in control

Earlier this month, Valero Energy Corp. changed the way it conducted business at 650 of its Texas-based Diamond Shamrock Corner Stores. The chain leased a 130,000 sq. ft. warehouse in the San Antonio area and spent $7 million to convert it to a self-distribution center that houses everything from Marlboro Reds to Red Bull to Red Hots.

"It puts us in control," says Gary Arthur, senior vice president of retail & specialty products marketing for San Antoniobased Valero. "Our view on this was, ‘If we can make our customers’ experience better and our store employees’ operation easier, we’re going to do this.’"

Distributor Core-Mark will dedicate 200 employees and 30 tractor-trailers toward operating the new distribution center. Additionally, Core-Mark continues to distribute to 390 Valero-owned stores that are not part of the new distribution center’s network because the geography and financials simply don’t add up.

"We spent over a year evaluating the feasibility of how to do it," Arthur says. "We talked to people in the industry like Sheetz and Wawa (see box, p. 28) who have done this. Once we decided to move forward with the center, we wanted to partner with someone in the distribution business who had that core competency."

Like Sheetz and Wawa, Wesco Inc. (Muskegon, MI) has some experience in the self-distribution business. Wesco’s setup has evolved from a 1,500 sq. ft. commissary where sandwiches were made in 1989 to a 32,000 sq. ft. warehouse that uses three tractor-trailers to distribute to the company’s 52 Michigan stores and 18 outside accounts.

"Is it worth it? The answer is yes," says Russ Bolitho, Wesco’s distribution director. "[Self-distribution] gives you independence from some distributors who won’t carry what you want. You have direct control of how you service your stores."

Bolitho says one of the keys to establishing a solid distribution infrastructure is to make sure the warehouse is big enough.

"If you don’t have enough space in your warehouse, instead of keeping—say, Gatorade—on pallets, you have to handstack them on racks and rotate them," he says. "That becomes an inefficient use of your labor time. You want to touch the product as few times as possible. If you’re not being efficient with fewer ‘touches,’ you’re going backwards. You have to be more efficient than the company that’s doing your deliveries now."

Arthur and Bolitho both say one of the biggest benefits of self-distribution is controlling when and how often stores receive deliveries.

"Our stores used to get deliveries once a week," says Arthur. "With this center, stores will get deliveries twice—sometimes three times—a week. We can also control the time of delivery, which is really important. We didn’t have that control before."

Before Valero decided to distribute on its own, deliveries sometimes arrived at stores at 7 a.m. That, according to Arthur, caused congestion at the pumps and often took employees away from customers during the stores’ busiest times.

Arthur is so "in love" with the idea of fewer delivery trucks clogging up his parking lot that he is negotiating with DSD vendors to drop their goods at the distribution center instead of at individual stores.

"We might get 20 to 30 deliveries each week from all of our vendors combined, so we’re trying to consolidate them and reduce congestion," he says. "We’re also talking to milk, ice cream, bread and pastry vendors about utilizing our distribution center."

DSD vendors that aren’t willing to do so might find themselves in a fight for shelf space at Valero’s stores.

"Major brands are important to us," Arthur insists, "but we’re also looking for opportunities to build relationships with new vendors that are willing to use our distribution center and allow us as a company to take advantage of our efficiencies."

A new store order
Arthur expects to gain efficiency from store managers spending less time in the back office and more time in the front of the store with customers. That would be possible because the computer that runs the distribution center networks with the back-office computer to track sales and inventory, and handle the ordering process.

"We’re going to have a suggested ordering system in which we’ll be able to make suggestions as to what the store manager should be ordering," Arthur says. "The system automatically creates a suggested list of items to be ordered, which can help our store managers. And, because of the system’s flexibility, special orders can be placed when needed."

Bolitho says one of the most important aspects of running an efficient selfdistribution center is to master the ordering process.

"When you’re going to buy direct, you have to buy bulk," he says. "When you buy from M&M/MARS as a distributor, you have to buy 5,000 pounds at a time. We have to buy Gatorade by the truckload, which is 42,000 pounds. You want to take the pallet. With Gatorade, there are 70 cases of 32-ouncers on a pallet. I’ll get two or three pallets of each flavor. When you place your order, you place it to make the weight requirements. Then, you want to make sure everything runs out on time so that you don’t have orders in between."

At any given time, Bolitho says that Wesco’s warehouse holds $1.5 million to $1.8 million in inventory.

"And we turn it 26 times per year," he says. Still, glitches exist and sometimes inventory runs out.

"We have to look at outside accounts if we have to buy in-between shipments," Bolitho says. "We’ll pay an upcharge to another distributor so that we don’t have out-of-stocks. That’s inefficient and we try to do it as little as possible because it doesn’t make us money. But it’s important to keep a relationship with your present vendors. We work with a grocery wholesaler and we buy a lot of food products from them. For instance, we can’t buy direct from Campbell’s, so we buy from the wholesaler. You have to keep a relationship with someone who can provide you with products you can’t get."

