SCDigest: Is Expansion in Direct Store Delivery the Next Logical Step in Moving to a Demand-Driven Supply Chain in Consumer Packaged Goods?
Through a special arrangement, what follows is an excerpt of a current article from Supply Chain Digest, presented here for discussion.
Though most estimates say total direct store delivery (DSD) growth has been relatively flat for many years, there are signs that growth could be rising, as retailers look to reduce operating costs and both retailers and manufacturers seek to become both leaner and more responsive to market demand.
According to Nielsen data, DSD represents 24 percent of unit sales and a surprising 52 percent of retail profits in the grocery channel (data excludes Wal-Mart). Moreover, according to a survey sponsored by the Grocery Manufacturers Association (GMA) and AMR Research, 77 percent of US-based retailers said that DSD will either increase or remain constant for them in 2008.
Part of what is driving the retail interest is undoubtedly the fact that with DSD, manufacturers or distributors take on the brunt of the effort and labor in terms of stocking and merchandising.
A recent GMA report on DSD noted, for example, that, "Today, it is very difficult for a retailer to find and train motivated employees for in-store merchandising. DSD helps the retailer to solve this problem. For the typical large-format store, DSD frees up nearly 17,000 labor hours per year per retail outlet allowing the retailer to focus on other volume-driving activities."
But perhaps a bigger driver is the opportunity to get closer to consumer demand and achieve more responsive replenishment - with lower total pipeline inventories.
In a typical non-DSD replenishment cycle, in which the manufacturer ships an order to the retailer's distribution center and the retailer ships to the store, the average total cycle time is about 9-10 days. AMR estimated the breakdown as follows:
- 3.5 days to process an order by the supplier
- 2.0 days to deliver the order to the retailer's distribution center
- 2.5 days for put-away and order picking
- 2.0 days for delivery to the store shelf (including backroom processing)
By contrast, the GMA study found that 26 percent of CPG respondents said they could deliver direct-to-store within 24 hours of an order, and 74 percent said they could do so within 48 hours. Of course, the population of respondents may have been slanted towards companies that already have strong DSD capabilities, while many CPG do not.
Nonetheless, clearly DSD offers the potential to reduce cycle times and take substantial amounts of total supply chain inventory out of the pipeline in many categories.
There are two opportunities for growth in DSD. One is for manufacturers/distributors with existing DSD programs to expand those relationships with additional retailers and stores. The other is to expand the number of categories and products that are supported by the DSD model.
In either case, manufacturers/distributors need to continue to advance their level of technology support. At the local driver/account manager level, for example, many have moved away from batch-based mobile terminals to real-time systems that connect directly to their back office inventory and sales systems.
Demand management and replenishment tools also need to be top notch.
"Cost-effectively servicing retail customers with a Direct Store Delivery model requires a single demand plan that provides both high-level and granular forecast visibility of time-phased volume by key distribution channels, customers, product lines and brands," says Karin Bursa, VP of Marketing at Logility.
Discussion Questions: Do you expect to see DSD programs expand, shrink, or stay the same? Why? How can they be made more effective?