large scale.
A distribution center is a facility that processes, stores, and distributes goods to customers or other locations such as retail stores.
The most well known example of a distribution center is an Amazon Fulfillment Center. These facilities are used by Amazon to store, process, and ship orders to customers.
The role of automation in distribution centers is to help to increase efficiency and accuracy in by reducing the need for manual labor and streamlining processes. Automated systems such as conveyor belts, sorters, and robots can help to speed up the movement of goods through the facility and reduce errors.
Distribution centers may have a separate area or process for handling returned goods, which involves inspecting and processing the goods to determine whether they can be resold or must be discarded. Depending on the type of product, returns may be processed and returned to inventory, sent to a different facility for processing, or disposed of.
Distribution centers typically use inventory management software to track and manage inventory levels. This software can help to optimize inventory levels, reduce waste, and ensure that products are available when needed.
Distribution centers typically have safety protocols in place to minimize the risk of accidents and injuries. Security measures may include access control, surveillance cameras, and security personnel to protect against theft or damage to goods.
The number of staff required at a distribution center will depend on the size and complexity of the facility, as well as the type of products being handled. Distribution centers may employ a range of personnel, including warehouse workers, supervisors, managers, and administrative staff.
Many distribution centers are adopting new technologies and processes to enable faster and more sustainable delivery. For example, some centers are using drones or autonomous vehicles for last-mile delivery, while others are adopting green energy solutions such as solar or wind power.
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