May 25, 2022

Article 2.23


Many of us have watched, from within our glacially changing channels, the killer-supply-chain solutions in the mass merchandise and PC industries. Wal-Mart and Dell have even re-applied their systems-are-the-solution business models to start eating up, respectively, the grocery and server/printer markets. There are only the quick and the dead in the large consumer goods channels; every survivor is racing to catch up in the supply chain redesign game.

(1) Note: According to a Yankee Group survey, consumer goods companies will spend 39% (more than any other industry) of their 2004 I.T. budgets on "edge of the enterprise" applications. "Edge" applications were defined in a "Consumer Goods Technology" article as: "allowing external parties to access and interact with internal data and applications to perform a business task." Explanations of all other numbers in parentheses in this article can be found in the "2.23 Support Notes under articles at ./articles/2_23SupportNotes.asp]

It now seems that smaller industry channels, with lots of fragmented-sized players and slow turning items, are no longer immune to major supply chain innovations. The client story that follows illustrates what the "China effects" and other trends are forcing channel players to think about.

A client whom I have known for 20+ years (call him "Ted") recently checked in to discuss his "supply chain redesign" problem. Ted is the CEO of a private, growth-by-acquisition, mini-conglomerate of manufacturing businesses ("MinCon"). Their four general divisions (6 domestic plants) all sell product through the same general, independent distribution channel. The distributors, in turn, will typically sell one to as many as four different segments of end-users. Almost half of MinConís production volume is sold through distributors to large-contract, end-user accounts that involves some special pricing deviation, and all of their volume is sold through independent rep agencies.

A number of trends/questions are forcing MinCon to rethink its supply chain from China to the end-users. Here are some issues that Ted and I discussed:

  • How to blend the increasing production from Asia with the decreasing production in the US in order to: offer a lower-total-procurement-cost, one-stop-shop, ordering and shipping service to its distributors while simultaneously reducing its total supply chain and inventory costs? ("Lower costs, improve value" constantly applies to all free-market competitors. But, urgent innovative action is required for those manufacturers and distributors that are experiencing rising imported supply at deflating prices while domestic operating costs are inflating and demand is flat or down.)
  • How to sell its distributors on buying the entire line on a systematic replenishment basis to achieve better turn-earn and fill-rate service economics? Many distributors still want to buy different commodities from multiple sources at lower prices to achieve an inferior total procurement cost with lower turn-earn and fill-rate service economics. How can MinCon help price-buying customers from hurting themselves?
  • How to reach the private and/or smaller independent distributors that are growing faster and selling more niche items than the rapid-consolidation firms of the late Ď90ís that are now shrinking, if not imploding? (2) ./articles/2_23SupportNotes.asp. How can MinCon service them on a profitable, frequent, order-size basis without getting killed on transaction-shipping costs? (3) ./articles/2_23SupportNotes.asp.
  • In any supply chain redesign solution, how do we create web-based services that take the pain out of special price contracts and tracking rep agency volume in a motivating way?

The general solution for all of these questions is some sort of full-service, master distribution center (MDC) capability that has shared costs for MinCon and other complementary manufacturers with the same customer base supply chain problems.

Examples of new MDCs being set up in channels are everywhere.

  • Consumer goods manufacturers like P&G, J&J, and 3M have set up their own internal, captive MDCs to which different divisions ship big quantities that are broken down to mixed pallets or cases to then ship to Wal-Mart-type customers just in time.
  • Four big bearing/power-transmission/automation control manufacturers created a joint venture MDC called Colinx that has created breakthrough savings and service value improvements.(4)
  • Giant wholesalers like Grainger, Graybar, Sysco and Hughes as well as the huge retail/wholesale buying coops like Ace, DoItBest and Johnstone Supply have all set up MDCs from which they continue to derive increasing benefits.(5)

Should MinCon forward integrate into the channel by creating their own MDC? Could they create a joint venture with other initially, non-competitive, but complementary manufacturers that share the same challenges and customer base like Colinx? Could they persuade some big wholesaler or buying co-op to backward integrate to solve their problems?

