More branches is not more reach. Sometimes it is less margin.
Network decisions get made on revenue and on instinct. Once each site, lane and order shows its true cost to serve, the map changes. Network optimization on a real cost base typically cuts distribution cost by 10 to 20 percent, not by serving less, but by serving from the right place.
Cost and Profitability Consulting · 150+ models since 2010 · TDABC
Distribution network optimization on a true cost base typically reduces cost by 10 to 20 percent, because the same order can cost very different amounts depending on which site fulfils it. As an illustrative sector pattern, a metals service-centre network saw order cost nearly double between two sites for the same order. After expanding to many sites, it used cost to serve to close roughly a quarter of its locations, rationalising the network rather than expanding it, and concentrated volume where it was cheapest to fulfil. With logistics costs reaching up to 40 percent of revenue, the site decision is a margin decision.
Geography is not the cost.
Two sites can fulfil the same order at very different cost: different labour rates, different handling efficiency, different distance to the customer, different utilisation. When the network routes by habit or by proximity on a map rather than by cost to serve, it routinely sends orders to the more expensive site. The same order costing nearly double from one location to another is not an edge case; it is the everyday cost of a network that cannot see itself.
The same problem shows up one layer down the network, at the route rather than the site, in logistics, where a minority of routes carries the operation and a long tail quietly drains it. In food and beverage distribution the unit gets smaller still: it is the individual drop, not the site, where the fixed cost concentrates.
THE SAME ORDER, FULFILLED FROM TWO SITES
Illustrative. One order, two sites, nearly twice the cost. Multiply that across a network and the case for rationalising, rather than expanding, becomes a number.
Fewer sites, more margin.
The instinct to add branches for coverage often subtracts margin, because each site carries fixed cost and splits volume. The illustrative metals service-centre network ran the opposite play: having expanded to many sites, it loaded cost to serve, found the duplication, and closed roughly a quarter of its locations, concentrating volume where fulfilment was cheapest. Optimization is not always growth; sometimes the highest-return move is to serve the same customers from fewer, better-placed sites.
Cost every site and lane
Load the true cost to serve of each location and each fulfilment path, not a network average.
Cost the order both ways
For overlapping orders, compare the cost of fulfilling from each candidate site.
Concentrate the volume
Route each order to the cheapest-to-fulfil site, and see which locations are left with too little to justify their fixed cost.
Rationalise the map
Close or repurpose the sites that no longer earn their cost, keeping coverage but cutting 10 to 20 percent.
Frequently asked questions
- How much can distribution network optimization save?
- Network optimization on a true cost base typically reduces distribution cost by 10 to 20 percent, because the same order can cost very different amounts depending on which site fulfils it. The saving comes not from serving less but from serving from the right place, concentrating volume where it is cheapest to fulfil.
- Is more branches always better reach?
- No. As an illustrative sector pattern, a metals service-centre network expanded to many sites, then used cost to serve to close roughly a quarter of its locations, rationalising rather than expanding. Order cost nearly doubled between two sites for the same order, so the site decision is a margin decision, not just a coverage one.
- How does cost to serve drive the network map?
- Once each site, lane and order shows its true cost to serve, you can see which orders should be fulfilled from where. With logistics costs reaching up to 40 percent of revenue, choosing the cheapest-to-fulfil site for each order is one of the largest margin levers a distributor has.
Serve the same customers from the right place.
The Profit Check needs no data upload. It points to where your network is most likely fulfilling orders from the wrong site, and what rationalising is worth.
- Duration
- 12 to 15 minutes
- You receive
- Score, 7 dimensions, sector benchmark
- Price
- Free, no email needed
Proof
A distributor in New Zealand. €1.335M of cost-to-serve made visible, then halved, and 830 loss-making customers brought down to 295.
Read the case study →Who you would be talking to
Miguel Guimarães, Founding Partner
Cost and profitability practitioner for 25+ years. Lectured alongside Professor Robert S. Kaplan at the CFO conference in Amsterdam (2009).
Call +351 910 313 731
