LEICESTER, Mass. -- Millbrook Distribution Services here released its RightSourcing study to help supermarkets evaluate their nonfood distribution decisions.
The study was conducted by Willard Bishop Consulting, Barrington, Ill., and co-authored by Gary May, Millbrook's chief learning officer, and Paul Weitzel, a director at Willard Bishop. Titled "Making Informed Supply Chain Decisions Using Activity-Based Costing," findings of the RightSourcing study were presented here during a press teleconference March 12.
RightSourcing is a method of activity-based costing to determine nonfood distribution expenses and the most cost-effective distribution channel -- direct from the manufacturer, self-distribution or through a specialized distributor like Millbrook.
"We've tried to find an academic study to validate the things we believe in and have known internally for quite a long time," said Bob Sigel, Millbrook's president and chief executive officer. Millbrook has been pursuing RightSourcing as part of a corporate strategy to obtain new business over the last three years.
The study used on-site observations, time studies and performance data from three supermarket chains. Sigel declined to name the chains that participated in the study because the retailers consider any information dealing with their costs to be confidential. He did mention that Shaw's Supermarkets, East Bridgewater, Mass., has been a progressive retailer in this area.
"Shaw's buys from us several hundred items of the top categories and brings it into their own facilities. We supplement the rest of those items. We've done that by looking at velocity, cost-to-serve and what the actual handling and degree of difficulty is on a number of these categories," Sigel said.
According to Sigel, the study presents category-level ABC data for health and beauty care/general merchandise that no one else has. "We're looking forward to using this information to help educate the many regional and national chains that currently self-distribute nonfood. We believe this study will form the basis for many new customer partnerships as we work together to lower total supply-chain costs and improve return-on-investment," he stated.
Although not a new concept, ABC has become an important analytic component in the industry's Efficient Consumer Response initiative. However, the way it is being applied to nonfood through RightSourcing is considered ground-breaking by the study's authors. ABC has been primarily used on grocery and perishables rather than the nonfood side of the business, said Weitzel.
"This study is beyond Millbrook," May stated. "This is a contribution to the ECR dialogue and the role the specialized distributor plays in the process."
Several key findings in the study show that HBC and general merchandise are "different animals with unique merchandising characteristics," May said.
As a composite category, nonfood costs almost three times more to handle than traditional grocery, the study revealed. Total supply-chain ABCs for grocery amounted to a little less than 13 cents per unit, while HBC/general merchandise costs exceeded 33 cents. Handling costs on a cents per unit basis were determined by looking at warehousing, transportation, inventory and store-level distribution costs.
The most dramatic difference was in inventory carrying costs. Nonfood totalled 11 cents per unit compared with less than one cent for grocery. Unique handling characteristics of nonfood that contributed to the wide disparity in inventory carrying costs are low unit volume, high average unit cost, wide variety, impulse nature of the items, constant change in item selection and small and odd-sized packages.
The study concludes that such characteristics "present a special challenge for distribution, merchandising and inventory management. They require focused attention and specialized knowledge, skills and systems to control the costs."
The study indicated retailers can base their decision on whether to outsource products through a specialized distributor by looking at unit velocity (defined as average unit sales per store per week) and cost of handling (activity-based costs expressed as cents per unit). Categories with relatively high unit velocity and lower handling costs lend themselves to self-distribution for most chains. Those categories with low unit volume and high handling costs are not profitable for the retailer to handle and should be outsourced, the study suggests. Items that move less than one piece per week per store are suspect. Goods moving less than half a piece per week per store are candidates for outsourcing.
"Items moving half a piece per week we could almost guarantee that they are enormously expensive to handle and are candidates for sourcing through a specialized distributor, if not candidates for deletion," said May.
The study notes that category averages in nonfood can be misleading. A few high-volume items that do the bulk of the volume can mask the extreme costs of carrying the variety items.