No matter their size, reach or scope, most retailers make three common mistakes when it comes to their supply chains. Faced with intense competition, squeezed profits and pressure to cut costs, savvy retailers are looking for new ways to reduce costs. One of the most promising areas for improving efficiency is in product distribution. Consider the top three distribution mistakes retailers make – and the shortest route to a smarter solution.
Mistake 1: Using last year’s cost metrics to predict next year’s costs
From a planning perspective, one of the most common errors retailers make is assuming that next year’s costs will be the same as this year’s or last year’s costs. Given the current environment – soaring fuel costs, a driver shortage that’s driving up wages, and regulatory mandates requiring cleaner, more fuel-efficient and more expensive engines, transportation costs are likely to continue to rise faster than distribution costs (the cost of facilities and labor).
The best way to circumvent the problem? First, allocate more money to transportation costs going forward. Second, look for creative ways to offset rising transportation costs. One way is to zero in on your distribution network. While transportation costs are spiraling upwards, distribution costs are expected to remain flat or grow at the pace of inflation. Think about where your distribution centers are located. Are too many located too far from stores? If so, consider repositioning them to minimize driving distances. Model an ideal distribution network and allocate enough funds for accelerating fuel, wage and equipment costs. Failing to factor the rising costs of transportation into budgets can add more pressure to already-squeezed margins.
Mistake 2: Thinking full containers are the best way to move merchandise from Asian manufacturers to the United States
Imagine a well-known department store shipping shirts manufactured in a textile manufacturing plant in China’s Guangdong province to the United States. If you’re like most retailers, you’re convinced the best way to get those shirts from Asia to the United States is to ship a container full of them to a U.S. distribution center and break down the shipments for delivery to your respective stores. The mistake here is assuming that the lowest cost option is handling store-level distribution in the United States. It isn’t. In fact, the smarter option is handling store-level distribution functions before products leave Asia. Handling distribution in Asia is so much more efficient that it can reduce costs by between 40 and 60 percent in labor costs alone.
From a practical perspective, making this model work means setting up distribution/mixing centers in Asia, where products from multiple vendors can be consolidated, packed into store-ready cartons, stuffed into containers and shipped to the United States, where the containers are deconsolidated and orders are shipped directly to stores. Missing an opportunity to optimize distribution in this way can result in higher costs, lower margins and a competitive disadvantage.
Mistake 3: Maintaining separate purchase orders and distribution models for store and online sales
As they pivot to respond to shifting consumer-buying habits, the majority of retailers have in-store and online sales channels. While many have deftly made the leap to e-commerce, many retailers continue to manage the two channels separately. Why? Unlike in-store distribution, where full case lots ship directly to stores, online orders are fulfilled on a one-off basis and shipped to individual consumers, a more complex undertaking.
Integrating the two channels is even more of a challenge. Most retailers generate separate purchase orders for online and in-store channels. A more efficient model aggregates forecasted demand, creates one P.O. for the products and ships them to the U.S., where products are separated, offering another 20 to 30 days of demand visibility. If an item doesn’t sell in stores, retailers can place fewer units in stores and shift inventory to the online channel. If a product doesn’t sell online, instead of marking it down and cutting profit margins, retailers can move it through a replenishment model to sell it in stores. The idea is to optimize inventory by deferring decisions about which channel products move through until the last possible moment, based on demand. The later a buying decision is made, the better retailers can protect margins. To be successful, multi-channel retailers need 360-degree visibility into the entire supply chain, access to inventory across the network and flexibility to fulfill all orders from all distribution centers.
The bottom line? Retail supply chains are in a state of flux. And all three mistakes – failing to accurately forecast rising transportation costs, shipping product from Asia to distribution centers in the U.S., and maintaining separate, dedicated in-store and direct-to-consumer channels – have a direct impact on profit margins. While making the necessary changes can be difficult, working with a third-party logistics provider with hands-on experience tackling these issues can help.
Chris Merritt currently serves as the Vice President and General Manager of Ryder’s Supply Chain Solutions Global Retail vertical. In this role, he is responsible for building and strengthening Ryder’s capabilities and presence in this industry vertical through better operational execution and innovative solutions. Mr. Merritt brings more than 20 years experience in the retail, healthcare, and logistics industries.