DSD’s Legendary Value To Suppliers

If you are a food manufacturer, the bottom line is that no one, absolutely no one in the food supply chain cares more about your products than your own company. One of the strengths of operating a direct store delivery (DSD) team is that it provides your business with unprecedented care in the form of the absolute control of your products starting way up stream in procurement of raw materials all the way to pack out and rotation of your finished products at retail.

The control over your product comes at a great cost and your company should perform a periodic analysis of your DSD team to ensure that the value derived from it continues to be greater than the cost of maintaining it. Chances are the results from this periodic analysis revalidates your company’s choice in direct story delivery in some or all of your sales channels.

In fact, a GMA study done a few years ago came to the conclusion that DSD was a formidable sales weapon for manufacturers. The study found that DSD provided faster sales turns, higher incremental lift from promotions, fewer out of stocks, and better service through in-store category management when compared to products that arrived at retail through direct warehouse deliveries. In short, DSD provides a manufacturer with a highly motivated, highly trained, flexible and efficient selling and delivery machine.

DSD Is Still A Value To All.  Oh yeah? Prove It.

There’s a fairly new supply chain initiative driven by a few of the larger grocery chains in the UK. These chains are challenging the conventional way business has been conducted by food manufacturers where food goods are delivered to the retailer, whether it’s to the retailer’s distribution center or directly to store.

It’s called “Factory Gate Pricing” (FGP) which means the sale of goods to the retailer occurs further up the supply chain right at the manufacturer’s “factory gate”.  The sale at the factory gate also includes the physical transfer of finished goods to the retailer either at the point of production or some other convenient location. This eliminates or significantly reduces the transportation expense traditionally borne by the supplier. The twist with the FGP initiative is that the “P” in FGP means that retailers also expect a price concession on the products purchased “at the gate” since the cost of transportation is no longer a factor for suppliers.

From the supplier’s perspective FGP may seem like a radical step but to these retailers it’s a logical step to improve their own supply chain efficiency. In addition to maximizing the retailer’s underutilized supply chain and driving down product costs, retailers gain control of the deliveries to their regional distribution centers and the flow of product to their shelves. This opens the current constraint at retail, commonly known as the receiving dock, by reducing the number of trucks waiting for dock space and the receiver’s time and attention.

Retailers also gain a distinct advantage over their non-FGP competition since they have complete visibility of their supply chain which now starts at the supplier’s factory and extends all the way to the shelf. Visibility is the secret to true network optimization according to one of the UK retailers.

In the US, something similar to FGP, some call Factory Direct Pricing, has been implemented to a very limited degree and doubtfully not as integrated into the supply chain as compared to the retailers in the UK. Traditionally deliveries in the US are still made either through direct warehouse with the retailer undertaking the secondary distribution responsibilities from their regional distribution centers to their stores or through direct store delivery where the manufacturer is responsible for product delivery, skipping the retailer distribution center, directly to each of the retailer’s stores.

Let’s Collaborate On This Because It’s Not An Option

The two main drivers of FGP for retailers are the reduction of costs and improving product on shelf availability. FGP is purported to improve on shelf availability of products in the system due to increased visibility of the supplier’s inventory.  So naturally the questions posed to suppliers by the retailers during the initial joint FGP meetings center around the supplier’s costs of serving the retailer. Retailers challenge each and every one of their suppliers to prove how their distribution network is more cost effective than theirs or join the FGP program.

One retailer put it rather bluntly, “engagement in this process is not optional”. Typically the retailer / supplier meeting will require subsequent meetings and studies on the cost and timing of current distribution routes to retail, design of the optimal supply chain, the number of SKU’s brought into the FGP system and the development of KPI’s. The bottom line here is that DSD suppliers need to understand the value they bring to their retailer partners and also the costs to serve them. 

FGP is a cause for concern for DSD manufacturers who traditionally are heavily invested in infrastructure such as trucks, warehouses, people and associated equipment. As volume is moved away from their own DSD network to the FGP network DSD manufacturers need to reduce their supporting infrastructure or vastly improve efficiencies. If they don’t they face increasing costs to continue to serve the balance of their non-FGP customers. Additionally there may be a number of suppliers who depend on a level of margin from their own DSD network which would be reduced or eliminated with the loss of volume to FGP.

Sure It Works “Over There”

A number of you are already thinking that this “FGP thing” may work and in fact makes a lot of sense in the UK due to its population density, but it won’t work here in the states due to our vast geography. It has less to do with geography than economies of scale. Retailers in the states have followed the same consolidation trends as they have in Europe. The have amassed their own distribution networks with large transportation fleets and warehouses along with a high level of logistics expertise. That’s a lot of horsepower that just screams to be optimized. 

Add the fact that grocery retailers are already facing an onslaught of nonunion competition and reeling from spiraling healthcare costs FGP may already be a topic of discussion in grocery retailer boardrooms across the country.

Summary: Know Thy Costs To Serve.

A lack of awareness of FGP could leave many food manufacturers, regardless of their method of distribution, at a strategic disadvantage unless they prepare now. Preparation means they need to gain a good understanding of the cost to serve their retail partners. It’s a double whammy for DSD manufacturers. They too need to understand their costs to serve but they will also need to resell their retail partners on the benefits of the customer facing attributes of DSD and how it contributes to their partner’s overall profitability.