Anyone who has ever engaged in ecommerce can attest to how easy it has become to purchase goods online. Distribution centers are a major reason any online purchasing has become so practical, not to mention why shipping times have become faster than ever before. These facilities are used to store goods before they're shipped off to end customers, whether the customer is an individual consumer, a wholesaler or a retail establishment. Distribution centers rely on strategic locations and efficient practices to accelerate order delivery and increase company profitability.
What Are Distribution Centers?
Distribution centers are logistics facilities that store finished goods before they're picked and packed to fulfill customer orders. In a sense, they can be thought of as specialized, strategically located warehouses. Distribution centers play a key role in the supply chain, particularly with regard to helping fulfill customer orders more quickly and accurately while keeping associated costs down.
Distribution centers can be run and managed differently depending on a business's needs or structure. For example, some retail companies build and manage their own distribution centers, while some partner with third-party logistics (3PL) providers. Other companies center their entire business model around being specialized distribution centers that sell to other companies, such as wholesale food distributors that supply to restaurants and hospitality companies.
Distribution center vs. warehouse:
Because they tend to look similar and distribution centers tend to take on warehousing capabilities like goods storage, "distribution center" and "warehouse" are often used interchangeably. But fundamental differences exist between the two, with each facility type designed to handle different operations.
- Warehouses are spacious buildings in which large quantities of goods are stored, often long term. Goods stored in warehouses are usually supplied to manufacturers or wholesalers rather than directly to consumers. It's uncommon for warehouses to actively handle order processing and fulfillment tasks in their day-to-day operations.
- Distribution centers are more like all-in-one logistics operations that store, pick, pack and ship products to fulfill customer orders — either to retail locations or directly to individual consumers. Distribution centers are commonly used by online retailers and ecommerce companies. Compared with warehouses, distribution centers tend to focus less on long-term storage and more on the flow of goods. This calls for processes that can keep fulfillment speeds up and costs down.
Key Takeaways
- Distribution centers form the basis of the modern supply chain network.
- They're used to store, pick, pack and ship products to fulfill customer orders.
- Facility organization and careful planning are keys to running a streamlined distribution operation.
- The right technology, from warehouse automation technology to enterprise resource planning (ERP) solutions, can also help distribution centers run efficiently.
Distribution Centers Explained
Distribution centers essentially infuse traditional warehouse practices with the capabilities of a fulfillment center to establish storage solutions that help companies quickly send goods to their customers. Specifically, distribution centers store large amounts of inventory and are located closer to their eventual delivery locations, making shipping faster, easier and more cost-effective. For example, a retailer might sell thousands of products from hundreds of suppliers, if not more. By having its own network of distribution centers or working with a 3PL, the retail company can store all sold goods from all suppliers in centralized locations. Instead of replenishing each retail store location's shelves by ordering from each supplier (which requires several shipments of goods coming from several locations), each retail store can receive one lump shipment from the nearest distribution center.
Distribution center management typically combines traditional warehouse best practices, such as inventory management, space optimization and quality control, with fulfillment practices, like order processing and product return and exchange workflows. To enhance the process, many companies use technology solutions, including automation or mobile data collection.
Why Do Companies Use Distribution Centers?
At some point, a business may begin to carry enough products or serve enough customers that it outgrows its storage space. The larger a business and its customer base become, the more challenging it is to keep up with demand. To grow and expand sustainably while effectively managing warehouse operations and providing top-notch customer service, the business's next step might be to open a distribution center or work with a 3PL. This centralized, logistical hub aims to efficiently consolidate orders, streamline operations and improve customer experience.
Distribution centers can be selected in strategic locations that reduce the cost and time it takes to get a product to its end destination. They can store larger quantities of goods for long periods of time, enabling companies to pay bulk rates for extra goods in advance. And when enough goods are on hand, it helps ensure that the right products are always available when orders are ready for picking.
