Product & Customer Profiling for Direct Store Delivery (DSD)

Liang Chen

(22 MAY 2008)

Advisor: Dr. Larry Lapide

Outlines

The customer and product suitabilityThe customer and product suitability

Modeling of StockModeling of Stock--out at the shelf and the generic out at the shelf and the generic

distribution modelsdistribution models

Sensitivity Analysis: Demand Pattern, Shelf Size and Sensitivity Analysis: Demand Pattern, Shelf Size and

Review FrequencyReview Frequency

ConclusionsConclusions

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From Production to Consumption

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Research Question

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What products, suppliers and customers are What products, suppliers and customers are

most suitable for the DSD model?most suitable for the DSD model?

Two Models: Generic Distribution and Stock-out

Modeling the generic distribution modelsModeling the generic distribution models

Three distribution models: DC model, Direct-to-Shelf and Through-the-

Backroom

Channel Profit = Revenue – Channel Costs

Modeling the stockModeling the stock--out situation at store shelfout situation at store shelf

Costs at the shelf = Costs of Lost Sales + Costs of Merchandising

Three key variables: Demand pattern, Shelf size and Review frequency

Unit Loss Function: Gu(k)

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The suitability of the DSD model

•• Company features determining the suitability of DSDCompany features determining the suitability of DSD

–– OverOver--all business strategyall business strategy

–– Economy of ScaleEconomy of Scale

–– Geographic LocationGeographic Location

•• Product features determining the suitability of DSDProduct features determining the suitability of DSD

–– Volume & VelocityVolume & Velocity

–– Perishability/Shelf LifePerishability/Shelf Life

–– SubstitutabilitySubstitutability

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–– High Demand VariationsHigh Demand Variations

–– Specialty ProductsSpecialty Products

–– New ProductsNew Products

Weekly Sales Revenue Breakdown - Single item, Single store

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Demand Variations - Co-efficient of Variation

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The DSD Model has The DSD Model has lower total costs at the lower total costs at the shelf than the DC Model shelf than the DC Model with the increase in covwith the increase in cov

Shelf Size - DC vs DSD

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If shelf size is too If shelf size is too small, DSD has no small, DSD has no cost advantagecost advantage

With moderate shelf With moderate shelf size, DSD has lower size, DSD has lower costscosts

Too big shelf size Too big shelf size diminishes the cost diminishes the cost savings of DSD from savings of DSD from lost saleslost sales

Review Frequency - By a single party

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Breakeven Point:Breakeven Point:Saved lost sales = Labor Saved lost sales = Labor spending on reviewsspending on reviews

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Review Frequency - By two parties

Labor Substitution Curve - Same Labor Costs

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Summary

•• DSD can reduces lost sales and improves sales at the shelfDSD can reduces lost sales and improves sales at the shelf

•• The benefits of DSD result from extensive merchandising at the The benefits of DSD result from extensive merchandising at the

storestore

•• DSD proves a better solution for products with volatile demand DSD proves a better solution for products with volatile demand

by providing more frequent shelf reviewsby providing more frequent shelf reviews

•• Retailers and DSD suppliers joins labor to maximize sales but Retailers and DSD suppliers joins labor to maximize sales but

the labor hours are exchangeable.the labor hours are exchangeable.

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Future Directions:

•• Category Management with preCategory Management with pre--set shelf sizeset shelf size

•• Labor substitution between the store and the supplierLabor substitution between the store and the supplier

•• A new approach to evaluate the value of DSD in bigger context: A new approach to evaluate the value of DSD in bigger context:

Cost to serveCost to serve

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Thank You!

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