August 22, 2008
SCDigest: Is Expansion in Direct Store Delivery the Next Logical Step in Moving to a Demand-Driven Supply Chain in Consumer Packaged Goods?
By SCDigest Editorial Staff
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?
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Having worked as a marketer in DSD organizations most of my corporate life, I can personally attest to the wonderful power and flexibility of these systems to both fuel and fulfill demand. How else could you put a brand in 99% ACV Grocery distribution nationally in one week (we did it at Frito Lay in the ’80s with Tostito’s), or maintain a 97%+ in-stock level on a billion dollar brand (it was Doritos in my day–now there are several)?
But the key to DSD affordability is twofold. First, the product must substantially benefit from the system in a tangible way versus warehouse delivered products. The two characteristics driving this are usually freshness and fragility. Second, the business must have sufficient scale and velocity to create breakeven or better drop sizes (total dollars delivered to a given store on a given day). It takes a large category to justify DSD expense–savory snacks, bread, milk, ice cream.
Of course, it also helps to have a big store. Supercenters can often justify a dedicated merchandiser–even non-DSD megamarketers like Kraft are experimenting with that. But the current trend to smaller format stores may be the biggest inhibitor to expansion of DSD.
Hmmm. Not too long ago, a very large c-store chain shared with me their case for reducing or limiting the amount of DSD in their stores. Granted, they are small format, which drives some of the issues, but here is the case that they laid out against DSD:
– Too many vendors in my store at the same time. Implications for a small format: crowded parking lot, crowded store aisles, difficult for shoppers to shop.
– For a lot of products, smaller, high-frequency shipments are better, and DSD preferred fewer visits. Daily delivery from a DC across all product categories was more economical than trying to get more DSD visits to stock fewer products–and doing so added to the problem above anyway.
– DC to store gave the retailer better inventory visibility, even though it meant carrying more stock to cover the additional lead time.
In the end, they could cost-justify all aspects of DC-to-store delivery over DSD. I don’t know that they’re still doing it, and I don’t know that the business case applies to larger formats in grocery. But I’m a bit skeptical, with all respect to AMR and GMA. It just doesn’t seem right for a retailer to outsource a fundamental part of their value proposition to their customers, and shelf stock and presentation is pretty fundamental to retail. It would just be better for retailers to be more timely and transparent with their inventory and product movement data throughout their supply chain.
It certainly is a concept worth pursuing. Some retailers have really struggled with this concept in making it work. I think the best retailers will find ways to make this a successful part of their overall strategy.
As a grunt in the trenches, so to speak, I find that the desire to eliminate/minimize retail employees’ jobs, benefits, wages, the move to DSD has at least one glaring flaw. Once the vendor leaves the building, the DSD product line must be “presented” on a daily, if not more frequently, basis. Presentation is a major focus in retail grocery and if the companies use DSD pack out, who is left to maintain orderly appearance?
Another problem that presents is the tendency for DSD delivering “account managers” to load back stock into the stores, especially during sales promotions. It is not unheard of for vendors to leave back stock and fail to provide pack out support during the weekly sales cycle. Product is received, invoiced and billed (read: paid for), while product sits waiting for the ?vendor to return to pack out and maintain presentation on the floor.
As for the “inability” to find “motivated” employees, you get what you pay for. Part-time workers haven’t got a lot to lose, low wages, inferior benefit packages, little or no respect, fluid schedules. Who can blame them? Part-time workers cannot support a family on one job, and fatigue alone will work against moral and “motivation.” As long as executives believe that they have an unlimited supply of desperate job seekers, they will resist paying the wages needed to attract the kind of people needed to meet their stated stocking and presentation goals.
Retail grocery is and will probably always be labor intensive. All the HR propaganda about “valuing associates” falls on deaf ears on payday. Treat them poorly enough, some other retailer sings them a siren song, and you’re in the rehiring/retraining cycle yet again, pulling the time and attention of experienced staff away from what they do best.
We are being spread pretty thin already; what are you all going to do when your aging staffs have had enough and opt for retirement?
These DSD numbers are very slanted. You cannot ignore the largest retailer in the grocery industry (Walmart) who just happens to do very little DSD, and then build a case around the efficiencies of DSD. This article also ignores the carrying costs that manufacturers and suppliers must carry to make DSD a reality.
On top of this, there is a tremendous cost to marry-up a top-notch replenishment system with the MIS systems of the thousands of suppliers for complete inventory control, JIT and minimization of OOSs. This feat in itself is almost impossible, and requires complex electronic handshaking, data mining and cross-platform corroboration that doesn’t exist today.
My two cents on the issue says that the potential for increased DSD service is definitely there over the next few years. Many analysts feel that the commercial RE markets are going to be the next segment to crumble, leading to a shortage of new warehousing facilities. As chains grow they will need more stock for replenishment, but the lack of space for use as DCs will feed the need for distributors to ship direct, which will also cut down on transportation costs in a coming era where energy economy will play a major factor.
