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By Jeffrey Cascini, WeiserMazars LLP and Richard Dregne, Supply Chain Consultant
Distribution networks that service the grocery sector continue to face escalating challenges in delivering expected service performance at a profit. Manufacturers are increasingly building a better understanding of the costs to service each of their customers and quite often find wide variation due to delivery network geography and order profiles along with product, handling and delivery characteristics.
Carrier capacity has remained tight in many markets, and because many grocery retailers have escalated their focus on reducing inventory levels, there is significant potential for increased pressure on upstream inventory. This has left manufacturers scrambling to find ways to sustainably achieve on-time delivery and high fill rates. Creative approaches are required to reduce total network inventory and delivery costs, while achieving expected delivery performance targets. Companies that can accomplish this will create a win-win solution for themselves and their customers.
Shipment collaboration among manufacturers is a process alternative that could drive efficiencies in the grocery delivery supply chain. This is not a new idea and is already in place in varying forms in some networks today, but has significant growth potential. The most common approach is vendor consolidation by a third party logistics provider (3PL). Under this system, multiple vendors ship into a regional location where the product is stored and subsequently mixed for outbound shipments to grocery stores.
Another approach is for manufacturers to align independently to address specific opportunities within segments of their portfolios. Both of these alternatives can leverage specific characteristics of the different products to drive shipping efficiencies across common customer delivery points.
Under either scenario, combining a high-cube/low-weight shipper with a low-cube/high-weight shipper can create greater transportation efficiencies than could be achieved independently. This can result in significant reductions in freight costs for the suppliers. From the grocer’s perspective, a broader product profile allows full truck order quantities to be met sooner than a single supplier could provide them, resulting in faster replenishment and reduced inventory requirements.
'Collaboration, Agreement and Alignment'
As manufacturers explore these options and look to align with other shippers directly or through 3PLs, they must thoroughly analyze many other factors and engineer them into the process. Critical elements for successful consolidation include product compatibility (content, weight, stack ability), commonality of customer base and ship-to locations, seasonality of demand, product promotion timing and factors that may be unique to either the product or the manufacturer. It will also be necessary to align how and where inventory will be consolidated to support outbound shipments, determine who will manage the inventory and outbound shipping, how warehouse labor and space costs will be allocated and how financial liability for inventory will be handled. These aspects will require collaboration, agreement and alignment in advance to ensure positive operational and financial results.
Risk must also be considered when entering this type of arrangement. Each entity involved is relying on other firms to perform as promised, thus linking its success to theirs. Having strong partners is necessary to mitigate potential problems going forward and, as in any business relationship, formalized processes, procedures and KPIs are required.
While all of this seems daunting, the rewards for successful collaborations can be significant. A robust distribution collaboration process can benefit all parties in the distribution supply chain. Grocers will profit from greater flexibility in building loads, resulting in reduced safety stock requirements and inbound deliveries. Manufacturers will realize reductions in outbound transportation costs driven by better utilization of both cube and weight, and although they will bear the complexity and cost of storing/managing the co-mingling of inventory, the net savings associated with the consolidated outbound freight can potentially be in the 10-20 percent range.