Supply Chain Frontiers issue #58
When a change in strategy is not accompanied by a change in the way supporting chains are designed, the result can be more cost and less efficiency. This has happened in the retail sector, where some companies are shifting towards small format stores but are still using distribution models based on the needs of traditional, large size outlets. SCM students Mayurpankhi Barooah and Seung Hwan Shin investigated this disjoint for their master’s thesis and came up with possible solutions.
Demographic changes, slower growth in existing segments, and an opportunity to leverage their existing networks of outlets are some of the factors that are motivating retailers to open small format stores in densely populated urban areas. RetailCo, a global, Fortune 500 company, is a major proponent of the strategy, and expects a significant part of its future growth to come from small stores that have a greater focus on grocery products.
The thesis research project examined ways to reduce the cost of the small format delivery process and improve customer service levels.
Smaller outlets require smaller volumes of product, one of the changes that RetailCo must account for when developing a delivery strategy for its new stores. In addition, groceries are delivered at ambient, refrigerated, or frozen temperatures, depending on the type of product.
The model analyzed by the researchers has two critical variables. The type of trailer used to restock the small format stores – whether single- or multi-temperature units – is one variable. The other is the number of stops involved; whether delivery runs involve single or multiple stops.
RetailCo, operates several large discount department stores and warehouse stores. The typical size of its small format outlets is approximately 40,000 ft2 compared to traditional stores that are approximately four times as large.
Grocery items are delivered to the small format stores in exactly the same way as for larger outlets. Trucks pick up the products from a DC and deliver them to different stores in a sequential manner. However, since the volumes are low for small format stores, this method translates into a large number of stops. In addition to making the delivery process more complicated, increasing the number of stops can cause drivers to run out of allowable work hours as permitted by government regulations.
One way to address these inefficiencies is to mix products at different temperatures in multi-temperature trailers. This approach might help to consolidate demand, thereby reducing the number of stops.
The researchers examined this method, and considered which delivery frequencies and days of service worked best for different kinds of products. They analyzed three months of sales and shipment data for a DC and nine small format stores in Oklahoma, US.
In addition to building a base scenario with actual demand data, the team looked at transportation cost per mile by trailer type, stoppage cost, annual holding cost, product value per pallet, and required service levels.
The analysis identified four delivery configurations.
- Single stop single temperature. A trailer set at one temperature delivers one category of product to a single store per trip.
- Single stop multi-temperature. A multi-temperature trailer delivers three categories of products to one store per trip.
- Multi-stop single temperature. A single-temperature trailer delivers one category of product to more than one store per trip.
- Multi-stop multi-temperature. A multi-temperature trailer delivers three categories of products to more than one store per trip.
Using multi-temperature trailers with multiple stops showed the lowest cost per pallet, as well as higher trailer utilization rate and higher delivery frequency compared to other delivery configurations. The next best option was using multi-temperature trailers with dedicated, single-store delivery. The current policy of using single-temperature trailers making multiple stops was one of the least cost effective options owing to the higher cost of delivery.
The analysis provided other insights into the best mix of delivery options. For example, the primary factors that influence the choice of multi-temperature trailers over single-temperature types were demand volume by product category, distances between the DC and stores, and delivery frequency.
Future research could include constraints such as the availability of back room space, different holding costs by product category, and the impact of using drop trailers on delivery routes.
For further information on the research, contact Dr. Bruce Arntzen, Executive Director, MIT Supply Chain Management Program at barntzen@mit.edu. The project was supervised by MIT CTL’s Dr. Chris Caplice, Dr. Francisco Jauffred, and Dr. Edgar Blanco. The Optimal Multi-Temperature Delivery Frequency for Small Format Stores thesis was the co-winner of the 2015 best SCM thesis award.