There are examples of existing distributors that have filled emerging channel needs in spite of perceived channel conflicts:

  • SuperValu, the grocery distribution giant, has set up a separate 3PL division, Advantage Logistics, to serve the direct-buying grocery chains that compete with both SuperValuís independent grocers and SuperValu's own retail stores.(6)
  • Aceís MDCs are doing measurably successful, collaborative planning and forecast replenishment (CPFR) with manufacturers. (7)
  • Aceís competitor, TruServe, has a division, "Induserve", that sells products to non-co-op customers.
  • ORS-Nascoís MDCs are doing "vendor managed inventory" (VMI) with welding supply distributors. (8)
  • Bunzl has two, main US distribution chains, but offers "warehouse replenishment services" from its MDCs to both its own locations and its competitors. The competitors may have second thoughts about buying from a division of a competitor, but best total value proposition still wins the day.(9)

One theme that runs through all of these case examples is the true economies of scale that all MDCs have for supply chain/electronic commerce applications on both the suppliersí and distributor/dealersí sides of the business. For the fixed cost of creating and maintaining real time channel inventory visibility and management, the cost is spread over much greater volume and inventory than if every producer tried to do the same with every distributor/dealer.

As MinCon further investigates and ponders potential MDC solutions, here are some of the design solution issues that Ted and I listed:

  • What will the stated "value proposition" be for distributors and indirectly for their customers? How will they measure, achieve and sell these superior economics?
  • What will be the initial and eventual scopes of the channel redesign solution(s)? If possible, can they start and test cheaply before jumping into some final, comprehensive solution?
  • How can they simulate the new economics that might be derived from a new supply chain model to better sell and negotiate with collaborative partners?
  • Who will maintain the most strategic control over any collaborative venture?
  • How will both the development costs and the new savings and service value be shared amongst the supply chain partners?
  • Competitive response: how fast might any new supply chain solutions and benefits be copied by competitors? Should we let them join the new platform or logistical utility? How many new levels of benefits can be created from the new proposed business model platform? If MinCon is a pathfinder for their competitors to follow, can they continue to be a prosperous first-mover in this new game?


After several discussions, Ted and I agreed on the following points:

  • The "China effects" add up to a strategic inflection point for most every US manufacturer. The more MinCon has produced in China, the more they realize that they can and must produce even more offshore out of economic necessity.(10) And, blending the expanding inbound goods with the shrinking domestic production requires a MDC solution for MinCon as well as other channel manufacturers that will have to blend offshore and domestic production.
  • Thanks to customer profitability and growth comparison reports, not all distributors are the same. MinCon must at once rationalize its distributor base to address current losing accounts, but still reach more and smaller distribution locations on a more frequent delivery basis through shared economics with other complementary manufacturers' goods.
  • Bigger end-users are shifting from buying "price" from too many redundant suppliers to buying "total procurement cost" from as few suppliers as possible. Distributors are starting to understand and want the same replenishment-system, total economics.(11)
  • An MDCís total volume throughput and larger, average volume flow from suppliers and to distributors allows for better economies of scale for all channel players when implementing all of the supply chain applications that are already proven winners in consumer goods channels.
  • MinConís final supply chain redesign solution will require new MDC capabilities that donít currently exist within its channel. Is there enough fear and greed in their channel to find other willing partners with which to co-create new channel economics? We will see.

In the meantime, how are your channel pressures building? Is it time for your company to rethink how it might be part of a new supply chain redesign solution? Or, do you think the same old, linear, one-size fits all, general, channel patterns of the past 25 to 150 years will keep on working?

Link to Support Notes for this article: ./articles/2_23SupportNotes.asp.

Ó Merrifield Consulting Group, Inc., Article # 2.23

D. Bruce Merrifield, Jr.