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Invoice Factoring for Distribution Centers

Posted on November 13, 2013 in Distribution

At the heart of every supply chain is the operation of a distribution center. Regardless of the industry, this is a business need that depends on functioning properly and consistently. Distribution centers need to run like well-oiled machines with a manageable and predictable cash flow.

Design of these operations must answer the call of seemingly contradictory requirements: flexibility and fast response times coupled with low-cost accurate service. The question one might ask: What is the best way to design these requirements for an optimal distribution network?

Answering this question leads to another: What is the best way to finance such operations? One of the best ways to meet this challenge is through invoice factoring. Not only will the distribution center have significant working capital, but it can grow without waiting 60 or 90 days for invoice payments. Already, this unique form of financing is an essential part of operations for many distribution centers across the globe.

Invoice factoring serves as a financial connector for having a distribution of this size and scope. Delivery to wholesalers, retailers and customers becomes much easier when the operational focus is on delivery without the hindrance of inadequate cash flow.

Invoices from orders typically filled at a company's distribution center, or warehouse can take several months before payment is received. In the mean time, the center is obligated to meet the demand for deliveries that depend on invoice payments.

Distribution centers can serve multiple purposes for companies of varying sizes. There are some small centers that are used as outposts for a main distribution facility. Space is often used for temporary storage to fill orders in diverse locations. Redistribution of certain goods as purchase orders are received enables companies to provide optimal service.

Manufacturers that operate their own distribution center can also benefit from getting a loan on invoices. Often, orders are placed well in advance by one client but the manufacturer is still waiting for payment for a previous order. Without adequate funds, production is delayed. With adequate funds, production of goods pre-sold to clients is manufactured without interruption. Cash flow is replenished and the manufacturer can buy raw materials.

By borrowing against outstanding receivables, the distribution center has needed funds for many different operational procedures. Funding is received without an interruption to filling customer orders. All distribution channels keep flowing towards profitability.

The Distribution Network

Typically, the distribution network involves taking into account tradeoffs for having a flexible and efficient operation. This helps to guarantee distribution center operations align with business strategy and objectives at the service level. In general, objectives could be directed towards achieving efficiencies throughout all service costs. Some objectives may also support goals set for growth in demand.

The distribution network may consist of complex systems that house different interactive elements. Several variables should be considered within a distribution network such as: • Varying service levels of customers • Varying service levels of channels • Cost structure for operations and transportation • Restrictions that may affect product management • Supply chain flow restrictions, both current and future • Raw material location • Infrastructure for communications

Whether the focus is to lower operating costs for a new facility or to build a new one, the distribution network should be sustainable. Factoring in restraints and requirements will determine the best case for growth goals. Building technical capabilities is also vital to having a network that balances cost, service and flexibility.

Productivity and Labor Costs

More than half of operating costs for a distribution center is associated to direct labor. Containing labor costs without compromising worker productivity is not easy feat. Nevertheless, improving both is paramount to having a successful operation.

For starters, having the ability to buy the right equipment can eliminate unnecessary steps during the work day. Productivity is lost when extra physical steps are required to complete simple tasks. Technology has advanced where imaging scanners can read barcodes on pallets multiple feet away.

This is just one example of how productivity can be improved. Employing such techniques in the distribution center would allow forklift operators to scan labels on high racks or the floor while remaining productive.

Wholesale Distribution

Some distribution centers operate for wholesale businesses, which are careful to select the best way to distribute products. It is not unusual for a wholesaler to adopt more than one method for marketing products. There are channels that work better than others but all require an efficient distribution center to keep products flowing.

Retail Distribution

In retail, traditional warehouses that were designed to house inventory have been replaced by larger and more technical distribution centers. Before, it was important to use warehouses as a holding station to keep product inventories well in advance of selling them in retail stores. Shipments to the facilities required labor-intensive tasks for large infrequent shipments.

Hundreds of people were employed at warehouses and worked on a single shift. Jobs were devoted to loading and unloading trucks, inspecting incoming packages and stocking products throughout the warehouse. A second group of workers would assemble outgoing orders for retailers.

When space opened up after orders were filled, workers had to move products around to make adjustments. Delayed shipments hampered the warehouse, along with early arrival of new products. Low level technology was reflected in the amount of work that was expected for each worker. A lack of material handling equipment such as forklifts and pallets made matters worse.

Today, that focus has shifted to efficient use of space and inventory. Standardized barcodes, high-speed conveyors, computerized databases and laser scanners has improved operations tremendously. A primary objective in new state-of-the-art facilities is maintaining just-in-time inventory to make goods shelf ready. Where most labor was completed manually, the modern distribution center manages the flow of information and products between retailers and manufacturers.

Utilization of advanced practices allow cross-docking of incoming shipments to distribution center. During this procedure, workers unload products at one bay of the facility. The high-speed conveyor can move the same products to another bay for shipment on the same day or another scheduled time.

Cross-docking still requires manual unloading of delivery trucks with some lifting equipment. However, packages are positioned on the conveyor to make it easier to scan the shipping container marker. Packages are weighed to verify the weight on each label. While this occurs, information captured from the shipping container marker is matched against the computerized database where purchase orders are recorded.

Handling Shipments

The next phase in a modern design is to prepare products for shipment to wholesalers, retailers or directly to customers. Typically, the main conveyor also has sub-lines that move packages to the dock that corresponds with the shipment. Packages being shipped to retail stores move along one line. Customer orders move in one direction and wholesale orders move in another.

Depending on the design and purpose of the distribution center, certain types of packages are moved to an area within the facility. The purpose of moving the packages could be to reconsolidate, price mark or to complete other manual processes. Eventually, the various sub-lines end up at the appropriate loading bay. Once the process completes, the computer is updated to reflect that the shipment was loaded onto the truck for delivery.

Completing this process means the distribution center can prepare for payments. Trucks make deliveries to stores or other destinations.

Size Does Matter

According to some industry leaders, modern distribution centers can cover nearly one million square feet. Some centers are larger when they are located in rural or semi-rural areas. Substantial investments are made in technology to manage material handling functions.

Centers this large will also have at least 14 miles of conveyors functioning to sort out products and shipments. In addition, some of these modern centers will take advantage of automated storage and automated retrieval systems. A typical facility may have 300 to 400 workers for several shifts.