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Activity Based Costing

The ABCs of Activity-Based Costing for Logistics

Only companies that have an accurate, ABC-based view of their delivery costs at the individual product and customer levels can successfully compete and win.

Tan Miller | Aug 15, 2017

Activity-based costing (ABC) has helped many companies for decades gain a true understanding of their costs to produce and distribute products to customers.  ABC provides a precise, accurate view of costs at very granular levels—namely, at the individual product, service and customer level. As we will discuss, this differs from traditional accounting systems that are best suited to generate cost analyses at the overall firm, function and facility level, but which distort costs at more granular levels such as the individual product or customer level.

ABC receives relatively little attention in the world of logistics today, where such forces as the rapid advance of technology, the growth of e-commerce and the rise of omni-channel dominate headlines and corporate resources. However, ABC remains a critical foundational tool that represents an absolute necessity to ensure a company can accurately understand its true costs to serve customers. In this article, we revisit this essential decision support capability.

What Is Activity-based Costing?

ABC first gained prominence in the corporate world during the 1980s as a new methodology that allowed manufacturers to accurately capture their true costs to produce individual products. Two of the original developers of this approach, Robert Cooper and Robert Kaplan, described this methodology in a 1988 seminal article titled, “Measure Costs Right: Make the Right Decisions.” These authors argued that because traditional accounting systems proportionately allocate a manufacturer’s overhead costs based upon gross measures such as the total dollar sales of each product produced, this results in distorted individual product cost calculations. (Indirect overhead costs are expenses such as heating, lighting and supervisory management. In manufacturing operations, note also that direct labor costs, direct labor hours and machine hours associated with producing individual products are other common “bases” or “drivers” for proportionately allocating overhead costs.) Further, when companies use aggregate measures to proportionately allocate costs such as marketing and distribution to individual products, the potential for major distortions in product costing dramatically increases.

Successes during the 1980s in applying ABC methods to manufacturing prompted an eventual expansion of this methodology to other key components of the supply chain (e.g., distribution). Manufacturers such as Proctor & Gamble and Warner-Lambert began using ABC models to determine their overall costs to serve individual customers (e.g., Walmart), and to evaluate the costs of offering different individual services to customers (e.g., services such as vendor-managed inventory and advanced shipment notices, or ASNs). To illustrate how ABC contributes to a company’s understanding of distribution and other related costs, let’s consider the following example where a company is evaluating the profitability of its three major distribution channels.

A Distribution Channel Profitability Example

Assume company XYZ is a manufacturer and distributor of pharmaceutical and consumer products, and it sells its products through three primary distribution channels: mass merchandisers, wholesalers and small retailers. Now let’s evaluate the overall profitability of each channel based upon: 1) a traditional accounting system, and 2) an ABC system.

Assume that XYZ’s traditional cost accounting system allocates its distribution center’s (DC) costs based upon either the total dollars or weight shipped to each customer and channel. Typically customers, channels and products do not consume DC resources (such as labor and machine time) proportionately to their dollar or weight volume, so a traditional cost accounting system will distort the true costs.

Now suppose the XYZ DC distributes a mix of low-valued to high-valued products with a wide range in the dollar value per pound, and it receives, stores and ships products in everything from individual eaches (e.g., pharmaceuticals) to pallet quantities (e.g., bulk consumer products). In addition, assume there are small pick lines (for eaches), automated conveyor lines (for cases) and forklifts (for bulk pallets) to move product from inventory storage to the shipping dock. Finally, there is a separate pick area to serve the special requirements of the three largest customers, and all modes of transport are used, from truckload to ground parcel to next-day air. An ABC view of costs at this facility would differ substantially from that of a traditional aggregate volume-based perspective.

Figure 1 shows the difference in the net profit generated by the three different distribution channels as calculated by traditional volume-based accounting and then by an ABC approach. In contrast to the volume-driver-based accounting system that uses only sales dollars to allocate costs, XYZ’s ABC system employs many more drivers. For example, the DC may use a case pick operation to serve small retailers and a bulk pick operation to serve wholesalers and mass merchandisers.

The ABC system would accurately calibrate the different costs of serving customers using the two different operations. It also would evaluate the costs of all other major components (such as order management, transportation and sales force activities) involved in serving customers.

