Damco eGuide
HOW TO BYPASS YOUR
DESTINATION WAREHOUSE BY
SHIPPING DIRECT-TO-STORE
Improve customer service, optimise operations, reduce risk
Jens Sode, Global Head of Lifestyle Vertical
Heino Kempers, Business Relationship
Manager
1
Table of Content
01. MANAGEMENT SUMMARY
3
02. THE KEY CHALLENGE: SATISFYING CUSTOMER NEEDS
4
03. BYPASSING THE TRADITIONAL REGIONAL DISTRIBUTION CENTRE
5
04. IMPLEMENTING DIRECT-TO-STORE WITH A LOGISTICS SERVICE
PROVIDER 8
05. DIRECT-TO-STORE BENEFITS ARE USUALLY SIGNIFICANT
10
06. WILL YOUR SUPPLY CHAIN BENEFIT FROM DIRECT-TO-STORE
DISTRIBUTION?11
07. CASE STUDIES
12
08. BETTER CUSTOMER SERVICE, INCREASED EFFICIENCY,
FEWER RISKS
15
2
01. MANAGEMENT SUMMARY
For retailers and lifestyle brands, satisfying the demands of their customers ranks high on the
list of challenges they face. In order to meet the capriciousness of today’s consumers and
the increasing pressure from the competition, every element of their operation needs to be as
agile and efficient as possible. This situation has stimulated innovative retailers to develop an
alternative for the traditional supply chain model.
The new model, direct-to-store or DC bypass, eliminates the regional distribution centre from
the supply chain by moving a maximum of value-added services like quality checks, making
the orders store-ready, co-packing and labelling to consolidation centres at origin. This
preparation allows orders then to be shipped directly to stores, customers or e-commerce
distribution centres.
All services that constitute the direct-to-store model can be provided by a third-party logistics
service provider. The success of the model depends on pre-defined business rules and
processes and on integrated visibility across the entire supply chain. We see that customers
who use it, apply it to the product categories for which it is most attractive: time-sensitive
products (fresh products, trendy items), products with special characteristics (high unit values,
large dimensions, heavy weight), and seasonal products.
If all conditions are met, the benefits of the direct-to-store model are usually significant.
One major result is an improvement in product velocity. Not only does this allow retailers to
respond more flexibly to changing customer demands, but it also reduces inventory and the
associated costs of capital. Because the cargo is no longer routed via a regional DC, the
distances travelled by truck are much shorter. Consequently, transportation costs are lower,
as are carbon emissions. Retailers using the model for seasonal items no longer need to have
warehouses that are dimensioned for peak periods but sit half-empty most of the time. And
last but not least: direct-to-store distribution eliminates a degree of risk from the supply chain
- a factor that is becoming increasingly important for retailers.
3
02. THE KEY CHALLENGE: SATISFYING CUSTOMER NEEDS
The challenge mentioned most often by our clients, especially in the retail and lifestyle industries,
is how to satisfy their customers’ needs in an efficient way. Consumers are increasingly
demanding and expect their items of choice to be available at all times, in physical stores
as well as online. Fashion trends change rapidly, making today’s hot item old-fashioned by
the day after tomorrow and forcing retailers to navigate between the Scylla of over-stocking
and the Charybdis of empty shelves. An efficient supply chain, with the shortest possible
lead times, enables retailers to follow the capriciousness that has become the standard of
consumer behaviour.
It comes as no surprise, then, that most leading research companies report that companies
with efficient supply chains have the best chances of surviving the competition. Not only
because they have the ability to react and adapt as the market situation changes, but also, and
even more importantly, because they have a lower cost base to operate from. Furthermore, we
see an increasing number of companies investigating the risks in their supply chain. Realising
how critical the supply chain is for their commercial success, they become aware that any
disruption, however small, can immediately have serious consequences. A port strike, an
episode of bad weather at origin, or a supplier who for whatever reason misses a delivery
date - any of these things, and many others, may cause a shipment of Christmas items to
arrive in stores after the holidays, effectively making them worthless. Companies that intend
to stay ahead of the game are trying to identify and understand their risks and developing and
deploying mitigating strategies and actions in the supply chain.
The direct-to-store model addresses each of these considerations by enabling retailers to
improve their customer service, reduce their operational costs and minimise the risk in their
supply chain, with a reduced carbon footprint as a bonus.
4
03. BYPASSING THE TRADITIONAL REGIONAL DISTRIBUTION
CENTRE
Over time many international companies have closed their local distribution centres and
moved their stock to a regional distribution centre, serving their region-wide customer base
or branches. Distribution centres also expanded their functions by providing value-added
logistics services, such as customising and localising products, adding components or
manuals, testing, quality control or final assembly. Later on, more sophisticated high-end
activities such as postponement manufacturing were also added.
