In part 1 of this series, I described three store delivery-channels that you can incorporate into your supply-chain network: centralized distribution with stocked products, centralized distribution through cross-docking and direct-to-store delivery (DSD). The question remains, however: what are the various factors that need to be evaluated when deciding for or against a particular delivery strategy?
1. Capital Investments
As described in part 1, stocking products for centralized distribution requires capital for real-estate and material handling equipment to store and retrieve these products. This is precious capital that you could reinvest into other aspects of your business, like introducing new product lines or opening up new stores.
A better financial decision might be to consider other avenues such as cross-docking or DSD, which can considerably reduce the sizing requirements of your facility or reduce the capital investments required to support growth.
2. Labor Costs
Choosing to stock product in a warehouse drives up the operating costs associated with handling and transporting product - a point that I touched on in part 1. Cross-docking can reduce these labor costs, but DSD transfers the handling and transportation costs to the supplier’s side.
3. Supplier characteristics, abilities and contracts
Even if you do decide that one delivery strategy is better than the other, you need to ensure that you can effectively integrate your existing suppliers into your distribution plan. Points to consider include:
- Where are suppliers located? What are their methods of delivery and lead times? If there is a risk of fluctuation in supply for a high demand product, then having that product stocked and ready to hit the road is the preferable option. On the other hand, if suppliers are located close to your retail stores, then having them deliver directly to your stores is less of a risk.
- Many powerful, big-name suppliers like Coca-Cola, PepsiCo, Kraft Foods, etc. will insist on delivering products to stores themselves. This gives them greater control over retail shelf space and moreover, such companies are able to provide value-added services to customers that smaller suppliers simply cannot. In these situations, you may be forced to work with your suppliers’ choice of delivery.
- Supplier contracts are another factor that will have an impact on your network strategy. Most suppliers will increase the cost of goods if they cross-dock or deliver directly to stores, due to the need for:
- More frequent deliveries
- Value-added services such store-friendly pallet configuration and retail shelf-space management
- Processing store orders directly
- Execution of store promotions
- Taking on risks associated with holding the product
The resulting increase in cost-of-goods may drive the decision on your choice of delivery strategy.
4. Product characteristics and movement
- Value of product
- High value products are better off being delivered directly to the store by the supplier. This way, any risk of damage, loss or theft is transferred to them. DSD can significantly reduce insurance costs for your business. Remember my friend, the premium-watch retailer from part 1? There’s a reason why his business has its suppliers deliver directly to its stores.
- However, there may be significant savings in cost-of-goods, if you choose to handle these products yourself. A careful operational and financial analysis is required to choose the right method.
- Fragile products/ products that are difficult to handle and transport
- Fragile products like glass and odd-shaped products like mattresses and doors are expensive to handle and transport in-house. You can reduce your labor costs by letting the supplier deal with the delivery of these products themselves
- Products with short shelf-life
- Products that have a short shelf-life like milk, bread or flowers need to reach retail stores as soon as possible once ordered -- unless they need to be further processed, like bananas that must be ripened before hitting stores. By-passing a warehouse can reduce the transit time involved in getting product to shelves and, as a consequence, improve the quality of your offerings.
- Products with a high rate of obsolescence
- Products that are highly dependent on market trends like electronics and clothing are risky to stock, especially if they are slow movers. If your inventory level is not optimized, you could end up with a stock of obsolete SKUs that you can’t get rid of.
- SKU movement
- If SKUs are shipped to retail stores by the truckload, then it may make sense to consider DSD. This minimizes handling and transportation labor.
- If a vendor supplies a high variety of low-volume SKUs, then centralizing distribution will significantly increase the labour costs involved in breaking down multi-SKU pallets for stocking. Products like gift-cards, tools and hardware like nuts and bolts may need to be handled by the pack, so DSD may prove to be a better alternative to stocking or cross-docking.
- If a vendor supplies a low variety of high-volume SKUs, such as for pallet-in, pallet-out operations, labor costs can be kept low, so businesses can take advantage of reduced cost-of-goods by choosing to stock or cross-dock these products.
Centralized distribution allows you to have greater control over your supply-chain network from supplier to store. Direct-to-store deliveries may create a lack of supply-chain transparency and quality control while preventing continuous improvement efforts; however, DSD can reduce finance times and invoice reconciliation times by 5-10%.
Choosing the right store-delivery strategy is a complex decision that requires careful analysis and the involvement of multiple departments like procurement, warehousing, transportation and retail. What store delivery-channel does your business use? Are there any other factors that you think are important in the decision making process? We’d love to hear your comments.
If you would like help assessing your supply-chain and understanding how you can optimize it, LIDD can help! Give us a call today to learn how we can serve you (http://lidd.ca/becoming-a-client/)