Product & Customer Profiling for Direct

Store Delivery (DSD)

By Liang Chen Thesis Advisor: Larry Lapide

Summary: This research collected industrial and researcher’s opinions about the value and suitability of the DSD model and analyzed the benefits of the DSD model by building two models: the generic distribution model and the costs of stock-out model. Besides company strategy, economy of scale and geographic locations, the research proves that the DSD model is most suitable for products with high volume, high velocity and high demand variations.

Liang Chen is a B.A. Economics from Shanghai Normal University. He spent almost 7 years in the logistics function for companies like Maersk Logistics, Dorel Industries and NYK Logistics before MIT

KEY INSIGHTS high customer satisfaction in most cases. Most merchandise replenished via the DSD mode are of 1. DSD can reduces loss sales and improves sales fast rotation, high volume, high sensitivity to product at the shelf for products of high volume, high features, short lead time and demanding operational velocity and high demand variations requirements. 2. DSD proves a better solution for products with The most prominent advantages of DSD focus on volatile demand by providing more frequent shelf micromarketing where employees are motivated to reviews maximize sales and category management that can help improve the ability to restock the stores for new 3. Retailers and DSD suppliers joins labor to product changes and major shelf set changes. maximize sales but the labor hours are exchangeable. The DSD models have the benefits that can be categorized to strategic competitive advantage and costs. Strategic competitive advantage refers to how a company grows and competes in the market by Introduction obtaining advantages over its competitors through the right distribution strategy. Strategic competitive DSD has been widely adopted in industries. Grocery advantage is always a part of the operations stores rely on a suppliers’ DSD network to replenish strategies, takes effect in a long term and is seldom store stock, assort the shelves and manage the quantifiable. Costs are a quantitative measure for the category. A DSD model can bring to suppliers and productivity of the whole model, often resulting in customers a clean shelf, high stock fulfillment and financial gains. The importance to store sales performance has display. Maintaining a good relationship with the driven some retailers (that have invested heavily in category manager of a store is also an important part transportation and warehousing assets) to start of merchandising. Delivery is where a supplier ships looking to shift products from flowing via a suppliers’ an order from a supplier’s distribution center directly DSD channel to their own internal network. to either the backroom or the shelf at each individual store of the retailer on a route truck. In some cases, Facing the pressure from retailers, supply chain such as for promotional items, the backroom might managers of DSD suppliers feel an urgency to have be replenished from the retailer’s DC directly rather answers to the questions: What values does the DSD than from delivery from the supplier’s DC. model still have to suppliers and retailers over a retailer’s internal network? If the shift is inevitable, to Based on the product’s physical flow, there are two what extent or what products and customers would types of DSD model: Through-the-Backroom and the DSD model still be the best solution? Finding the Direct-to-Shelf. right answer is critical for suppliers and retailers to The Suitability of the DSD Models justify and leverage existing DSD networks and to determine future strategies for replenishment and The DSD Model bears a big difference in network investment. responsibility and operations for suppliers than the DC Model. Such difference results in the respective The Generic Distribution Model strength and weakness of DSD model. The benefits from the strength of DSD model can be easily off-set by its weakness if the model is not applied properly. The DSD model should be applied to companies and products that can benefit most from the model. The benefits include: Strategic Competitive Advantage and Costs. When a supplier is choosing the suitable distribution model, the following factors should be considered:

Related to who:

• Company overall stragety Source: Interviews • Economy of Scale Based on interviews with industrial experts and • Geographic Locations researchers, a generic distribution model from Related to product features: suppliers to retail stores is built: The DC model and the DSD model. The DSD model can be further split • High volume and velocity into: Through-the-Backroom Model and Direct-to- • Short shelf life/Perishables Shelf Model. • High demand variations In a DC model, a supplier renders an order at a • Substitutability retailer’s distribution center where the retailer • Specialty Products receives, stores and distributes the product to the stores served by this distribution center. • New Products

