Central Warehouse or Direct Store Delivery(DSD): Why Some CPG’s Are Making The Switch
Everybody was so excited about the possible savings and efficiencies of Direct Store Delivery (DSD) when it first came in vogue in the 1990s. And for some products, it’s still the best choice. But some leading CPG companies, like Kellogg’s, are switching back to the Central Warehouse supply chain method and for good reasons, but we won’t go into detail with them here. Bottom line though, both approaches have their place in the CPG retail ecosystem but CPG’s are a dynamic entity and so must be their distribution strategy, hopefully, this post will help sort out the pros and cons of both strategies.
The History and Value of DSD
When Direct Store Delivery (DSD) was first tried, the numbers came in strongly in favor. In 2008, the Grocery Manufacturer’s Association reported that while only 24 percent of products were in a DSD supply chain, they accounted for 52 percent of profits. There were huge cost savings for retailers in terms of reduction of warehousing costs, reduced out-of-stocks, time spent merchandising and other areas. But those were costs assumed by the CPG companies and reflected in the price to the consumer.
According to a report by MWPL International, a supply chain consulting company, taking on all those costs was proving just too expensive for CPG companies. Most companies now own many brands with thousands of products. They can achieve significant economies of scale by working through centralized distribution centers. Many have regional remixing facilities where they can provide stores with an entire truckload of a variety of products rather than just sending an order of one or two products direct to the store while the others are distributed centrally.
In essence, rather than consolidating their processes for all, or most of their products, they were dividing resources between the two delivery systems. They were also replicating in-store services that retailers were already doing for their other products.
DSD Increases the CPG’s Job
With DSD, most CPG companies sold the idea to retailers by creating extra value, doing a lot of retailers’ traditional jobs themselves. This includes Shelf Inventory Management, Store Ordering, In-Store Forecasting, Store Level Authorized Item Management, Price and Promotion Execution and In-Store Merchandising. These are all tasks traditionally handled by retailers with the old Central Warehousing System.
With DSD the CPG has to have extra people, trucks, a huge amount spent on labor going in and out and between stores to ensure it can cover all these bases for what might be just a couple of hundreds of items. That only makes sense if DSD is the absolute best solution for that item and not a relic of an unsuccessful experiment with efficiency.
There are some pretty clear outlines for what items make sense for DSD.
The Product Determines the Delivery
Some products may require DSD. With ice cream, fresh eggs, and dairy, for example, retailer warehouses may not have the facilities to store fresh or frozen products for a period of time so they need to be delivered from the manufacturer to the store to avoid spoilage. Other products are fragile, like bread and potato chips. These are so easily crushed—and therefore usually unsellable—that it only makes sense to reduce the number of people and machines handling them.
Other products like crackers and boxed entrees can more easily be transported and stored in warehouses by the major retailers. But in the case of smaller retailers, they don’t necessarily have space. So a big question that determines whether a product is a good candidate for DSD is churn. Is this a high-volume, high-velocity product that will clearly outstrip the other products being sent to the store? If so, DSD might be the best solution, if the business case makes sense.
If you’re working with a sophisticated store like a Wegman’s DSD might not be needed. They might have their own facilities to store all kinds of products. On the other hand, for some specialty food companies, unlike the mega producers, DSD might be the best option. Perhaps their volume can’t support the kind of storage and distribution systems of the major producers. Again, that’s a case where DSD works perfectly.
The thing to remember when making the decision is that the DSD concept was born out of the Lean methodology which meant cutting out extraneous steps and reducing inefficiencies to improve workflow and profits. So the big question to ask yourself when considering this supply chain issue is: Are we creating efficiencies and making both ourselves and the retailers more money? That’s the ultimate test.