A topic that is coming up with greater frequency amongst our client base is that many consumer goods manufacturers are feeling more pressure from retailers to relocate their distribution centers (DCs) to more centralized locations. This creates a real dilemma for suppliers – how do they offset some of the additional costs of adding a centralized distribution location to their network design while still remaining flexible to their retail customers?
Over the last decade, as more and more manufacturing is done in the Far East, and as retailers have been taking more and more control of the last leg of transportation into their DCs, many suppliers have decided to locate their DCs as close as possible to their inbound ports of entry on the West Coast of the U.S. The logic is simple: although the DC is located further away from major population centers (which are weighted to the U.S. East Coast), the retailers bear the burden of paying the freight to their (retailers’) eastern DC(s). The suppliers’ inbound freight to their own (suppliers’) DC(s) is very low, and they are able to offer a low cost of goods to the retailer.
Retailers, however, are becoming increasingly aware of the implications of procuring goods from suppliers with a single distribution point on the West Coast. Many large retailers have developed complex transportation consolidation and pooling systems to reduce freight costs from the West Coast to the middle of the country. However, in the last few months, we’ve heard of renewed pushes from retailers like Wal-Mart and Home Depot to persuade their suppliers to setup distribution points which are further east. This would result in an overall supply chain that is more efficient – the cross-country transportation leg would be made using highly efficient modes like truckload and rail/intermodal, and more expensive modes like LTL and parcel would be limited to shorter distances. However, the immediate impact of such a move is often to lower the retailers’ transportation costs while increasing the suppliers’ inbound freight costs. This seems like a non-starter for most suppliers who are already operating on razor-thin margins with large retailers.
Fortunately, retailers seem to be more willing than in the past to offer real financial incentives for relocation. Suppliers are starting to have substantive talks with retailers about raising their cost of goods slightly to offset the inbound freight costs. While we have yet to see a deal of this nature consummated, these talks represent a step in the right direction. More centralized distribution points represent greater overall efficiency in consumer goods supply chains, which should mean lower prices in stores. Additionally, many suppliers still have a portion of their outbound freight under their own control. Having a foothold in the Mid-West will allow them to serve these customers more profitably, especially under “pre-pay and allow” terms. This will also represent a boon to 3PLs in areas like Scranton, Louisville, Columbus, and Memphis. Some 3PLs in these locations have already developed creative freight programs to pool shipments from multiple suppliers to the same retailer, passing on the savings to the suppliers.
On the individual retailer’s side of the equation, the decision to offer price concessions in exchange for lower freight costs is not always a simple one. The retailer is paying to help a supplier create a better overall supply chain, which could be a stepping stone to offering centralized distribution points to other retailers as well. The retailer’s competitive advantage from having inventory closer to demand may be a short window. However, at some point in the future, it is not unreasonable to see the retail community view more efficient vendor supply chains in the same way that they’ve viewed the adoption of EDI and other protocols in years past: that there is value to creating more uniformity and efficiency, even if their competitors also benefit from some of the changes.
If you are a consumer goods manufacturer and have a story to share about collaborating with a retailer to re-design your supply chain, please feel free to share it here!