A new distribution model
Many international companies still consider this centralised supply chain structure to be the
most efficient way of organising their distribution. But some, faced with the need to respond to
the increasing complexity of managing more and farther located suppliers while servicing more
scattered markets, have moved their logistics operations to low-cost countries and centralised
the distribution directly from origin. Labour-intensive logistics activities are increasingly being
performed at lower-cost locations by suppliers themselves or by logistics service providers.
Sourcing consolidation platforms operated by third-party providers are taking the role of
traditional distribution centres.
In essence, what has evolved here is a new distribution model, based on direct shipments
from origin to a final retailer, a store or an e-commerce provider, while bypassing the traditional
distribution centre. This model is called direct-to-store or DC bypass. We can describe it as
consisting of two parts: upstream and downstream:
• In the upstream part of the supply chain, direct-to-store takes advantage of sourcing
consolidation platforms located in the origins, like China or Indonesia, where goods
are consolidated and prepared store- or customer-ready. From there these goods are
shipped to their final destination.
• In the downstream part, shipments bypass the traditional distribution centre and,
supported by cross-docking, directly reach the final destination, which can be a
customer’s regional distribution centre or a store.
This distribution model enables retailers and lifestyle brands to make significant improvements
in their potential to serve consumers while at the same time reducing costs, risks, and carbon
emissions. To understand how these benefits come about we will first explore the model in
some detail and look at two implementation examples.
Direct-to-store vs. centralised distribution
As a start let’s compare direct-to-store to the centralised distribution model that is used by
many companies today. One should keep in mind that one condition for benefiting from the
direct-to-store model is that a company should be able to allocate bulk orders to customers
early in the supply chain: the more accurate the demand forecasts, the later the inventory
allocation can take place. This rarely applies to a retailer’s full product range, which is why
companies that benefit from the direct-to-store model typically use both distribution models
and use the direct-to-store model for specific cargo flows and/or customers. With that in
mind, let’s have a closer look at both models (see figure 1).
5
Figure 1: A comparison of traditional centralised distribution and the direct-to-store model
• New markets and new products: innovation and expansion, both geographically and in
terms of product offering, fuel growth and keep consumers engaged.
• Holidays and seasons are opportunities to benefit from consumers’ willingness to spend
money on particular items. Optimising this benefit requires an intimate knowledge of local
circumstances and customer preferences.
• New sourcing geographies, mentioned earlier, may be needed to add flexibility and speed
to the supply chain.
• Cost-to-serve is an important consideration: retailers are becoming increasingly aware
of the costs associated with their inventories and the gains that can be realised by
optimising them.
• Outsourcing non-core activities will enable a retailer to focus on his strength.
Implementing this part of a strategy requires finding the right partners and working closely
together with them.
In the case of the centralised distribution model, deliveries from suppliers are transported to
a central location, usually in full-load quantities, rather than to each store or customer. Loads
are then consolidated from a number of suppliers and delivered to the store, ideally in a single
full load. The centralised distribution centre acts as a single entry point to a region.
Logistics operations like pick-and-pack or making the order shop-ready are performed at the
destination in the regional DCs.
In a supply chain based on the direct-to-store model, deliveries from several suppliers are
consolidated at a consolidation centre at the origin, close to the suppliers. Value-added
logistics services like quality checks, making the orders store-ready, co-packing, labelling and
consolidation are performed in the consolidation centre at origin in this model: significantly
earlier in the supply chain.
6
Because of this preparation, orders can then be shipped directly to a store. Deconsolidation of
containers at destination is required for example when a container carries products for several
stores or customers, or when the product’s final destination doesn’t have the capabilities to
receive an ocean container. Sometimes this process only involves trans-loading of the cargo
from ocean container to a truckload, and in other situations it may involve cross-docking
of the cargo to prepare store shipments. Deconsolidation of direct-to-store containers may
result in full-truck loads (FTL), less-than-truck loads (LTL) or parcel loads.
7
04. IMPLEMENTING DIRECT-TO-STORE WITH A LOGISTICS
SERVICE PROVIDER
A typical direct-to-store implementation is a smart combination of logistics services that can
be provided by a third-party Logistics Service Provider or LSP. How this works is made visible
in Figure 2
Figure 2: Logistics services provided by a Logistics Service Provider (LSP) in direct-to-store implementations
Step by step, from left to right in the diagram, the process is as follows:
• Companies place their orders with their suppliers and send a copy of every order to their
Logistics Service Provider (LSP). it is critical that the suppliers deliver according to plan;
this can be ensured by a vendor management programme, provided by the LSP - since
it is part of their core business, LSPs are usually better positioned for running vendor
management programmes than retailers.
