Inventory management is an important part of manufacturing operations. Ensuring a consistent and steady level of parts and raw materials, as well as completed goods in a make-to-stock situation, is a must. This becomes more important when lean practices such as just-in-time require an extremely low level of stock.
For job shops and small- to mid-sized manufacturers, the solution is to apply logistical practices that minimize the need for inventory control through warehousing. The two most common methods are drop shipments and cross-docking. The question is, what best suits the business?
Cross-docking: Logistics as inventory
Among the two choices, cross-docking is the more popular. Logistics firm ShipEdge referred to it as a strategy in which goods stay only in a warehouse or distribution center for a limited period of time. In some cases, the systems functions akin to a production assembly line: A truck offloads the merchandise at one side of the dock, employees in conjunction with enterprise resource planning technology sort and pick the goods based on where they need to go, then the items get placed on a different truck for shipment to the customer. Organization methods are dependent on whether the truck does multiple shipments for a single route or multiple goods for a single customer.
The primary benefit for manufacturers is it allows versatility in overhead, according to SpeedCommerce. For example, both suppliers and distributors don’t necessarily need to run warehouses to store items. That allows a reduction in various costs, such as fewer employees to conduct inventory and maintain stocks and less warehouse space. It’s also a great solution for bulk orders, since distribution centers can perform logistical functions such as packaging and labeling. However, there are certain risks involved, especially when running a make-to-order operation. Primarily, there is the matter of the distribution centers trusting manufacturers to deliver a product in working condition. If a company cannot provide orders in a timely and effective manner, they’re less likely to get the support from distribution centers needed to access cross-docking operations, or will be forced to pay a heavy fee that outweighs the benefits.
Drop shipments: Going direct to the customer
While cross-docking mitigates the need to have a warehouse space, drop shipping minimizes the need of a distributor. The process, as noted by SITMI Management Learning in an article for LinkedIn, requires the distributor, whether as a retailer or otherwise, to reduce its role to merely a supplier of shipping information. To put it more simply, shipping becomes a direct-to-customer matter on the manufacturer’s side, with the distributor merely providing the information for companies to deliver the product themselves. This is all in return for a fee.
In make-to-order operations, drop shipping is particularly beneficial. It means developing a direct relationship with the customer, which is quite useful in business-to-business environments where there is more need for consistent communications. Moreover, it limits the necessity of working with distributors to get products to where they need to go. However, there are also issues. Because manufacturers work with the clients directly, they must handle customer service issues that will inevitably appear. Moreover, it requires getting accurate information on the customer, for any mistakes can lead to otherwise avoidable delays. Finally, the company has to provide the entire logistics structure themselves, which can be costly. When a business considers its choices, it must take into account what level of responsibility and control it’s willing to take.