There are many benefits to cross-docking and the best distribution software allows distributors to maximize these benefits. However, before launching into the benefits, it makes sense to clarify the term “cross-docking.” Common usage of the term cross-docking in the supply chain, refers to two different but similar processes. For some, cross-docking means getting goods in then immediately sending them out. Essentially the distributor’s warehouse is organized to support the immediate receiving, sorting, and, if necessary, re-packaging of goods from suppliers, then immediately sending the goods to customers, without ever taking the goods into inventory. For others, cross-docking is a misused but more common term that is synonymous with drop-shipping. Typically drop-shipping is used for items that the distributor doesn’t regularly stock or that are currently out of stock or for unusually large orders of a particular item. To drop-ship, the distributor takes the order from the customer and simultaneously issues a purchase order to the supplier (often the manufacturer), requesting the supplier to ship the item directly to the customer. The customer oftentimes does not know, nor cares, that the item came directly from the manufacturer and that the distributor just facilitated the transaction.
In both of these cases, the distributor got all the benefits of not having to put the items into inventory. JIT systems originated in manufacturing but are now widely used in the supply chain. Through cross-docking, the distributor is, in effect, the JIT conduit between the supplier and the customer. In this article we’ll focus on the drop-shipping sense of the term cross-docking, but the observations are applicable to both meanings of cross-docking.
Benefits of Cross Docking
The best distribution software lets distributors reap the many cost- and time-saving benefits of cross-docking. Fundamentally, cross-docking alleviates the need for inventorying and warehousing products. When done right, cross-docking:
- reduces labor costs,
- eliminates inventory holding costs,
- frees up working capital and warehouse space,
- reduces delivery time and transportation costs,
- lowers warehouse expense because less square footage is needed,
- savings from cross-docking can be passed onto customers, allowing distributors to retain and acquire new customers by pricing more competitively, and
- fewer “touches” mean less risk of handling damage which translates to fewer returns and happier customers.
Simply put, cross-docking saves time and money while improving customer satisfaction.
Clearly, there are many advantages to this JIT or “no-inventory” model, but there are also potential problems, as well. With that in mind, here are seven great tips for cross-docking that will help you reap the most reward from the practice, while also avoiding the common pitfalls.
Tips for Cross-Docking
- Choose Products Most Appropriate for Cross-Docking
Your business distribution software should provide you the information necessary to determine which products work best for the practice of cross-docking. First and foremost, some of the best choices for cross-docking are items that have a stable and constant demand. Other great candidates are products that don’t need much work to make them consumer-ready, in the sense that they’re already packaged, barcoded, and ready for sale. Furthermore, oversized, heavy, and difficult or expensive to ship items (think large machinery, for instance) make good cross-docking products. Finally, definitely consider cross-docking products when the cost of a stockout is high. Other good candidates include:
- Pre-inspected products that don’t require quality control on your end,
- Perishable goods,
- Promotional or seasonal items, and
- Newly launched products whose future demand is difficult to quantify.
- Choose the Right Kind of Cross-Docking for Your Needs
There are actually a number of different ways to cross-dock products, and it all depends on what you do, who your customers are, and who your suppliers are. For instance, if you’re a distributor, you may have customers ask you to have product cross-docked to them directly from the manufacturer. On the other hand, you may be the one drop-shipping directly to an end customer on behalf of a retailer. Depending on the type or types of cross-docking you choose to engage in, you’ll have to have different policies and rules in place to address the different scenarios. Spend some time defining and communicating your returns policies to your customers.
- Consider Offering a Wider Selection of Products to Offset Lower Margins
For distributors who have product cross-docked from the manufacturer directly to their customers, one of the major downsides of cross-docking is a lower margin on products, because manufacturers often charge a convenience fee. However, because you don’t have to pay upfront for inventory that’s cross-docked, it means you use that working capital to offer a wider range of products. For instance, say you’re a distributor of restaurant equipment. Instead of offering just restaurant equipment to your customers because you have to pay upfront to inventory them, you can have your restaurant equipment cross-docked directly from the manufacturer which frees up capital you can use to inventory and sell restaurant furniture. In the end, although you end up with lower margins on the restaurant equipment, you have a larger product line, appeal to a wider customer base, and have more opportunities to make a profit.
