This article was written with the help of Nick Capuano’s has over 10 years experience in the food and beverage industry focused on delivering innovative negotiation solutions. As a Senior Consultant at TGP his understanding of CPG gives him a unique perspective on the multidimensional layers of value within business negotiations.
Many people believe that price is the sole determinant in negotiations, but in reality, total value is a much more critical factor. The direct store delivery (DSD) model, widely offered by Consumer Packaged Goods (CPG) companies to their partners, is a perfect example of this. DSD is a vertically integrated business model that delivers products straight to a store, and it can drive significant value for both suppliers and retailers.
What is DSD?
The DSD model is a supply chain method where products are delivered directly from the vendor to the store, avoiding the strain on the retailer’s distribution network. Many DSD suppliers offer full merchandising services, including unloading, stocking, and rotating products in-store, allowing retailers to focus their labour on other tasks.
The Process of DSD
The DSD model involves a network of teams working together to maximize efficiency and deliver value to the partnership. The teams work along the entire supply chain, from the warehouse to the stores and buying office, and include the following roles:
- Loader: Responsible for loading the truck quickly and accurately
- Driver: Ensures all orders are delivered as scheduled for the day
- Merchandiser: Stocks and rotates products, sets the shelves to the planogram, builds displays for promotions, and makes the store look great
- Sales Representative: Helps stores maximize their profit, writes accurate orders, secures display space for promotions, and discusses innovation with store managers
- Key Account Manager: Works with the buyer to create a joint business plan and uses data analytics to sell innovation and plan promotions
- Front-Line Manager: Simplifies and cascades the business plan to their team, and ensures high levels of execution and accountability.
Benefits of DSD
Retailer profitability is dependent on the benefits of the DSD model. The following are some of the key benefits:
- Quick Turns: Ideal for product freshness, high velocity SKUs, frequent retailer promotions, and a high touch index required to handle the product
- Labour: Retailers can save wages and waste costs by leveraging vendor-supplied labour in-store
- CapEx: Retailers can save capital expenditures on storage at the warehouse and store level with frequent direct store deliveries
- Delivery: Retailers have the option to invest in their own distribution network, hire a third-party operator, or use a mix of both, optimizing their supply chain for maximum value
Maximizing Total Value in Negotiations
In complex negotiations, price is just one of many variables to consider. To maximize total value, it’s essential to consider the following:
- Order Accuracy: What percentage of orders is being agreed upon?
- On-Time Delivery: What percentage of deliveries are required to be on time?
- Out-of-Stock (OOS) Acceptance: What percentage of OOS is acceptable?
- Waste Coverage: Who will cover waste?
- Service Outage Resolution: How will service outages be resolved?
- Number of Promotions: How many promotions will be run?
- Promotion Funding: How will promotions be funded?
- Shelf Space Allocation: How much shelf space is allocated?
- Display Space Allocation: How much display space is allocated?
- Innovation Item Listing: Which innovation items will be listed?
Top grocery retailers know the importance of extracting the most value from the DSD model offered by their suppliers. They’ll negotiate for more frequent deliveries and lower order minimums to ensure full shelves and limited back-stock. They’ll maintain strict delivery windows, demanding their stores are prioritized before the competition’s stores with each truck that goes out. They’ll negotiate additional merchandising service on the weekends when traffic is highest, or additional days during the week above “standard practice”.
Beyond deliveries and service, these top chains are also demanding the most out of their account managers. If quarterly business planning isn’t enough, they’ll require weekly meetings with their suppliers.
This allows retailers to apply pressure to their suppliers by asking tough questions, and demanding excellence:
- How many deliveries were missed last week or arrived late?
- Which stores had out of stock conditions because merchandising service wasn’t up to par?
- How many orders had unauthorized products that had to be rejected by the receiver?
- How can we fix these misses, so it does not happen again next week?
- If we are going to talk about driving your sales, then you need to correct all these issues.
The pressure does not stop with questions surrounding deliveries and service. Scan the marketplace landscape, identify how suppliers are activating with your competition, and tell those suppliers you want promotions in your stores to be bigger and better. You must capture the value available to you through the DSD model, or the competition will take what’s rightfully yours.
As you negotiate, look to where you can extract value from the deal and maximize the size of the prize. Of course, there are far more variables (both tangible and intangible) for you to negotiate with to find value, and there are many levers of value to pull. Make sure you are pulling on the levers that maximize value for your stakeholders, while protecting your business interests.
