Understanding Retail Distribution Models

Gue observes that there are three primary models for delivering goods to retail stores:

1. Traditional Warehousing/Distribution, in which vendors ship goods to retail DCs, where the goods are stored until store orders need fulfilled, where they are then picked (often using a "wave" process" for batches of stores) and delivered to the stores.

2. Crossdock DCs, in which shipments from inbound suppliers are moved directly to outbound vehicles, with very little if any storage in between. In the best possible situation, products never touch the floor or a shelf, though some amount of staging is often used.

3. Direct to Store Delivery, in which vendors ship goods directly from their own facilities to retail store outlets.

In reality, many if not most retailers probably use some type of hybrid system, with an increasing number of them, for example, running both crossdock and traditional distribution operations in a single facility, which many thought too difficult to manage in the past.

Home products giant Home Depot, as another example, is substantially through a multi-year project to transform its model from one in which some 75% of goods were delivered by vendors direct to its stores and 25% from Home Depot DCs to the exact reverse of that. Home Depot is using a new network of crossdock-focused Regional Distribution Centers (RDCs) to get that job done.

Another model that is emerging is the so-called "DC Bypass" approach for imported goods, in which import DCs would transload the arriving containerized goods for manufacturers and ship the imported products directly to retail DCs - and maybe even retail stores - without the products moving into the manufacturer's distribution network at all.

For the first three models, Gue has nicely summarized the pros and cons of each approach in a summary graphic, as shown below.

Source: Kevin Gue/International Commerce Review

Looking at the chart, it might initially appear that the traditional distribution approach is the most costly - and while it clearly is from a handling only perspective, there are other considerations, Gue says.

Direct-to-store, he notes, has the disadvantages of some loss of control of stock availability, high costs of receiving at stores (imagine weekly shipments from every vendor), and often much higher transportation costs, since vendor shipments often use expensive less-than-truckload or parcel shipment modes.

The crossdock model also has some downsides. It also sacrifices some inventory control by not holding buffer stock between the vendor and store, but unlike shipping direct-to-store it maintains transportation efficiencies by consolidating small shipments into full truckloads for store deliveries.

While the benefits of reducing an entire layer of network inventory through the crossdock model are huge, there are other factors that must be considered, Gue says. For example:

(1) Lead time from order to delivery at the store is longer than with traditional distribution, so stores typically have to hold slightly more stock to hedge against stockouts. If vendors are far away, lead time could be several days.

(2) Unlike direct delivery from vendors, crossdocking requires the retailer to buy (or lease) and operate crossdocks, or to pay a third-party logistics provider to do so.

(3) Crossdocking requires greater coordination with vendors, sometimes with painful details of implementation.

Still, the trend clearly seems to be towards greater use of crossdocking in retail.

Source: http://www.scdigest.com/