Production and consumption cycles rarely match, so most companies must store their goods while they wait to be sold. For example, Snapper, Toro, and other lawn mower manufacturers run their factories all year long and store up products for the heavy spring and summer buying seasons. The storage function overcomes differences in needed quantities and timing, ensuring that products are available when customers are ready to buy them.

A company must decide on how many and what types of warehouses it needs and where they will be located. The company might use either storage warehouses or distribution centers. Storage warehouses store goods for moderate to long periods. In contrast, distribution centers are designed to move goods rather than just store them. They are large and highly automated warehouses designed to receive goods from various plants and suppliers, take orders, fill them efficiently, and deliver goods to customers as quickly as possible.

For example, Amazon operates more than 100 giant distribution centers, called fulfillment centers, which fill online orders and handle returns. These centers are huge and highly automated. For example, the Amazon fulfillment center in Tracy, California, ­covers 1.2 million square feet (equivalent to 27 football fields). At the center, 4,000 employees control an inventory of 21 million items and ship out up to 700,000 packages a day to Amazon customers in Northern California and parts of the Pacific Northwest. During last year’s Cyber Monday, Amazon’s fulfillment center network filled customer orders at a rate of more than 500 items per second globally.22

Like almost everything else these days, warehousing has seen dramatic changes in technology in recent years. Outdated materials-handling methods are steadily being replaced by newer, computer-controlled systems requiring fewer employees. Computers and scanners read orders and direct lift trucks, electric hoists, or robots to gather goods, move them to loading docks, and issue invoices. For example, to improve efficiency in its massive fulfillment centers, Amazon recently purchased robot maker Kiva Systems:23

When you buy from Amazon, the chances are still good that your order will be plucked and packed by human hands. However, the humans in Amazon’s fulfillment centers are increasingly being assisted by an army of squat, ottoman-size, day-glo orange robots. Amazon now has more than 30,000 of them in 13 fulfillment centers, double the number from a year ago. The robots bring racks of merchandise to workers, who in turn fill boxes. Dubbed the “magic shelf,” racks of items simply materialize in front of workers, with red lasers pointing to items to be picked. The robots then drive off and new shelves appear. The super-efficient robots work tirelessly 16 hours a day, seven days a week. They never complain about the workload or ask for pay raises, and they are pretty much maintenance free. “When they run low on power, they head to battery-charging terminals,” notes one observer, “or, as warehouse personnel say, ‘They get themselves a drink of water.’”

Inventory management also affects customer satisfaction. Here, managers must maintain the delicate balance between carrying too little inventory and carrying too much. With too little stock, the firm risks not having products when customers want to buy. To remedy this, the firm may need costly emergency shipments or production. Carrying too much inventory results in higher-than-necessary inventory-carrying costs and stock obsolescence. Thus, in managing inventory, firms must balance the costs of carrying larger inventories against resulting sales and profits.

Many companies have greatly reduced their inventories and related costs through just-in-time logistics systems. With such systems, producers and retailers carry only small inventories of parts or merchandise, often enough for only a few days of operations. New stock arrives exactly when needed rather than being stored in inventory until being used. Just-in-time systems require accurate forecasting along with fast, frequent, and flexible delivery so that new supplies will be available when needed. However, these systems result in substantial savings in inventory-carrying and inventory-handling costs.

Marketers are always looking for new ways to make inventory management more efficient. In the not-too-distant future, handling inventory might even become fully automated. For example, many companies now use some form of RFID or “smart tag” technology, by which small transmitter chips are embedded in or placed on products and packaging for everything from flowers and razors to tires. Such “smart” products could make the entire supply chain—which accounts for up to 75 percent of a product’s cost—intelligent and automated.

Companies using RFID know, at any time, exactly where a product is located physically within the supply chain. “Smart shelves” would not only tell them when it’s time to reorder but also place the order automatically with their suppliers. Such exciting new information technology is revolutionizing distribution as we know it. Many large and resourceful marketing companies, such as Walmart, Macy’s, P&G, Kraft, and IBM, are investing heavily to make the full use of RFID technology a reality.

The choice of transportation carriers affects the pricing of products, delivery performance, and the condition of goods when they arrive—all of which will affect customer satisfaction. In shipping goods to its warehouses, dealers, and customers, the company can choose among five main transportation modes: truck, rail, water, pipeline, and air along with an alternative mode for digital products—the internet.