The recently passed 800 plus page energy bill is full of grins and giggles, but for the most part the main gist of the bill will be to increase operating expenses. Translate that into a need to either increase retail price, or reduce operating costs to maintain profit margins. Bigger chains with thousands of stores will probably not be affected to any great degree, but I feel the smaller retailers will definitely be rethinking the whole matter of the supply chain, starting around 2010.
Retailers are constantly looking to reduce, not increase the number of vendors at the back door. They look to reduce the labor and time required for receiving and streamline the process to specific days and times. Increasing the amount of DSD limits that option unless you streamline it with cooperation and cross-dock with your wholesaler.
I can’t imagine DSD vendors have any better opportunity to find more and better associates to say that they have any easier time of it than the retailers themselves. For some DSD products the use of the DSD Merchants in store merchandising opportunities simply makes sense. In other areas, I am not so sure that the value gained by outsourcing would out weigh the control and hands-on necessary to ensure customer satisfaction.
The density of DSD in the product mix today is pretty full as it is now. Expanding that further? I don’t see any huge percentages of growth out there for that to happen.
There are certainly optimizations possible through technology based ordering that can improve the fulfillment process, though. In this area there is a great opportunity to improve the supply chain process, reduce out of stocks, etc.
There are also advantages with scan based trading that can be pursued to reduce the cost of inventory in the chain and increase the vendor’s stake in mutual success.
An interesting issue that can be positively influenced by the continuation of supplier consolidation that makes DSD more affordable and the discussion that closest to the consumer gives you a huge advantage. On the other hand, rising fuel costs and the labor, vehicles, insurance, etc, to deliver effective DSD service makes moving to this delivery process more difficult.
Sure, retailers want as much DSD support as suppliers will offer but the key to effective JIT distribution may well reside with RFID and a technology that can improve JIT replenishment and improve ROI for retailers and suppliers both, which in turn provides better retail pricing for consumers. I do not believe you will see a ramp up of DSD by suppliers as for the vast majority, it is simply cost inefficient to do so
Today it is difficult to find many motivated employees at grocery retailers. And it’s difficult to find any retailers that don’t want to push costs to manufacturers. Manufacturers seem willing to accept those expenditures when they can lead to generating profits beyond the additional costs. With the rising cost of gasoline, insurance, etc, I don’t see many companies moving towards DSD.
DSD is a high risk/high reward proposition for retail with many moving parts on both sides. As today’s contributors have described, there are good opportunities for DSD in many situations. Fine-tuned inventory management systems are essential to keep DSD programs on track for retailers and vendors.
If this is the future, it ought to be combined with a very intelligent use of these in-store resources. Kraft’s Wall-to-Wall program is a great example of the additional benefits that can be achieved by effectively leveraging DSD resources.
I am not surprised by the story above on the C-store that found DC delivery was better than DSD for them. As we noted in our piece, there are also some contra-DSD trends. Walmart (controversially) wants PowerAde, for example, to go through its DCs to stores rather than local Coke Distributors, and Home Depot is aggressively moving away from vendor direct-to-store shipments to DC shipments (it’s a different issue, for sure, but related).
There also may be some tension between various benefits of DSD and the cost of fuel and other green issues with multiple delivery vehicles rather than larger trucks from DCs.
That said, many European retailers (Tesco) in effect mimic some of the results of direct store delivery with their frequent replenishment cycles per store per day. They can do that in part because they have the store density required.
So, one interesting question will always be: who has the greater distribution density, the retailer or the manufacturer/distributor? That density is a combination of stores for the retailer and total customers/stores for the manufacturer in an area, times total volume. So, Walmart wants to deliver its own PowerAde because it has the volume in a store to support that. Others would not, and DSD may become the better answer. But retailers will in general tend to look at the incremental transportation costs to get a product to a store as almost zero, and tend to ignore or discount DC and inventory costs.
But from my own direct experience, I think the AMR numbers are pretty close to correct in terms of cycle times. The real question is whether new categories could develop the network distribution capabilities at the manufacturer to support rapid response and fulfillment. This, as we noted, was a key factor in why Kellogg bought Keebler in 2001–to acquire a DSD infrastructure it lacked.
Better-run retailers don’t want DSD. They want to control their own destiny. They don’t want to pay the upcharge. And shoppers don’t want DSD. They don’t always want to shop by brand. No DSD folks stock shelves the way customers shop. People don’t want pretzels in 4 different places in 2 different aisles.
Here’s a test no DSD supplier is willing to run: offer grocers the choice between DSD at today’s prices or conventional distribution at a discount. Split the savings from cutting out DSD 50:50 with the grocers. Want to bet how many grocers would take the 50:50 savings in a hot minute? I believe that 80% of DSD volume would be lost in less than one year.
