DSD Supply Chain Is The Biggest Blind Spot to Grocers Seeking to Embrace a Digital Future

Winning Retailers Recognize Solving DSD is a Crucial Part of Preparing for the Omnichannel World.

By now, we all know it’s real, and it’s happening: Consumers are migrating to the web for their grocery shopping. With FMI and Nielsen announcing just last month that online grocery sales will reach $100 billion within five to seven years — and not 10 years as they’d declared just a year earlier — the sense of urgency for grocers to prepare for the dawning (and daunting) future has never been more acute. 

Not surprisingly, in the same study, only 7% of retailers declared themselves ready for this new reality. 7%. Let that number sink in.

Article authored on Medium.com by Tal J Zlotnitsky, President & CEO of iControl Data Solutions: https://medium.com/@tal.zlot/for-grocers-looking-to-embrace-a-digital-future-its-the-direct-store-delivery-supply-chain-thats-6b3f5026d826 

In reading the advice of various industry sages, I’m repeatedly struck by a massive blind spot that is not getting nearly enough attention: Direct Store Delivery.

How Relying on DSD Vendors Benefits Grocery Retailers

For most grocers, Direct Store Delivery — or DSD as it is colloquially known within the industry — represents a foundational component of their supply chain. Contributing to 25% of goods sold and over half the profits of a typical grocer, DSD vendors supply many of the most in-demand, fastest-turning goods grocers sell: dairy, bread, soda, ice cream, salty snacks, beer, wine, and much more. In fact, more than 9 in 10 consumer shopping baskets contain items sourced from DSD vendors.

DSD vendor models are also economical for retailers. Through reducing costs of storage, transportation and labor, DSD drives a 30% improvement in working capital for retailers, according to a Grocery Manufacturers Association study. Moreover, DSD ensures grocers have fresh, often locally sourced, goods on their shelves.

DSD Vendor Model Challenges and Solutions

But DSD solutions also come with significant and well-known challenges for grocers. Common challenges that grocers report about direct-to-store delivery across a broad geographic footprint include the fragmented nature of the distribution network, where the same item can be delivered into different stores by dozens or hundreds of different DSD vendors, all with their own workflows, nomenclature, invoicing, and route accounting systems. While data-intensive, many DSD workflows have remained manual, repetitive, and error-prone. And because of the fast-moving nature of the goods and the high velocity of activity, most backend workflows are time-sensitive as well.

For all of the above reasons, grocers find it exponentially harder to keep track of inventory levels — or in-stock availability — for DSD as opposed to their own warehouse-supplied goods. And most if not all grocers have elected to more or less relinquish that responsibility to their DSD vendors and suppliers, under the directionally correct theory that they are best able to track and respond to demand and movement.

Indeed, virtually no grocers I have come across over my years as President & CEO of iControl Data — which works with nearly all grocers in the U.S — maintains perpetual inventory on their DSD goods. None that I’ve met have more than a directional sense of their item-level, in-stock levels for DSD automation.

For decades, this imperfect approach has prevailed because it was... good enough. Consumers have mostly been able to find the goods they want on the shelves. And when those goods have been out of stock — and some studies show DSD solutions out of stock levels are double those of warehouse-delivered goods — the average consumer has been able to substitute for another, similar item within arm’s reach.

When the consumer’s shopping experience is not in the physical store but online, not having visibility to in-stock levels of goods that are in 9 out of 10 baskets is the proverbial equivalent of “playing with fire” for grocers, especially traditional brick & mortar grocers who plan to fulfill orders out of their physical stores. Having been conditioned by Amazon to expect to receive the right order 99.9% of the time, consumers will simply not tolerate a high fail rate from their online grocery experience.

“The key to remember is that customers don’t care how their order is fulfilled, as long as they have a consistent quality experience no matter how they interact with your brand,” writes Roger Falkenstein of HighJump.