In this fictitious case, one can observe that based on the ABC costing system, the small retailer channel provides the smallest profit margin (4%), while the mass merchandise (11%) and wholesale (9%) channels yield a higher return. Conversely, the traditional costing system incorrectly indicates that the small retail channel generates the highest profit margin (16%), followed by the mass merchandise (9%) and wholesale (7%) channels, respectively.

Note that in the traditional system, XYZ’s $84 million total annual operating expenses are allocated to each channel based upon that channel’s proportion of total gross revenue (e.g., the small retail channel’s operating expense equals 100/700 x $84 million). This gross allocation of operating expenses distorts XYZ’s cost to serve each channel.

This example illustrates the alternative, more accurate cost and profitability insights that a good ABC system can generate, and the dangers of making decisions without an ABC system.

The ABC Models behind ABC Systems

To develop an accurate ABC system, a company must first develop a good process model of the activity or operation of interest. XYZ requires that its ABC system capture how its costs to deliver products to each customer differ. At the minimum, therefore, XYZ must create ABC models of its DC operations and transportation delivery processes.

Further, as Figure 1 illustrates, XYZ is evaluating its costs by customer (and distribution channel) in terms of sales force activities and customer service. In practice, this would necessitate that XYZ construct and maintain process models of each of these major components of the order-to-delivery process. For illustrative purposes, we briefly consider DC operations which represent one of the key activities of this overall process.

Figure 2 illustrates the process and cost model that XYZ would maintain of this operation. A team of DC operations and accounting/finance personnel would develop the process flows and cost analyses necessary to generate this model.

A review of Figure 2 shows that the cost per unit (i.e., per pallet, case or each) of every activity is calibrated. XYZ can combine this DC ABC model with its databases that provide data on how many cases, pallets and eaches its DC picks and ships to each customer, in order to assess the costs XYZ incurs in serving each of its customers from the DC. XYZ would need similar models of the other major activities (e.g., transportation) utilized in serving its customers.

Collectively, these ABC process models would facilitate XYZ’s evaluation of the true cost to serve each customer.

ABC Is More Critical than Ever in Logistics

Omni-channel and the business to consumer delivery process represent one of the most dynamic, rapidly evolving areas of logistics operations. Further, the escalating competition that B2C suppliers face to provide same-day or near-same-day deliveries to consumers (often with no delivery fee) places many suppliers under severe cost pressures. Business-to-business suppliers similarly face ever-increasing service demands and cost pressures, and many suppliers now compete in both the B2B and B2C worlds.

To compete today, and to design efficient, profitable delivery strategies for tomorrow, demands that suppliers accurately know their costs to deliver every product to every customer. Suppliers managing without this essential information have little hope of designing and executing efficient and effective delivery network strategies and operations. Only suppliers armed with an accurate, ABC-based view of their delivery costs at the individual product and customer levels can successfully compete in the long run.

Final Takeaways

It is beyond the scope of this article to review in detail development and implementation strategies for ABC systems. However, there are several key takeaways we will address in closing, and we offer additional references for the interested reader.

• First, it is important to note that ABC costing systems are intended to complement traditional accounting and financial systems, and should not be viewed as replacements or threats to a company’s existing systems. Rather, ABC systems facilitate detailed insights on a company’s true cost to serve individual products, to offer specific customized customer services, and so on.

• It is imperative that an ABC system utilize the same underlying data and database sources as the other accounting systems of a company. ABC systems will employ the data differently and may have additional input sources than do the traditional accounting systems; however, the “total costs” of the two systems must be identical. In other words, any cost analysis generated by an ABC system must align with a company’s financial reporting system at an “aggregate level.” As illustrated in Figure 1, individual cost analyses (such as the cost to serve different distribution channels) will differ between the ABC and traditional accounting systems. However, at the aggregate total operating cost level, the systems must agree.

• To develop ABC models of its operations, a company should utilize operational colleagues working with accounting/finance colleagues in a team-based approach. For example, to construct an ABC model of a distribution center, the project team should include several DC managers, as well as other logistics and accounting personnel.

• Commercial software is available to facilitate the development and deployment of ABC systems, or alternatively a company can develop its own ABC models to complement its existing accounting systems.

To conclude, in the rapidly evolving world of 21st century logistics, it is more critical than ever for companies to invest sufficient resources in the well-established, foundational decision support capability that an ABC system provides.

New Robotics

New Robotics Impact the Future of Distribution

Regardless of the season, a shift in technology or changes in product delivery, some things tend to remain the same. Food and beverage warehouses and distribution centers, for example, are always closely monitoring their employees’ productivity and work environments, along with their costs, automation and throughput.

