Leading retailers understand that incorporating product segmentation and distribution elements into replenishment strategies can improve on-shelf availability by 1% to 3%, reduce inventory levels by 3% to 5%, and create a differentiated shopping experience.

Too many organizations treat their supply chains and thus their replenishment strategies as a monolithic concept. This leads to suboptimal use of consumer insights, non-competitive cost structures, and glacial supply mechanisms that create inconsistent execution at store level and frustrating shopper experiences.

Demand-driven retailers recognize and acknowledge the existence of clearly identifiable, independent supply chains that require different distribution networks, resources, personnel, and planning methodologies. To unlock the potential this realization provides, building an objective evaluation mechanism and executing the appropriate toolset, policies, and technology is paramount. Leading retailers and their respective supply partners are already underway with this work.

Evaluating supply and demand uncertainty plays a key role in this development. Quantifying supplier uncertainty leads retailers to consider more hands-on supplier management and a larger commitment to inventory investment, providing better visibility technology and closer scrutiny of transportation modes. To mitigate demand uncertainty, a distribution network focused on automation, reducing cost structure with longer lead times, or exploring transportation consolidation opportunities gives retailers an edge.

Putting segmentation to work for demand-driven distribution networks: Collaborative evaluation allows for a dispassionate discussion about why a given product group is allotted disproportionate resources, requires significant manual labor intervention, or costs more per unit sold in handling/management than other groups. Separating heart and mind is vital to gaining the best grasp on key elements:

1. Evaluation of variability in demand activities
2. Strategic nature of the product line
3. Availability of resources to distribute and merchandise the product line

While understanding supply and demand uncertainty is important, an executable replenishment strategy requires a more granular level of analysis that considers the level of handling, customization, or services required to support customer service requirements.

For example, products that require heavy use of value-added services either because of configuration requirements, assembly, or finishing require a more flexible, experienced, or capable supply chain infrastructure than less-complex products. Additionally, products heavily promoted in a channel or that require custom packages in the forms of pallet display modules, features, or discount events will require a different level of insight, planning, and execution.
A clear understanding of the risks, benefits, and cost to serve will clarify the rules of engagement and ensure the best distribution strategy is constructed to optimize sales as well as cost.
To help retailers begin, we highlight three major replenishment strategies:

Direct store delivery (DSD)--The process of suppliers, typically consumer products (CP) manufacturers, delivering products directly to retail stores
Vendor-managed inventory (VMI)--The storage of materials, generally at point of use, replenished by the vendor either at agreed intervals or monitored remotely
Scan-based trading (SBT)--Processes by which suppliers maintain inventory ownership within retailer warehouses or stores until items are scanned through the point-of-sale (POS) system.
AMR Research