Creating Supply Chain Efficiencies

Getting products to stores more efficiently is now a major focus for all major retailers and distributors. Better distribution means lower costs and higher margins—both items high on c-store owners’ agendas these days—when customers are clutching their wallets more tightly than they have in years.

“There are two ways to make money: increase prices or reduce expenses, so naturally there’s a push to look at reducing distribution costs at a time when consumers are increasingly price-sensitive,” said NACS spokesman Jeff Lenard. “If you can take a penny out of the system per product, that’s a huge lift.”

7-Eleven Inc. is aiming to do more than that. The company plans to lead a new distribution charge with a test in California, and some onlookers predict the results will dramatically change how the industry does business going forward.

Preparing for Pilot
Tom Scallion, vice president of business transformation for 7-Eleven, said the 5,800-store chain is scheduled to begin the pilot distribution study in Los Angeles in January of next year. “The LA study is designed to introduce consolidated orders and deliveries for fresh, frozen, grocery and beverages at 371 stores,” said Scullion, whose primary wholesaler is McLane. “A new inventory management system will be introduced at the same time.”

Scallion said 7-Eleven franchisees and participating vendors and suppliers should see increased profits and simplified store operations through seamless store ordering, improved fill rates that reduce out of stocks and a lower number of deliveries, all made during off peak hours.

He also expects the study to produce better inventory shortage management, reduce the cost of goods, improve store-labor efficiencies, help to build the company’s brand and boost sales and profits for participating suppliers.

“Distribution is a big reason that 7-Eleven is the only truly national convenience store chain,” said Lenard. “You can’t outstrip your distribution. That’s why you see more c-store chains that are regional as opposed to national.”

What a lot of industry retailers face is getting a good deal on products when other trade channels are getting a better deal, Lenard noted, which is the prime reason why Wal-Mart and other big box operators can offer the low prices they do.

“Being cost competitive is pretty difficult when you’re buying from your competition,” Lenard said.

Streamlining Boosts Margins
Tim Cote, vice president of marketing for Beaverton, Ore.-based Plaid Pantries Inc., said his company streamlined its distribution system several years ago and is indeed enjoying the benefits the process delivered.

Working with Core-Mark, Plaid redid its milk and ice cream delivery programs, which had previously been handled by the dairy producer. Buying from a distributor has proven much more cost-effective than buying from a producer, improving Plaid’s margins on milk products.

“It was a very expensive process for the direct-store delivery (DSD) guys to call on our stores, so we were able to get more frequent deliveries going through our distributor than our DSD supplier,” Cote said. “Our stores are able to have better in-stocks this way. We’re very happy getting it through the wholesale distributor instead of the DSD network.”

There’s a learning curve for store owners and distributors alike, “but significantly more learning for the distributors,” Cote said. “One day you’re distributing candy bars, and then you start distributing milk, which has a sell-by date and has to be kept very cold all the time.”

Plaid’s distributor delivers milk and ice cream as part of the fresh program it does for the company, monitoring supplies and keeping the store stocked. “Our milk delivery is a hybrid between a traditional distributor program and a DSD program,” Cote said. “It was a program our two companies put together. We said, ‘we’d like to get milk from you, let’s build a program.’”

There is certainly great value in consolidated delivery, according to supply chain expert Kit Dietz, head of Kit Dietz Consulting. “Having a lot of products riding to market on the same truck benefits retailers by lowering delivery costs, which in turn raises margins,” he said. “From a sales and profit standpoint, leveraging the warehouse delivery system makes sense.”

Because distributors generally carry a wide range of brands consumers know and like, they can actually act as a management arm for retailers. “They can provide merchandise that is multi-vendored, focusing on the best segment across the category,” Dietz said. “That doesn’t happen with DSD.” 

From a pure category management perspective, retailers have a much better opportunity to optimize and leverage brand preferences through the warehouse system. “The opportunity to focus on branding strengths from multiple manufacturers in an individual merchandising set provides a lot more opportunity to satisfy the consumer with brands that are very popular while also delivering higher margins for the retailer,” Dietz said.

Building Distributor Relationships
Plaid’s relationship with Core-Mark bears a striking resemblance to that between a consumer and their favorite convenience store. “You have to have a close relationship,” Cote said. “Every chain is going to want slightly different things. We were able to work out a program that’s very, very specific.”

Plaid’s distributor was already at its stores, Cote pointed out, delivering thousands of dollars of products every week, so their incremental costs of picking up milk and delivering it to us was very small. “Everybody wins this way,” he said. “For DSD, delivery costs are not a big deal when they’re bringing in stuff by the pallet to a Wal-Mart or huge grocery chain. When they’re bringing it in by the hand truck to a c-store, it’s a lot more expensive.”

“Long-term, this isn’t a whole lot different than what 7-Eleven is doing with their distribution centers, or from what Circle K is doing with its self-distribution,” Cote added. “This is really where the industry is going.”

Plaid Pantries still gets a lot of the products it sells through DSD, but far fewer than it did just three years ago.

Beverages are the trickiest category to consolidate, according to Dietz. “You’re talking about a pretty monumental task to make that work,” he said.

Breweries in particular are especially happy with the three-tier brewery/distributor/retailer system because the distributors effectively provide a rolling sales system that manages in-store displays that enhance product sales, Cote said.

Right now, all beer companies don’t allow anyone to pick up and then re-distribute beer because it would weaken their core distributors. “I don’t think that’s going to change,” Cote said. “Ten years from now beer will still be distributed the same way because breweries really don’t need a central distribution system.”

C-store distribution, Lenard said, should be more about getting the right product when you need it and getting enough of it as opposed to having a whole lot of it on hand.

Moreover, costs have to be at least somewhat competitive because many people aren’t willing to pay all that much for convenience these days. “If people expect a candy bar to be 75 cents because that’s what the competition charges, then you have to charge that,
or close to it,” Lenard said. “The reason things are sometimes more expensive at c-stores is that the store’s costs are higher, and those costs include distribution. You’re getting smaller shipments, and if you’ve got five stores in different parts of town, delivery takes more effort.”

The best chance for improving the way the industry gets product to market is viewing the entire supply chain as collaborative process. “I believe there needs to be a greater focus on category management, and specifically, category management execution,” Dietz said, adding that the solution to the problems of distribution lie in retailers working with manufacturers and distributors, who can bring unique insights about the consumers they serve. “If we could focus on improving the distribution levels of core products in all categories, there is a huge sales opportunity for retailers to capitalize on.” CSD

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