In the retail supply chain, it is common practice for a foreign manufacturer to ship goods directly to a retailer’s domestic distribution centers (DCs), where goods are stored until being shipped to individual stores. In its simplest form, “DC bypass” takes one link out of the supply chain.

Bakers Shoes, a specialty retailer of fashion footwear, worked with Descartes, a provider of supply chain execution solutions (and a Logistics Viewpoints sponsor), Transmodal, a provider of global third party logistics services, and FedEx to implement a DC bypass strategy. By implementing the DC bypass strategy, Bakers could shift the processes previously performed in the third-party DC in Los Angeles to a consolidation warehouse in Shenzhen, thus performing the bulk of handling and labeling in a low-cost country, while reducing the cycle time and costs of running through the DC in L.A.

Here are the details. After production is complete, Bakers’ manufacturing partners deliver the merchandise to Transmodal’s consolidation center in Shenzhen, where the merchandise is counted, weighed, and cubed. In parallel, Transmodal warehouse personnel log on to the Descartes system, create a receipt, and print out the necessary warehouse labels, which are then applied to the inbound cartons and used to locate the merchandise within the consolidation center.

Descartes’ Purchase Order Direct system then sends the warehouse receipt to Bakers. This receipt is netted out against open orders. Bakers then looks at the merchandise available for allocation to individual stores, reexamines its demand forecasts, and allocates inventory to individual stores. When the final allocations are sent back to the Descartes system, Transmodal’s staff can then apply carton-level labels with the necessary data required to execute a direct ship program. The cartons are then scanned and loaded into a container.

Bakers’ has visibility into the whole process. Since the weight and dimensions of the cartons are captured initially by Transmodal at the consolidation center, Bakers can match these up with the destination information and send the package-level detail to FedEx. After being received in the US, the containers are sent via truck or rail to the FedEx hub and then delivered to stores.

Bakers found that this process worked well for airfreight because of the short lead times; the total airfreight cycle time is approximately four days source-to-store. Initially, however, Bakers’ allocations were far from optimum when goods moved by ocean, which is not surprising given the four week cycle time and the higher margin of error associated with fashion demand forecasts. DC bypass ocean freight had levels of store-to-store transfers, and lost sales, that were just too high.

Bakers kicked off a phase two project to correct this problem. Now as goods crossed the ocean, the ship was considered a “floating warehouse” and store-level allocations were postponed to the last minute to allow for a better matching of demand and supply.

This required some process changes. Instead of applying store-level destination labeling in Shenzhen, the Descartes system generated carton-level inventory labeling which was used to scan cartons into the ocean containers. These inventory labels allowed for in-transit inventory visibility. As goods are scanned in at the FedEx hub, the inventory details are sent at the last minute to Bakers’ headquarters. The retailer then makes the allocation decisions, after which FedEx shipping labels are printed for store delivery.

Using DC bypass, Bakers has reduced source-to-store cycle time by three to five days. In addition to the inventory savings, the company has also realized a 15 percent reduction in air freight charges. For ocean freight, the retailer reduced the cost of its distribution operations by 25 percent.

While DC bypass takes a link out of the supply chain, it does require IT-enabled collaboration between manufacturers, 3PLs, and the retailer. An IT workbench is required to handle the multi-party purchase orders (POs), advance ship notices (ASNs), and various demand and inventory status messages. Without the ability to make these electronic messages easily visible, this would be an all but impossible process except at very low shipment volumes. A DC bypass strategy also requires more accurate demand forecasts, precise delivery allocation planning, and tracking and tracing tools for supply chain visibility as shipments change hands and move from one mode of transport to another.

But as Bakers’ experience shows, a DC bypass strategy can be well worth the effort.

Neelam Singh is a Senior Analyst at ARC Advisory Group’s Bangalore office, where she focuses on supply chain management and enterprise applications. ​Neelam has over 9 years of experience in the IT industry conducting research in the supply chain management segment. Prior to joining ARC, she worked for Oracle as a Manager of Competitive Intelligence.