Direct Supply is the process whereby the supplier ships goods directly to the dealer without having to transition the goods through the distributor’s warehouse. This enables the distributor to be the conduit between the supplier and the dealer. The delivery process can be streamlined without directly handling goods.
In the normal supply process, a dealer purchases from a distributor. The order is processed and the goods sent to the dealer. If the distributor does not have the goods in stock, an order is sent to the supplier who then sends the goods into the distributor’s warehouse. The goods are unpacked, checked and stored; the dealer’s backorder is processed and the goods are picked and sent out.
Direct Supply, by sending goods directly to the dealer from the supplier, eliminates additional handling, storage and repackaging but maintains the logical interaction with the distributor. The order processing time is dramatically reduced, the goods are delivered faster to the dealer and the overall supply chain costs are reduced.
Cost reductions are the result of the distributor not directly handling the stock, and using the supplier as a virtual warehouse. For the distributor, the logistics costs of handling and continual movement of goods is removed, as are any storage costs, which remain with the supplier. This becomes more important when a third party logistics operation is being used by the distributor as each transaction in the warehouse attracts specific costs.
Furthermore, local suppliers often have multiple branches and the cost of either supplying to a dealer directly, or to the distributor’s warehouse, is about the same. Transportation costs are decreased because there is now a single transportation process, as opposed to two.
Transportation times are reduced because goods do not go through an intermediary warehouse at the distributor level, and as a result, delivery times are far more predictable. Where the supplier has multiple branches the delivery times are improved again, for example, interstate dealers for the distributor are being supplied by their local state branch.
However, not all goods are suited to this process. Those that are a perfect fit for the strategy include locally supplied parts and consumable goods. For example, in the automotive industry this might include high turnover items such as tyres, oil and batteries. These can be supplied directly using local authorised suppliers. In addition, some automotive dealers have expanded that process within the network to incorporate services such as the fitting of tow-bars, sports kits or spoiler kits. Large components are an example of goods which may best be handled through a distributor. For example, it would not be cost-effective for engines to be shipped from an overseas supplier directly to a dealer, with the transportation and logistics costs being too great.
How it works
The operation of the Direct Supply system is relatively simple once it has been correctly set up. The order is placed through the distributor and then passed to the supplier with a delivery instruction – please deliver to customer. The supplier can then make use of local warehouses/branches. The distributor plays a pivotal role in the overall business. The distributor is able to negotiate volume based pricing and sets up the primary agreement with the supplier. This may even allow direct ordering from dealer to supplier, via a unique customer identification number. The distributor receives all notification statements and invoices from the supplier and in turn invoices the dealer. Without the distributor, the supplier’s financial systems would become very complicated, with numerous transactions with many dealers. Additionally some suppliers are not interested in trading directly with the retail outlets due to their low volume. The distributor therefore is required to negotiate with the supplier and manage the financial process with individual dealers.
Advantages for distributor, supplier and dealer
For the distributor, the stock is virtually passed through the warehouse, and the supplier maintains control and responsibility over all of the physical supply chain process, just as they would when supplying to the distributor’s warehouses. The cost of additional warehousing is eliminated and this benefits both the distributor and dealer. Another important benefit is the reduction in the number of goods with expiry times in the distributor’s warehouse. Generally, a distributor would incur a cost of continually reviewing and checking goods with respect to expiry and shipping dates. This is largely eliminated for high demand items that can be supplied directly.
While the benefits for the supplier may not be as obvious one significant advantage is that the time to meet distributor supply requirements is spread, potentially, over several branches, which eases pressure on the supplier’s distribution network. This also results in higher levels of customer satisfaction for the distributor and their dealers. Forecasting is also improved because direct supply provides an indication of the real usage of goods. The supplier can compete more effectively and as such, encourage the use of genuine/authorised components.
The advantages for the dealer include significant cost reductions, which are passed from the distributor, and the delivery of goods is more predictable without the additional distribution process. The dealer can implement a more cost efficient and streamlined ordering process that addresses actual, as opposed to expected, requirements and they also benefit from a simplified ordering system and reduced pricing of parts. Direct Supply, by removing one complete step in the traditional supply chain, streamlines the process – the goods are sent directly from supplier to dealer. The distributor still plays a pivotal role, managing the process, undertaking price negotiations, handling financial transactions and maintaining the communication channel. The result is a more efficient supply chain with reduced warehousing, transport and administrative costs, increased efficiency, faster delivery of goods and greater customer satisfaction.
Supplying products directly from the supplier to the dealer significantly enhances and streamlines the supply chain process. Direct benefits across the board to the supplier, distributor and the dealer include reduced delivery times that are more predictable as well as reduced costs in product handling, warehousing and transportation. The successful management of the entire direct supply process, maintaining control of the products through administration, financial, warehouse and inventory processes can be achieved with a well structured supply chain management system. The benefits are:
- Increased efficiency
- Cost reduction
- Faster delivery
- Increased customer satisfaction
- Reduced handling of goods
- Reduced transportation of goods
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