Advanced Pool Distribution: Part One--How Pool Distribution Works
on Aug 24, 2017
Pool distribution is a key part of the equation for retailers trying to achieve excellence in store replenishment and omnichannel fulfillment, at the lowest costs. In part one of this series, we examine how pool distribution works and summarize the key difference between advanced vs. basic pool distribution.
Achieving Speed, Precision, Flexibility, and Profitability Simultaneously
Retailers are under pressure to deliver online omnichannel excellence and maintain the relevance and vitality of their physical stores, all while keeping costs down and sustaining profitability. Transportation costs are an important and growing piece of this equation. Amazon has set a high bar with expectations for ‘free’ 2-day shipping1 (Amazon subsidized their transportation costs by $7B2 last year). Competing retailers need to match those expectations. At the same time, there are pressures to make smaller more frequent deliveries of inventory to stores. And all of this needs to be done at the lowest possible fulfillment costs.
Pool distribution can be a key part of the equation for retailers trying to achieve those competing objectives simultaneously. It leverages forward-deployed inventory to provide responsiveness (radically decreased transit and replenishment lead times) and can provide surge capacity. Even though many transportation managers have heard of pool distribution, they may not fully appreciate how much it has evolved in recent years from the basic pool distribution they may be familiar with. This paper describes what differentiates advanced pool distribution from basic pool distribution and the benefits made possible when working with an advanced pool distribution provider combining speed, flexibility, precision, inventory control/access, and lower costs simultaneously.
How Pool Distribution Works
Retailers often have one or two central DCs to serve the entire country (or continent in the case of Europe). Depending on their volumes and the markets they sell into, a large retailer may also have multiple regional DCs. While it is common for a retailer to locate regional DCs near major markets where they have enough stores to justify it, this still leaves many stores that are at a distance from their DCs. Small or mid-sized retailers may only have a single DC serving the entire country. For those numerous stores and markets that are not near one of the retailer’s DCs, goods are typically shipped to the stores using some combination of long-haul LTL (less-than-truckload), long-haul dedicated TL (truckload/milk run3), and/or parcel deliveries. This is expensive (in the case of parcel), slow (in the case of LTL), and imprecise (i.e. both parcel and LTL have long delivery windows). Dedicated TL and LTL both add processing time and labor costs at the DCs. For stores that are not near a retailer’s DC, using pool distribution can be a much better option than dedicated TL, LTL, or parcel.
A pool DC is run by a third party and is shared with multiple other retailers who also have stores in that market. Retailers who could not otherwise justify having their own DC in that market, gain the advantages of a local DC, with value-add capabilities and controls. By using pool distribution, the retailer can consolidate multiple individual-store shipments into a single TL (truck-load) shipment to the pool distribution provider. The PD (pool distribution) provider then splits the consolidated shipment into per-store shipments. By combining those per-store shipments from all the retailers they serve within a mall or shopping district, the PD provider can now do daily or even sub-daily deliveries.
Figure 1 – Origin DC’s Perspective—Consolidating Multiple Long-Haul Shipments, More Frequent Store Deliveries
Figure 1 shows the perspective of a hypothetical retailer that has a DC in Columbus, shipping to 10 stores in the Seattle area. Without pool distribution, they are forced to use more expensive, less frequent LTL or parcel deliveries. With pool distribution, they can consolidate all of the deliveries for that market into a single TL or LTL load. This enables more frequent deliveries, especially from the pool distribution point to the stores. It also saves a substantial amount of labor at the origin DC, by reducing or eliminating the store-level sorting, palletizing, staging, or (in the case of milk runs) sequentially loading the goods.4 Instead, cartons can be fluid loaded in any sequence until the truck is full. It reduces the DC space requirements. Store-level sorting is done by the PD provider who specializes in that process and can thereby do it much more efficiently. For the final mile, there are economies of scale benefits from being combined with other retailers’ shipments.
Another advantage is a reduction in transportation management complexity. Pool distribution simplifies outbound shipping from the DC. What formerly required multiple shipments (and potentially multiple modes and different carriers) is now handled in a single shipment to the pool operator. A retailer might have 20 or more carriers servicing stores in a single region, which can be replaced with a single carrier, making transportation management much more efficient and cost effective.
Keep in mind, there will typically be many dozens of retailers sharing the same pool distribution provider (that’s the ‘pool’ in pool distribution). Therefore, pool distribution helps as well from the perspective of the destination mall or shopping district where all those retailers’ stores are located. As shown in Figure 2, without pool distribution, the mall receives separate shipments from each retailer. With pool distribution, these shipments are consolidated into TL or LTL shipments. This substantially reduces traffic and congestion at the mall’s delivery areas. This can help to lower costs (such as in locations where there are fees for delivering to congested urban areas), as well as to comply with ordinances in places that restrict access. Deliveries can be more precisely timed, so they arrive at the desired time slot and avoid too many vehicles arriving all at the same time.
Figure 2 – Destination Mall’s Perspective—What Changes with Pool Distribution5
Pool distribution can provide the speed and visibility of parcel at the cost of LTL, with granular visibility and control better than both. Figure 1 and Figure 2 illustrate some of the benefits of basic pool distribution. However, the advantages of pooled distribution can go far beyond saving money on transportation, especially when the right PD providers and underlying infrastructure are used. This is where Advanced Pool Distribution comes into play. Table 1 below outlines the key capabilities comprising advanced pool distribution and compares and contrasts it with parcel and LTL.
Table 1 – Comparison of Parcel, LTL, and Advanced Pool Distribution
In part two of this series, we look at what differentiates advanced pool distribution from basic pool distribution.
1 Amazon Prime members pay $99/year, but since that is a sunk cost for them, other retailers need to somehow match up to the ‘free 2-day delivery’ expectation that Prime members now have, in order to be perceived as at parity with Amazon (all else being equal). -- Return to article text above 2 Amazon reports their ‘Net Shipping Costs,’ which is a measure of how much more they pay for shipping than what they charge in shipping fees and Prime fees. At $7B, that is about 5% of revenue and represents an enormous impact on profits, which can be viewed as an investment by Amazon to buy market share. Other retailers are generally not in a position to make those kinds of sacrifices to their profits and so have to become very innovative to compete. -- Return to article text above 3 A ‘milk run’ is when a single truck collects goods from several suppliers and drops them off at the customer or (as in this case) a single truck collects goods at the DC and drops them off at several stores serially. -- Return to article text above 4 When goods are loaded for a milk run, the last stop has to be loaded first. If other cartons are ready first, they have to be temporarily stored in a staging area, which takes up more room and also means additional handling of the goods. -- Return to article text above 5 Some factors reduce or increase the number of trucks. A parcel truck may make deliveries to multiple retailers on one visit, reducing the number of trucks, but may also make multiple deliveries per day to one retailer, increasing the number of trucks. In any case, a mall without pool distribution has many more trucks than one served by pool distribution. -- Return to article text above 6 PDC = Pool Distribution Center. Inventory held at the PDC can usually be delivered to stores on the same day. -- Return to article text above 7 PRO number is a 7 to 10-digit freight bill number, unique to each shipment, typically printed on a barcode sticker affixed to each pallet. The entire shipment has the same PRO number. -- Return to article text above 8 Pool Distribution requires sufficient store-density in a market (enough to fill a full trailer at frequent intervals). Retailers may collaborate and combine loads with other retailers and reach sufficient volumes in lower density markets. -- Return to article text above
To view other articles from this issue of the brief, click here.