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Distribution Case

THE CASE

Company B is a mid sized automotive retailer with some general merchandise in their product assortment. Company B was growing annually however at a significantly less rate than its national competitors. Therefore retaining its existing customer basis was critical to their business. They have over 400 locations across the country and have 3 major competitors in the country. Their core target audience was do it yourself males aged 25-35 with an average disposable income of $40,000. Company B had over 5 distribution centers across the country with over 300 suppliers located around the country. Stores merchandise seldom changes based on location therefore having an efficient supply chain was critical.

Company B was experiencing issues with their top moving skus within their supply chain. These skus were seasonal, had a short shelf life, large cube and their vendor would not refund any excess merchandise left after the season. Any merchandise left would have to be liquidated or heavily discounted which often put Company B at a significant loss in margin. Furthermore, during season it was critical for Company B to have the merchandise in their stores given their competitive position in the market. Company B prefers to use its own fleet to transport merchandise as it was more cost efficient. They had a healthy number of transport vehicles. They would pick up merchandise at the vendor location and bring it to their distribution center where it was sorted and sent to individual stores. Furthermore, purchase decisions of these skus were often volatile to conditions such as weather and promotional events. The purchase size for each order was up to 20x as large as other merchandise in terms of cubic volume. As a result the distribution center experienced difficulty in processing these large orders in a short period of time, which sometimes contributed to over capacity at the distribution centers.  Inventory was often delayed to get to the stores and store managers complained about the number of customer complaints. Company B really needed to be in stock for these “traffic drivers” so it can remain competitive however their logistical challenges led to angry customers who saw advertised merchandise not to be found in their stores.

OUR APPROACH AND RESULTS

Company B had  solid track record as being the primary choice for automotive service and repair. However, their top selling skus, which were traffic drivers often showed up late or didn’t show up at all. The company couldn’t hold excess inventory after the season due to costs and space in the DC. Therefore there were two primary issues which were DC capacity and store access to merchandise. We analyzed the company’s supply chain to reveal the following findings:

  • Although all stores received merchandise, certain geographical areas had larger demand for merchandise
  • Overstock was a larger concern in the eastern part of the country
  • Given the cubic volume, not all DC’s were equipped to handle this freight, only 2 out of 5 were capable which had to service the entire country
  • The vendor had facilities in Quebec and Ontario only.
  • Vendor had a contract with a 3PL in BC to produce their product for a larger retailer.
  • The vendor carried no inventory as it was a just in time process. They were able to produce enough volume per day to service 3 days of Company B’s demand
  • Forecasts to vendors were communicated the day of a large shipment need
  • Turn around time for vendors was often less than a day

Based on these findings our recommendation was to develop a joint program including DC storage and vendor direct delivery with a small amount of emergency stock in locations accessible to the individual stores. This resulted to a 65% reduction in excess inventory, adequate staffing and capacity at the DC to process the reduced freight and the vendor servicing part of the stores in the country for an increase in cost of goods, however, this increase was much less than the penalty Company B faced in excess inventory prior to the new strategy.

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