Weekly, monthly and quarterly business reviews have consumer product companies asking themselves, “What should we do?” In today’s economy, they are caught in the middle of a price and service war amid e-commerce giant Amazon and other major big-box retailers.
While building their own direct-to-consumer e-commerce strategies, some try to manage the proliferation of customer complexity and third-party requirements without making any modifications to their current network. Others overspend capital investment in their distribution networks, building redundancy with channel partners and neglecting the lead-me challenges of a multi-echelon network against their product life cycles or shelf life.
Ah, but there are potential strategies available to consumer products companies, including a method to align go-to-market strategies with potential network design options.
Direct-to-consumer strategies occur when consumer goods companies target consumers with marketing campaigns to shape demand and drive revenue. In a pure direct-to-consumer strategy, there is no reliance on channel partners to market or promote the product to consumers.
Channel partner strategies are many in variety but involve a partnership with another organization to handle aspects of promotional and sales activity. Included in this category are the following:
Retail Partnerships: Consumer goods companies will partner with retail arms or dealerships that will market and sell products to consumers. These partnerships will often run cyclical promotional campaigns with shared marketing budgets and various risk/reward scenarios to allow for shared risks and profits.
Wholesale Distributor Partnerships: Consumer goods companies will partner with distributors to promote, market and make in-roads with retailers.
MARKET AND PRODUCT SEGMENTATION
Before selecting a distribution strategy, it is imperative that you select a market and inventory strategy. The distribution and inventory strategy does not have to be a “one size fits all” strategy. Certain products that an organization markets may fit better in a direct-to-consumer strategy, while others fit better through a retail or wholesale partner strategy. The strategy for a product line will often depend on the ability to drive sales, its size and the nature of a consumer’s purchase behavior with the product.
This is why product segmentation is critical for any inventory or distribution strategy. A few potential segmentation exercises that consumer products companies may think through:
Required Products: These items are typically items the consumer knows they need and will seek out on their own.
Large Required Purchases: These items are typically researched or shopped around, and consumers are not likely to spend large amounts of money without getting the chance to touch and feel the item. Items in this category may include vehicles, appliances, categories of furniture and certain types of electronics.
Small Required Purchases: These items are sought out by consumers but often with minimal effort in comparison shopping. Consumers may test them out before purchasing but due to their low-risk return nature, they will often purchase them sight unseen. Think some clothing lines, makeup and hygiene products, small electronics, house supplies and food items and over-the-counter medical supplies.
Discretionary Products: These items are not necessarily deemed required by consumers but can be sought to fulfill perceived wants. Items could be ancillary electronics, clothing and furniture accessories, and sporting and recreational equipment.
Impulse Items: Typically not sought out ahead of time or researched by consumers, these items are added onto an existing buying scenario and triggered at a point of purchase or electronic notification (such as a social media advertisement, viral online promotion or recommended add-ons by an e-commerce site).
The simplest and most direct route comes from factory to consumer. Injecting channel partners into the mix adds to that complexity but often with some benefits: pre-positioned inventory for lead-time reduction, consolidation of logistics activities and the ability to rely on the channel partners for increased sales activity (marketing power, inventory positioning).
Companies should consider the following distribution strategies that will allow them to position inventory close to the customer while managing total logistics costs:
Direct-to-Customer Network: This network does not warehouse product on its own but will build to order and ship product into channel partner facilities with the expectation that the channel partners will fulfill orders and get the product into consumers’ hands.
Single DC Centralized Network: This network stores all product at a single distribution point and can contain a warehouse with a warehouse division of each case and pallet pick to service a wide range of customer demands.
Hub and Spoke Centralized Network: This network will centrally store all products while carrying fast-running products in spoke facilities located near customers. Complex networks may carry “C” items in a central hub, “B” items in a regional hub and “A” items in local spokes or service centers with rapid replenishment from C and B locations.
Decentralized Multi-DC Network: The decentralized network strategy occurs when multiple regional DCs hold all of the inventory necessary to support that region. Typically, these DCs will redeploy inventory from location to location and perform zone-skipping shipments to fulfill orders that cannot be fulfilled by the originally assigned DC.
ALIGNING MARKET CHANNEL STRATEGY WITH DISTRIBUTION
There is a common challenge when companies with traditional logistics org charts create a distribution strategy without aligning with their product and go-to-market strategy. The strategies often conflict and require additional operating costs to connect. In our experience, successful organizations design network strategies that align with their go-to-market strategies at a product segment level.
Consider the difference between distribution strategies of an impulse item and large required purchases. The impulse items are typically purchased as consumers are shopping for other items, so storage techniques and inventory locations need to be near the consumer. On the other hand, large required items may be better suited for a direct-to-consumer or direct-to-customer distribution network.
As go-to-market strategies and product segmentation stratifications are considered, certain distribution strategies come to the forefront as better matches than others.
DRIVE THE RIGHT STRATEGIC DIALOGUE
Today’s rapidly changing business environment and competitive forces require us to continuously reflect and respond to changes. Our go-to-market strategies will evolve and shift with market forces over time. Our product segmentation may be further refined or re-categorized, or even shift, based upon changes in consumer buying behavior.
It is imperative that organizations have long-term plans with thoughtful dialogue around their go-to-market strategies and product segmentation over a five-year period. These necessary inputs will drive the right strategic dialogue to shape distribution strategy.
Your channel will change, which is why it’s more important than ever to keep your eyes glued to the screen.
Derek Browning is director of LeanCor Supply Chain Group.