Shriram writes about Centralized vs Decentralized distributions.

1. Special FocuS RETAIL CHAIN DISTRIBUTION MODELS
DecentraliseD centraliseD
Illustration By Sanjay Dalvi
PerFecting the suPPly chain
to gain Market share
For a retailer, it is all about selecting the right distribution system as his choice could have a direct bearing on the
quality of service offered to the customer and the cost of service. the system not only has to reduce costs, but also
add to a company’s bottom line system wide. the direct store delivery and centralised distribution systems are the two
preferred choices for retailers. But before finalising on which distribution system to implement, a retailer has to consider
factors such as store density in the identified service area, manufacturers’/vendors’ distribution infrastructure and
capabilities, store format & location and cost consideration among others. it is only after considering these factors
and weighing the pros and cons that a retailer should finalise on a distribution system, which will help him emerge a
winner in the marketplace.
a decision regarding the selection store, thereby bypassing a retailer’s Decision Drivers
of a distribution system for store distribution centre. Before analysing the pros and cons
replenishment is highly critical as • Centralised Distribution (CD): This of various systems, it is important to
it has a far reaching impact on the network describes the flow of goods understand how the following factors
business. This impact could be in from the manufacturer’s distribution drive the decision:
terms of both – the quality of service network to a distribution centre Store density in the identified service
offered to the customer and the cost of (DC). The replenishment orders area
service. At one end is the 100 per cent of the multiple outlets are then Setting up a standalone back end
availability of all products on the shelf, processed, consolidated and system is a costly proposition. There
while at the other end is the lowest delivered to the outlets at the DC. should be sufficient number of stores
cost incurred to ensure the same. The
adopted distribution system should
address both these parameters and
should be capable of striking a balance
between availability and cost.
Distribution MoDels
Distribution modelling is one of the
most discussed and debated subjects
in the retail sector. The following
two systems are often discussed and
compared:
• Direct Store Delivery (DSD): This
is used to describe a method of
delivering products from a supplier
or distributor directly to a retail Figure 1: Pictorial representation of Direct Store Delivery and Centralised Distribution models
38 • SMART LOGISTICS • OCTOBER 2011

2. to be serviced in the identified area so Profile of the merchandise to drive costs out of the supply chain
that the back end cost is spread across The profile of the merchandise in and manage it efficiently. Many supply
more stores and hence, optimised. It terms of volumes, freshness, shelf life, chain experts refer to Walmart as a
should be physically feasible to service size & shape, handling challenges, etc. supply chain-driven company that also
the area identified within a reasonable plays an important role in the choice of has retail stores. The first Walmart
time i.e., the order to delivery cycle the delivery system. store opened in 1962 and the first DC
needs to be reasonable. Thus, the Cost consideration in 1970. From there on, till today, it
radius within which the stores fall is an Retailing is a low margin business, successfully continues to work with
important consideration. As a thumb driven by volumes and saving on the CD model with some level of
rule, the transit time below 12 hours is all-round costs is an integral part of fine-tuning for different countries,
a desirable expectation. A cost-benefit building a sustainable business. Hence, locations and markets.
analysis of both the systems i.e., DSD any decision on the distribution Walmart confined to its time-tested
v/s CD is a must. While taking the system cannot be taken without doing distribution model when it entered
decision, immediate future store a cost-benefit exercise. The cost to India with an arrangement with the
opening plans also need to factored be considered for this purpose is the Bharti Group in 2007. All its small
in. overall system cost in the supply chain format retail stores in the entire
Manufacturers’/vendors’ distribution i.e., the cost of all the stakeholders northern region were serviced out of
infrastructure and capabilities like the manufacturer, vendor, DC,
Reliability and consistent deliveries to vendor’s distribution channel, stores,
the stores are critical. Generally, major etc. This is because irrespective of
manufacturers and vendors operate whoever incurs costs in the system, the
through a structured distribution end customer ends up paying for it.
channel. The challenge arises when
one deals with a medium or a minor Flow through or cross Docking McDonald’s Success Story
vendor or one’s stores are not within Flow through or cross docking is a bridge
the urban township. In such a scenario, between the DSD & CD model used Apart from the food & grocery retailers,
the vendor needs to be flexible to meet in the back end to bring in efficiency there are many other segments where
the Centralised Distribution model
the business challenges, particularly and cost savings. Here, the vendor
has been successfully implemented.
during the start up stage. packs & labels the merchandise for
Quick Service Restaurants (QSR)
Store format the individual stores and then directly and some foodservice segments
The size and format of the store delivers to the DCs. At the DC, they are use such a system. McDonald’s, the
impacts the replenishment system. For unloaded and then simply cross docked global leader in QSR business, is a
example, a large sized cash & carry and loaded to the outbound vehicle. case study. They operate under this
format ordering in bulk will have This saves space, working capital, time, system in all the global markets.
captive storage facility. In such a case, efforts and minimises documentation. In India, too, they started with the
a DSD could be a good option. But High-value products, seasonal centralised model right from Day 1,
the same may not be the case with a merchandise, promotion items, etc. when they opened their first outlet in
small format store. could be routed through this system. 1995. Initially, they operated out of
Store location two Distribution Centres (DCs) – one
Another important factor, which global Practices in the north and the other in the west.
Today, about 240-odd McDonald’s
influences the distribution system Let us understand how various major
outlets are serviced out of these
selection, is the store location. If there global retailers handle the store two DCs and another two satellites
are restrictions and constraints in free deliveries: hubs at Bengaluru and Kolkata.
access to the stores, then a DSD may Walmart Ever improving inventory turns,
not be an efficient system and multiple Any discussion on retail needs to start reducing supply chain cost per outlet,
small frequent deliveries may not be with Walmart, the US$422 billion consistent and predictable deliveries
an option. In most of the cases, the world’s No. 1 retailer. It is widely to outlets, comfort and convenience
vendor’s delivery timings clash with known that Walmart is innovative and to vendors, faster new openings,
business hours and interrupt the focus efficient in its back end & front end. In full customer focus at the outlets
on the front end. In such a case, a fact, its USP of ‘Every Day Low Price’ and happy customers are the major
CD will be a good option as suitable brings to the fore its better purchasing benefits McDonald’s enjoys. In fact,
delivery timings could be worked and supply chain competitiveness. The
the back end supply chain efficiency
gives it an edge over its competitors.
around the constraints. key to a retailer’s success is his ability
OCTOBER 2011 • SMART LOGISTICS • 39

