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
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!
This is a hot topic for me personally as I have managed 5 strategic studies for retailers over the past 3 years which have involved a detailed evaluation of this very question. My conclusion is that the benefits of self-distribution only make economic sense for retailers who are above a certain revenue threshold (which truly varies by industry and its profit margin).
There needs to be enough volume to push through any retail distribution center to justify the operating expenses, particularly fixed overhead. The benefits of self-distribution go well beyond promotional moneys that may be enjoyed. Other benefits of self-distribution include: the elimination of wholesaler markups, the loss of promotional moneys in the event that the wholesaler diverts against the manufacturer, forward buy opportunities, and other deal moneys that generate a significant portion of the buy-side benefits of self-distribution. The pressure for publically-traded manufacturing companies to achieve quarterly revenue targets will, in my mind, always ensure that big promotional incentives are available to the market regardless of the trend towards scan based promotions.
Retailers also use the self-distribution strategy to gain control over their product variety, store delivery frequency, out-of-stocks, ordering constraints, etc. Dealing with a wholesaler that provides poor service levels or is technologically out of date is also a major driver towards self-distribution.
Many larger self-distributing retailers who have outsourced to wholesalers have done so for debt reduction or labor strategy reasons. In the former case, selling off the distribution center and inventory assets to a wholesaler is a strategy that can be used to combat high debt – e.g. some firms in the retail grocery industry have done this out of necessity. In the latter case, eliminating a militant unionized distribution center and giving the business to a wholesaler is a labor strategy that has been used by numerous firms, particularly in the NorthEast.
So this is a complex topic that is highly company-specific and I would be very hesitant to conclude anything will change due to scan based promotions, RFID, etc.
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.
Self distribution definitely has it’s two faces. As Logisticsguy notes, volume, among other quantity and distance issues, is a key measure for determining if a retailer could profit from managing its own fulfillment. A retailer with low volume, few store fronts, or geographic dispersal would likely not see profitable results. Another major issue is management focus. It is easy to say that self distribution manages and controls supply, assortment, quality, etc. However these benefits come at a cost to the senior team. A retailer now must also be expert in warehousing, transportation, reverse logistics, forecasting, and other practices not associated with running stores. The question needs to be asked and answered as to how these functions will be integrated with the rest of the organization.
On the positive side, self distribution can be a panacea for a retailer that 1) maintains a strict control of assortment, quantities or quality, 2) needs to manage sudden and unforeseen shifts in demand, 3) has service as the driving force to measure success, and 4) has multiple channel offerings including E-tailing, catalog and store front that can be managed from a central point of inventory.
Remember this too, that most if not all small retailers already benefit from “self distribution.” Almost every independent grocery and food retailer that I have spoken to fills their shortfalls from their broadline or specialty wholesaler through Sam’s, Costco, Smart and Final and local sources. Indeed, restaurants are compelled to source local ingredients as a marketing statement just to compete in some parts of the country. If we add this dimension to the discussion, one can see it doesn’t have to be an all or nothing, brick and mortar decision.