Warehouse Club Logistics

 One of the critical components of the club business model is lower operating expenses. Expense reduction enables the clubs to operate on the lowest possible gross margins, which allows them to offer the lowest prices in the market; the number-one reason a member would pay for a membership.  One component of club operating expense efficiency is product distribution.

The club buyer is looking to compare four different net landed costs (NLC) at the club location.  To get there, he will first look at the cost of picking an item up at the manufacturing facility (freight on board plant, or FOB  Plant).  After factoring in the discounts, such as terms or spoilage allowance, the buyer will determine the freight cost that the club must pay to get the product to the club location or distribution center.

If delivery is direct to the club location, there is no other cost to factor in.  However, if delivery is through the distribution center, the buyer must factor in any additional distribution discounts that may be available from the manufacturer, as well as the distribution and freight cost to get the product to the club location.

The club buyer will do the same analysis for a product that the manufacturer pays to deliver (delivery prepaid) to the club or distribution center.  Now the buyer has four different cost scenarios.

The buyer will analyze what affect either direct delivery or distribution center delivery has on the inventory level of an item.  If the costs are similar, but the inventory effect is different, the buyer will lean toward the method that reduces inventory. If the costs are different and the inventory effect is the same, the buyer will lean toward the method that reduces the cost.

 Vendor Insights

 The following are tips, suggestions and insights from manufacturers regarding product distribution in the warehouse club industry.  
Distribution Allowance - The clubs view their distribution facilities as profit centers.  The outbound freight costs that club distribution  centers incur is a revenue source that is charged to the buyer's cost of goods reducing gross margins.   Buyers will look to the  manufacturer to subsidize that cost in the form of a distribution allowance.  From speaking to manufacturers, Costco's internal  distribution cost is normally $.01 per pound or $1 per hundred weight or pounds (CWT).  That cost increases when the weight-to-cube  ratio decreases.  For instance, a pallet of toilet tissue and a pallet of detergent represent approximately the same cube, but the  detergent weighs a great deal more.  The pallet of toilet tissue will have a lower weight-to-cube ratio and be more expensive to  distribute.  SAM'S distribution cost ranges from 2.5% to 6% of the cost of an item and BJ's internal cost ranges from 4% to 6% of the  cost of an item.  SAM'S and BJ's costs also vary depending on the weight-to-cube ratio of an item.

Pallet Integrity - A food manufacturer said that the warehouse clubs reject product at receiving doors more often than retail  customers.  The main reason is pallet integrity.  Club vendors need to comply with pallet and receiving requirements to prevent those  rejections.