DCs and the bottom line

Distribution executives have been clamoring for boardroom recognition for years. Finally, it looks like they have it. More than ever, C-level execs are noticing the financial gains that can accrue to the bottom line when a distribution center runs smoothly and efficiently.

For evidence of that, you need look no further than Big 5 Sporting Goods, a West Coast-based retailer with stores in 11 states. Big 5 recently announced the financial results for its fiscal third quarter. During that period, the company improved its margins—a gain the retailer attributes partly to operational efficiencies realized at Big 5's new DC in Riverside, Calif., which cut DC costs by $1 million.

Big 5's gains came despite a challenging economy that saw same-store sales remain nearly flat. But the DC operations took away some of the sting. "We meaningfully increased product margins during the quarter, while realizing significant distribution center savings from improved operating efficiencies," Steven G. Miller, the company's chairman, president, and CEO, said in a press release. So you see, distribution can play a critical role in increasing shareholder value.

Like Big 5 Sporting Goods, medical and surgical supply distributor Owens & Minor puts a great deal of emphasis on its distribution services. In fact, the company hosted its annual Investor Day for Wall Street analysts and professional investors last month at its state-ofthe-art DC just outside Baltimore. Along with providing investors with a financial outlook for 2008, Owens & Minor hosted tours of the DC, part of a complex distribution network that ships to 4,000 hospitals nationwide. It isn't the first time the company has showcased its DCs to investors. The company held its 2005 investor day at its DC in Fort Lauderdale, Fla.

While smooth-running DCs can contribute to profitability, the opposite also holds true. In November, the law firm Kaplan Fox & Kilsheimer LLP filed a class action suit in the U.S. District Court for the District of Colorado on behalf of investors who purchased the stock of Crocs Inc.—maker and retailer of the wildly popular Crocs shoes—between July 27 and Oct. 31, 2007.

Among other things, the suit alleges that unbeknownst to investors, the company was experiencing distribution problems in Europe, a result of moving its distribution facilities to the Netherlands. In addition, it claims that the company was experiencing distribution problems in Japan with a third-party distributor. Crocs' stock dropped by 36 percent on the day after the announcement.

As the cases of Owens & Minor, Big 5 Sporting Goods, and others show, the DC can clearly drive sales and profitability. But, as the Crocs case indicates, the converse is also true. The lesson here: When things go wrong, it's even more important to communicate with the boardroom than it is when things go right.