Tuesday, March 4, 2008

Primary freight - to do or not to do?

With Foodstuffs in New Zealand apparently embarking on a national initiative to become the provider of primary freight (supplier warehouse to retailer distribution centre) one has to ask why? Three reasons are often advanced:
1) The supply chain is seen as a strategic competence and so the more control a retailer has of it the better able they are to gain competitive advantage in this area.
2) It significantly reduces retailer costs.
3) It enables greater flexibility in the retailer's distribution strategy.

Arguments 1 & 3 are perhaps to wide to argue here, so let's focus on 2 - the costs.

At the hub of this position is the nature of the retailers freight arrangement - do they pay for the capacity in the trucks travelling to AND from the stores or only for deliveries.

If the latter is the case the cost benefit for the retailer derives from them having access to a lower freight rate than the supplier for the primary freight leg. Based on our observations around the industry in NZ there is likely to be slender picking for the retailer if this is to be teh source of their savings.

More likely is that the retailer already owns (or pays for) the truck capacity both to and from the stores - for instance if they hire the truck, or own the freight company. Here the retailer expects to gain from using the empty or backhaul capacity when the truck returns from the store to the retailer DC to carry loads of supplier product from the supplier to the DC. As the total truck cost is already covered, but for the loading time, route diversion and a small increase in running costs the trip from the supplier to the DC is already paid for.

Well that's the retailer economic rationale anyway.