How Distribution Centers Work
There's no one set way a distribution center operates; that will depend on the nature of the industry. For example, some distribution centers ship items only to stores; others may focus on direct-to-consumer purchases and some do both. A distribution center's daily operations are often driven by demand, unlike a more traditional warehouse, which stores as much of as many products as it can.
Regardless of the industry, suppliers or manufacturers typically ship their products directly to the appropriate distribution centers, where they are received and put away in their appropriate storage locations. When it's time for delivery, employees handle the necessary fulfillment and logistics processes. In other words, the appropriate items are picked from stock, packed and shipped every time a customer order is made. An alternative approach is a distribution center's use of cross-docking — a strategy in which fast-moving inbound freight is immediately moved to a separate outbound dock to bypass the need for storage and therefore accelerate the delivery process.
Smaller companies may choose to outsource their distribution networks to a dedicated logistics organization, while larger companies are more likely to own and run their own distribution networks that are designed to transport goods from manufacturers or wholesalers to retailers or consumers. Large-scale companies may have several distribution centers located throughout the store's markets, with each distribution center either serving an established number of stores or a set geographical region if it's a direct-to-consumer operation.
A key part of the process is distribution management, which aims to oversee the transport of products from supplier or manufacturer to wholesaler, retailer or end customer. This can include activities and processes like raw goods vendor management, warehousing, inventory management and supply chain management.
Benefits and Drawbacks of Using a Distribution Center
When run well, distribution centers play a critical role in supply chain efficiency and business growth. For example, they can keep costs down by decreasing inventory carrying costs, since distribution centers tend to deal with goods that are stored for short periods of time, unlike warehouses. Another benefit is shipping speed: A company with several distribution centers in a mass-market area can potentially deliver to customers faster, saving on shipping costs and boosting customer satisfaction. Furthermore, by centralizing the order fulfillment process, distribution centers can fulfill larger orders with many SKUs faster. This is much more effective than placing multiple orders with different suppliers to fulfill a single customer order.
Yet distribution centers are not without some drawbacks. These operations must be run tightly to ensure efficient operation — any small, overlooked detail can potentially cause unforeseen problems and bottlenecks. Miscommunications regarding picking and packing can lead to order-fulfillment issues, and disorganized inventory or warehouse layouts can make it hard for workers to do their jobs efficiently. Similarly, minor quality control issues can lead to recalls that not only cause a company to lose money but also can harm its reputation. What's more, distribution centers aren't immune to natural disruptions that can negatively impact operations, such as severe weather events; human disruptions like strikes, riots or wars; transportation disruptions due to accidents or maintenance; and consumer demand fluctuations, such as those due to recessions or depressions — all of which can negatively impact operations.
Examples of Distribution Centers
There are a few main types of distribution centers, including those that deliver directly to retail companies, only to individual consumers or to both. Orgill, for example, is an independent distributor that partners with vendors and manufacturers to supply hardware and home improvement products to thousands of retail stores globally. The company has seven distribution centers across North America.
Similarly, Sysco is a company that distributes food products and kitchen equipment to restaurants, food service companies, health care and educational facilities, and hospitality companies. Sysco has over 320 distribution facilities around the world. On a smaller scale, Baldor Specialty Foods is a specialty food distributor with a handful of locations that enable the company to directly service restaurants, hotels and similar companies in the Northeast and mid-Atlantic regions of the U.S.
Other companies, particularly those focused on ecommerce, deliver only to individual customers. Amazon is a well-known example. The company has more than 100 active so-called "fulfillment centers" across the U.S. alone. Sellers ship their items to these fulfillment centers, where they are stored until workers pick, pack and ship them to fulfill customer orders. Amazon's distribution centers generally range in size from 600,000 to 1 million square feet.
Nike is another example. It has over 50 distribution centers around the world, enabling the company to sell directly to consumers, wholesalers and retailers. The company has six primary distribution centers in the U.S., the largest of which is a 2.8 million-square-foot facility located in Tennessee, with 33 miles of conveyor belts, 73 outbound doors and 96 receiving spurs.