And, as the seasons change, technology shifts and product delivery becomes even more demanding. Yet, these crucial aspects of successful distribution are still top priorities. By utilizing the following robotics offerings, warehouses and distribution centers are improving their odds for success—whether its higher profit margins, improved work environments, more automation or higher throughput. As a result, they no longer have to be wary of change. Rather, they can fully embrace it.

Working in Sync with Employees

To help maximize food and beverage warehouses and distribution centers’ thin margins, Dematic’s robotic product offerings are replacing fork trucks with automatic guided vehicles (AGVs) that conduct virtually every type of activity that traditional fork trucks have in the past—but without the cost of manual labor.

After all, as autonomous robots, AGVs can automatically load and unload trailers, while also performing automatic picking and transport in food and beverage distribution warehouses. Not to mention, in blast freezer or cold storage environments, they can operate nearly all day long, as they only require battery swap outs every several hours. As a result, the AGVs free workers from the harsh temperature environments that are inherent in food and beverage distribution warehouses, so that they can work in more value-add areas instead.

“As we look ahead to the future, one area where we will be seeing new developments in robotics is where the robots and workers work closely together,” says John Clark, mobile automation product marketing manager for Dematic. “Historically, the idea of AGVs was to do work without people or separately from workers. But a new generation of AGVs is now poised to work alongside—and in sync—with workers.”

Dematic’s latest AGV, which is scheduled for release this fall, will operate automatically alongside workers. Once orders are complete, the AGV will then leave the worker and automatically transport the orders to shipping, prior to another AGV arriving to continue picking.

“For a food and beverage distribution center, where orders are typically cases, rather than pallets, this will be a valuable labor-saving picking option—and much less expensive than an AS/RS or conveyor solution,” he adds.

Increased Flexibility and Adaptability

As a consulting and engineering firm, Peach State Integrated Technologies is involved in a variety of projects in which it evaluates traditional automation options like AS/RS, multi-shuttles and palletizers as a means to reduce operational costs. These tools still offer considerable capability, as many operations are mostly manual, especially food and beverage distribution, which is generally still conducted at a full case level.

Nonetheless, many co-packers have been exploring more robotics solutions lately, primarily to handle some of their tasks.

“These could include taking three 12-pack cases of product of three separate flavors and creating 12 three-packs of all three flavors for a warehouse or grocery customer—or adding a ‘mix in’ like nuts or granola to a yogurt or applesauce cup to create a totally new product,” says Dean Starovasnik, practice director at Peach State.

Oftentimes, according to Starovasnik, the de-palletizing of initial products, along with heat sealing or shrink wrapping (prior to palletizing the final products), have been applied to not only reduce labor, but also offer assistance with ergonomic issues. Yet, the actual handling of individual items in between these functions has never received much attention—until now.

“Normally this work is—if not seasonal—at least pretty irregular with relatively short-term contracts,” he explains. “Therefore, the payback is more challenging. So the increased flexibility and adaptability of the newer robotic tools is appealing.”

With regards to the “mix in” example, the application of a “mix in” cup to a base product cup, such as granola to yogurt, can be quite challenging, and applesauce cups may not be the same size as yogurt cups, and so forth. For that reason, the flexibility of robotic arms with grippers, adaptable to varying sized objects, is very appealing now.

“The gripper—normally multiple cup capacity—grabs and applies some number of cups of cracker crumbs simultaneously, usually with the aid of a vision system to increase the speed of the grab and placement,” he states. “The flexibility is important as the actual contents of each job vary in size, method of attachment and types of products.”

Starovasnik adds, that, “If the robot can move from one job to another quickly, the realized throughput is enhanced. This helps to increase pay back as staff is not required to reconfigure the robot, yet it continues to produce at a consistently high level.”

Automated Mixed Pallet Picking

By combining technology like its light goods shuttle system (the CycloneCarrier), along with conveyor systems that have high performance, palletizing robots, Swisslog has recently developed a fully automated system for order picking of mixed case pallets.

The system, known as ACPaQ, is considered a universally applicable solution, as it features the RowPaQ—which is designed for mixed row palletizing, and comprised of a palletizing robot (KUKA’s KR470)—and a four fork row gripper that is capable of handling multiple cases.

