What is DSD?
The Pros and Cons of Direct Store Delivery
Over the past few years, supply chain issues have led to product shortages. Consumers have struggled to get hold of all sorts of goods – from toilet paper to tomatoes and even medicines. In manufacturing, the international shortage of semiconductors has affected the production of consumer electronics, computers and cars and wholesalers and distributors have felt the impact of cardboard and packaging shortages.
Some of these supply chain disruptions within the UK have their roots in the fallout from Brexit, the pandemic and the Ukraine war. These and other factors have caused transport delays, labour shortages and panic buying.
Supply chain disruptions like this are ongoing and their impacts are set to continue for some time. So, it’s not surprising that retailers and suppliers look to distribution methods that allow them to better manage their supply chains and to ensure a reliable and continued supply of goods.
One way of alleviating the impact of supply chain disruption is direct store delivery – or DSD. It’s a large market and is projected worldwide to reach USD 1.19 trillion by 2027. There are both pros and cons for both retailers and suppliers.
What is DSD?
DSD is a distribution model whereby a supplier – whether the manufacturer or the distributor – delivers its products directly to retail stores and outlets, bypassing the retailer’s own warehouse or distribution centre.
DSD is commonly used in industries such as food and drink, accounting for 70% of the DSD market. It is also popular for other consumer packaged goods and pharmaceuticals. Products can be delivered to stores without having to handle the logistics. The brand or manufacturer manages everything, often also stocking the shelves.
Benefits of DSD for Suppliers.
For suppliers, DSD offers greater control over the distribution process. Suppliers can ensure that their products get to where they need to be, both quickly and accurately. This allows for more efficient stock management.
Another advantage of DSD is that suppliers can offer a larger number of products to their customers. Suppliers that manage their own distribution can ensure that all their products are available to retailers, even those that may not be in high demand.
Because the DSD model is more likely to ensure that a product is always available on the shelf, this can increase sales. Even getting a product on the shelf of a major supermarket can boost sales and brand awareness. By ensuring that it is always available, a supplier will be able to maximise sales volumes.
DSD also allows suppliers to replenish stock in good time, without having to keep stores waiting and reducing the risk of out-of-stock situations.
Benefits of DSD for Retailers.
For retailers, one of the key benefits of DSD is that products get into their stores more quickly, as it eliminates the storage of products at their own warehouse. With products going on sale more quickly, retailers more consistently have the products they need on their shelves, which can boost sales, improve the bottom line and enhance customer satisfaction.
DSD also reduces retailer costs. Savings can be made on warehouse overheads, as fewer products need to be stored in their own warehouses. With products delivered directly to the store, there are fewer shipments being made, reducing transportation costs. Additionally, shelf replenishment becomes more efficient through a reduction in labour costs.
With faster delivery, goods arrive at the point of sale in better condition, which is especially important for perishable food produce with a short shelf life. This helps retailers to maintain the freshness and quality of their products, improving customer satisfaction.
DSD also helps to prevent out-of-stock situations, which can lead to dissatisfaction among customers. This is highlighted by the recent food shortages in the UK, where there was widespread frustration about the lack of fresh vegetables in supermarkets. By having stock delivered directly to the store, retailers can prevent this unhappiness and also avoid the loss of sales due to out-of-stock situations.
Finally, DSD helps retailers to manage demand surges by replenishing supplies when needed. This can be particularly important during periods of high demand, such as national celebrations and seasonal or special events.
Disadvantages of DSD for Suppliers.
Although DSD results in faster delivery, it nevertheless incurs extra distribution costs for the supplier. Instead of delivering to just one or two main warehouses for each supermarket customer, the supplier needs to deliver to possibly hundreds of outlets. This entails the supplier running its own distribution network, which involves buying or leasing a fleet of vehicles, hiring and training drivers and maintaining delivery equipment. There are also extra costs incurred for fuel, road tolls and vehicle maintenance.
The high costs of DSD were behind Nestlé stopping DSD distribution in the US in 2019 in favour of delivering direct to retailer warehouses. Nestlé was able to eliminate the costs of its DSD operation, which involved 4,000 people across 230 locations and the use of 1,400 lorries and 2,000 different delivery routes.
The DSD operation can be more complex to manage than other distribution models. It requires the supplier to manage stock management, order fulfilment and delivery scheduling. This all needs to be carried out at a more intricate level than shipping goods in bulk to a far smaller number of retailer-operated warehouses.
For it to work efficiently and smoothly, the DSD model requires suppliers to have a well-established distribution network. This can be difficult for smaller companies or those with limited resources. With a higher volume and greater frequency of deliveries, a weak distribution network will have higher transportation costs and longer delivery times, making it hard to achieve satisfactory levels of efficiency.
Disadvantages of DSD for Retailers.
Retailers that rely heavily on DSD may be more dependent on their suppliers for stock management and delivery, which may be a disadvantage when a particular supplier experiences delivery or quality issues.
Although there are cost savings for retailers due to not having to warehouse the goods that are supplied via DSD, the supplier’s costs will increase if they distribute using DSD. These costs are unlikely to be fully borne by the supplier, who will pass them onto the retailer. In order to determine which model has the most favourable financial benefit, all costs must be carefully considered.
Some commentators argue that out of stock situations are more common with DSD as it promotes the ability to add more SKUs. When there are more products to sell, there is a greater chance of running out of stock at the shelf level. This happens because there is limited space on the shelf and demand for each product can vary, which means there is less stock available to meet demand.
In these cases, retailers that add more SKUs to cater for wide consumer requirements may paradoxically see more out of stock situations. In general, a well-known brand has more customer loyalty than the retailer, so if a store is out of stock of a particular item, there is a risk that the customer will go elsewhere to secure their preferred brand. Once lost to a competitor, that customer may never return.
What About the Customer?
In all of this, it’s important to remember the most important party – the customers – and here, DSD offers several benefits.
DSD provides higher assurances that stores are always fully stocked and produce is as fresh as possible. This gives customers access to a wide range of products and means they are not disappointed by out-of-stock situations.
Plus, with reduced handling and transportation, supplier goods are less likely to be damaged before they reach the retailer’s shelves. This is a win for all parties involved – suppliers, retailers, and customers – ensuring that goods pass through the supply chain in good condition.
If you employ a DSD distribution model, a Transport Management System (TMS) such as Geo2 can help optimise your delivery routes and schedules, reduce delivery costs and improve delivery accuracy. Try it for for free today, with a 14 day free trial. Geo2 streamlines workflows and provides real-time visibility into your distribution process.