Trucks have increased their share of transportation steadily and now account for 40 percent of total cargo ton-miles (a ton of freight moved one mile) transported in the United States. Trucks are highly flexible in their routing and time schedules, and they can usually offer faster service than railroads. They are efficient for short hauls of high-value merchandise. Trucking firms have evolved in recent years to become full-service providers of global transportation services. For example, large trucking firms now offer everything from satellite tracking, internet-based ­shipment management, and logistics planning software to cross-border shipping operations.24

Railroads account for 26 percent of the total cargo ton-miles moved. They are one of the most cost-effective modes for shipping large amounts of bulk products—coal, sand, minerals, and farm and forest products—over long distances. In recent years, railroads have increased their customer services by designing new equipment to handle special categories of goods, providing flatcars for carrying truck trailers by rail ­(piggyback), and providing in-transit services such as the diversion of shipped goods to other destinations en route and the processing of goods en route.

Water carriers, which account for 7 percent of the cargo ton-miles, transport large amounts of goods by ships and barges on U.S. coastal and inland waterways. Although the cost of water transportation is very low for shipping bulky, low-value, nonperishable products such as sand, coal, grain, oil, and metallic ores, water transportation is the slowest mode and may be affected by the weather. Pipelines, which account for 17 percent of the cargo ton-miles, are a specialized means of shipping petroleum, natural gas, and chemicals from sources to markets. Most pipelines are used by their owners to ship their own products.

Although air carriers transport less than 1 percent of the cargo ton-miles of the nation’s goods, they are an important transportation mode. Airfreight rates are much higher than rail or truck rates, but airfreight is ideal when speed is needed or distant markets have to be reached. Among the most frequently airfreighted products are perishables (such as fresh fish, cut flowers) and high-value, low-bulk items (technical instruments, jewelry). Companies find that airfreight also reduces inventory levels, packaging costs, and the number of warehouses needed.

The internet carries digital products from producer to customer via satellite, cable, phone wire, or wireless signal. Software firms, the media, music and video companies, and education all make use of the internet to deliver digital content. The internet holds the potential for lower product distribution costs. Whereas planes, trucks, and trains move freight and packages, digital technology moves information bits.

Shippers also use multimodal transportation—combining two or more modes of transportation. Eight percent of the total cargo ton-miles are moved via multiple modes. Piggyback describes the use of rail and trucks; fishyback, water and trucks; trainship, water and rail; and airtruck, air and trucks. Combining modes provides advantages that no single mode can deliver. Each combination offers advantages to the shipper. For example, not only is piggyback cheaper than trucking alone, but it also provides flexibility and convenience. Numerous logistics companies provide single-source multimodal transportation solutions.

Companies manage their supply chains through information. Channel partners often link up to share information and make better joint logistics decisions. From a logistics perspective, flows of information, such as customer transactions, billing, shipment and inventory levels, and even customer data, are closely linked to channel performance. Companies need simple, accessible, fast, and accurate processes for capturing, processing, and sharing channel information.

Information can be shared and managed in many ways, but most sharing takes place through electronic data interchange (EDI), the digital exchange of data between organizations, which primarily is transmitted via the internet. Walmart, for example, requires EDI links with its more than 100,000 suppliers through its Retail Link sales data system. If new suppliers don’t have the required EDI capability, Walmart will work with them to find and implement the needed tools.25

In some cases, suppliers might actually be asked to generate orders and arrange deliveries for their customers. Many large retailers—such as Walmart and Home Depot—work closely with major suppliers such as P&G or Moen to set up vendor-managed inventory (VMI) systems or continuous inventory replenishment systems. Using VMI, the customer shares real-time data on sales and current inventory levels with the supplier. The supplier then takes full responsibility for managing inventories and deliveries. Some retailers even go so far as to shift inventory and delivery costs to the supplier. Such systems require close cooperation between the buyer and seller.

Most companies assign responsibility for various logistics activities to many different departments—marketing, sales, finance, operations, and purchasing. Too often, each function tries to optimize its own logistics performance without regard for the activities of the other functions. However, transportation, inventory, warehousing, and information management activities interact, often in an inverse way. Lower inventory levels reduce ­inventory-carrying costs. But they may also reduce customer service and increase costs from stockouts, backorders, special production runs, and costly fast-freight shipments. Because distribution activities involve strong trade-offs, decisions by different functions must be coordinated to achieve better overall logistics performance.