Types of Storage Used at Distribution Centers
Items delivered to distribution centers are stored according to product characteristics and quantities. Specialized equipment is used to handle different types of storage containers. Following are five common types of storage containers used in distribution centers.
Intermodal containers, commonly known as shipping containers, are used to move large quantities of goods. They're called "intermodal" containers because they can be used across different transportation methods, including ship, rail and truck.
Bulk boxes, also known as bulk bins, are pallet-sized boxes used to ship and store bulk quantities of an item. Bulk boxes are typically made of corrugated cardboard, wood, aluminum, steel or plastic. Some might have plastic liners to protect the contents of the box. Contents are usually loose parts, such as screws, bolts or loose apples, or granular materials, like powders.
Pallets are flat, level transportation structures that stably support heavy loads of goods and can be easily moved with implements like pallet jacks and forklifts. Pallets are most commonly made of wood or plastic and can handle a load of one ton. Pallets can be stored on the floor, stacked or stored on pallet racking.
Cases, also known as cartons, are boxes containing many items. A case of wine, for example, contains 12 individual bottles. Cases are often stored and transported on pallets but can also be stored in warehouse racking.
Totes are reusable containers similar to bulk boxes. They're often stored on pallets and are used to hold and transport goods, often liquids, semi-solids or solids. A common type of tote is an intermediate bulk container (IBC), which is a cube-shaped, reusable container often used to carry pharmaceuticals, grains, chemicals, liquids, food ingredients and sand.
Distribution Centers & Technology
Many successful modern distribution centers rely on various technologies to streamline operations, from receiving and storing items to picking and packing them for shipping. These technologies range from automated robotic equipment to management software that relies on automation and cloud computing. Here are a few warehouse automation technologies commonly found in distribution centers.
Automated storage and retrieval systems (AS/RS)
Are a type of goods-to-person (GTP) fulfillment technology that automatically stores and retrieves products. AS/RS technologies include cranes, carousels, vertical lift modules (VLMs) and shuttles. High-volume warehouses, especially those with space constraints, are usually more likely to benefit from AS/RS systems.
Barcode and RFID systems
Help companies reduce the need for paper management, saving on storage space and eliminating some time-consuming steps during the put-away and fulfillment processes. For example, instead of workers having to write down or type product or shipment information, they can carry mobile devices and scan barcodes. This streamlines processes and can reduce human error.
Automatic guided vehicles (AGVs)
Are vehicles that navigate a fixed path throughout a warehouse or distribution center, often to transport inventory from receiving to storage locations. Autonomous robotic forklifts are an example of an AGV designed to transport pallets without the need of a human operator. They are most effective in spacious environments that require repetitive tasks.
Distribution Center Processes
Distribution centers handle receiving products from manufacturers or wholesalers, organizing them and shipping them to their final destinations as quickly as possible. This requires carefully monitoring inventory levels so as to keep operations running as efficiently as possible. The three major processes that occur in most, if not all, distribution centers are:
Receiving goods.
Distribution centers first receive goods, usually from suppliers, manufacturers or other long-term storage warehouses that belong to the company. Trucks arrive and are unloaded at a receiving dock. The process can be made faster using equipment like pallet jacks and forklifts, as well as mobile technology like scanners. At this point, employees should make sure all received items accurately match their order and are of appropriate quality.
Storage.
After deliveries are unloaded, inspected and scanned in, they're stored in secure locations according to the distribution center's stock management strategy, such as first in, first out (FIFO) or last in, first out (LIFO). Conveyors may be used to move orders from receiving to storage, where, for example, they're placed on pallet racks. Warehouse workers should be keeping track of stock. Temperature control is important for certain industries. Some distribution centers cross-dock, eliminating the need to transport items to a longer-term storage location within the distribution center. Cross-docking is typically an effective solution only for distribution centers that rapidly turn over inventory.
Order fulfillment.
Once a customer places an order, it must be picked, packed and shipped. Depending on the size and scope of the distribution center, picking and packing might be performed by the same individuals, or there may be dedicated picking, packing and shipping teams. Warehouse management systems (WMS) can be used to automatically assign an order picking strategy that emphasizes accuracy and efficient workflow, such as batch picking, wave picking or zone picking. Items are packed and then shipped.