• Based on the order information and well-defined business rules, agreed between the
company and the LSP, the latter creates shipment plans. The LSP shares instructions
with the suppliers and cargo is delivered to the consolidation centre or port of loading
based on the plan.
• At a consolidation centre close to the suppliers, a LSP consolidates the cargo based on
well-defined and agreed business rules.
• Logistics services such as quality checks, store-ready packaging and barcode labelling
and scanning at outer or inner carton levels can be provided at these locations.
• All items are consolidated into container loads or airfreight shipments and transportation
is arranged to the final destination.
8
• At the destination, shipments can be checked and deconsolidated at a deconsolidation
facility managed by the LSP. Since the majority, if not all, of the required value-added
activities have already been taken care of, companies no longer need to flow their
shipments to their DCs. Additional logistics value-added services, if needed, can be
provided at the deconsolidation centre.
• From this location the orders are delivered directly to the customer’s DC or store, or they
can be held for later delivery.
Because the entire model is managed by one third-party logistics service provider, information
about the status and location path is available end-to-end throughout the entire supply chain.
This information is typically made available to all relevant stakeholders.
9
05. DIRECT-TO-STORE BENEFITS ARE USUALLY
SIGNIFICANT
Damco customers who have adopted the direct-to-store model have realised a variety of
benefits. As we mentioned in the previous section, the model can provide visibility of all orders
from beginning to end. Depending on the specific business parameters it is even possible
to track a shipment on in-store date, thus eliminating unpleasant surprises or half-informed
decisions.
The direct-to-store model reduces costs in several ways. Bypassing the regional DC and
delivering the orders directly to the store will result in lower labour costs and save storage
space at the DC. Also, because logistics value-added services are typically executed at a
consolidation centre at origin, companies will benefit from lower processing costs.
Some companies choose to apply the direct-to-store model only, or mainly, to handle their
seasonal freight flow. In this situation the main benefit is that the model will alleviate the pressure
on their own DCs. And in all cases the improved efficiency of distribution at destination will
drive significant carbon emission reductions - a major issue for many fashion and lifestyle
brands.
Last but not least, direct-to-store will yield significant improvements in product velocity. For
many retailers this is the central benefit, because it enables them to improve the way they
serve their customers’ needs. The improvement in product velocity, together with some of the
effects mentioned before, will in turn also result in a reduction of supply chain costs and cost
of capital.
10
06. WILL YOUR SUPPLY CHAIN BENEFIT FROM DIRECT-TOSTORE DISTRIBUTION?
The direct-to-store model is more attractive for some product categories than for others. We
have identified three groups of products for which the model is especially beneficial.
Time-sensitive products
Products with a value that rapidly diminishes or expires within a period of time mainly benefit
from improved product velocity. Examples of products in this category are:
• Fresh products, such as food and flowers. This category probably is the most demanding
of all because in most cases the entire supply chain will be temperature-controlled.
• Trendy items that are quickly outmoded (electronics, clothes).
• Promotions (for example, items related to product launches or fairs).
• Collectibles.
Products with specific characteristics
Items with a high unit value, such as jewellery, benefit from the reduced time-to-market.
They may also require a level of security that cannot be guaranteed in a standard regional
DC. Another category that doesn’t fit with standard DCs (and sometimes that is to be taken
literally) are products with a high volume or weight, such as furniture and outdoor equipment.
Many retailers prefer not to handle these special items in their own DCs because of technical
restraints.
Seasonal products
Time-sensitive products typically have high volumes of sales in a short period of time. Directto-store distribution reduces the need for extra DC capacity that would not be utilised for a
large part of the year. This category includes products for seasonal sports (clothes, sports
gear and accessories) and items for short high-volume periods like Christmas, Back-toschool, Black Friday and Valentine’s Day.
11
07. CASE STUDIES
The following two case studies will be helpful to give an indication of how large the benefits of
the direct-to-store model can be in specific situations.
Multi-brand retailer with European destination markets
The first case involves a multi-brand retailer who predominantly imports goods from Asia to
Europe, using two regional DCs. For a pilot project with the direct-to-store approach, this
Damco client selected three of their approximately 100 active customers, from the same
brand, based on volume and location. The expected annual volume for this pilot was 6,366
pallets, 115,000 cartons or 1,375,000 units.