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Having worked as a marketer in DSD organizations most of my corporate life, I can personally attest to the wonderful power and flexibility of these systems to both fuel and fulfill demand. How else could you put a brand in 99% ACV Grocery distribution nationally in one week (we did it at Frito Lay in the ’80s with Tostito’s), or maintain a 97%+ in-stock level on a billion dollar brand (it was Doritos in my day–now there are several)?
But the key to DSD affordability is twofold. First, the product must substantially benefit from the system in a tangible way versus warehouse delivered products. The two characteristics driving this are usually freshness and fragility. Second, the business must have sufficient scale and velocity to create breakeven or better drop sizes (total dollars delivered to a given store on a given day). It takes a large category to justify DSD expense–savory snacks, bread, milk, ice cream.
Of course, it also helps to have a big store. Supercenters can often justify a dedicated merchandiser–even non-DSD megamarketers like Kraft are experimenting with that. But the current trend to smaller format stores may be the biggest inhibitor to expansion of DSD.
Hmmm. Not too long ago, a very large c-store chain shared with me their case for reducing or limiting the amount of DSD in their stores. Granted, they are small format, which drives some of the issues, but here is the case that they laid out against DSD:
– Too many vendors in my store at the same time. Implications for a small format: crowded parking lot, crowded store aisles, difficult for shoppers to shop.
– For a lot of products, smaller, high-frequency shipments are better, and DSD preferred fewer visits. Daily delivery from a DC across all product categories was more economical than trying to get more DSD visits to stock fewer products–and doing so added to the problem above anyway.
– DC to store gave the retailer better inventory visibility, even though it meant carrying more stock to cover the additional lead time.
In the end, they could cost-justify all aspects of DC-to-store delivery over DSD. I don’t know that they’re still doing it, and I don’t know that the business case applies to larger formats in grocery. But I’m a bit skeptical, with all respect to AMR and GMA. It just doesn’t seem right for a retailer to outsource a fundamental part of their value proposition to their customers, and shelf stock and presentation is pretty fundamental to retail. It would just be better for retailers to be more timely and transparent with their inventory and product movement data throughout their supply chain.
It certainly is a concept worth pursuing. Some retailers have really struggled with this concept in making it work. I think the best retailers will find ways to make this a successful part of their overall strategy.
As a grunt in the trenches, so to speak, I find that the desire to eliminate/minimize retail employees’ jobs, benefits, wages, the move to DSD has at least one glaring flaw. Once the vendor leaves the building, the DSD product line must be “presented” on a daily, if not more frequently, basis. Presentation is a major focus in retail grocery and if the companies use DSD pack out, who is left to maintain orderly appearance?
Another problem that presents is the tendency for DSD delivering “account managers” to load back stock into the stores, especially during sales promotions. It is not unheard of for vendors to leave back stock and fail to provide pack out support during the weekly sales cycle. Product is received, invoiced and billed (read: paid for), while product sits waiting for the ?vendor to return to pack out and maintain presentation on the floor.
As for the “inability” to find “motivated” employees, you get what you pay for. Part-time workers haven’t got a lot to lose, low wages, inferior benefit packages, little or no respect, fluid schedules. Who can blame them? Part-time workers cannot support a family on one job, and fatigue alone will work against moral and “motivation.” As long as executives believe that they have an unlimited supply of desperate job seekers, they will resist paying the wages needed to attract the kind of people needed to meet their stated stocking and presentation goals.
Retail grocery is and will probably always be labor intensive. All the HR propaganda about “valuing associates” falls on deaf ears on payday. Treat them poorly enough, some other retailer sings them a siren song, and you’re in the rehiring/retraining cycle yet again, pulling the time and attention of experienced staff away from what they do best.
We are being spread pretty thin already; what are you all going to do when your aging staffs have had enough and opt for retirement?
These DSD numbers are very slanted. You cannot ignore the largest retailer in the grocery industry (Walmart) who just happens to do very little DSD, and then build a case around the efficiencies of DSD. This article also ignores the carrying costs that manufacturers and suppliers must carry to make DSD a reality.
On top of this, there is a tremendous cost to marry-up a top-notch replenishment system with the MIS systems of the thousands of suppliers for complete inventory control, JIT and minimization of OOSs. This feat in itself is almost impossible, and requires complex electronic handshaking, data mining and cross-platform corroboration that doesn’t exist today.
My two cents on the issue says that the potential for increased DSD service is definitely there over the next few years. Many analysts feel that the commercial RE markets are going to be the next segment to crumble, leading to a shortage of new warehousing facilities. As chains grow they will need more stock for replenishment, but the lack of space for use as DCs will feed the need for distributors to ship direct, which will also cut down on transportation costs in a coming era where energy economy will play a major factor.