Depending on the nature of the operation, some distribution centers will also manage returns. Distribution centers that process returns in-house typically must communicate with the customer initiating the return and, once the item is received, restock it or refurbish it, if necessary.
Costs of Using Distribution Centers
Opening a distribution center can be costly in the short term, but long-term benefits tend to outweigh initial expenses. This is because distribution centers aim to maximize efficiency when it comes to receiving, storing, packing and distributing goods — translating to lower inventory carrying costs, less chance of stockouts and less chance of losing customers due to prolonged fulfillment times.
Of course, there are costs associated with building and operating a distribution center, and they can differ depending on whether a company runs its own distribution center or uses a third-party distribution service. The costs of building a distribution center depends on various factors, such as size, location and type of building. A distribution center built in California or New York will likely be more expensive than one in Alabama, for instance. A major company with a large distribution operation might expect to spend millions on construction alone. Other costs to consider include permits, planning costs, material costs, engineering costs, security system, legal fees and taxes.
Operating costs typically include those associated with handling products, such as the labor and equipment involved in receiving, put-away, picking and shipping; the fuel and electricity to handle such equipment; plus upkeep. Storage costs include inventory carrying costs; administrative costs like clerical and IT-associated costs; supplies, insurance, office expenses and general management; and variable costs like labor.
How to Organize Your Distribution Center
No matter the type of distribution center, all have three core areas: the receiving dock, storage and shipping. No surprise, these areas are noted to be some of the most congested areas in a warehouse — and congestion can lead to bottlenecks that cause a decline in productivity. On the other hand, an optimized distribution center layout that creates a seamless flow of goods and people from receiving to shipping can help poise teams for success by increasing productivity, improving accuracy, saving time and prioritizing safety. The following tips can help any distribution center, regardless of industry, capitalize on organization.
Carefully consider layout.
Categorize each area of the distribution center by its function, such as receiving, shipping, packing and storage. When doing so, it's a good idea to keep the packing area as close to shipping docks as possible. A staging area in the receiving zone can help provide the space required to unload vehicles and efficiently check in orders. Floor plans likely depend on the size of the distribution center. Smaller ones that receive goods infrequently or only ship weekly may be able to keep shipping and receiving bays side by side without risking traffic jams, whereas larger operations will perform better with multiple discrete receiving and shipping bays.
Don't forgo safety and security standards.
Inventory should be strategically stored not only to maximize efficiency but to meet safety and security standards. This also includes ensuring that aisles are wide enough to safely accommodate both foot traffic and pallet jack and forklift movement, as well as any other automated technologies in use. This can help maintain safety standards while preventing traffic jams.
Utilize vertical space.
Racking systems are useful for stacking products as high as safely and efficiently as possible, maximizing storage space — but be sure not to build racking higher than allowed by manufacturer specifications or overload weight limits. Consider ways technology can maximize use of vertical space, too. For example, AS/RS systems may be able to reach higher than forklifts. Efficient heights for pickers must also be considered. Try to keep popular items waist-to-shoulder height so pickers don't need additional equipment like forklifts or stepladders to reach them.
Don't be afraid to reorganize inventory.
Frequently purchased products should always be easiest for pickers to access, which may mean the need to reorganize the distribution center from time to time. For example, a distribution center that carries seasonal items, like Christmas decorations, may benefit from moving those items closer to picking locations toward the end of the year and moving summer items to less-frequented storage locations.
Keep it clean.
Routine cleaning can help keep a distribution center organized and easy to work in and create a sense of calmness, all of which may increase employee job satisfaction. Consider adding a cleaning checklist with daily, monthly and semimonthly cleaning tasks, from sweeping and regular decluttering to deep cleaning and equipment maintenance tasks.
Optimize for automation technology.
