With the growth of e-commerce, CPG manufacturers increasingly need the ability to sell and fulfill a variety of SKUs directly to consumers (D2C) and/or in smaller quantities to their business customers (B2B). However, traditional CPG distribution capabilities built around large-scale shipments to customers’ distribution centers are not suited to meet small quantity fulfillment (SQF) requirements, because of the vast differences in customer expectations, ordering practices, pick, pack and ship requirements, and final mile delivery.
So then, how does a CPG manufacturer go about developing SQF capabilities? For many companies, determining how to best leverage systems, providers, and capabilities across organizations can be daunting, but here are some key questions to help formulate your organization’s strategy:
- What is your go-to-market strategy for D2C? B2B? What customer-facing web presence is required to support your go-to-market strategies? For starters, it is important to realize that go-to-market strategies do not have to be “one size fits all.” For example, some of our CPG clients choose to use “Fulfillment by Amazon” (FBA) for certain segments of their business simply because they currently cannot outperform FBA on cost or service. For other segments of their business, they utilize existing in-house capabilities to meet client needs. Cost and service implications are driving these choices, so understanding each segment of your SQF business is key to making smart decisions.
- For physical fulfillment capabilities, should you look to build those capabilities in-house or leverage a 3PL partner? Time, cost, and control are important factors to consider when determining your SQF strategy. Depending upon your organization’s ability to leverage its existing systems and distribution capabilities, a trusted 3PL partner with proven SQF capabilities will likely be faster than building in-house capabilities. In addition, those same 3PL providers are probably already purchasing parcel freight in large amounts and, consequently, will have steeper parcel discounts than the typical, truckload-purchasing CPG manufacturer (we have seen as much as 20% steeper discounts). With that being said, the time and cost advantages need to be weighed against what you may give up in control, specifically control over revenue growth, maintaining and/or increasing margins, and preserving presentation of your brand to your customers.
- What is your optimal SQF distribution network? Regardless of whether you choose in-house or 3PL, this question is critical to ensure your SQF distribution network delivers the required service at the lowest possible cost. As a starting point, the strategic questions of “how many DCs do we need, where should they be, and how big do they need to be?” can be addressed through supply chain network design. Network design can also analyze how best to leverage a CPG manufacturer’s existing distribution network and/or potential 3PL providers’ distribution networks.
- How do you most effectively execute your SQF distribution? This question becomes more significant when choosing to build in-house SQF distribution capabilities. The execution questions around how to set up an SQF environment in a small space and potentially using the same inventory as your primary CPG distribution are critical to your operating costs and to your customers’ experience. The good news is that CPG manufacturers can draw upon the recent innovations and lessons distributors have learned from their journeys toward omni-channel capabilities. Over the past few years, what works and what doesn’t work for SQF distribution has become much better known.
SQF can be challenging to implement, but it can also be rewarding over time. Chainalytics has seen CPG manufacturers with 200% revenue growth expectations in SQF over the next 2-3 years, but employing the right resources proves critical to any CPG manufacturer’s success in standing up SQF capabilities. Whether your organization is currently witnessing an increase in SQF demand or it’s your strategic choice to grow SQF, outside expertise may be needed to navigate the many complexities and to identify the best path forward for your organization.
Dan Sobbott is a director in Chainalytics’ Supply Chain Design competency where he focuses on helping organizations optimize their supply chain network strategy.