Due to its versatility, the ACPaQ can palletize complete rows, while taking up to four cases from a pick-up conveyor at a time and then placing them on pallets. And, of equal importance, it also allows units of different dimensions to be processed at the same time, as package types like cartons, crates, shrink wrapped products and trays can all be handled gently.

In addition to its applicability, regardless of package type or size, the ACPaQ’s row grouping of products has been estimated to increase throughput by up to 1,000 units an hour, roughly two to three times more than typical solutions.

“Based on our relationship with our parent company, KUKA, we are positively impacting safety in warehouses, as we automate unsafe or heavy tasks previously performed by humans,” says Patrik Seibel, global market leader for Swisslog. “And we’re increasing the availability of distribution center operations because our automation is less dependent on a large workforce, thereby ensuring that customers receive their orders.”

Compartmentalized Trucks Cut the Cost of Grocery Distribution

Compartmentalized Trucks Cut the Cost of Grocery Distribution

In Europe, distribution can account for as much as 20% of total logistics costs in the grocery supply chain. Since margins are generally thin, there is an obvious imperative to maximize the efficiency of supply chain operations

Editor’s Note: This article was written by Dr. Alexander Hübner, Associate Professor of Logistics and Supply Chain Management, Luxembourg Centre for Logistics and Supply Chain Management and Manuel Ostermeier, Research Associate at Catholic University of Eistert-Ingolstadt. For more information on the research contact the author at: alexander.huebner@uni.lu.

Groceries need to be stored and transported at different temperatures depending on the nature of each product – so why not rationalize the distribution of these items by accommodating different temperature zones in the same truck?

This is the basic rationale of multi-compartment vehicle (MCV) distribution, which is gaining ground in Europe. But adding complexity to vehicles comes at a cost. The Luxembourg Centre for Logistics and Supply Chain Management (LCL) has analyzed this tradeoff to shed light on the cost-effectiveness of MCV distribution.

In Europe, distribution can account for as much as 20% of total logistics costs in the grocery supply chain. Since margins are generally thin, there is an obvious imperative to maximize the efficiency of supply chain operations.

Grocery products come in deep-frozen, cold or ambient temperature segments, that are subject to strict regulation. The majority of product is shipped to stores from distribution centers. European discounters and most full-line supermarkets operate several regional DCs. These facilities are organized according to temperature-specific segments, and typically serve 50 to 400 retail outlets.

Traditionally, delivery trucks are equipped to carry one temperature category of grocery product, which restricts the number of outlets they can serve. Hence, the introduction of MCVs that deliver all product segments and provide much more route planning flexibility.

However, these versatile vehicles also add complexity to supply chains. At DCs, the trucks visit multiple doors to pick up different temperature category products. Traditional, single-compartment (SCVs) trucks can usually complete loading operations at a single bay. In addition, loading and unloading MCVs is more complicated, in that the vehicles are partitioned into different compartments for each temperature zone.

There are three substantial process and cost differences between the MCV and SCV models.

  • MCV distribution requires additional operational processes. The extra stops required to pick up a mix of product segments at the DC generates more travel and set-up time. Reopening the compartments when unloading at retail outlets also adds time to this option.
  • MCV distribution reduces operational process time. Since trucks carry multiple product segments, they can serve customers with more than one product type at each stop. Thus, the number of stops and unloading set-ups at retail outlets can be reduced. These advantages also lower the time required for the stores for the goods reception (e.g. checking orders, completing shipping documents).
  • MCV distribution reduces travel costs. There is more flexibility when assigning orders to trucks and building delivery routes, and this reduces driving distances significantly.

Given these differences, the LCL researchers considered several variables when analyzing the cost implications of MCV versus SCV distribution. These variables include the number of compartments on each truck and each tour, which orders are assigned to which compartments and truck, and which outlets and outlet orders are combined on each tour.

The ability to customize vehicles was also considered. For instance, the number and size of compartments can be altered for each tour, and it is possible to deactivate individual compartments if necessary. Orders of one temperature zone can be combined in the same compartment; others must be transported separately.

The researchers built a mathematical decision model and solution approach for minimizing loading/unloading and transportation costs associated with the routing of MCVs, for different compartment configurations. The order assignment and routing needed to obey compartment and capacity targets. A further constraint built into the model pertained to the sequencing of locations in each delivery run.