Automation-focused distribution centers might benefit from different layouts than those used by centers that rely on strictly manual processes. Thus, a company that plans to incorporate automation should work with automation solution vendors as well as architects or contractors to understand and implement any unique requirements. For example, a distribution center that plans to use a conveyor system suspended from the ceiling should consider the load-bearing capacity of ceiling beams before installation.
Distribution Center Planning
When planning a distribution center, it's important to consider location. Ideally, distribution centers should be located near main highways or roadways, making it easy for trucks to deliver or pick up products. They also are usually established near major population centers, near ports or in industrial hubs. Having multiple distribution centers, such as one on the East Coast and the other on the West Coast, can help a company distribute goods to all customers faster and cheaper. Multiple inventory locations can also help a company mitigate risk if, for example, a natural disaster occurs in one area.
Beyond location, conventional modern distribution centers might plan to include some or all of the following functions:
Goods in.
Also known as goods receipt or goods receiving, this warehouse function refers to the physical movement of goods into the warehouse from external suppliers. Goods in usually occurs in a receiving bay. Workers might use specialized equipment, such as forklifts, pallet jacks and conveyors, to unload containers and carry in materials. At this point, goods are checked for correct quality and quantities.
Bulk storage.
This area of a warehouse controls larger orders, such as those that only contain full cartons or boxes. Bulk quantities might be stored in warehouse racking and require workers to use forklifts or other materials-handling equipment to move, store and pick full pallets of goods.
Shipping.
Shipping teams control the flow of orders out of the distribution center. Workers might pack customer orders and prepare them for shipping, and also build pallets. Distribution centers that deal with international shipping might also have export teams dedicated to getting goods ready for an international journey, including proper documentation and preparation of appropriate shipping containers.
Production.
For some distribution centers, especially for companies that pack wholesale bulk shipments, it's important to have a production team to repack goods as necessary. A supermarket, for example, might pack raw items with their own packaging. Such production can also be managed by third parties or at production facilities, instead of at a distribution center.
Quality assurance (QA).
QA teams are responsible for ensuring that all goods meet necessary standards. To do so, QA teams might conduct periodic spot checks of random samples of incoming goods, goods in storage and outgoing products.
Transportation.
Transportation teams arrange and coordinate shipments to and from the distribution center. Some companies might partner with third-party transportation companies, while other larger companies might have their own private transportation networks.
Specialized departments.
Depending on the nature of the items being stored and distributed, companies may also benefit from dedicated product departments. A food distributor might have separate refrigerated and non-refrigerated sections, and each department may require its own shipping and receiving bays.
Job Types in Distribution Centers
Distribution centers have a variety of departments. While the most obvious might be those that manage direct, hands-on labor, such as the crews that receive shipments, pick orders and pack them, distribution centers also have indirect labor departments, such as human resources, maintenance and facilities operations, finance and accounting, management and more. Common jobs in distribution centers can include:
- Unloaders and receivers who unload trucks, break down pallets, scan in inventory and check the quality and quantity of received items.
- Put-away workers who store received items on warehouse shelves and in racking.
- Order fillers who pick and pack items according to pick lists and prepare them for shipment to their end destination.
- Supervision and management, such as managers and supervisors who oversee the warehouse and floor, supervise labor and create and manage employee scheduling.
- Human resources workers, who handle tasks like payroll, employee benefits and onboarding.
- Facility operations, housekeeping and maintenance teams that keep the space clean and tidy and make sure machinery is functioning properly.
- Inventory management teams that oversee inventory levels by recording daily deliveries, tracking shipments and ordering more inventory as necessary.
- Asset protection teams that provide security by making sure items are stored safely and securely.
- Quality control teams that verify that all incoming, outgoing and stored goods are up to established quality standards.
- Technology teams that are responsible for supporting and maintaining IT systems and keeping them secure. An IT department can be especially valuable for organizations that embrace cloud technology and other tools that rely on the Internet, such as enterprise resource planning (ERP) systems.
