What is a Distribution Center? What are the Benefits and Drawbacks?
Discover the essential functions and advantages of distribution centers. Learn how they optimize supply chains and enhance efficiency. Read the article now!
In today’s supply chain, distribution centers play a critical role in getting products from manufacturers to retail stores and customers efficiently. As customer demand continues to rise for faster shipping and better product availability, companies are partner with multiple distributors to boost supply chain efficiency and meet expectations.
But what exactly is a distribution center? How does it differ from a warehouse and why should consumer brands pay attention? Let’s break it down.
How Do Distribution Centers Work?
The entire process inside a distribution center is focused on streamlining operations. Goods arrive in shipping containers from manufacturers or redistributors. Once received, items are scanned and moved into storage systems using automated equipment, conveyor systems and retrieval systems. Inventory is then stored temporarily in storage racks or storage containers before it is picked, packed and shipped out.
The distribution process relies heavily on warehouse management and transportation management software, tracking inventory levels, managing inbound and outbound shipments and coordinating labor across departments. Dedicated buyers are assigned to specific categories to improve forecasting accuracy and product selection.
Types of Distribution Centers
Distribution centers vary based on the type of goods they handle and the needs of the businesses they serve.
Retail distribution centers support large retailers by managing inventory and shipping products directly to retail stores.
Fulfillment centers serve ecommerce companies by processing online orders and handling last-mile delivery.
Food distributors rely on specialized distribution centers with climate control and strict quality control protocols.
Cross dock facilities receive goods and immediately sort and ship them without long-term storage, reducing storage costs and improving efficiency.
Types of Storage Systems in Distribution Centers
Distribution centers use different types of storage systems based on the nature of the goods and the speed at which inventory moves. For consumer brands, these systems can significantly affect order fulfillment times and storage costs:
Pallet Racking Systems: Ideal for storing bulk quantities of packaged goods. Efficient for brands shipping large cases or pallets.
Shelving Systems: Used for smaller, fast-moving items. Perfect for snack brands or cosmetics that move quickly and in smaller units.
Mezzanine Systems: Add extra storage space by building vertically. Helpful for brands with varied SKUs and limited floor space.
Automated Storage and Retrieval Systems (AS/RS): Robots and conveyors manage inventory. Great for high-volume brands with predictable movement.
Temperature-Controlled Storage: Essential for perishable goods like beverages, dairy or frozen products.
Distribution Centers vs Warehouses
Choosing between a warehouse or distribution center depends on your supply chain goals.
Traditional warehouses are best for storing inventory long-term. They focus on storage space, suspended store inventory and static inventory management.
Distribution centers tend to emphasize speed, automation and turnover.
The key differences lie in how each facility supports the distribution network. Automated storage systems, conveyor belts and real-time data are more commonly found in a distribution center than a traditional warehouse.
Why Use a Distribution Center?
There are several reasons why companies choose to use a distribution center.
Streamlined order fulfillment: Distribution centers handle the order fulfillment process more efficiently, helping to reduce lead times and improve customer satisfaction
Lower shipping cost: These centers help businesses lower their shipping costs by strategically placing inventory closer to end users.
Lower overhead: Distribution centers help optimize storage space, which can reduce overhead and lead to cost savings.
Optimized supply chain: Distribution centers also support better supply chain planning. Having several distribution centers across different regions helps businesses buffer against disruptions and meet demand spikes more effectively.
Retail requirement: In some cases, big box retailers do not want to deal with individual brands directly, which forces brands to work with a distributor instead. Getting into a distribution center often requires having an anchor account that pulls enough volume to justify the shelf space.
This means brands must also have the right margins and operational discipline to support distribution center demands, from tight ship windows to scalable inventory management.
Drawbacks of Distribution Centers
Despite the benefits, there are challenges associated with using a distribution center.
Lack of resource to scale: Managing inventory across multiple distribution centers can become complex and requires tight logistics coordination.
Low velocity: distribution centers are not designed for long-term storage. Distribution centers prioritize efficiency and turnover, so slow-selling products can be a liability. If your product does not sell fast enough, you might be forced out of a distribution center to make room for faster-moving inventory.
Low product margin: Distribution centers often take up at least 25% margin, so small brands need to ensure that their cost structure allows for trade spend, middlemen and still staying profitable. Without healthy margins, using a distribution center can quickly eat into your bottom line.
Predatory terms and conditions: There is often a cautionary note around working with distributors. Consumer businesses must fully understand the terms and implications of their agreements or risk being caught off guard by hidden fees, chargebacks and unfavorable conditions. Without clarity and leverage, small businesses can find themselves in financially risky situations.
When Are Brands Ready for Distribution Centers?
For emerging brands or startups, direct distribution can be a more manageable and cost-effective route. This involves shipping directly to retailers or consumers without relying on third-party logistics.
Brands are typically ready to move into distribution centers when they have:
An anchor account or retailer demanding regular volume
Sufficient margins to support distribution center costs, trade spend and distributor fees
Streamlined operations with tight control over inventory management and logistics
The ability to meet strict ship windows and high fulfillment standards
Tested the market and gathered ample customer feedback on their product
If these elements are not in place, the risks can outweigh the benefits. It is important to evaluate your cost structure, operational capacity and retailer relationships before scaling into a distribution center strategy.
Conclusion
Distribution centers are a powerful tool for consumer brands looking to grow their retail footprint and meet increasing customer demand. When used strategically, they can reduce storage costs, improve order fulfillment, handle inventory at scale and create stronger supply chain efficiency.
But working with distributors is not without its risks. Brands must weigh the costs, margins and operational requirements before diving in.
If you are not quite there yet, direct distribution can be a strong interim strategy. What matters most is aligning your logistics with your growth stage and staying flexible as your brand evolves.
FAQ
What is the difference between a warehouse and a distribution center?
A warehouse stores products long-term, while a distribution center focuses on quickly moving inventory in and out to fulfill retail and customer orders.
When should a consumer brand use a distribution center?
Brands should consider using a distribution center when they have high product demand, strong retail partnerships and the operational capacity to manage tight ship windows and inventory turnover. It’s best suited for brands with established margins and anchor accounts.
How much margin do distribution centers typically take from brands?
At least 25% margin. Brands must ensure their cost structure supports this along with trade spend and middlemen, while still remaining profitable.
Can small consumer brands work with distribution centers?
Yes, but small brands must be ready. This means having scalable operations, solid inventory management and retailer pull-through. Otherwise, direct distribution is more cost-effective in the short term.
What are the risks of working with a distributor?
Common risks include hidden fees, chargebacks, complex terms and losing shelf space if your product doesn’t sell fast enough. Brands need to understand agreements thoroughly and ensure they can maintain sales velocity.
