“Centralized vs. Decentralized Distribution Network: Which is More Efficient for FMCG Supply Chains?”

As of 2021, the global FMCG (fast-moving consumer goods) market size is estimated, shared by Allied Market research in their report (Jan 2023), to be around USD 11.3 trillion and is projected to reach $18.9 trillion by 2031, registering a CAGR of 5.1% from 2022 to 2031. The growth is attributed to the rising population, increasing urbanization, growing middle-class population, and changing consumer preferences. The FMCG market includes food and beverages, personal care products, household cleaning products, and other consumables typically sold at a low price point and have a short shelf life.

Importance of designing an effective distribution network

Designing an efficient distribution network is a critical aspect of any supply chain. A distribution network refers to the system of warehouses, transportation, and logistics services that a company uses to move its products from manufacturing sites to its end customers. Here are some of the reasons why designing a distribution network is essential for any supply chain:

• Enhances customer satisfaction: A well-designed distribution network ensures that products are delivered to customers promptly, efficiently, and cost-effectively. This can help to improve customer satisfaction and loyalty, which can translate to increased sales and revenue for the business.
• Improves cost efficiency: An efficient distribution network can help to reduce transportation and handling costs, optimize inventory levels, and improve supply chain management, which can lead to cost savings for the business.
• Enhances flexibility: An effective distribution network can give businesses greater flexibility to respond to changes in customer demand, market conditions, or other unforeseen events. Companies can minimize the impact of supply chain disruptions by having multiple distribution channels and backup options.
• Streamlines operations: A well-designed distribution network can help to streamline processes and reduce inefficiencies. By optimizing transportation routes and storage locations, businesses can reduce the time and resources required to move products from one location to another.
• Enables expansion: An effective distribution network can support business expansion by providing the infrastructure and resources necessary to reach new markets and customer segments. This can help businesses to achieve growth and increase market share.

A glance at FMCG markets:

Emerging economies such as China, India, and Brazil are expected to be major growth drivers for the FMCG market, with increasing consumer spending and rising disposable incomes. The COVID-19 pandemic has also impacted the FMCG market, with increased demand for essential products such as packaged food, personal hygiene products, and cleaning supplies.

Regarding product categories, food, and beverage are the most significant segments in the FMCG market, accounting for a substantial share of the overall market. The personal care segment is also expected to grow significantly, driven by increasing consumer focus on health and wellness and raising awareness of personal grooming and hygiene.

The global FMCG market is significant and growing, driven by rising population, urbanization, and changing consumer preferences. Despite challenges such as increasing competition and evolving regulatory landscape, the FMCG market is expected to grow steadily in the coming years.

The fast-moving consumer goods (FMCG) industry operates in a highly competitive and dynamic market. As such, efficient supply chain management is essential for businesses operating in this sector. One of the critical decisions FMCG companies need to make is adopting a centralized or decentralized distribution network. In this article, we will explore the debate on the impact of centralised and decentralised distribution networks on FMCG supply chain efficiency.

Centralised Distribution Network

A centralised distribution network consolidates all distribution activities in a single location. This approach is commonly used in businesses with an extensive product range and a high sales volume. The advantages of a centralised distribution network include:

• Cost-effectiveness: By consolidating distribution activities in a single location, businesses can use economies of scale, reducing transportation, storage, and handling costs.
• Better Control: A centralised distribution network enables businesses to exercise greater control over their inventory levels, as all products are stored in a single location. This makes managing stock levels easier and ensures products are delivered to stores when needed.
• Improved Planning: With a centralised distribution network, businesses can better plan their production and inventory levels, leading to improved supply chain planning and management.

However, a centralised distribution network can also have some disadvantages, including:

• Longer lead times: As products are shipped from a single location, it can take longer to get them to retail outlets located far away. This can result in longer lead times, which can impact product availability.
• Higher Risk: A centralized distribution network presents a higher risk to businesses in the event of supply chain disruptions, such as natural disasters or transportation strikes. If the distribution center is affected, it can lead to delays in product delivery and even stockouts.

