How to Leverage Technology and Collaboration to Drive Value
By Rex Clothier
Traditional distributors have become more aggressive on cost increases, and some are even shutting down distribution operations in key markets. Cited factors include increased congestion, driver shortages, union activity, SKU complexity, drop size, and volume declines. This is often amplified by increased demand and growth of small parcel delivery.
With lower asset utilization rates, higher labor costs and increased demands for efficiency, distributors are truly faced with real cost increases, and at the same time are also more frequently running at optimal to over-capacity levels. Incremental distribution capacity requires large investments and requires time to build volumes to run optimally. Run well, only large scale “system” distribution networks (dedicated distribution network) can run as efficiently as a distributor network can. After years of consolidation and chasing volumes for efficiency, traditional distributors and “system” distributors are now able to focus on increasing margins, “firing” their low return customers, passing through costs, and maintaining efficiency.
In the recent past, big brand owners have had significant leverage in the recent past to negotiate lower costs from their distributors. Logistic efficiencies created from volume, captive end users who demand the brand for their ultimate consumer, and optionality to switch to alternate distributors all led to lower costs for the brand owners who required concessions from distributors. This leverage has waned recently as consumers want more choices and are accepting more substitutes for traditional brands.
Consumers’ demand for value is pressuring trade dollar spend that traditionally protected brand placements and locked out new entrants. As new entrants are pressuring access through distribution to consumers, distributors have more options to fill their capacity with greater optionality, leading to heavier negotiation positions on new contracts.
Certainly, the CPG industry will work to manage these increased costs more aggressively. As there are increasingly fewer options for brand owners to move their distribution business to, pricing pressure from incumbent distributors is likely to grow. This will be an increased focus for distributors and industry participants in the near to intermediate term. Brand owners in particular, many of whom have enjoyed preferential costing on their distributor solutions, will be challenged as distributors reset their margin requirements. In addition, as distributors work to simply maintain the flow through of cost increases, the distribution risk of closing non-profitable distribution centers is a real risk for CPG industry participants to consider.
Industry participants facing these challenges can take steps to mitigate this growing distribution risk:
- Work closely with incumbent distributors to fully understand the specific risks that exist in specific market regions. Operating a “close to the vest” approach increases the risk for all parties in the supply chain. Establishing open and transparent communications with transparent performance metrics and cost metrics is essential to navigate to the best solution for all participants.
- Perform detailed competitive arena assessments and confirm where the highest risk markets are. Distributors must be profitable to remain viable; industry participants must deliver value to consumers and must have a clear assessment of the value that distribution brings to the consumer. All parties have a vested interest in understanding the real costs and working together to optimize those costs.
- Focus on efficiency, performance, and value creation metrics when evaluating optimal flow of goods. Too often relationships and ease of doing business together outweigh the overall contribution to the end consumer. In the long run, consumers will choose where the strongest value is delivered.
- Put focus on efforts that can drive cost out of distributors cost structure with your distributors. Distributors can operate efficiently within supply chain networks as they can achieve consolidated performance across their customer networks. This consolidation effect is generally more efficient, but determining how to better manage the impact of your business within their network means even greater efficiency for both parties.
- Take advantage of technology. New advances in AS/RS (Automated Storage and Retrieval Systems) continues to take cost out of supply chain. Advanced Demand planning solutions provide more efficient management of inventories, operations, logistics and procurement across the end to end supply chain. Increased visibility and transparency allow more efficient management for all parties in the distribution network.
Distribution networks are an important component of a product’s makeup as it is received by the consumer. While largely hidden from the consumer, its importance must be understood. Industry participants throughout the supply chain will be faced with increased risk and cost mitigation challenges more and more. Recent challenges and trends clearly put distribution networks in the driver’s seat for end-to-end supply chains to continue to drive total value.
Rex Clothier is Vice President, CPG at Maine Pointe, a global supply chain and operations consultancy.