Direct Store Delivery | An Analysis

The purpose of this theoretical and literary analysis of DSD and its relevant component parts/attributes in this study, is to encapsulate the basis of the concept, technology, past research and to elucidate potential solutions to the problem situation; based on investigated best practices and deployment techniques in the industry. The focus of literary investigation will be aligned with the main DSD processes adopted at BMW, namely sales and delivery.

Originality theme

DSD has been largely utilized in the beverage industry by some ‘giants’ such as PepsiCo and Coca-Cola for many years, however whilst benefits are realized, it must be noted that DSD is not a ‘one size fits all distribution model’ (A. Otto et al, 2009). BMW has customized many aspects of its DSD process to fit its strategic goal and the business environment fostered by a third world country. Operating a DSD business in a third world country is vastly different from those in first world countries, as economic, political, technological, environmental, social and legal elements affect the intended ‘model’ deployment to great and sometimes disadvantageous extents. Currently, there are no DSD solution providers locally in Trinidad, and as such, whatever solutions exist, are offered by foreign companies, operating in different markets and environments.

The bottled water industry in Trinidad, is subject to fierce oligopolistic competition, a primary reason why BMW must capitalize on DSD technology to gain a competitive advantage over its rivals. How this is accomplished rests on BMWs ability to leverage available resources with intended outcomes. Therefore, potential solutions should afford some measure of flexibility and customization to specific needs of the company.

An overview of the DSD concept

Direct Store Delivery has been defined by Otto and Shariatmadari (2008, p.11) as a

“business process that manufacturers use to both sell and distribute goods directly to PoS and Poc, including additional product and market related services such as merchandizing, information gathering, or equipment service and bypassing any retailer or wholesaler logistics”.

This definition has been further corroborated by Vinod (2004, p. 359), who stated that companies who employ the DSD process do not send goods to any locations using third party actors, including independent wholesalers or nor the retailer’s own warehouses. DSD is based on a decentralized distribution model and has been adopted by many industries such as the food and beverage; where in groceries alone, it accounts for 24 percent of unit sales and 52 percent of retails profits (GMA, 2008).

According to A. Otto et al (2009), there are two types of DSD sales; route sell and pre-sell (Matthews 1995). GMA (GMA 2002a, P 21) further goes on to define route sales as “a form of DSD in which the sale and delivery of product is accomplished by the same individual on the same day the sales person typically the route driver has products on the truck and replenishes each store based on immediate needs”. Pre-sell is defined by GMA as a form of DSD in which order placement occurs [.] prior to DSD delivery (GMA 2002a, P 21). A company can utilize one or both methods in the deployment of their DSD. BMW has used this hybrid combination as a result of the mixed market demands and requirements of its customer base; in an attempt to achieve a wider coverage of sales.

Why companies use DSD

The strategic goal of a company decides the focus and direction of its DSD activities, therefore its retailing thrust. Stern and El-Ansary (1992) has defined retailing as “the activities involved in selling goods and services to ultimate consumers”. DSD therefore can be thought of as a type of retailing but centered on de-centralized distribution. D. Simchi-Levi, P. Kaminsky and E. Simchi-Levi (2003) states that products can be produced and distributed at the right quantities, to the right location, and at the right time, which results in minimal system-wide costs while fulfilling customer demands in a de-centralized distribution system.

Eleni Mangina, Ilias P. Vlachos (2005, p. 403-420) indicates that in the last decades, advances in information technologies and increased competition have changed the business environment in the food and beverages industry. To further substantiate that view, Clark and Hammond (1997) and Fearne and Hughes, 2000 A. Fearne and D. Hughes, Success factors in the fresh produce supply chain: Insights from the UK, British Food Journal 102 (2000) (10), pp. 760-772. Full Text via CrossRefFearne and Hughes (2000) added that increased competition and advances in information technologies push for considerable structural changes in food supply chains. Companies began to see the value in having an efficient supply chain management as indicated by Fearne and Hughes (2000), Hayenga, (2000) and Lambert and Stock (1993) when they said that enterprises have turned their attention to logistics management as the last frontier of gaining and sustaining a competitive advantage.