Figure 3: Existing and new situations for a pilot with direct-to-store for a retailer importing from Asia to Europe
In the existing situation all cargo was shipped to the German port of Bremerhaven by ocean
carrier. From there it was railed to the European DC in the Czech Republic, to be trucked
to the UK in the final leg of the supply chain. The total distance travelled by the cargo at
destination was around 2550 km.
In the new situation, tested in the pilot, the cargo is shipped from Asia to the port of Rotterdam,
where it is loaded onto a barge for transport to a logistics service provider’s deconsolidation
centre in Belgium. From this deconsolidation centre it is then trucked to the customers. In this
arrangement the cargo travels 1020 km by road: 1530 km less than with the previous solution.
Not only was the distance covered by truck reduced to less than half, but also the supply
chain has become much simpler and easier to manage (see figure 4).
12
Figure 4: Pilot situation supply chain
The retailer places an order with their supplier and sends a copy to the logistics service
provider that is managing their logistics. The LSP uses this information for planning purposes.
With support of decision trees, previously agreed between the retailer and the LSP, the cargo
is consolidated and shipped, either to the European DC or - as part of the pilot project directly to the customer.
In the last case the cargo is routed to a cross-docking centre in Belgium. Here the goods are
unloaded from the container, made store-ready and loaded onto a truck. This all happens
within 24 hours after the container arrives at the cross-docking facility. After loading, the truck
takes the goods to the customer for delivery.
This implementation reduced the total lead-time by no less than 11 days. It also generated a
saving on inventory costs of €200,000 per year and increased stock turns from 9% to 13%.
And, last but not least, carbon emissions were reduced by an impressive 50%.
13
North American retailer, sourcing domestically and internationally
Similar benefits were realised with a different direct-to-store set up by a North American
Damco customer. This is a retailer who services over 500 stores in the US (see figure 5).
Figure 5: A US retailer using the direct-to-store model ships directly to stores from two deconsolidation centres
This retailer receives all of their internationally sourced products and most of their products
from domestic origins at one of two cross-docking facilities. Both of these facilities, one on
the East Coast, the other on the West Coast, are run by a logistics service provider and have
a fully automated deconsolidation setup.
The retailer places orders with the suppliers based on sales forecasts. The products are prepacked and labelled with a unique bulk label at origin. This organisation has implemented a
delayed allocation process that allows a bulk order to be matched with store-level needs. In
other words: products that are on their way to the cross-dock centre can be allocated to a
store and will then be delivered directly to that store.
This implementation of the direct-to-store model yielded a lead-time shortening of 5 days and
an operating costs reduction of 10%.
14
08. BETTER CUSTOMER SERVICE, INCREASED EFFICIENCY,
FEWER RISKS
With the above description of the direct-to-store model in mind it is easy to understand how
and why it can help retailers outclass their competition. The main effect is that it improves
the ability to service their customers by improving product velocity and offering end-to-end
visibility, which support their responsiveness to changes in market situation and customer
demands.
A direct-to-store supply chain also contributes to a more efficient operation. It reduces
the overall need for inventories because, as we saw in the case studies, lead-times can
be shortened dramatically. Lower inventories translate immediately into lower capital costs.
Similarly, the direct costs relating to transportation and product handling will go down by
adopting the model, and carbon emissions will be reduced because cargo is trucked over
smaller distances.
A third significant advantage is elimination of risks from the supply chain. As the processes in
the supply chain can be managed more accurately, a retailer can afford to operate more driven
by direct store or customer demand and will be able to manoeuvre smoothly around peak
capacity constraints. This reduces the need for markdowns and the risk of having warehouses
filled with obsolete inventory.
Damco is there to help!
Over the past years Damco’s supply chain specialists have gained considerable experience
with implementations of the direct-to-store model under a wide variety of circumstances. If
you are interested to explore how the model may improve your supply chain we will be happy
to make our expertise available to you. Please contact your local Damco representative or
send an email to [email protected].
You can find more information about direct-to-store on the Damco website:
Leaflet | Video | Product Details
15
About the authors
Jens Sode is Damco’s Global Head of Lifestyle Vertical
Heino Kempers is Business Relationship Manager at Damco
About Damco
Damco, one of the world’s leading third party logistics providers, specialises in
delivering customised freight forwarding and supply chain solutions. The
company has more than 300 offices in over 100 countries and employs 11,000+
people. Damco is part of the Maersk Group. More information about Damco
can be found on www.damco.com
All rights reserved. No part of this document may be reproduced or transmitted in any form or by any means,
electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of Damco
International BV.adopting the model, and carbon emissions will be reduced because cargo is trucked over
smaller distance
16