As the supply chain landscape evolves, businesses are altering the way they manage inventory and are cutting back on internal costs in order to maximize sales. Companies like Amazon are setting the stage for new supply chain logistics, leaving direct-store-delivery (DND) services behind. A method that grocers, merchandisers and manufacturers have based their operations on for years.
In keeping up with these trends, Nestlé USA announced this week it’s shutting down their frozen DND operations with retailers, in exchange for a centralized warehouse model for their frozen pizza and ice cream brands.
The changes will leverage the highly efficient warehouse network it already uses for its frozen meals and snacks, according to Nestlé. The transition will take place during the third quarter of 2019 and will be finalized by the second quarter of 2020.
“Ice Cream and Pizza are growing categories in which we hold strong leadership positions,” said Steve Presley, Chairman, and CEO of Nestlé USA. “As we continue to focus on driving long-term profitable growth, leveraging a simpler route to market unlocks resources we can use to fuel our efforts in demand generation, such as product innovation and brand building.”
The changes to their supply management system will lead to the closure of eight company-owned frozen distribution centers and frozen inventory transfer points. It will also dismiss around 4000 US workers according to Bloomberg.
The transition to a centralized warehouse system is tempting for many companies because it’s less laborious than a DND system.
In a DND system, consumer-packaged goods companies carry out a lot of the retailer’s tasks for them. Including in-store merchandising, in-store forecasting and re-stocking their own products on grocery stores shelves when needed. Although this is touted to give suppliers a competitive advantage, it’s timely and expensive.
“Moving to a warehouse model has numerous benefits for us and our retail customers,” said Presley. “By taking advantage of the unmatched breadth and depth of our existing frozen warehouse network, our retail customer partners can better leverage their existing networks. This change is a win-win for Nestlé and our customers.”
In a centralized distribution center, also referred to as the warehouse model, the flow of products is delivered directly from the central warehouse to the retailer’s warehouse, where it’s the grocery stores responsibility to manage and stock the products accordingly.
It is also easier for suppliers to keep track of their inventory since all their products remain in bulk at one warehouse as opposed to a DND system where their products remain in multiple warehouses near the retailer.
However, leaving stocking up to retailers themselves runs the risk of possible inefficiencies and a loss in sales. If the retailer runs low on inventory, ordering a truckload of shipments from the manufacturer could take time to deliver. A centralized warehouse is also limited to one location, which could increase transportation costs and longer traveling times for suppliers as well.
Furthermore, retailer’s warehouses need to be equipped to store the company’s products which vary depending on food items. For example, Nestlé’s frozen items will need to be regulated under certain conditions to avoid spoilage. It is likely that their retailer’s warehouse withholds the proper environment to carry bulk amounts of frozen products for long periods of time.
Since products spend more time in the supply chain as opposed to a DND system, eggs, milk and other fresh produce are typically DND oriented because they have limited shelf life and need to be restocked immediately to sustain freshness.
A centralized warehouse system will allow this food giant to cut back on labor cost, which in turn makes their products cheaper, and give them a competitive advantage among other frozen brands in a growing market.
Nestlé isn’t the only company to switch, Kellogg’s made the transition back in 2017 for similar reasons. However, other multinational snack companies like PepsiCo Frito-Lay, credit DND for their boosted sales, due to employees keeping a close eye on in-store products and stocking them efficiently.