Optimal Sourcing and Distribution Strategy

Situation

A $3 billion retail chain had always allowed their individual store manager to decide what to stock and how to acquire it. While autonomy did enable store managers to match their individual stores' product assortment to local markets, it had created significant disadvantages for the Chain:

  • Economies of scale in purchasing were almost impossible to achieve
  • Direct-Store-Delivery (the primary distribution method) was being cut back by suppliers (because of rising costs) - causing fewer options for the stores
  • Delivery minimums were being increased dramatically - requiring the store to order and carry more and more inventory
  • Rack-jobbers had raised their mark-ups on merchandise to the point that this option had become uneconomic for many product categories
  • Competitors were increasingly using captive warehousing and distribution alternatives - resulting in lower "landed-on-the-shelf" costs

Problem

We were asked by the Client to identify the optimal sourcing and distribution strategy for each of their non-pharmaceutical product categories. Specific alternatives to be considered included various wholesalers and rack-jobbers, direct-store-delivery (DSD), and various forms of Chain controlled self-warehousing and distribution (including various 3PLs).

Solution

Extensive interviews with store managers and suppliers
Documented current volumes for each key product category (i.e., dollars, cube, pounds, shipments, minimums, etc.)
Documented current prices, mark-ups, volume discounts, etc. for each product category and for each sourcing alternative
Documented key attributes (e.g., frequency of delivery, minimum shipment, inventory implications, etc.), capabilities and costs for each distribution alternative (wholesaler, self warehousing, 3PLs, etc)
Built a financial model that enabled "what-if" analysis of various alternative combinations of product category, sourcing and distribution alternatives
Validated model, and performed extensive analysis Made recommendations

Benefits

Chain contracted with a 3PL for warehousing and delivery
Developed centralized purchasing for some product categories
Continued with some wholesalers/rack-jobbers/DSD for selected categories after renegotiating prices
Recommendations identified reductions in "landed-on-the-shelf" costs of 0.6% to 2.1% depending upon the product category, equaling over $6 million in savings in COGS

For additional information, contact Pete Crosby 310 553-6837 Petecrosby@cgrmc.com