3. retail chain distribution models, continued
revenue. It opened its first store in the
UK in 1929. Like other leaders, Telco
considerations
too follows the CD process to service its
centralised Distribution Direct store Delivery stores with some localisation for specific
Inbound Higher cost, split volumes, less
Economical logistics cost than full truck load & multiple markets. Tesco has a limited presence
because of – delivery
consolidated from the
deliveries. Could be a choice at
the start up stage when outlet in India. In 2008, it announced their
volumes supplier numbers are low
intention to invest in India and tied up
Lower system inventory and
better turns due to predictable & Inventory
Higher system with Tata Group’s Trent to open Star
inventory because
consistent deliveries.
Multipoint inventory build up
levels of safety stocking at Bazaar hypermarket stores, which are
every outlet
avoided predominantly serviced through a CD
Better, as dedicated Product Store staffs’
responsibilities split centre. All other leaders like Metro
professionals available to availability
focus on back end and on store between front end
customer and back
AG, Target, SPAR, etc. conceptually
deliverables to stores shelf
end supplies adopt the CD model with suitable
Single delivery – minimum
interruptions and paper work at the
Delivery
to store modifications required to match the
Multiple deliveries
store. – interruptions
to store – more time spent at format or the local market needs.
Leaves more time for the store the back end
personnel to focus on customer operations
Outbound winning ForMula
Lower cost – Single transportation Multiple deliveries The Indian breed of organised retailers
Illustration By Sanjay Dalvi
delivery/multiple store cost – store – higher cost
drops/full truck load delivery like Reliance, More, Big Bazaar/Food
Bazaar, etc. follow the same CD model.
Though the model is conceptually
established, the operational stability is
yet to be achieved. The full benefit
Figure 2: Pros and cons of Centralised Distribution and Direct Store Delivery models
of such a system will accrue only
after perfecting the operation. The
the 80,000sqft central DC at Banur in partners instead of directly shipping it unorganised retailers in India, who
Punjab. This centre included a facility to a Carrefour DC. Smaller suppliers are now in majority, still use the DSD
to store and handle temperature- whose goods do not sell through model and have achieved success. It is
controlled merchandise too. Vegetables quickly in stores present problems to rightly believed that over a period of
& fruits were exceptions, which were retailers. The retailer can take truckload time, organised retailers will emerge
shipped out of a separate collection shipment, but then, it has to store stronger with the benefit gained
and consolidation centres. Initially, the goods in warehouses for a longer from perfecting their supply chain,
for the first two years, all the stores period of time, thus incurring increased marketing and management.
in northern region, including those in inventory carrying costs and spoilage. The CD system is a proven model for
NCR, Rajasthan, UP, Uttarakhand, The retailer could also take less-than- retailers. But its effectiveness depends on
etc. were serviced out of the Banur truckload shipments, which raises the the rigidity of the implementation and
DC. Though the operation at the DC cost of the goods, clutters the DC its interface with technology. Depending
is outsourced, Walmart controls and yard, and makes the receiving process on the local realities, some work around
intensively oversees the functioning. more labour intensive. However, if a may be essential, especially in a start up
Later, it added two more DCs – one in consolidation centre covers a broad environment. No concept is complete
NCR and another one in Bengaluru. enough region, both the goals can be unless it cuts costs, saves money and
Carrefour achieved. The consolidation centre adds to the bottom line, system wide.
The €101-billion French retailer is No.2 can receive full truckload shipments All decisions need to be fit within this
in the world in terms of generating more frequently. The merchandise parameter. Understanding, tracking
revenue. It opened its first store in from the consolidation centres flows and computing the realistic costs then
1958. Like Walmart, Carrefour’s through the DCs to the stores against gains prime importance. But incurring
stores depend on the supplies from the specific orders. Carrefour’s India entry additional cost in the beginning to build
central DC. Carrefour also uses their is constrained by FDI regulations. Its a viable system for the future is the call
centralised consolidation centres, which visibility is limited to one wholesale of the day. Many leaders have taken
are designed for smaller suppliers. cash & carry in Delhi. this route before emerging winners in
These suppliers ship their goods to Tesco the marketplace.
a consolidation centre run by one of Tesco, the £61-billion retailer, is the
Carrefour’s third party logistic (3PL) third largest in the world in terms of H Shriram, MD, ImpelPro SCM Solutions
40 • SMART LOGISTICS • OCTOBER 2011