The question posed above depends on several factors, such as; 1) volume; 2) channels / regions; 3) current assets being deployed for distribution; and 4) current cash flow and ability to sustain future distribution costs.
Small, rapidly growing vendors are so busy merely collecting cash and meeting payrolls that direct distribution is not an option. It usually does not make financial sense for manufacturers with annual sales less than $3 million to invest in trucks, drivers, maintenance, insurance and the other trappings of self-distribution. Ryan Black, Chief Executive Officer of Samba, Inc., contracts with United Natural Foods and other distributors. “We outsource distribution and focus on our core competencies – producing high quality organic, fruit-based food and beverages and marketing the Sambazon brand.”
Logistics providers serving foodservice vendors deliver to multiple distribution points – restaurants, hotels, schools, and other channels. As these vendors grow and their accounts payable to logistics providers increases, there may be opportunities for substantial savings by “in-sourcing.”
Benefits of Direct Distribution
Green Mountain Coffee Roasters, one of the largest specialty coffee roasters, owns their own fleet of trucks to distribute their fresh coffee. Rick Peyser, Director of Public Relations, said, “We have always distributed directly and, as the company grows, we will probably maintain direct distribution.” Starbucks, conversely, uses 3rd party logistics providers to distribute its roasted coffee.
There are also intangible benefits of direct distribution. Data can be collected on the order patterns of your direct customers. How often – and on what days – do my customers order particular products? Is there an increase in order activity for specific SKUs prior to a certain holiday? Why are my sales rising to restaurants but declining to specialty coffee shops? The answers to these questions usually are concealed when using a 3rd party logistics provider, but could be valuable information to your business planning.
For example, if you know your sales are declining to specialty coffee shops, then you can develop new, tailored products and fill the unmet needs of that particular channel. You may also conduct promotions or develop unique POP materials specifically for specialty coffee shops. Alternatively, if you detect an increase in order activity for a SKU at a given time, then increase production to avoid being out-of-stock and losing sales opportunities.
Controlling distribution may also increase your customer base, since many distributors have high minimum order quantities and refuse to deliver to small accounts.
Cost of Direct Distribution
This customer data and control over your distribution channels comes at a price, however. Arguably, a small manufacturer that delivers tiny quantities to multiple customers throughout a wide region will be less efficient than a large distributor with limited distribution points. Your customers may not be willing to pay for this inefficiency, preferring instead to purchase larger quantities if they receive substantial cost savings.
More importantly, management may spend significant resources on logistics. This could detract from a focus on the vendor’s core business. You may decide that paying for a 3rd party logistics service provider is well worth the incremental costs and management time. When it comes to shipping your goods – fuggetaboutit!
One means of obtaining the customer data you require for efficient production / marketing while avoiding the costs of direct distribution is to insist that the distributor provide you with detailed sales reports from their end-user customers.
Depending on your company’s stage of development, size and resources, direct distribution is a viable but often expensive option to enhance control over your customer base. For small vendors it is better, perhaps, to focus on what you do best.
–Peter M. Guyer
Peter M. Guyer is the Founder and President of ATHENA MARKETING INTERNATIONAL (athenaintl.com), an international marketing, consulting and business development firm serving food and beverage manufacturers. Tel. (206) 749-9255.