Cross-docking

By Estelle Vermorel, February 2020

Abstract graph illustrating the complexity of a supply chain Cross-docking is a logistics method, pioneered in the 1930’s, where a flow of goods enters and exits the facility without ever being put in storage. The goods are literally flowing from one dock to the next. Cross-docking removes load and pick operations associated with a regular warehousing strategy, but at the expense of the flexibility offered by actually putting the goods in storage. Since the 2000’s, with the rise of e-commerce, cross-docking has taken a new meaning and can be instrumental in the success of a company to gain competitive advantage through costs reduction, and most of all risk reduction in front of demand uncertainty. Not bearing the risk of holding stocks certainly comes with many advantages, but it also has its drawbacks, in particular in terms of negotiations with the suppliers and quality of service.


A new generation of cross-docking

Cross-docking literally means crossing the docks; it refers to a logistics method where products are unloaded on one side of a cross-docking terminal (inbound doors), coming from wagons, containers or trucks, and then transferred to the other side of the terminal (outbound doors) to be loaded again in trucks and dispatched to multiple locations. This is a “spoke-hub” (or Hub and Spoke) type of optimization meant to reduce costs and increase efficiency.

This method has been used for decades by FMCG companies (Fast-Moving Consumer Goods) to dispatch the goods originating from heavily concentrated production capacities over dispersed geographies. For example, a large consumer electronics company would produce in China, unload the products in a central hub - such as Rotterdam for Europe - before dispatching them to warehouses in different countries to serve different markets.

Another case of cross-docking is the consolidation of smaller shipments that can be combined into larger ones in order to lower transportation fees. Goods are then transported in tractor-trailers able to carry 40 tons, rather than in small carriers with ten times less capacity. This can typically be used for transportation between cities before dispatching goods for last mile delivery.

However, with the growing success of e-commerce, a new generation of cross-docking has appeared. E-commerces have a much lower infrastructure footprint than their brick-and-mortar counterparts and many of them try to maintain this competitive advantage for their supply chain investments. Therefore, holding inventory, with all the risks and costs attached to it, has little appeal to them. Cross-docking has emerged as one of the most popular ways in e-commerce to serve physical goods to customers without even holding any inventory risk, the goods flowing without interruption from supplier to merchant to the client.

Strategically, e-commerces choose warehouse locations as close as possible to their suppliers - OEMs (Original Equipment Manufacturer) or wholesalers who are actually holding the stocks. Whenever the e-commerce customers buy from the website, orders are placed to the suppliers accordingly - sometimes for several deliveries per day - and the e-commerce retrieves the products only to dispatch them for last mile delivery. Far from the initial large imports strategy, it’s all about small batches. The idea is to avoid warehousing almost entirely if possible. Trucks are discharged, products are placed directly on a conveyor belt and repackaged to the end customer with other products whenever possible for multiple orders. This strategy can be game-changing for e-commerces, but it is not a magical pill either and it certainly doesn’t fit every situation.

Pros and cons of cross-docking for e-commerce

Pros

Not bearing the responsibility of holding inventory has many obvious advantages. First and foremost, all the costs related can be avoided or drastically reduced, and there are many (see Inventory costs): warehousing costs, capital costs, inventory services costs including insurance, hardware, manpower, etc.

Handling goods is also reduced as there is no need to handle the products a first time in order to stock them properly on warehouse shelves and then getting them out again for delivery. Aside from the costs related to that additional step, in terms of manpower, hardware, time and such, for certain types of goods this can be an advantage in itself, especially for fragile products or perishable goods that spoil quickly.

The other main advantage that comes from this new generation of cross-docking is the reduction - and near disappearance - of the risk related to fluctuating demand. Orders to the suppliers are placed after the customers have made their wishes known. They might still cancel orders later on, there might be issues with the payment, or returned products, but there is no comparison with a situation where the retailer needs to forecast demand way in advance, with all the difficulties inherent to such an exercise. Additionally, if payments are made in advance, the reduction of working capital necessary for the organization is a huge plus.

Such advantages can give an important competitive edge, so why hasn’t cross-docking become the one and only method used in business? As always, if there are pros, there are cons…

Cons

While not holding inventory means less risks, and reduces certain categories of costs, on the other hand, when scaling up, every company, sooner or later, is tempted to start holding its own inventory. Why is that? Because there are significant advantages to being able to order in large bulks to suppliers. Cross-docking for e-commerces usually means buying in small quantities after orders are placed by customers. For customer satisfaction reasons, e-commerces can seldom afford to wait until orders have piled high enough to reach large quantities of the same product. Suppliers usually work with MOQs (Minimum Order Quantity) or MOVs (Minimum Order Value) and price breaks, granting discounts and lower prices per unit when certain volumes are reached. It is much harder to reach MOQs or price breaks where cross-docking is involved. Negotiations with suppliers are much more complicated in this kind of context. This is the main reason why large e-commerces are tempted to start holding inventory when they grow enough that they can afford to take risks on their faster rotating products. They can then increase their margins significantly.

What about reaching the customer faster? This is often - mistakenly - listed as a pro for cross-docking. It might have been true several years ago, but with the recent evolution in supply chain, and the generalization of 24 hours delivery (or even deliveries within the same day), this has become more of a con then a pro. On average, it is slower to serve customers through cross-docking than serving from stock (if inventory is handled properly). It easily adds a delay of 12 to 24 hours, thus making fast delivery almost impossible or very risky. For a company to boast ability to deliver within 24 hours - not 24 hours after receiving the goods from suppliers, as written in small fonts in the Terms and Conditions -, they have to carry the responsibility of holding inventory.

As a rule of thumb, relying on cross-docking means to be always limited by the quality of service of the suppliers. By definition, there is no buffer if they have a production accident, or delays in their deliveries. There is also no possible adjustment or control on the trade-off between costs and level of service (unless by changing suppliers). That is, if a supplier decides to deliver faster and increase the quality of service for a higher cost (or the opposite), there is no choice but to reflect that policy on the customer. On the contrary, by holding inventory and possibly mixing suppliers from the same kind of products, a company can have better control on that policy and adjust the trade-off to suit its needs.

Sensitive factors

In the end, it is up to each company to weigh the pros and cons of cross-docking, depending on the context, the type of products, available suppliers, etc. It also depends a lot on customers and suppliers’ geography, on the costs related to carrying inventory and the complexity of the products sold.

Companies need to keep in mind as well that cross-docking is not a magical pill and needs to be handled properly. Dedicated processes are required to streamline cross-docking, among other things a proper IT system and physical dispatch system. Complexity also arises when there is a mix between a cross-docking logic and a logic to serve from stock, with possibly two types of procurement, systems, conveyors, etc.

Lokad’s take on cross-docking

In the 2020’s, the difference between classic warehouses and cross-docking platforms will slowly fade away. Regular warehouses get gradually augmented with cross-docking capabilities, while cross-docking platforms get gradually augmented with the capacity to hold some inventory. Moreover, the advances in warehouse automation that offer programmatic control over the flow of goods within the facility are blurring those lines even further.

Our take is that companies should adopt supply chain strategies that let them leverage both cross-docking and stocking. In particular, predictive optimization tools are needed to support teams - in particular the procurement teams - and let them dynamically switch from one option to another at the most granular level, that is, every single unit in transit.

Such a capability requires the ability to assess quickly the financial gains associated with both methods and the risk taken by holding stock for one type of product versus the increase in margins, costs generated, etc. This is the type of logic and tool that Lokad aims at implementing with the Quantitative Supply Chain, in order to give companies more flexibility and enhance their performance.