A Move to Consolidation Warehousing

Discussion
Oct 25, 2002
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By Ronald
Margulis


The current distribution system is plagued by multiple touches of product, which leads to productivity losses, product damage and other inefficiencies. A collaborative warehousing approach in which there is one touch between plant and retail store and all products are shipped to an intermediate consolidation point in full truckloads is the answer, according to Jack Haedicke, President of Arena Consulting Group.


Haedicke, who was an executive at Nash Finch, C&S Wholesale, Kraft and Coca Cola, outlined the consolidation warehouse concept at the Food Industry Productivity Conference in Atlanta earlier this week. He explained the distribution metrics currently being used in retail simply cannot compete with the more efficiently managed Wal-Mart distribution system. What is needed is a system that eliminates two or more transfer points in favor of a single intermediary point.


The consolidation warehousing model assumes cost-sharing that benefits both the Supplier and the Retailer/Distributor. Retailer/wholesaler benefits include:


  • SM handling costs (put-away/retrieval/picking)

  • Handling cost reductions on non-slow mover volume

  • SM inventory carrying costs

  • Displaceable outside storage costs

  • Avoided cost of funds for new warehouse space

  • Profits from reduced out of stocks/increased sales

There would also be a substantial one-time cash flow impact from reduction in inventory. The total savings could approximate $0.30 per case, or nearly half the current cost.


Supplier benefits include:


  • Production labor savings from smoothing production cycles

  • No diverting, No Forward Buying

  • Direct plant ship freight rate savings

  • No costs for case pick

  • Inventory carrying cost savings

  • Outbound freight consolidation savings

  • Wait time and unload cost savings

  • Profit from increased sales (reduced out of stocks)

The total savings could reach $0.30 per case


Several major food industry participants are currently pursing consolidation warehousing, including Supervalu, Interstate Frozen, ES3 (formerly part of C&S Wholesale), AmeriCold and Fleming. Among the barriers to adoption Haedicke mentioned are the facts that obtaining leverage scale advantages requires scale of participation in a geographic region, manufacturer fear of multiple inventory locations and are imbedded infrastructure or current long term 3PL agreements and there is a question of ownership of the consolidated warehouse. In addition, collaboration with trading partners and competitors is an alien concept to most companies.


Haedicke said the main reasons a company would want to adopt consolidation warehousing as a strategy are:


  • This is the hub and spoke system is use by Wal-Mart

  • Retailer/Wholesaler- The ability to gain leverage scale economics that none but the largest can achieve alone

  • Wholesaler- A chance to help small stores survive if cost savings are passed through

  • Manufacturers- Lower operating expenses than the current system

  • Manufacturers- Maintaining a broad base of distribution and customer competition

Moderator’s Comment: Question: Is consolidation warehousing
a viable solution for retailers and wholesalers trying to emulate Wal-Mart’s
distribution efficiencies?


In theory, we agree with Mr. Haedicke. Consolidated warehousing,
however, requires cooperation between parties. Experience tells us that this
is easier said than done. [George
Anderson – Moderator
]

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