For retailers, a key question is whether MCV distribution is superior to the more traditional SCV option in terms of cost. The model analyzed the performance of a distribution system with MCVs only, alongside one served solely by SCVs. Different average order sizes (low, med, high) were tested with simulated data to obtain general insights. The approach enabled researchers to simulate a broad set of distribution scenarios that included up to 200 customers and five product segments.

MCV outperformed SCV for each average order size. The smaller the order, the wider the gap. For example, transporting small orders in MCV trucks achieved a cost saving of 23.6%. The analysis suggests that the advantages yielded by MCV distribution increase significantly as average order size decreases.

These findings were benchmarked against data from an actual distribution operation of a large German retailer. The data set covered one week of movements from a distribution center in a region of Germany to more than 400 customers. The savings achieved by using MCV trucks as opposed to SCVs were in line with those indicated by the model. The switch to MCV distribution yielded a cost saving of 6.3% for the week.

The researchers also used the model to explore other possible advantages of an MCV-based distribution system. The model confirmed that this versatile system can achieve more efficient vehicle routing as well as greater operational flexibility.

Clearly, these results will vary for different distribution systems. However, the model provides a valuable decision support tool for the grocery industry in Europe when assessing the pros and cons of MCV distribution.

Instant Gratification Nation

Instant Gratification Nation: The Impatient American Consumer [Infographic]

by Ayaz Nanji  |

August 11, 2017
Many Americans say technology has made them more impatient today than they were five years ago, according torecent research from Fetch and YouGov.

The report was based on data from a survey of a YouGov poll conducted in May 2017 among 2,489 US adults age 18 and older.

Some 41% of respondents say technology has made them more impatient than they were five years ago. Among Millennials, the proportion is 45%.

Only 26% of respondents say they would wait longer than 30 minutes for takeout food, and 41% of consumers say they would not wait longer than 15 minutes for a ride requested via a mobile app.

Check out the infographic for more findings from the poll:

DC Food Stores

Across D.C., a resurgence of the small neighborhood grocery store


Good Food Markets in Northeast Washington is one of a handful of small-scale neighborhood grocery stores that have opened across the city in the past two years. (Bill O’Leary/The Washington Post)
 August 2
On a stretch of Rhode Island Avenue that for years was a food desert stands Good Food Markets, a small neighborhood grocery store that opened in January 2015.

Arranged neatly on shelves inside a tiny retail space of a mere 800 square feet is a diverse selection of fresh, packaged and prepared items. There’s pasta and canned tomatoes for a quick weeknight dinner, but also fresh fruit and vegetables, organic quinoa in bulk and even Vietnamese spring roll wrappers.

“I love it,” said Senait Teklehaimanot, 48, a resident of nearby Woodridge who does almost all of her weekly shopping at Good Food Markets. “They’re reasonably priced and have good products.”

Good Food Markets is just one of a handful of neighborhood grocery stores that have opened across the District recently, part of what appears to be a resurgence of small-scale groceries catering to neighborhood residents — in stark contrast to the trend of disappearing mom-and-pop stores in small towns across the country.

Even as more openings are in the pipeline for large retail chains such as Whole Foods and Wegmans, the smaller neighborhood stores are making their mark. By one count, at least six have opened since 2015, and more are in the works.

Good Food Market is part of a trend of small-scale neighborhood grocery stores that opened up across the city in the past two years. (Bill O’Leary/The Washington Post)

Of course, neighborhood groceries are not new to the city. The family-owned Rodman’s has been a fixture of Northwest Washington since 1955. And Yes Organic Market, which now has six stores across the District, traces its roots back to 1970, when it opened under its original name Yes Food Shop in Georgetown.

But the most recent spike suggests a shift in the dynamics of the city’s grocery business.

There is a “renaissance of the neighborhood,” said Keith Sellars, president and chief executive of the Washington D.C. Economic Partnership, a nonprofit, “and people want services that they can walk to” as well as “convenience on all levels.”

The new corner groceries are part of a broader back-to-the-city movement in parts of the country, said Brett Theodos, a senior research associate in the Metropolitan Housing and Communities Policy Center at the Urban Institute. That trend, Theodos said, is driving demand for a “job-rich, transit-rich environment” and “the meeting together of commercial and residential sectors in a way that feels very authentic and vibrant.”

D.C. history through its stores

Grocery stores, writes Michael Ruhlman in his new book “Grocery: The Buying and Selling of Food in America,” are “a barometer of our country’s collective state of mind.”

