Reconnecting manufacturing and distribution in supply chains

Our reliance on imports and the disconnect between manufacturing and distribution operations in Australia were exposed during the height of the COVID-19 pandemic. We either couldn’t get products on our shores or locally manufactured products were flying off the shelves because distribution operations couldn’t keep up with significant demand spikes.

This has highlighted the need to strengthen Australia’s supply chain sector, with the Federal Government recently committing $1.5 billion to the sector through their Modern Manufacturing Strategy.

While the government’s strategy is focused on building local manufacturing capability, I believe it will also help reconnect two crucial components of supply chains –manufacturing and distribution. Organisations now have the urgent need and ability to invest in their operations, which will see greater co-location of manufacturing and distribution sites to streamline operations.

While large-scale combined manufacturing and distribution facilities in Australian aren’t new, such as Coca-Cola Amatil’s combined manufacturing, bottling and warehouse facility in Richlands Queensland, the rate of adoption of this strategy is set to reach new heights.

Traditionally in the food, beverage and FMCG sectors, both land and capital has been preserved for the expansion of manufacturing operations, as it was perceived as the area with the highest return on capital. However, with the falling cost of automation and advancements in robotics over the last five years and now the government’s investment in local manufacturing, a significant opportunity has arisen for these manufacturers to invest in optimising their entire supply chain.

By investing in facilities that process, package, store and distribute goods from a single location, organisations can significantly streamline their supply chain, providing a plethora of benefits.

Greater control of inventory levels

Co-located manufacturing and distribution sites provides organisations the ability to be more agile in their manufacturing to build buffer stock, lean out manufacturing over the year and prevent excess inventory. We find that many FMCG businesses are manufacturing lead (i.e. focus on lean operations and the most efficient production processes at the expense of distribution costs). The cost and service requirements for distribution had been the secondary consideration but we have now seen a significant increase in companies looking at their total cost of manufacturing and distribution rather than just focusing on one or the other.

For example, in the cold beverages sector consumption is highly weather dependent. Often during cold patches in the warmer months, there would a backlog of stock sitting in the distribution centres, while the production line of drinks continued, creating excess inventory. This could be a day to day change. By treating manufacturing and distribution as integrated functions rather than separate entities, organisations have greater ability to build buffers when required or slow down manufacturing to wear down stock.

Through greater control of inventory, it will also enable organisations to ensure product quality and greater flexibility to meet the growing demand of smaller and more frequent deliveries, especially with the rise of ecommerce.

Eliminating costly transport legs

Finished goods have traditionally been taken from the manufacturing plant and delivered to an offsite warehouse where it would be stored and then distributed to stores or directly to customers.

A combined manufacturing and distribute site eliminates costly transport legs between an organisation’s production and storage sites, optimising processes and creating immense operational savings.

Rethinking the property strategy

While co-locating manufacturing and distribution functions creates immense benefits from an operational point of view, it also needs to be considered from a property lens.

Traditionally, manufacturing sites have been owner occupied sites to ensure the occupier has control of their manufacturing processes and expensive equipment. Whereas distribution centres have traditionally been occupied on lease structures, providing occupiers with flexibility to expand, consolidate or move their distribution operations.

We are currently seeing a lot of organisations since COVID commenced wanting to release the capital in the owned manufacturing sites to reinvest in co-location and automation in distribution.

Manufacturing and distribution should not be separate parts of an organisation’s supply chain. Organisations who take this time to reconfigure their operations and combine manufacturing and distribution will build greater resilience in supply chains, enabling them to better serve their customers.