PORTLAND, Ore. -- Direct-store delivery is destined to change.
Executives speaking during a panel at an industry event here last week predicted that the use of innovative technology now on the horizon promises to alleviate one of the most intractable problems associated with direct-store-delivered product, namely bottlenecks caused as product is checked in at store level.
The solution to that labor-intensive problem could involve a change as fundamental as moving product typically delivered on a DSD basis through warehouse-based distribution systems.
Such a solution, though, brings with it a new suite of challenges, including issues such as responsibility for merchandise and retailers' loss of in-store services currently provided by DSD vendors. Views on the future of DSD were presented at a panel discussion held here during the ninth annual Executive Forum 2003, an event sponsored by SN and the Food Industry Leadership Center at Portland State University. David Orgel, SN's editor-in-chief, moderated the DSD panel.
Mike Ellis, senior vice president of the food division for Fred Meyer Inc. here, said some changes in DSD practices are required. "With high labor costs, route salesmen can't afford to sit in back rooms, waiting to check in. The true key is finding all the inefficiencies [in the DSD system], and getting rid of them. Technology will be the salvation of DSD because it will streamline it, and make it easier for vendors and retailers to manage." According to Chris Baldwin, national vice president of DSD and integrated logistics, Kraft Foods, Northfield, Ill., "The only sure thing is DSD will change, and technology will be a big premium in the way we deal with customers. I don't think a full-blown move of DSD items into the warehouse is the answer, but with the bottlenecks that occur [at the stores' back doors], we're willing to look at alternative forms of distribution."
Al Carey, president of PepsiCo Sales, Purchase, N.Y., said his company's route salesmen make 250,000 sales calls a day across the United States, "but one of the most frustrating aspects of the system is the inability of those salesmen to get to more stores because of time spent waiting to check in at each one.
"But changes in technology will change that. Scan-based trading might make DSD more efficient, or we could use RFID [radio frequency identification] on cases or pallets that could offer a big breakthrough. If we could eliminate the 30 or 40 minutes of waiting time per stop through technology, we could re-engineer the routes, eliminate congestion and reduce inventory errors, and the DSD people could visit more stores and build more displays."
For Ellis, the success of scan-based trading would depend on developing good relationships with vendors. "We'd pay the vendor for the product when a customer purchases it, with payments based on scanning data," he explained. "We've been involved in scan-based trading with some vendors for several years, and we've had some success. But the sharing of information is a key, and everyone would need to understand the rules."
Carey said PepsiCo is involved in several tests of scan-based trading, "and it's a great idea. There have been some hitches, though, that have to be worked through before we could expand it.
"The biggest concern is, can we control shrink? We've done most of our tests through Grocery Manufacturers of America, and while we believe we're making it work, we can't always reconcile the inventory efficiently. And with only a limited time in each store, we find we are spending all the savings we achieved just inventorying product.
"But what we've also learned is, there absolutely must be price and item synchronization with customers using some industry standard because you've got to transfer data back and forth. But because our tests have relied on manual labor, we've determined we couldn't sustain that system for a larger rollout. So the necessary first step is getting items and prices synchronized with UCCNet or some other industry standard.
"But if the retailer controls the product, then who's responsible for it? That's one question we're still working on because it affects the liability at the store."
Said Baldwin, "We send armies of people to inventory product, so we have not moved forward on any changes. But we think RFID will enable us to establish a perpetual level of inventory, which will enable us to keep count without requiring people to go into the stores to count inventory manually.
"However, we need a standard on how to pay based on scan data, and that will change how manufacturers recognize revenue and account for customers, and those are significant changes that will require a lot of work."
Carey said RFID -- a technology that reads a chip embedded in a pallet or case -- could move merchandise through a store's back door more quickly.
Ellis said RFID is unlikely to be practical until at least 2006, "and it could be 10 years away on individual items."
Yet, scan-based trading could be a temporary measure for DSD vendors until RFID becomes a reality, Baldwin said. "Synchronization will require changes, and it will push both retailers and suppliers to simplify the way we do business with each other. But there's still a lot of work to be done on data synchronization. The industry has been looking hard at it for the last two years, and we're working with our customers to develop computer codes."
Carey said he agreed that price-item synchronization can happen, "but there are still millions of dollars in manhours being spent on deductions. So if we can get synchronization, we can eliminate those millions of dollars and the labor involved chasing them, and we think we can achieve that by the end of 2004."
Todd Cornwell, director of sales for Franz Family Bakeries, a regional company based here, said the technologies being discussed would require significant investments by every company. However, Ellis said the costs would become more affordable as the technologies become more mainstream.
In terms of moving DSD merchandise through a retailer's warehouse, Ellis said, "Retailers are already going to every store with at least one truck every day, so what if we put some DSD items from the warehouse onto those trucks? For example, we deliver bread from our bread plant to the stores on trucks that are not usually very full, so why not cross dock a DSD bread line at the distribution center and put it on the same trucks? That could lower supply chain costs.
"But the question that comes up is, do the DSD vendors share the cost of transportation? And what happens to other retailers serviced by that DSD bakery, which would now be servicing fewer stores from his trucks?"
Asked how technological changes in DSD practices might impact the in-store labor performed by DSD vendors, Cornwell said, "That's still an unknown, but if it does happen, I believe it would take retailers twice as long to do the kind of work DSD vendors perform now. And DSD product is guaranteed. We give retailers credit for what doesn't sell. But we won't do that if the product is going through their warehouses."
Carey said many chains prefer to devote most end displays to DSD products "because they understand the value of the labor they get and the boost to sales DSD items provide."
Baldwin said, the system in which DSD suppliers oversee their sections "provides an opportunity to communicate the value of those products to consumers. There's a huge value to the labor we perform."