On a more local level, corner grocery stores can also trace the contours of a changing city. As the District has developed over the years, its grocery stores have also evolved with it.

Between the late-19th to early-20th centuries, hundreds of eastern European Jews, lured to the United States by the promise of religious freedom and economic opportunity, opened small grocery stores in the Washington area.

In the early ’20s, a dozen of these grocers teamed up to establish a cooperative: the District Grocery Stores. At its peak, the cooperative boasted 300 stores across the city and surrounding suburbs. But the arrival of the first Giant supermarket in 1936 presaged disruptive changes to the existing grocery market. Already,“the writing was on the wall,” as a Washington Post story put it.

Still, the District Grocery Stores chugged along. The 1968 riots that rocked the city, however, destroyed many stores, and the cooperative dissolved in 1972.

Then came the Koreans, a group of new immigrants who brought about a renaissance of the mom and pop corner grocery store. By 1980, Koreans owned an estimated half of the District’s corner stores. But this also gave rise to resentment from the black community, and confrontations over money, territory, and race played out over grocery store counters.

In recent years, corner grocery stores have earned another reputation: as suppliers of liquor and highly processed, unhealthy foods.

Efforts have been made to improve the offerings, but many still fall short of stocking the necessary goods for a nutritious diet. This leaves a large gap between retail chains and corner stores — a gap that the new neighborhood grocery stores are trying to fill.

Reviving the local store

When Tracy Stannard and John Fielding opened Broad Branch Market in the District’s Chevy Chase neighborhood in 2008, they decided to stock high-quality fresh produce and fresh fish and butchered meats in addition to the usual beer and wine, candy and prepared foods.

Their decision to go into the grocery business had everyone telling them, “You’re crazy,” they recalled. The neighborhood market, which dates to 1919, had sat vacant for several years. On top of that, neither Stannard nor Fielding had any experience selling groceries — both had come from restaurant backgrounds.

The partners succeeded, anyway — perhaps due in part to their great timing. They were at the forefront of the corner store revival, right on the cusp of the city’s demographic boom driven by an influx of millennials.

Now, almost 10 years later, Broad Branch Market is in the company of numerous other neighborhood grocery stores. There’s Glen’s Garden Market in Dupont Circle and Shaw; Streets Market and Cafe on 14th Street and on the corner of 13th and Massachusetts Avenue; Union Kitchen Grocery on Capitol Hill and in Shaw; and Good Food Markets on Rhode Island Avenue. Stannard and Fielding also recently opened Soapstone Market in Van Ness, in November 2016.

Rising demand spurred by a growing population and increasing income levels helps explain the trend, said Theodos of the Urban Institute.

Consumer tastes have also evolved in recent years.

“The general person has much more food knowledge than people did 20 years ago” and are looking for more and higher-quality options, said Fielding, co-owner of the Broad Branch and Soapstone markets.

And people might just have had enough of big-box stores. Half of U.S. consumers shop at three or more stores to get all their groceries, which include a growing number of specialty items, according to Magid, a Minnesota-based research firm.

“A lot of people are sick of how big they are,” Fielding said of the large retail chains.

But beyond reflecting market trends, these neighborhood grocery stores are also where pressing questions facing the city are playing out: How should the District balance the need to revitalize some of its neighborhoods while avoiding the worst outcomes of gentrification, such as rising costs, and ensuring equitable food access for all?

A balancing act

On a recent Monday morning, Lysaundra Campbell, 26, stopped by the newly opened Streets Market and Cafe on Massachusetts Avenue to pick up milk and a box of cereal on her way to work. She commutes from Anacostia every day and doesn’t usually have time for breakfast at home — so the addition of this grocery store has been very convenient, she said.

Still, she would hate to see a store like Streets Market and Cafe in her own neighborhood because “it’s a sure sign of gentrification,” she said, which in her view means the eventual displacement of longtime residents and loss of neighborhood character.

Owners of these newer neighborhood grocery markets push back against the idea that their stores, which often stock more expensive, specialty items, price out lower-income consumers and are yet another instance of gentrification.

For one thing, many of the new stores have opened in spaces that had stood vacant for some time. And Soapstone Market, in Van Ness, has been part of a broader effort to revitalize the neighborhood.

