Reprinted from MODERN MATERIALS HANDLING, February 1, 2004

Retail distribution strategies to watch
Retailers and their suppliers are making tough decisions to centralize, regionalize, outsource and collaborate to ensure future success.  

Distribution is the backbone of every retail business. Inventory must get to store shelves when customers are most interested in buying. It's equally important that distribution be efficient and cost-effective. Clearly, it is the strategies that a company chooses to maximize its distribution effectiveness that make a difference—both to customers and the bottom line.

Today, three strategic considerations are high on the list of retail distribution managers. To begin, they must weigh the pros and cons of centralized and regionalized distribution. Then there's the issue of running their own DC operations or outsourcing to a third party. And finally, retailers and their suppliers must decide how much to collaborate with each other as partners across the retail supply chain.

In this special report on retail distribution, we will take a look at the decisions that retail distribution leaders are making on these three strategies and what it means to their success.

Centralization vs. regionalization
Retailers and their suppliers continue to struggle with the issue of DC centralization or regionalization. The challenge is to find the right balance between inventory control, costs, and time to store shelves.

Retailer JC Penney has spent the past two years moving away from centralization in favor of regionalization. According to Tim Lyons, spokesperson for the retailer, "Our competition was able to deliver products faster. Our buying cycle and the process of getting goods to market was too long."

During the past two years, the company has established 13 Store Support Centers (SSCs) located around the country. These regional DCs gather products from domestic suppliers and then deliver them to anywhere from 60 to 120 stores. Imported products still are initially received at Alliance then head to the SSCs where they are combined with domestic products for store shipment.

Since adopting the SSC strategy, Penneys has been able to cut in half the average time that it takes to move merchandise from its domestic vendors' docks to stores, from 14 days to only seven.

Lead times have also been trimmed for the overseas items. What used to take 37 days from overseas docks to stores now can be accomplished in only 26 days. Greater flexibility is also gained.

Cosmetics supplier Coty, on the other hand, has decided to go the other way and centralize distribution to maximize flexibility for its customers—the nation's retailers. Until the company centralized three DCs into one in Sanford, N.C., it had performed bulk picks that were shipped to retailers' DCs where they were resorted and picked again before shipment to individual stores.

Today, Mark Newberry, vice president of logistics, says the new DC organizes its orderpicking by individual retailer stores. The retailers simply crossdock Coty products when they arrive at their DCs. By centralizing, Coty could justify a high degree of automation, including pick-to-light, carousels, conveyors and sorters, and has much better control over its own distribution.

Distribution outsourcing is currently a $65 billion business and is growing 7% annually. Companies find a lot of advantages to outsourcing as it allows them to be more flexible and tap into expertise that they may not possess internally.

"Outsourcing can take advantage of experience across many customers and bring best practices in distribution," says Ann Drake, CEO of DSC Logistics (847-390-6800), a third-party logistics provider (3PL). "It also allows customers to focus on their core competencies," she adds.  

The Scotts Company, maker of the well-known lawn and garden products works with about 15 different 3PLs that perform warehousing and order fulfillment.

In addition to not binding them to real estate, another major reason why Scotts chooses to outsource is because of the highly seasonal nature of its business. Most of the company's retail distribution takes place in the months leading up to spring and through the summer. Outsourcing allows Scotts to occupy warehouse space only when needed. Otherwise, the company would be at overcapacity during some months and well below during the rest of the year. A 3PL can adjust to these changes and has the ability to lease remaining space to other clients during the leaner months of distribution.

Many companies make such an extensive use of outsourcing that they need someone to manage it all. This role, often performed by a current logistics provider or a consultant, is known as a 4PL. They are responsible for all of their clients' third-party contracts, including warehousing, labor and transportation.

The key to all outsourced efforts is the willingness to trust someone else with your data, products and customers. Companies willing to work together can find great benefits by experiencing the fresh ideas of their partners.

When the distribution burden is heavy, find someone to share it. That philosophy is driving many retailers and their suppliers to collaborate with each other as partners, sharing expertise and even distribution infrastructure.

Visibility is certainly one of the most common ways that retail companies are collaborating today. Sophisticated software permits data to be shared easily among groups throughout the supply chain. Suppliers can relay information on product availability, while customers can have access to real-time information about order status, shipping dates and store locations that have available merchandise. It also allows for automatic replenishment of items sold.

But sometimes collaboration goes beyond the mere sharing of data—it can even get physical. One of the most unusual collaborative efforts now taking place in the supply chain is occurring in Crossville, Tenn., and is a strategy that could be easily copied by retailers.

In this collaborative model, four companies that are normally fierce competitors have joined forces to distribute their industrial products. Timken, Rockwell Automation, SKF Group, and INA Holding Schaeffler KG, makers of ball bearings and other products for industry, saw that they had about 85% of customers in common and shared the majority of shipping destinations. The four realized that each could save greatly on warehousing, processing and shipping costs by pooling their resources, and thus CoLinx was born.

In this "shared services operation," each of the four members owns inventory placed in Crossville, and now several other locations in the United States. The operation uses the jointly owned CoLinx company to manage a Web site, pass orders along to the member companies, and pick the orders as needed from the DC. The products from one company are then combined together with items ordered by the same customer from any of the other companies to create a single shipment.

While no large-scale retailers are yet collaborating on this level with competitors, it may be only a matter of time before distributors see the benefits of such an arrangement. Many small-to-mid-size retailers may actually need such a model of shared warehousing, picking and transportation to survive, let alone compete, in a retail world dominated by large mass merchandisers.

In the end, retail distribution managers are faced with a changing landscape that requires them to continually re-examine how they manage inventory and get it to store shelves.
© Copyright February 1, 2004. Modern Materials Handling. All rights reserved.

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