Tom French, founder and CEO of Supply Chain Coach, explains the concept of manufacturers owning the cost of fulfilling orders for all of their sales partners — a practice embraced by Lodge Cast Iron. A finalist in the 2019 Supply Chain Innovation Awards competition.
SCB: Why is it important today for manufacturers to own the cost of fulfilling orders for all their sales partners?
French: There isn't a whole lot of profit to be shared among the companies that are selling your product, primarily because of all the costs to get it there and the partner trying to fill e-commerce orders. The manufacturer can fill them at the plant before packaging and inventory. It will be the lowest-cost option. Keeping a product’s price at the level at which everybody can make a profit, whether it's through Target, Amazon or Lodge, is really important. That's why they own that. A lot of people think that Walmart's going to pay for that product to be shipped to its DC, put away, pulled, repackaged, and reshipped. We're trying to eliminate all those costs. The manufacturer has to help the retail company make money doing it.
SCB: Has this been the state of affairs up to now, or are you proposing a change in the way it's done?
French: I'm proposing that we need to change it. If the manufacturer steps in and does this for the retailer, they all win. Lodge Cast Iron, one of the companies we’ve worked with, makes cast-iron skillets. It has a foundry in Tennessee, where it’s filling orders out of manufacturing before packaging and inventory for a lot of its retail customers. That allows them to set their price point to make sure they get a good profit.
SCB: But aren’t you asking manufacturers to absorb additional costs, which need to be baked into the price of the finished product?
French: It isn't absorbing, it's eliminating. The manufacturer eliminates the cost to pull the product and build store-level pallets for Target or Walmart. Putting them into shipping, into a truck, delivering to the distribution center, putting them back into inventory — all of those steps we're eliminating. It’s so much more of an advantage if a manufacturer does it at one point, eliminating the whole supply-chain cost to get it there, so they'll profit.
SCB: Let’s talk more specifically about Lodge. How did they come to adopt this strategy?
French: They've been around for four generations. Now millennials are saying cast-iron skillets are the best way to cook. So Lodge was turning down orders, and had to build another foundry in Tennessee. Then they decided they needed to build a distribution center to handle more product.
SCB: Has this practice spread to other makers of consumer products, or are we in the early stages of this becoming a common thing to do?
French: We’re in the early stages. A lot of people don't understand it, whether they manufacture here or overseas, that they own that cost. It's incumbent on them to figure out how to do it more cost effectively, so that they're generating a greater profit to serve.
SCB: What’s slowing adoption of this strategy?
French: Manufacturers aren't set up today for it. They're eager to ship you a pallet of a single item, and you worry about how it gets to the consumer. But today, the consumer is able to see who else is competing, and they're going to buy from a competitor if you don't manage your costs better. So it's really important for manufacturers to understand they own it, no matter how we go to the market.
SCB: Lodge had to open a distribution center in order to do this. But a lot of manufacturers have no such capability, correct?
French: That's correct. So they're going to have to change. People need predictable delivery, but in order for us to have that and stay in business, we have to start figuring out how to eliminate costs.
SCB: Are you proposing that the manufacturer directly carry out these tasks, as opposed to relying on a third-party logistics provider or other outsourced entity to do it on behalf of the retailer?
French: You can go to a 3PL, but generally speaking it will not have the lowest cost to operate. We can direct the pick and the shipping correctly, and we can put it into a multi-stop truck going to an Amazon last-mile delivery, at 70% savings.
SCB: Manufacturers can be very traditional in their ideas of what they can and can’t do. So maybe it's a bit of a hard sell?
French: It is definitely. I think it's a game changer once they understand the issue. They're not set up to manage it yet. The minute they make that decision and realize how much more money they could make doing it, I think we're going to see a change fairly quickly.
SCB: We’ve been talking about hard goods, but what about in the area of food production? A lot of food companies outsource to co-packers and the like. How can they become part of this?
French: The biggest manufacturing base in the U.S. is food. When the co-packer becomes the manufacturer, that’s the point at which we want to be able to manage it. Once co-packers understand that instead of shipping to another DC, they can ship e-commerce orders directly to the consumer, it’s going to end up changing the food environment and the way we do it today. This is what's got to happen.
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