What is Distribution Center: Role, Advantages, and Disadvantages

A distribution center has become an essential part of the supply network for many eCommerce and other businesses. It is a package handling center or a warehouse that maintains an extensive stock of multiple products from various clients. Depending on the nature and type of these products, there may be an air conditioning or refrigeration system to aid with their proper preservation. From the distribution center, these goods will get distributed to resellers, wholesalers, or directly to end customers.

Role of a Distribution Center

The market demand determines the number of distribution centers. There will be more of them if it is high. These centers play multiple roles in processing goods from the manufacturer to the customer. Let us consider some of these roles:

Temporary Holding Facility: Unlike a regular warehouse, the distribution center stores products only for the short-term. It is more focused on maintaining a quick and efficient flow of goods. It removes things that are no longer in demand and gets more supplies of those that are.

Goods Terminal: A distribution center acts as a terminal that receives products in both small and large quantities. You can group the small number of goods or break down the large bulks into manageable sizes to make it easier to send them onward.

Docking Center: A distribution center serves as a docking area where you can group all the products that are going to the same destination. You can pack them and arrange for their dispatch.

Assembly Facility: It may be necessary to assemble some products—such as bicycles or furniture—before sending them to resellers, wholesalers, or customers. The distribution center can serve as a convenient assembly facility for such goods.

Canceled Goods Depot: Product cancellations and returns are a routine occurrence in eCommerce businesses. These canceled goods come back to the distribution center and then get sent to the manufacturer’s work facility or warehouse.

Advantages of a Distribution Center

Many companies find it advantageous to have a distribution center for some of the following reasons:

  • It offers more shopping convenience for customers as the company can cater to as many of them as possible without having to manage multiple store operations.
  • It is time-saving as the distribution center’s integrated software system can monitor and process orders and move goods to make faster deliveries to the customers.
  • It is cost-effective since it allows the company to expand or scale down its operations without having to invest in or divest from separate real estate infrastructure.
  • It offers more buying choices to retailers and other customers since they can make purchases as needed from the distribution center instead of having to buy bulk goods that they have nowhere to store.
  • It makes it more financially viable for retailers and other customers to purchase the products by breaking large bulks into smaller bulks.
  • It makes it easier for the company to accept returns and make replacements.
  • It makes it possible for the company to get customer feedback from resellers and use that to improve their products.
  • It helps the company to keep track of which goods are in more demand in the market and adjust its inventory accordingly.

Disadvantages of a Distribution Center

Along with the undoubted advantages, there are some disadvantages too in using a distribution center:

  • Depending on the products and their storage requirements, the company may have to pay high rent and utility fees for their maintenance and processing at the distribution center, and these costs could offset its profits.
  • There can be errors in inventory control management about product quantities as well as about how perishable some products are. Such costly mistakes can end up cutting into your revenue.
  • The company can suffer extensive financial losses if it keeps all of its inventory is in a single distribution center, and that is affected or destroyed by a natural calamity or an accident.

If you are thinking of using a distribution center to maintain your inventory, it is advisable to weigh the advantages and disadvantages carefully. You should also consider the market demand for your goods and decide if renting a distribution center will have long-term business benefits.

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