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Third-Party Logistics: Exploring the Direct-to-Consumer Cold Chain

Analyst Insight: Direct delivery of orders to the customer's doorstep is a hot topic for transportation and logistics executives—from giants like Amazon to mom-and-pop specialty retailers. In particular, there is a lot of buzz around the direct-to-consumer cold chain. Free delivery and free returns, combined with the complexity and cost of cold chain distribution center (DC) and delivery assets, make for a chief marketing officer's dream and a chief financial officer's nightmare. How can you get this capability just right? – Don Anderson, Principal, Tompkins International

Third-Party Logistics: Exploring the Direct-to-Consumer Cold Chain

Direct-to-consumer cold chain is a transportation and logistics priority for multiple industries, including grocery, pharmaceutical, and specialty retailers in need of temperature-controlled delivery of their products. Competing for a larger share of consumers’ spend on temperature-controlled goods increasingly requires retailers and manufacturers to implement direct-service capability in the form of one or more of three models—high-asset, low-asset, and store fulfillment.

The high-asset model is based on the failed but instructive closed-loop order logistics and delivery model of Webvan, a dotcom darling that set out to revolutionize home doorstep grocery delivery. Unfortunately, it mostly succeeded in providing valuable lessons in cold chain delivery. Today, the high-asset model is employed either in an outsourced environment using a logistics service provider (LSP) and assets or as an in-sourced market differentiator. In both cases, the retailer focuses on high-density markets: 50 percent of today’s U.S. population is concentrated in 40 metropolitan areas and 70 percent is located in the top 100 metropolitan areas. This enables economies of scale in delivery services, as well as locally positioned inventory in temperature-controlled DCs. Currently, the in-sourced high-asset model for direct-to-consumer cold chain service is employed primarily by grocery and ready-to-eat retailers such as AmazonFresh, FreshDirect, Peapod and Safeway. However, the outsourced model is broadly employed by firms of any size in many industries using a wide range of LSPs who continue to invest in major metro-located DCs and associated delivery capabilities.

An alternative model that fits well for certain types of retail and consumer goods companies is the low-asset model – best illustrated by Instacart, a one-year-old home grocery delivery service founded by an ex-Amazon supply chain engineer familiar with the inherent challenges and costs of procuring, storing, fulfilling and delivering perishable goods. Unlike the asset-heavy model, Instacart employs sophisticated workflow management software to enable personal shoppers to fulfill and deliver customer orders. While this model is exposed to the flaws of crowdsourcing businesses, it may still be a prototype for innovative companies looking to leverage a more cost-effective resource pool.

The third model for the last-mile conveyance of goods to the consumer is the store fulfillment model. Brick-and-mortar retailers in all lines of business are aggressively designing, testing and implementing store fulfillment and pick-up models that leverage store locations in high-density markets. CVS, Walmart, Safeway and others that have saturated key markets with physical locations are effectively responding to customer demand for click-and-collect order fulfillment of temperature-controlled and ambient goods orders. More than half of the American population lives within five miles of a Walmart store, which exemplifies the importance of extending the idea of online consumer self-service fulfillment to existing infrastructure.

                                                     The Outlook

Consider the following steps to meet direct-to-consumer delivery:

Start with strategy. Match your delivery strategy with an overarching business plan that gives respect to consumer-facing service and cost profiles.

• Leverage knowledge. Understand consumer delivery and cold chain lessons learned (good and bad) and apply them to your business.

• Develop and deploy solutions across all business dimensions. Executive sponsorship and participation across all processes is required.

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