Delivering on "direct to consumer" in the CPG industry – Strategy – CSCMP's Supply Chain Quarterly
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When it comes to manufacturing direct-to-consumer products, there is a distinction between fast-moving and slow-moving stock-keeping units SKUs. Slow-moving SKUs can benefit from production outsourcing, as the supply chain can be designed for efficiency.
Third-party manufacturers can handle low demand more efficiently because they can lower material and manufacturing costs by spreading them over products from multiple customers.
Outsourcing production allows CPG companies to focus their efforts on marketing and sales. As DTC sales build up, the supply chain needs to become more resilient and responsive, and companies can bring manufacturing in-house. Razor blade manufacturer Harry's first started outsourcing its blade production to a German factory, but once it had a big enough client base, it proceeded to purchase the factory so that it could control the production.
Finally, the customization and personalization that is enabled by the DTC channel creates additional challenges for manufacturers. The DTC channel allows for a large number of product variations, but this adds complexity and cost from a manufacturing point of view.
There is a big difference between profitable diversity and money-burning complexity. One way to mitigate the negative effects of SKU proliferation is through standardization of the costliest components.
Another approach involves product postponement, or shipping almost-ready products in bulk to a mini-warehouse or a retailer store and customizing them closer to the demand, just before last-mile deliveries. Postponement is particularly effective if the customization is related to quantities or product mix; that is, if the DTC order can include customer-specified quantities rather than manufacturer-determined and a customer-specifiedmix of products specific quantities and mix of toothpaste, toothbrushes, and dental floss, for example.
Delivering the ordered product into the hands of the consumer is an expensive, tricky part of DTC that CPG companies are still struggling to master. As retailers such as Amazon and Walmart offer free one- or two-day delivery for premium members or for qualifying purchases, the need for speed and flexibility in the DTC channel has increased, adding complexity to the logistics network.
CPG companies will need to consider transportation partners and delivery points that they have not worked with before. Delivery options increase every day as new transportation players such as Uber and Lyft and options click-and-collect, time-slot delivery, lockers, and others proliferate. As technology improves, even seemingly bizarre delivery ideas can become feasible, like drone-based deliveries.
CPG players will need to carefully review and pilot the various options before choosing the one s that minimizes costs while also fulfilling customers' requirements. Additionally, CPG companies going DTC have to worry not only about product deliveries but how to handle returns and reverse logistics. First, manufacturers must establish the minimum price point that makes home delivery of individual SKUs economically feasible.
As companies set a price point, they will need to consider factors such as product weight, temperature control, fuel price, delivery options, and demand. Given the unpredictable nature of some variables such as fuel, distributor availability, and regulationscompanies should recognize that there are certain products that might not qualify for free shipping by themselves but can be shipped free as part of a larger DTC subscription.
As companies try to make pickup and home delivery more affordable, they are desperately seeking economies of scale, which would help lower costs.
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One option is to have smaller distribution and fulfillment centers in many large metropolitan areas. Based on the Census data from the U.
Census Bureau, if CPG DTC players had distribution and fulfillment centers in the top 36 most populated metropolitan areas, they would be able to reach and offer feasible pickup and home delivery options to over half of the U. But this would require a major network redesign, as many CPG distribution networks currently rely on a few, large, centralized or regional DCs to deliver to retailer DCs.
Having a large number of distribution nodes also implies that CPG manufacturers would need to have more transportation routes and logistics partners. Partnering with their biggest retailers or with third-party logistics companies that can provide warehousing and distribution capabilities in metro areas is one viableoption.
By having more decentralized distribution capabilities, DTC companies can test pilot programs locally, as a delivery or return solution which works in one area might not be economically feasible in another area. Once the "mile before the last mile" is covered getting the products to the last distribution stopthe "last mile" must be addressed. Either the company delivers the product to the consumer's doorstep, or the consumer covers the last mile and picks up the order.
If the order volume is big enough, delivering to the customer's home as the final shipping destination should not be a logistical problem.
However, the majority of DTC CPG sellers do not have such economies of scale or predictable enough demand to accommodate this option. Efficient deliveries would also depend on powerful analytical capabilities that would create optimal routes and prevent delivery vehicle capacity from being underutilized.
Hence DTC CPG manufacturers might find it best to partner with the right third-party logistics partner for home delivery services. To lower the complexity of the last-mile deliveries, the click-and-collect model is becoming an increasingly popular option, as deliveries can be grouped together, significantly reducing the number of drop-off spots. DTC companies have to enter into arrangements with retail store owners or with building managers to enable this service.
An additional benefit for the retailer is that consumers coming to pick up their orders in the store might make additional store purchases while they are there. Big retailers are already investing in facilities to allow for this category's growth.
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Walmart has been expanding its click-and-collect infrastructure taking advantage of the fact that over 90 percent of Americans live within ten miles of a Walmart store. However, the click-and-collect model has to overcome certain challenges. First of all, companies have to partner with facility owners like retail stores, office building managers, and others.
For the consumer-facing front-end model, DTC players can choose one or a combination of the following options: In-store pickup from a retail partner: Typically used by DTC clothing companies, customers come inside a partner's retail store to ask the staff for their order. Bitch Planet mixes solid world building, action and emotional hooks with an unapologetic wallop of feminist philosophy.
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