In a Direct Store Delivery (DSD) Model, the supplier The Industry Case is responsible for replenishing a retailer’s store, a Our sponsor company is a world-wide food company process including two major functions: that has been engaged in the DSD operations for merchandising and delivery. Merchandising includes decades. The current material flow is from the plant such tasks as inventory control of the store to the regional distribution center. From there, the backroom, ordering, replenishing the shelf, products are further delivered to a local depot controlling the shelf life and improving the shelf covering eight stores in average. A route truck delivers products to the stores by milk run and the driver moves the pallet into the store’s backroom. Then a merchandiser visits each store on a regular basis. At the store, the merchandiser reviews the sales, forecasts the demand for the next review cycle, determines the items and the quantities of each item in the next order, and writes the order on behalf of the retailer store. The merchandiser is also responsible for product merchandising and category management at a store. A merchandiser sorts the items stored in the backroom and moves them to the Figure 1:Sensitivity to co-efficient of variation shelf for replenishment. Before putting products on the shelf, the merchandiser reviews the shelf life of Shelf size is also an important factor. As is shown in each unit and removes the expired or damaged units Figure 2, bigger shelf size can help both models to off the shelf. Then the shelf is refilled to full with the decrease costs. The DSD model enjoys more cost items from the backroom. Lastly whenever seeing it reduction than the DC model in a wider range of shelf necessary, the merchandiser will make sure that the size. display of the shelf is in good order and the product presentation is easy to see.

The Cost of Stock-Out Model

The DSD model can reduce the stock-out costs at the shelf by reviewing and replenishing the shelf in a more frequent manner than in the DC model. To quantify the benefit from this perspective, a Stock-out model is built. In this model, there are two kinds of costs that are assumed to occur at the shelf level: the stock-out costs and the labor cost of merchandising. The sum of these two costs is the total costs at the shelf. The objective is to minimize the total costs at Figure 2:Sensitivity to the shelf size (S) the shelf. Meanwhile, it is always assumed that the Lastly, the review frequency is actually the cost driver labor cost of merchandising should be less than the of the total costs at the shelf. My study indicated that saved lost sales. whoever reviews the shelf individually or combined, Three key variables, demand pattern, shelf size and there exists an optimal number of reviews in a review frequency are further studied to show their period. As is shown in Figure 3, the lowest total costs impact to the total costs at the shelf. occurred at the review frequency as 7 times a week.

Demand pattern is described by two parameters: the mean and the co-efficient of variations (cov). COV is an indicator for the demand fluctuation. As is shown below in Figure 1, the DSD model proves to have lower total costs than the DC model.

Figure 3:Review Frequency – By Single Party Further developed from Figure 3, Figure 4 indicated Conclusion that the supplier and the retailer can split labor hours to achieve the same lowest total costs at the shelf as This work collected extensive information about long as the combinations fall on the labor substation industrial opinions and practices to study the value curve. and suitability of the DSD model. Two quantitative models were further developed to show the benefit. The study turns out that the DSD can reduces loss sales and improves sales at the shelf. Such benefits result from extensive merchandising at the store. The DSD model proves a better solution for products with volatile demand by providing more frequent shelf reviews. Retailers and DSD suppliers can join labor

to maximize sales but the labor hours are exchangeable.

Figure 4:Labor Substitution Curve

The Total Channel Cost

Now the stock-out model is integrated into the generic model in order to calculate the profitability of each model in supplying one item to one store.

The channel profit equals the revenue minus the total distribution costs. The distribution costs include warehousing, transportation and costs at the shelf.

It is also assumed that all three models have the same sales in a period so we can calculate the savings of reducing stock-outs in each model. It is also noted that the product price in the DSD model is a little bit higher than that in the DC model, therefore, resulting in a revenue increase in the DSD model.

Figure 5 indicates the comparison of the weekly profit of the three models. The Through-the-Backroom model has the lowest channel cost.

Figure 5: Weekly Sales Revenue Breakdown – Single Item, Single Store