Logistics Management

Dave Schneider

The more things change the more…..
February 7, 2008

In a past life (about 13 years ago) I was toiling away as a consultant on a distribution network analysis and site selection project. In the initial project meetings with the client we identified the key parameters that would be used to determine the location. In this project, just as in almost all of the others that I have done, transportation costs were the primary driver.

Then I asked “Should we look at just outbound transportation costs for the location driver, or should inbound also be included?” I got some looks from some folks at the table that looked like they thought I was stupid. I also saw that one or two others at the table were confused about the question.

The top client manager held silent, looking around the table to see what his team would say. Into the void the 2^nd manager spoke up and said “Of course include the inbound transportation costs”.   There was a fair amount of supporting head movements to the statement, except from the top manager.

I waited for a few moments, and then said “If I remember my notes from earlier in the day, a significant amount of your inbound freight is prepaid. I do not see why we should include that freight cost in the model analysis. I would think that you would want to optimize your costs, not the costs of your suppliers.”

It did not take long for the top manager to speak up and say “I don’t care about the vendor costs, just ours. Use just the outbound costs.”

Now fast forward to today. I was reading this week in one of the “top of the new year” prediction reports in a trade publication (you know what I am talking about, predictions from the folks at Aberdeen, AMR, etc. – people whose job is to research on what the “best in class leaders” are doing and what the “average and laggards” should be doing). One of the “predictions” was that there would be a “growing focus on inbound logistics and pressure for retailers to convert terms” of sale from FOB Destination – Prepaid to FOB Origin – Collect.

My gosh! I had to write that one down: “a growing focus”.   Wow. 

Yes, I am being a bit sarcastic. 

Heck, I remember a more than a few years ago, like two to three past lives (or is it 4?) where I worked at a retailer who was focused on converting freight terms to collect. That company was one of the few “big dogs” in the space, where the top 3 players only had 5% of the total market. The vendor to DC freight was “cooked” into the cost of goods on the invoice or was the classic “pre-paid and add” and it was always a “battle” to get the vendor to let go of the freight. Part of the line was that the “vendor makes extra points of profit” from the freight so they don’t want to give it up.

Growing focus? How about a continuous focus? Or better yet, an evolutional focus.

I say evolutional focus because that is what it is. It depends on the maturity of the specific market and the size and numbers of “big dogs” in that specific market.

Here is my example:

Take a retail market, say retail hardware and home improvement. When the hardware market started to grow hardware was a “department” at the “general store” or “department store”. There were some “big dog” department stores, but in most cases they direct contracted with a manufacturer to make the goods, so they “controlled” the whole transaction process. But most general stores were small, single location businesses, run by a single proprietor (think of Mr. and Mrs. Olsen). The single proprietor didn’t know freight, he just ordered what he thought he would need from the traveling salesman and the goods arrived a few weeks later.

The market continues to grow; there are more and more kinds of hardware. Mr. Olsen can’t keep up with the hardware, along with the dry goods, the cloth, the big city factory clothing, the pots and pans, etc. At some point his nephew (or a neighbor kid) gets hired and he takes care of hardware. Later on the kid gets tired of working for old man Olsen and rents space down the street and opens up his own hardware store, just hardware, none of the dresses and other stuff.

The business continues to grow, and the market continues to grow. There are more hardware manufacturers starting up, making more hardware items. What started out as a few hundred items now has grown to a few thousand. By the 1920’s there were over 250,000 different “hardware” items being made, not including plumbing, electrical, and other products that you now find in the “hardware” store. Around this time groups of hardware stores, and lumber yards, were starting to form alliances, buying groups, so to get a “better deal” by buying greater quantities. Into the depression many of the weak proprietors were absorbed into the stronger players, almost all of those strong players were members of the buying groups.

Even then, the term of sale were “Delivered”. Even as the buying groups got bigger and started to build warehouses and ship to the members, the inbound from the vendor to the DC was still prepaid. You have to move forwards in history to the 1980’s before pressure from the “buyer’ of the goods started to push on the vendors to change the terms of sale. Even with the emergence of the “big box” retailers the terms of sale conversion process did not gain momentum until the last 10 – 15 years.

Posted by Dave Schneider on February 7, 2008 | Comments (0)