AB 701: California Distribution Center Law Regulates Product Quotas
In September 2021, California Gov. Gavin Newsom signed into effect AB 701. The law, which went into effect Jan. 1, 2022, specifically regulates the use of production quotas in distribution centers and warehouses. For example, AB 701 states that:
- Employers are prohibited from requiring work meets quotas that prevent them from complying with health and safety laws, such as employees' taking rest or meal breaks.
- Employers must provide a written description of each quota an employee is subject to, plus any potential consequences that could result from not meeting the quota.
- Employers are prohibited from taking adverse actions against employees who fail to meet undisclosed quotas.
The law specifically targets employers that use "warehouse distribution centers"” and have control over the wages, hours or working conditions of 100 or more employees at a single distribution center, or 1,000 or more employees at one or more distribution centers in the state of California. Employee counts must also include workers provided through third parties like staffing agencies, provided the employer exercises control over their wages, hours or working conditions.
The term "warehouse distribution center" applies to any establishment primarily engaged in operating storage facilities and merchandise warehousing or that are primarily engaged in selling merchandise using non-store means, such as ecommerce or catalogs. Specifically, AB 701 cites four North American Industry Classification System (NAICS) codes to define a "warehouse distribution center":
- 493110: General Warehousing and Storage.
- 423: Merchant Wholesalers, Durable Goods.
- 424: Merchant Wholesalers, Nondurable Goods.
- 454110: Electronic Shopping and Mail-Order Houses.
However, it's important to note that under the law, it's irrelevant which NAICS code is assigned to your establishment. Instead, if any of the above definitions could apply to your business, your warehouse or distribution center qualifies.
Optimize Your Distribution Center With NetSuite
Running a distribution center — or several — requires the synchronization of many moving parts. This can be best handled by advanced tools such as those offered by NetSuite, including NetSuite Inventory Management, NetSuite Warehouse Management and NetSuite Enterprise Resource Planning, which connects and centralizes the various applications in a single, integrated suite. When implemented properly, these tools allow entire distribution center teams and companies to manage inventory, from scanning barcodes when products are received to developing automated pick lists to connecting with customer relationship management (CRM) tools that automatically provide tracking information for customers. In turn, these solutions can help reduce human error and improve efficiency, thereby leading to cost savings — and getting products to their end destinations faster.
Conclusion
Distribution centers play a key role in the modern supply chain. They focus on receiving products from different locations and vendors, organizing them and storing them safely before shipping them to their end destination, whether that is a retail location or end consumer. Distribution centers are typically located near highways and roadways close to major metropolitan areas to expedite delivery times. Using the right technology, such as inventory management, warehouse management and ERP solutions, can help distribution centers operate more efficiently.
Distribution Center FAQs
What do distribution centers do?
Distribution centers are logistics facilities that receive goods from suppliers and store them until they're ready to be picked and packed to fulfill customer orders. Distribution centers combine warehouse processes like item storage with fulfillment center operations to help companies ship goods to customers as quickly and efficiently as possible.
How big are distribution centers?
Distribution centers vary in size, depending on the nature and needs of a business. Micro-fulfillment centers might be less than 10,000 square feet, whereas some of the largest distribution centers in the world exceed 1 million square feet.
What's the difference between a distribution center and a warehouse?
Though they may look similar and share processes like storing goods, distribution centers incorporate order fulfillment processes while warehouses usually simply store goods, often for extended periods of time. Distribution centers typically handle the shipping of goods directly to retail stores and/or consumers, while the goods stored in warehouses are more often supplied to wholesalers or retailers. Items are often stored in distribution centers for less time than in warehouses.
What are examples of distribution centers?
There are a few main types of distribution centers, whose differences reflect the model of the business. For example:
- Companies with physical locations that have their own distribution centers to help deliver products to stores and customers more efficiently.
- Ecommerce companies that rely on distribution centers to fulfill customer orders.
- Companies that, by nature, are distribution centers. This can include wholesale companies that receive goods directly from manufacturers or vendors and distribute them to retail locations, or food distribution companies that ship fresh produce and kitchen goods to restaurants and hospitality companies, for instance.