As seen in the above illustration, Fig, DSD is used by manufacturing companies for various reasons and outcomes, or to alleviate (a) specific problem area(s) with regards to sales and delivery logistics. An example of this is the classic vehicle routing problem (VRP), which Ching-Jong Liao, Yaoming Lin, Stephen C. Shih (2010, p. 6868-6873) identifies as involving the service of a set of customers with known demands by a fleet of vehicles from a single distribution center. An inherent attribute of DSD is its known efficient delivery logistics, which may serve to remediate a VRP.

However, in the case of BMW, there was no real alternative to employing DSD, since using centralized distribution channel third parties were not as profitable and readily available in required geographic locations to maximize market penetration.

DSD – Good or Bad?

GMA states that DSD offers consumer packaged goods (CPG) manufacturers and retailers unique opportunities to maximize sales and minimize inefficiencies in the supply chain (GMA, 2005). McEnvoy (1997) goes on to say that despite its complexities, DSD still provides great benefits to both suppliers and retailers in most product categories. Another advocate of DSD, Progresive Grocer (1995), adds that a DSD model can maximize sales by providing much more micromarketing of products through highly motivated route drivers or merchandizers. There exists much bias pro DSD from retailers such as groceries due to the beneficial value added services inherent in the DSD process.

Both the Beverage Industry (2006, p.13) and Food Logistics (2007, p.12) imposes that as sales execution at the PoS level becomes increasingly important, DSD seems to be the most efficient distribution mode or even a marketing tool for a manufacturer to cope with these challenges. Wilfraat, M. (n.d.) identified some benefits to retailers such as; reduced labour expense for re-ordering since this is done by the supplier, a reduction of 5-10% in merchandising time spent handling item data and a 1% + reduction in logistics cost savings. GMA (2008) fully endorses DSD and offers that DSD accounts for 24% of volume, 52% of store profits, drives a 30% improvement in working capital, allows five times faster shelf replenishment and 25% off in-store merchandizing labour. Benefits to the manufacturer has been identified by Kinsey (2000, p. 1127) where he states that DSD allows manufacturers to streamline their supply chains and reduce stock levels in the system.

On the other side of the spectrum, 7-Eleven CEO Joe DePinto called DSD a “fragmented and inefficient” system that clogs convenience stores with as many as 50 to 60 deliveries per week [] The current supply chain is archaic and complicated, [] It takes store operators’ attention away from serving the customer.” (Gatty, 2008). Another concern came from David Bishop, managing partner of Balvor, Barrington, Ill, who indicated that “smaller drop sizes per delivery eat into profit margins, motivating these changes, and that motivates some retailers to search for alternative sources.” (Wilfraat, M. (n.d.). Manufacturers are warned by Lofstock, J., Quackenbush, K. and Sharrah, K. (2007) that DSD could negatively affect retail partners as; manufacturers pre-price their items which translates into a lower profit margin for retailers, retailers may have a loss of control since products are delivered directly to shelves by manufacturer, bypassing normal delivery controls. Some retailers have switched from DSD to centralized distribution in recent years, such as Walmart, Office Max, and Home Depot has announced in 2007, a plan to shift from its current mix of 60% DSD goods, 40 % its own distribution network to 25% DSD and 75% self distribution model (Wulfraat, M. (n.d.)).

Both real and perceived benefits and disadvantages of DSD to manufacturers and retailers alike should be carefully considered before a decision to employ the process. Whilst seemingly the benefits to retailers surpass those of manufacturers given the nature of DSD, manufacturers should recognize that DSD is not suitable for every company, or its products. The opinion that DSD should be treated as a strategic tool instead of a mere distribution network has merit, in that the DSD processes and outcomes need to be aligned with the strategic goals of the company. Failure to properly analyze dynamic market conditions and identify current and future corporate goals before adopting DSD, will inevitably lead to financial losses for the company. The shift of companies from DSD to centralized distribution is not conclusive evidence to discredit the efficiency of the process, but can be considered as an indication of a shift in the strategic goals of a company; and the mismatch of employed processes and technologies in pursuit of the new direction. Many beverage companies like Coca-Cola, Pepsi Co and Coors have not deviated from DSD, which strongly suggests that product characteristics and play a big part in the success of DSD.