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A real-life example of the self-distribution supply chain model

A self-distribution approach to supply chain management can help a company lower the risk of disruption. Learn how Ahold Delhaize USA is doing just that.

If the pandemic taught supply chain leaders nothing else, it was this: Interdependency creates vulnerability.

True independence is virtually impossible because suppliers are critical to success, but some companies are taking more direct control. Such is the case for Ahold Delhaize USA. The U.S. arm of Dutch grocery retail company Ahold Delhaize is moving to a self-distribution supply chain model as a way to operate more efficiently and save money over time. Leaders at other companies can consider whether that model is right for their company based on a number of factors.

In a self-distribution model, companies purchase goods directly from their manufacturers, store those products in their own warehouses and transport them through their own networks, cutting out the middleman.

"That means we have control of the … functions across a supply chain," said Chris Lewis, executive vice president of supply chain for retail business services at Ahold Delhaize USA's services company.

Instead of using a third party to manage functions such as replenishment, forecast, logistics, distribution, Ahold Delhaize now directly manages product movement from a manufacturing plant to the store.

When the self-distribution model is appropriate

While this model may work for Ahold Delhaize, it may not be right for every company, said Mike Griswold, a research vice president at Gartner Inc.

"We tend to see self-distribution or the move to self-distribution in larger retailers, companies that have several hundred stores and have multiple distribution centers," he said. "Smaller, maybe more regional players with only a hundred stores that don't even have a distribution center are using third parties," he said.

Company leaders that want to go down the self-distribution road need to decide if they want this to be a core competency, he said.

"Do they want to be responsible for the operations of a warehouse and all the things that come with that, whether that's a unionized workforce or a non-union workforce? The same on the [transportation] side," Griswold said. "Do they want to be responsible for the service relationships that need to be established with the stores in terms of things like delivery frequency and ownership of the quality of the delivery of the product and so on?"

Benefits of the self-distribution model

Nevertheless, there are benefits to a self-distribution model, Griswold said.

One of the benefits is that it gives companies definite control over when and how they deliver products to their stores and it gives them control over the inventory, he said.

"If you're working with a third party and they're doing distribution for you and for three other retailers, and they have a scarcity of inventory, depending on where you are in the relationship, you may or may not have first preference to that inventory," Griswold said. "And often customers have to pay for higher service levels. But in a self-distribution system, you take control [over all that]."

Recently, Ahold Delhaize's first distribution center, Freetown Grocery in Freetown, Mass., transitioned procurement from a third-party vendor to the self-managed network, providing direct control of inventory and replenishment at this facility. The company announced plans to move to a self-distribution model in December 2019.

This is by far the biggest change management project I've ever been part of.
Chris LewisExecutive vice president of supply chain for retail business services, Ahold Delhaize USA

The company's brands are Food Lion; Giant Food; The Giant Company; Hannaford and Stop & Shop; Retail Business Services, a U.S. support services company the provides services to the brands; and Peapod Digital Labs, its digital and e-commerce engine.

Ahold Delhaize is also planning to transition five other distribution centers into the self-managed network in 2021: a fresh facility in Freetown, Mass., a distribution center in Jessup, Md., and a distribution center in Carlisle, Pa. In addition, ADUSA Distribution will open new facilities in Mauldin, S.C., and Manchester, Conn.

Before Ahold and Delhaize merged in 2016, Delhaize owned all its distribution centers and had its own buyers, Lewis said. However, Ahold had partnered with distributor C&S Wholesale Grocers for its supply chain services.

The move to a self-distribution model will enable the company's businesses in the U.S. to reduce costs, get products to store shelves faster, enhance vendor relationships and improve product availability and freshness for customers, Lewis said.

An integrated self-distribution model will give Ahold Delhaize greater flexibility, including the ability to move product around the network and send it to the distribution centers and stores that need it most, he said.

"By leveraging the right technology and data upfront and doing [fewer] handoffs throughout the supply chain, we can get products to physical and digital shelves faster, decreasing [the number of] days products spend in distribution centers and on trucks and giving customers fresher products with more days of life once they get them home," Lewis said.

And as Ahold Delhaize adds new facilities to the network, including new fully automated frozen warehouses planned for Pennsylvania and Connecticut, the company will place facilities in locations close to the local brand retail stores they service, Lewis said. The locations of the two new fully automated frozen facilities, for example, should reduce miles traveled by 3 million miles annually, he said.

"Ahold Delhaize is certainly at the size and scale where running this themselves probably makes a lot more sense," Griswold said.

That's especially true when considering the size and scale of the stores, the number of stores, how they're spread across the country, and the desire to have more control over the service they can provide their own stores, Griswold said.

Tools to support a self-distributed supply chain

As part of this transition, Ahold Delhaize had to implement common tools across its physical locations to enable total real-time visibility into its inventory, he said. Those tools included warehouse management, transportation management, forecasting and replenishment tools, as well as a new SAP ERP system.

"We started talking strategy at the beginning of 2019 and spent probably four months," Lewis said. "We actually included C&S in the exercise because we thought it was important to either move fully outsourced, so you can leverage your whole size and scale, or bring it all [in-house]."

Ahold Delhaize also brought in Kearney, a consulting company headquartered in Chicago, to help with the transition.

"[Ahold Delhaize's leaders] had a vision in place for this transition and they wanted us to challenge them in their thinking," said Sameer Anand, a partner at Kearney. "They wanted to know: What are the considerations they are not thinking about? What is it in terms of emerging scenarios they should be planning for with this move to self-distribution? How should they think about the degree of change with the various stakeholder groups within the supply chain that could happen?"

Anand said there were many challenging components of the move to a self-distribution model, including transitioning the sites and taking ownership of them, as well as dealing with the ordering and logistics processes. And in parallel, Ahold Delhaize was implementing the new tools and systems, he said.

After the decision to move to a self-distribution model, Ahold Delhaize also had to work with its employees on the change.

"This is by far the biggest change management project I've ever been part of," Lewis said. "We really started with the CEO [Kevin Holt] in the U.S. and his team. I spent quite a bit of time with them, really enrolling them in the change."

Ahold Delhaize also set up an extensive change management program that includes employees in every part of the company, including supply chain workers, people from the brands, finance, communications and human resources, he said.

"There's a lot of training as we talk to people about why we're making the changes and there are forums for leaders twice a week that we've held since we announced in 2019," Lewis said. "There's a premade video we push out to all associates and a lot of printed articles and newspapers on the activities when they're happening."

With the increase in omnichannel retail due to the COVID-19 pandemic, moving to a self-distribution model makes sense this year in particular as companies want to have more control over their inventories and supply chains, said Susan Beardslee, principal analyst at ABI Research.

"Not only do you have to have the front end, but you're able to orchestrate and integrate the back end of how those orders are filled and then do that very quickly -- [essentially] the Amazon effect," she said. "With this self-distribution model, you're not competing with the other guys necessarily. So, I think that really helps with some of the same-day pressures and helps to cut some costs."

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