- Have a Solid Plan in Place to Track Cross-Docked Inventory
Another potential drawback of cross-docking is that you have less control over the inventory, and if you want to keep your customers happy, then it’s essential that you have measures in place to track products and orders. This can work in both ways: either the manufacturer is shipping directly to your customers, and the inventory never even enters your warehouse, or you’re drop-shipping directly to customers, and the inventory involved goes through different channels than your regular product line. In either case, it’s necessary to have a strategy in place that allows you to keep a close eye on your orders, your inventory, and your fulfillments. You need software for distribution companies that manages and tracks your inventory. These distribution software solutions can help you keep an eye on where products are, where they’re going, and when they arrive.
- Choose Your Partners Wisely
Because of the lack of control during cross-docking, it’s important that you choose partners that you trust. Just as you want to have sturdier measures in place to track cross-docked product, so too, you want to carefully vet the manufacturers that you have drop-ship for you or the retailers that you drop-ship for. The main reason for this is that you are ultimately the one responsible for making sure that product gets where it needs to go, and customer dissatisfaction can seriously damage your reputation if you choose the wrong partners. For instance, say that you ask a manufacturer drop-ship a refrigerator to one of your customers. You’re relying on that partner not only to ship the item but also to ship the right item to the right customer, on time. That’s a lot of trust you’re putting into another business, and a vetting process will help you choose our partners wisely. Similarly, if you’re cross-docking on behalf of a retailer, you’re trusting that retailer to provide you with all the right information to ensure you get the right product to the right customer, on time. All of this requires software for distribution companies capable of tracking cross-docked or drop-shipped items. The best distribution software should also give you the ability to comprehensively manage linked special orders and POs and to easily send RFQs to multi-source products at the best prices and terms.
- Have a Clear Policy in Place with All Partners Involved
Part and parcel of choosing the right partners is making sure you have a policy laid out so that all parties involved understand their rights and responsibilities. There are many different points along the way where cross-docking can go wrong, and a solid policy will help to avoid issues such as:
- Who deals with returns and how they’re managed,
- Who takes responsibility for lost shipments,
- How shipping costs are calculated and paid for, and by whom,
- How backorders are handled,
- How tracking numbers and order information are shared, and
- How partners communicate with each other regarding inventory availability and stock-outs.
Having in place strong business distribution software that allows all these issues to be configured correctly is critically important.
- Make Sure the Policy Is Clear for Customers, Too
Aside from profit, customer satisfaction is the main goal that you must keep in mind when making any business decision, because if the customer isn’t happy, then your business isn’t happy and won’t grow. And whether your customer is the retailer (where the manufacturer drop-ships) or the end consumer, then you must ensure that your cross-docking policies are clearly laid out and understandable for the customer. Otherwise, this could lead to confusion and disappointment, and possibly a returned product, lost sales, and a bad reputation for your business.
Cross-docking can be a great way for businesses to sell products without having to spend time and money inventorying and warehousing them, but the practice must be done properly if you want to gain the most benefit. The key points to remember about cross-docking are that you have to choose the right products and the right type of cross-docking for your needs, and you must have clear strategies and policies in place to track and manage orders and expectations. Finally, your policies and strategies must be clear to all parties involved, including suppliers, retailers, and end consumers, because this is the only way to ensure that cross-docking will work for everybody and that your customers will be happy with the process. For more information about how ADS Solutions’ software for distribution companies facilitates cross-docking contact us today. We’d be happy to review your current cross-docking procedures and discuss whether our Accolent ERP software can help your distribution business.