Moreover, substitution becomes far more challenging in a virtual shopping experience, versus the ease of a consumer simply placing an alternative item in their basket while at the store (a process that occurs between each consumer’s ears, based on his or her individual preferences and circumstances, and to which most grocers have no tangible access).

As Christian Wanner, cofounder of one of Europe’s first and largest online grocery stores, LeShop, told McKinsey, “You cannot imagine how much energy goes into substitute management: proposing intelligent substitutes, then having a whole logistics process for the customer to receive the substitute. You have to pick the substitute separately from the rest of the items so that you can ask the customer whether she agrees with the substitutes, and if the customer says, “I agree with this one but not with that one,” then you need a process whereby the rejected substitute comes back to the store, and you need a process to manage the price difference between what she originally ordered and the substitute, and so on and so forth.”

And it is to this reality that far too many experts in the industry have given scarce attention: Fulfillment of Direct Store Delivered goods that is on-par with the exceptional precision Amazon has conditioned consumers to expect, is simply not possible for U.S. grocers today.

The Two Steps Grocers Must Take to Drive Optimal DSD Vendor Partnerships

My company, iControl, which is in the business of consolidating and automating inter-company workflows and performance challenges within the Direct Store Delivery supply chain, has seen a considerable surge in grocers who are recognizing this challenge and engaging with us and their trading partners to try to urgently address it. 

One c-level executive at a national grocery chain wrote to me that, by his estimation, his company’s “very ability to even stay on the field, let alone come out ahead” depends on being able to compete with Amazon on precision and fulfillment accuracy. “I don’t see how we can possibly do that when we have such a glaring blind spot [in DSD] to such a big part of our supply chain.”

Over the next 5 years, all brick and mortar grocers who wish to “stay on the field” will have to adapt to the evolving demands and expectations of their consumers. No longer will the successful retailer’s mission be strictly about conveniently located, bright stores, with safe parking lots, well-lit aisles, full shelves, and short checkout lines. It will also have to be about an online shopping experience that is not merely easy and fast, but also exceptionally precise.

Among the key changes in business practices industry experts often speak of — which I agree with —to execute on this reality, there are two additional changes that must occur that get a lot less attention in my view: First, grocers must re-orient internal resources away from tedium towards consumer satisfaction. Second, grocers must gain and retain visibility to DSD trends and be able to deploy their knowledge to minimize the need for scalable DSD software in 2018.

1. Re-orient internal resources away from tedium towards consumer satisfaction. Winners will reorient their organizations to hyper-focus on the consumer. With resources scarce, grocers will need to do that by repurposing resources, and especially human resources, away from back-end workflows and activities that are vital but introspective in nature — such as pricebook synchronization or invoice v. receiving record reconciliation — towards consumer-oriented workflows and activities. Doing this will have to mean automating and consolidating the tedium, and recruiting athletes that are more oriented towards data science and data analytics.
2. Gain and retain visibility to DSD and be able to deploy their knowledge to minimize the need for substitutions. Winners will recognize that tolerating the DSD blind spot is unacceptable. They will address it not by ripping out core systems, which is too expensive, too disruptive, and in the case of DSD software — where the challenge is far more about managing inter-company workflows across from a fragmented supply chain — almost beside the point. They will do it by deploying exceptional third-party solutions, such as Empower DSD(TM) from my company, and by leveraging the insights to manage their DSD Supply Chain far more vigorously, and with a far greater emphasis on data-driven metrics.

Ultimately, I expect that a fair number of the well-known grocers many of our children have grown up with will perish in the coming decade. Some of that creative destruction is unavoidable, and probably healthy. But many grocers still hold their fate in their own hands.

Will leaders recognize that solving the DSD software conundrum exceeds insignificance “sexier” endeavors, such as creating a slick app?

From what I’m seeing so far, I’m optimistic that many of our customers are alert to fast-moving DSD Trends and challenges, and planning properly for them. Most will make it to the other side of this raging river— different in their go-to-market strategy and staff composition, but still in the game.