The goal of integrated supply chain management is to harmonize all of the company’s logistics decisions. Close working relationships among departments can be achieved in several ways. Some companies have created permanent logistics committees composed of managers responsible for different physical distribution activities. Companies can also create supply chain manager positions that link the logistics activities of functional areas. For example, P&G has created product supply managers who manage all the supply chain activities for each product category. Many companies have a vice president of logistics or a supply chain VP with cross-functional authority.

Finally, companies can employ sophisticated, system-wide supply chain management software, now available from a wide range of software enterprises large and small, from Oracle and SAP to Infor and Logility. For example, Oracle’s supply chain management software solutions help companies to “gain sustainable advantage and drive innovation by transforming their traditional supply chains into integrated value chains.”26 It coordinates every aspect of the supply chain, from value chain collaboration to inventory optimization to transportation and logistics management. The important thing is that the company must coordinate its logistics, inventory investments, demand forecasting, and marketing activities to ­create high market satisfaction at a reasonable cost.

Companies must do more than improve their own logistics. They must also work with other channel partners to improve whole-channel distribution. The members of a marketing channel are linked closely in creating customer value and building customer relationships. One company’s distribution system is another company’s supply system. The success of each channel member depends on the performance of the entire supply chain. For example, furniture retailer IKEA can create its stylish but affordable furniture and deliver the “IKEA lifestyle” only if its entire supply chain—consisting of thousands of merchandise designers and suppliers, transport companies, warehouses, and service providers—operates at maximum efficiency and with customer-focused effectiveness.

Smart companies coordinate their logistics strategies and forge strong partnerships with suppliers and customers to improve customer service and reduce channel costs. Many companies have created cross-functional, cross-company teams. For example, Nestlé’s Purina pet food unit has a team of dozens of people working in Bentonville, Arkansas, the home base of Walmart. The Purina Walmart team members work jointly with their counterparts at Walmart to find ways to squeeze costs out of their distribution system. Working together benefits not only Purina and Walmart but also their shared, final consumers.

Other companies partner through shared projects. For example, many large retailers conduct joint in-store programs with suppliers. Home Depot allows key suppliers to use its stores as a testing ground for new merchandising programs. The suppliers spend time at Home Depot stores watching how their product sells and how customers relate to it. They then create programs specially tailored to Home Depot and its customers. Clearly, both the supplier and the customer benefit from such partnerships. The point is that all supply chain members must work together in the cause of bringing value to final consumers.

Although most big companies love to make and sell their products, many loathe the associated logistics “grunt work.” They detest the bundling, loading, unloading, sorting, storing, reloading, transporting, customs clearing, and tracking required to supply their factories and get products to their customers. They hate it so much that many firms outsource some or all of their logistics to third-party logistics (3PL) providers such as Ryder, Penske Logistics, BAX Global, DHL Logistics, FedEx Logistics, and UPS Business Solutions.

For example, UPS knows that, for many companies, logistics can be a real nightmare. But logistics is exactly what UPS does best. To UPS, logistics is today’s most powerful force for creating competitive advantage. “We logistics,” proclaims UPS. “It makes running your business easier. It can make your customers happier. It’s a whole new way of thinking.” As one UPS ad concludes: “We love logistics. Put UPS to work for you and you’ll love logistics too.”

At one level, UPS can simply handle a company’s package shipments. But on a deeper level, UPS can help businesses sharpen their own logistics systems to cut costs and serve customers better. At a still deeper level, companies can let UPS take over and manage part or all of their logistics operations. For example, consumer electronics maker Toshiba lets UPS handle its entire laptop PC repair process—lock, stock, and barrel. And UPS not only delivers packages for online shoe and accessories marketer Zappos, it also manages Zappos’s important and complex order returns process in an efficient, customer-pleasing way.27

3PL providers like UPS can help clients tighten up sluggish, overstuffed supply chains; slash inventories; and get products to customers more quickly and reliably. According to one report, 86 percent of Fortune 500 companies use 3PL (also called outsourced logistics or contract logistics) services. General Motors, P&G, and Walmart each use 50 or more 3PLs.28

Companies use third-party logistics providers for several reasons. First, because getting the product to market is their main focus, using these providers makes the most sense, as they can often do it more efficiently and at lower cost. Outsourcing logistics typically results in a 10 to 25 percent cost savings.29 Second, outsourcing logistics frees a company to focus more intensely on its core business. Finally, integrated logistics companies understand increasingly complex logistics environments.