The recently passed 800 plus page energy bill is full of grins and giggles, but for the most part the main gist of the bill will be to increase operating expenses. Translate that into a need to either increase retail price, or reduce operating costs to maintain profit margins. Bigger chains with thousands of stores will probably not be affected to any great degree, but I feel the smaller retailers will definitely be rethinking the whole matter of the supply chain, starting around 2010.
Retailers are constantly looking to reduce, not increase the number of vendors at the back door. They look to reduce the labor and time required for receiving and streamline the process to specific days and times. Increasing the amount of DSD limits that option unless you streamline it with cooperation and cross-dock with your wholesaler.
I can’t imagine DSD vendors have any better opportunity to find more and better associates to say that they have any easier time of it than the retailers themselves. For some DSD products the use of the DSD Merchants in store merchandising opportunities simply makes sense. In other areas, I am not so sure that the value gained by outsourcing would out weigh the control and hands-on necessary to ensure customer satisfaction.
The density of DSD in the product mix today is pretty full as it is now. Expanding that further? I don’t see any huge percentages of growth out there for that to happen.
There are certainly optimizations possible through technology based ordering that can improve the fulfillment process, though. In this area there is a great opportunity to improve the supply chain process, reduce out of stocks, etc.
There are also advantages with scan based trading that can be pursued to reduce the cost of inventory in the chain and increase the vendor’s stake in mutual success.
An interesting issue that can be positively influenced by the continuation of supplier consolidation that makes DSD more affordable and the discussion that closest to the consumer gives you a huge advantage. On the other hand, rising fuel costs and the labor, vehicles, insurance, etc, to deliver effective DSD service makes moving to this delivery process more difficult.
Sure, retailers want as much DSD support as suppliers will offer but the key to effective JIT distribution may well reside with RFID and a technology that can improve JIT replenishment and improve ROI for retailers and suppliers both, which in turn provides better retail pricing for consumers. I do not believe you will see a ramp up of DSD by suppliers as for the vast majority, it is simply cost inefficient to do so
Today it is difficult to find many motivated employees at grocery retailers. And it’s difficult to find any retailers that don’t want to push costs to manufacturers. Manufacturers seem willing to accept those expenditures when they can lead to generating profits beyond the additional costs. With the rising cost of gasoline, insurance, etc, I don’t see many companies moving towards DSD.
DSD is a high risk/high reward proposition for retail with many moving parts on both sides. As today’s contributors have described, there are good opportunities for DSD in many situations. Fine-tuned inventory management systems are essential to keep DSD programs on track for retailers and vendors.
If this is the future, it ought to be combined with a very intelligent use of these in-store resources. Kraft’s Wall-to-Wall program is a great example of the additional benefits that can be achieved by effectively leveraging DSD resources.
I am not surprised by the story above on the C-store that found DC delivery was better than DSD for them. As we noted in our piece, there are also some contra-DSD trends. Walmart (controversially) wants PowerAde, for example, to go through its DCs to stores rather than local Coke Distributors, and Home Depot is aggressively moving away from vendor direct-to-store shipments to DC shipments (it’s a different issue, for sure, but related).
There also may be some tension between various benefits of DSD and the cost of fuel and other green issues with multiple delivery vehicles rather than larger trucks from DCs.
That said, many European retailers (Tesco) in effect mimic some of the results of direct store delivery with their frequent replenishment cycles per store per day. They can do that in part because they have the store density required.
So, one interesting question will always be: who has the greater distribution density, the retailer or the manufacturer/distributor? That density is a combination of stores for the retailer and total customers/stores for the manufacturer in an area, times total volume. So, Walmart wants to deliver its own PowerAde because it has the volume in a store to support that. Others would not, and DSD may become the better answer. But retailers will in general tend to look at the incremental transportation costs to get a product to a store as almost zero, and tend to ignore or discount DC and inventory costs.
But from my own direct experience, I think the AMR numbers are pretty close to correct in terms of cycle times. The real question is whether new categories could develop the network distribution capabilities at the manufacturer to support rapid response and fulfillment. This, as we noted, was a key factor in why Kellogg bought Keebler in 2001–to acquire a DSD infrastructure it lacked.
Better-run retailers don’t want DSD. They want to control their own destiny. They don’t want to pay the upcharge. And shoppers don’t want DSD. They don’t always want to shop by brand. No DSD folks stock shelves the way customers shop. People don’t want pretzels in 4 different places in 2 different aisles.
Here’s a test no DSD supplier is willing to run: offer grocers the choice between DSD at today’s prices or conventional distribution at a discount. Split the savings from cutting out DSD 50:50 with the grocers. Want to bet how many grocers would take the 50:50 savings in a hot minute? I believe that 80% of DSD volume would be lost in less than one year.