Does Self-distribution Still Make Sense?
Commentary by Bill Bittner, President, BWH Consulting
One of the advantages of being a self-distributing retailer is the ability to take advantage of purchasing discounts offered by manufacturers. Many manufacturers have gone to scan based promotions that pay retailers based on what is sold instead of what is purchased. At first glance it seems that the trend to scan based has no natural limit and the continued decline in purchasing opportunities will take away one of the incentives for self-distribution. But you have to think about why some manufacturers will not want to use scan based promotions.
Sure, scan based promotions reduce the paperwork and confusion around associating inventory cost with selling discounts. Concerns over stock protection, forward buying and diverting are all reduced. But two types of manufactured products will always require purchasing incentives. Seasonal products will have purchasing incentives to encourage pre-season purchases that help to even out the production schedules. “Lumpy Demand” items will continue to require pipeline inventory in order to avoid lost sales when the “lumps” occur.
But a bigger factor looming on the horizon may be radio frequency identification (RFID). The ability to direct specific cases to fulfill particular requirements will have a huge impact on in-store processes. Imagine a truck that is loaded according to “need” with the items that are most needed on the selling floor loaded last and the least needed items placed on the front. The cases are grouped by category according to the specific store layout and in numbers of cases that reflect the handling equipment used in each store. RFID will allow the distinction of cases bought for a customer request or to route close-dated cases directly to the selling floor. In fact, the person unloading the truck could be told which cases should go the backroom turn inventory, which are for the next week’s sale and which need to go directly to the sales area.
The leverage of a little extra effort in the warehouse on performance at store level can be a great incentive for remaining a self-distributor.
Moderator’s Comment: What do you think about the advantages of self-distribution? Will scan based promotions take away the incentive for self-distribution?
Can wholesalers offer the same kind of service to the stores?
When thinking about this topic I really went both ways before I finally decided that the potential leverage of the warehouse makes me lean toward self-distribution.
The challenge for wholesalers is to come up with a way to offer a menu of services that retailers can choose to consume. Retailers that are making their
decision based strictly on cost may want to opt out of some the services. What might be the most efficient way of operating for the wholesaler may not be the best thing for the
stores.
The enlightened warehouse operator of a self-distributing retailer will be able to help his organization achieve a lower landed cost at the shelf edge by
putting in the “extra steps” at the warehouse that align the product deliveries with the store needs. On the other hand, a progressive wholesaler may be able to offer
retailers only the services they need with corresponding reduction in charges.
I guess the jury is still out. –
Bill Bittner – Moderator
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5 Comments on "Does Self-distribution Still Make Sense?"
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Generally, the self-distributing retailer has an edge because there is one less step in the transcription of the paperwork to do the deal and the downstream billing.
The higher uncertainty of the final value to be received — and the delay in receiving that value — on a scan based deal compared to an off-invoice deal can be offset by offering a deeper discount on the scan based deal. It’s up to the parties to determine how much deeper that should be.
The real reason for self distribution is control. If you want to provide maximum customer satisfaction then you want to minimize out of stocks. When you do your own buying, planning and distribution, you have the opportunity to control your inventory and maximize customer service. Also, doing your own buying gives an operation the ability to develop direct relationship with suppliers. This is of great benefit as this direct relationship pays dividends. Suppliers often provide marketing information and merchandising ideas that some how don’t filter to retailers through wholesalers.
If suppliers can move promotions from buy to scan based payment it will be a blessing to both parties. Manufacturers will finally find a way of more efficiently promoting product, and retailers won’t tie up valuable resources (cash, warehouse space, etc.) trying to make an extra dime. All can get back to what’s really important — customer service!
I agree with most of what TheLogisticsGuy writes, although wholesalers typically negotiate with the retailers they supply on promotional moneys from diverting and other buy-side funds, as well as forward buy opportunities. I know of a leading retailer that is outsourcing the replenishment function for one of the reasons he cites, and is still getting most of the trade dollars. As far as I can tell, the only funds they aren’t getting all of are associated with warehouse slotting fees, and I believe they are getting a chunk of this amount as well.