Actionable Insights From APT's Retail Practice

Streamlining the Supply Chain: Applications of Business Experimentation

August 8th, 2017 | Posted by APT in Manufacturing | Retail

Marketing, merchandising, promotions, and pricing: these are just a few of the areas in which leading retailers and CPGs are already leveraging business experimentation to test new programs and measure their overall impact. While organizations are increasingly standardizing analytic processes to evaluate new initiatives in these areas, there is a significant opportunity to optimize programs in another crucial area: supply chain.

With the emergence of Amazon and other online-only competitors, it’s more important than ever that CPGs and their retail partners collaborate to ensure they have the right products on the shelf at the right times. Applications for retailers and CPGs to leverage test vs. control analysis may seem more easily applicable for programs such as new pricing structures and marketing campaigns. However, there are a variety of “testable” initiatives that retailers and CPGs should consider to inform their decision-making and strategies. This approach will ultimately help them develop a greater competitive advantage in a changing industry environment.

For example, while some CPGs use a centralized model of distribution, others use direct store delivery (DSD). This approach involves CPGs shipping items directly to the store rather than routing them through a warehouse. While DSD can have benefits for CPGs and retailers alike, it is often most valuable for the distribution of certain products, such as fresh foods or perishables, for which CPGs may not have the necessary refrigerated storage space. It can also be valuable for the distribution of fragile products, such as salty snacks, which are more easily damaged during the distribution process. This approach is typically deployed for very high-velocity items such as soda and beer as well, as they are impulse drivers that it is important to maintain in-stock in order to drive sales.

Of course, as with any program of this scale, there are many factors to consider before investing in widespread implementation. One key consideration is cost. DSD requires a significant labor investment from CPGs, as this model necessitates additional representatives to make regular store visits, manage products on the shelf and handle all other relevant in-store operations. There are also benefits for CPGs; some executives believe that this approach gives them a competitive advantage in driving sales, as it enables them to take ownership of displays and keeping product in stock. With this in mind, business experimentation can help CPGs better understand whether DSD is the right approach for them – and if so, with which products and retail partners it will be most effective.

As an example, imagine a CPG was planning to introduce DSD, but first wanted to determine what the right coverage patterns would be in a DSD environment. Understanding that this change would entail additional investments in labor, the organization would want to understand how to structure coverage for the greatest ROI. Taking a test vs. control approach would allow the CPG to roll out varying levels of coverage based on profitability – such as having greater coverage in suburban and high-income areas, where it may prove to be more profitable.

Another application of testing in the CPG supply chain is the cadence and timing of shipments. As many top retailers are adopting stricter rules around vendor deliveries, CPGs can be fined for making deliveries later – or even earlier – than scheduled. Testing different shipment timings, whether through a warehouse or DSD distribution model, can help CPGs streamline routes and deliveries, boosting overall efficiency. Of course, it will be important for CPGs to coordinate these tests with their retail partners, to avoid any disruption in delivery, and incurring late delivery fines.

Similarly, some retailers are also testing the impact of shifting their delivery schedules. For example, a retailer may want to re-examine their pallet delivery strategy, and measure the sales impact of changing the delivery schedule and format. This approach can help retailers to better understand the key characteristics of the stores in which the new schedule and format are most effective, enabling the executive team to determine in which additional locations to use the new strategy for maximum profitability.

Overall, retailers and CPGs alike can benefit greatly from using business experimentation to evaluate and refine their supply chain strategies. While the applications of testing in this area may be less immediately obvious than those in areas such as marketing and merchandising, the organizations that succeed in standardizing testing processes in this area will have a significant competitive advantage.

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