Successful Case Studies:

There have also been instances in the FMCG sector where businesses have successfully implemented a centralized distribution network, improving efficiency and cost savings. Here are a few examples:

1. Procter & Gamble: Procter & Gamble (P&G), a leading FMCG company, implemented a centralized distribution network for its beauty products in the UK. The network consisted of a single distribution center serving all of P&G’s beauty brands, including Olay, Max Factor, and Pantene. The centralized distribution network enabled P&G to improve supply chain efficiency, reduce transportation costs, and optimize inventory levels. As a result, the company achieved significant cost savings and improved customer service levels.
2. Unilever: Another major FMCG company, Unilever, implemented a centralized distribution network for its ice cream products in Europe. The network consisted of a single distribution center in the Netherlands that served all of Unilever’s ice cream brands, including Magnum, Cornetto, and Ben & Jerry’s. The centralized distribution network enabled Unilever to reduce transportation costs, improve delivery times, and optimize inventory levels. The company achieved significant cost savings and improved supply chain efficiency.
3. Nestle: A global FMCG company, Nestle implemented a centralized distribution network for infant nutrition products in Europe. The network consisted of a single distribution center in Germany that served all of Nestle’s infant nutrition brands, including Gerber, NAN, and Nido. The centralized distribution network enabled Nestle to improve supply chain efficiency, reduce transportation costs, and optimize inventory levels. As a result, the company achieved significant cost savings and improved customer service levels.

These examples illustrate that a centralized distribution network can lead to significant cost savings and improved supply chain efficiency, especially for businesses with a broad product range and high sales volume. However, it is important for businesses to carefully evaluate their distribution needs and choose a distribution network best suited to their requirements. Factors such as product demand, customer geography, and supply chain risks should be considered when making this decision.

Decentralized Distribution Network

A decentralized distribution network involves multiple distribution centers, each serving a specific geographic area. This approach is commonly used in businesses with a broad geographic spread of customers or where product demand varies significantly by region. The advantages of a decentralized distribution network include:

• Faster lead times: By having distribution centers closer to retail outlets, businesses can reduce lead times and improve product availability.
• Lower Risk: A decentralized distribution network reduces the risk of supply chain disruptions, as the impact of any disruption is limited to a specific geographic area.
• Increased Flexibility: A decentralized distribution network enables businesses to respond quickly to changes in demand or market conditions. By having multiple distribution centers, companies can quickly adapt to changes in consumer preferences or shifts in demand.

However, a decentralized distribution network can also have some disadvantages, including:

• Higher Costs: A decentralized distribution network can increase operating costs, as it requires multiple distribution centers and increased transportation and handling costs.
• Reduced Control: A decentralized distribution network can make it more challenging to manage inventory levels, as products are stored in multiple locations.

Successful Case Studies:

Here are a few recent examples of businesses that have implemented a decentralized distribution network with success:

1. Amazon: Amazon has implemented a decentralized distribution network with multiple fulfillment centers across the United States to improve delivery times and reduce shipping costs. This approach has enabled Amazon to offer same-day and two-day delivery to its customers, which has helped the company to maintain a competitive edge in the e-commerce industry.
2. Zara: A leading fashion retailer, Zara has implemented a decentralized distribution network with multiple distribution centers worldwide. This approach has enabled the company to quickly respond to changing fashion trends and reduce product lead times. Zara’s decentralized distribution network also helps the company to manage inventory levels more efficiently and reduce the risk of supply chain disruptions.
3. Coca-Cola: Coca-Cola has implemented a decentralized distribution network for its beverages in India, with multiple distribution centers serving specific geographic regions. This approach has enabled the company to reduce transportation costs and improve customer delivery times. Coca-Cola’s decentralized distribution network has also helped the company to adapt to regional differences in consumer preferences and product demand.
4. Walmart: Walmart has implemented a decentralized distribution network with multiple distribution centers across the United States. This approach has enabled the company to reduce transportation costs and improve store delivery times. Walmart’s decentralized distribution network also helps the company to manage inventory levels more efficiently and reduce the risk of stockouts.

These examples illustrate that a decentralized distribution network can provide businesses greater flexibility, faster lead times, and improved supply chain efficiency. By having multiple distribution channels and backup options, businesses can minimize the impact of supply chain disruptions and respond quickly to changes in consumer demand or market conditions.

Conclusion

In conclusion, centralised and decentralized distribution networks have advantages and disadvantages. The choice between them depends on various factors, such as the nature of the business, product demand, and the geographic spread of the customer base. To maximize FMCG supply chain efficiency, companies must carefully evaluate their distribution needs and choose a network best suited to their requirements. Ultimately, the key to success in the FMCG industry is a supply chain that is agile, efficient, and responsive to changes in demand and market conditions.