Aside from certain food products, Bolitho doesn’t normally need to deal with wholesalers. The need for inbetween shipments is rare because IBM’s AS400 hardware and operating system assist Bolitho in the operation.

"It costs about $200,000 and annual-fees run about $20,000 per year," Bolitho says. "It takes electronic orders, prints the order into a ‘pick ticket’ for the warehouse employees, invoices the stores, handles accounts payable and receivables, and it tracks our inventory in a system called ‘Item Level Inventory,’ so you can know how much you have at any given time. It runs the whole thing."

The technology helps Bolitho reduce out-of-stocks to a bare minimum without overstocking at the store level.

"We have ‘case pick’ and ‘each pick’ items," Bolitho says. "When someone wants three bags of Brach’s chocolate nuts, we break up cases and pick out three bags so that stores have only what they need and no additional inventory. Mustard is a good example of an ‘each pick’ item. If that was a ‘case pick,’ the store would have 24 mustards sitting there when it needs only three to have its shelves full."

At Valero, Arthur is hoping that the chain’s new distribution center will create the same efficiencies.

"We’re going to be able to make emergency drops," he says. "So if we run into a situation where a store needs something unexpectedly, we have the ability to schedule a delivery with even a small number of ite
ms. We think it’s going to lower our outofstocks, which will drive sales."

Sales opportunities
Reducing out-of-stocks isn’t the only way that self-distribution drives sales and increases profitability.

"Vendors call us and ask us for ‘one-stop savings’—they’ll deliver at store-level for ‘X’ price, but they’ll give a cheaper price if it’s all delivered to one location," Bolitho says. "Plus, it gives us power-buying opportunities. We can buy up when there are deals and a lot of stores can’t do that because they don’t have the ability to carry the additional inventory."

Aside from additional inventory of existing products, chains that self-distribute often feel they can more easily launch new—and often high-margin— products.

"We’re always looking for innovative products," Arthur says. "For instance, next month we’ll start selling fresh flowers at our stores. When you’re working through a third-party distributor who’s not only servicing you but all c-store marketers, oftentimes they have limited space or room on the truck, which makes it hard to add new products like charcoal or firewood. So we feel that’s going to create a huge opportunity for us, too."

Both Valero and Wesco take advantage of the opportunity to do buy-ins on pallet programs.

"Our pallet programs, which have included everything from firewood and soft drinks to our own bottled water, have been very successful," Arthur says. "The products are offered at an extreme value and strategically placed outside the store.

Because consumers recognize the value, they are driven inside the store, which results in incremental sales."

Bolitho says chains that begin selfdistributing will soon realize that buying direct from the manufacturer also helps an operator take full advantage of promotional opportunities.

"When you buy direct, you know the promotions that are coming up, so you can plan your advertising money better," he says. "It’s better because you’re working directly with the manufacturer. If you’re going through a third-party distributor, they have to get a piece of that pie."

The warehouse
The most impressive aspect of selfdistribution might be the technologies utilized inside the warehouse.

At Valero’s new warehouse, a "pick-to-light" system assists employees in selecting merchandise. Pick-tolight works like this: The computer at the warehouse receives an order from a store. After that, the computer generates a barcode sticker that is slapped onto a big plastic container. The containeris placed on a 120-ft.-long conveyor-belt that has racks and racks of goods on each side. Two employees work the conveyor belt—one on each side. An employee scans the barcode sticker on the plastic container and red lights flash over the products that need to be placed into the shipment container. Numbers also flash next to the red lights. So for instance, if a store needs five bottles of mustard, a red light and the number "5" would signal above the items on the rack.

Above the main floor of Valero’s warehouse is a 22,000 sq. ft. mezzanine that’s specifically designed to handle cigarettes. "It’s physically separated by security systems and barriers and control devices to maintain the integrity of our stamping and distribution operations," Arthur says.

Cigarettes create unique self-distribution challenges. Chains must stamp their own cigarettes for the states in which they do business.

"We bought a unit that opens up the cartons, stamps each pack and closes them back up again," Bolitho says. "It was an expensive machine (about $70,000). Plus, you can get add-ons like a self-packer on the backside of it or more heads if you need more than one stamp. We only have a one-head machine because each pack requires only one stamp, but some distributors have to do state, county, and city stamps, so they need additional stamps."

Bolitho says that being a distributor-also means paying cash-in-advance for smokes.

"Now, most of the wholesalers are giving time to pay the bills," he says. "As a distributor, the inventory is paid for immediately. The cigarette companies are all doing that now. The other thing you have to take care of is returns and damaged product. When you become a direct buyer from vendors, they won’t support returned, damaged or outdated product. Some will, but not all of them. That’s another aspect that you have to keep in mind—you have to manage your inventory appropriately."

Fortunately, self-distribution centers are helping both Valero and Wesco make that happen.