“The neighborhood really needed a hangout space, kind of a third space,” said Theresa Cameron, executive director of Van Ness Main Street, part of the D.C. Main Streets program that works to revitalize traditional business districts in the city. Now, Soapstone — a combination of grocery store, deli, bar, and cafe — is providing just that, she said: a gathering space for the community.

On Rhode Island Avenue, Good Food Markets is also serving as an anchor for the community.

“It is absolutely building a sense of place” to have the Good Food Markets in the neighborhood, along with the capoeira studio next door and a coffee shop nearby, said Kyle Todd, executive director of Rhode Island Avenue Main Street.

But this still leaves the question of whether the new corner grocery stores are affordable to the general population.

Danielle Vogel, owner of Glen’s Garden Market, said that she consciously price-matches her retail chain competitors.

Cullen Gilchrist, the chief executive and co-founder of Union Kitchen, which operates two grocery stores specializing in local products and has plans to open more, said that his company aims to attract everyone, from young professionals to construction workers.

“In building a local economy, we can’t just serve a subset of people,” he said.

And at Good Food Markets, the driving mission of the entire business is “bringing the overall progress of prosperity and development across the District,” co-founder Kris Garin said.

Good Food Markets intentionally chose to open on Rhode Island Avenue between the two Northeast neighborhoods of Woodridge and Langdon, where close to a quarter of the population are food stamp recipients, said Philip Sambol, the vice president for operations. The goal is to make healthy food accessible to everyone.

“Access means it’s affordable, culturally appropriate, and you feel comfortable walking into the store itself,” Sambol said.

For Teklehaimanot, a Good Food Markets regular, this focus on access is a relief.

“Usually when a neighborhood gentrifies, the new stores that open are mostly very expensive,” she said. But Good Food Markets has kept things affordable, even as it also stocks a selection of specialty organic and local products.

“It’s good for everyone,” she said.

Direct to Consumer

Direct Hit

E-commerce has forever changed the way people shop. Now businesses of all sizes must reassess their supply chains to go direct to the consumer with faster-than-fast delivery and free shipping.

In Meredith Wilson’s classic The Music Man, River City residents line the street when the Wells Fargo wagon rolls into town. They wait for delivery of salmon from Seattle, grapefruit from Tampa, raisins from Fresno, a bathtub, a cross cut saw, and, of course, musical instruments for the town band.

Times have certainly changed, but customer demand has not. As direct-to-consumer (DTC) strategies, and the technologies utilized to implement them, have ramped up the velocity at which goods flow through the supply chain, horse-drawn wagons have given way to drones and robot delivery vehicles.

“DTC is not a new concept,” says Frank McGuigan, president and COO of Frisco, Texas-based Transplace, a non-asset-based logistics service provider. “What’s brought DTC to the forefront is the ability of e-commerce channels to provide a broader spectrum of products directly to consumers.”

“Compared to low overall retail growth of just 1 to 2 percent, e-commerce is on fire”—a $370-billion market expanding at a 15-percent compound annual growth rate that currently accounts for 8 percent of overall retail sales, according to a recent report compiled by A.T. Kearney and published by the Council of Supply Chain Management Professionals.

That figure, the report says, is expected to make up 14 to 16 percent—or $1 trillion—of the U.S. retail landscape by 2022.

E-commerce “presents a fundamental shift in how consumers shop,” says the report. “Instead of firms pushing cases and pallets to physical stores, e-commerce has consumers pulling customized baskets to their desired location, whether home, a nearby store, or other convenient location such as lockers. This push-to-pull model has created a structural change in underlying supply chains and the movement of goods in terms of product flow, location of assets, delivery mode, and enabling technologies and analytics.”

ANALOG MODE IN A DIGITAL WORLD

Customers today “live in a digital world, while many businesses continue to operate in analog mode with a 50- to 60-year-old business model,” notes Melissa Runge, vice president of analytical solutions at Spend Management Experts (SME) in Atlanta.

“They’re increasingly unwilling to shop that way, so companies that hope to be around in the future have to reconfigure their supply and distribution chains to better conform to customer expectations,” she says. “The age of waiting for new products to appear on store shelves is over.”

Social media and technology “have radically increased customer expectations to the point where they want to order a product and have it delivered tomorrow, if not sooner,” Runge adds. “Business is moving down that trajectory and won’t go back.”

Jeff Jones, vice president of business development at third-party logistics provider Saddle Creek Logistics Services in Lakeland, Florida, agrees with Runge.

DTC is all about customer expectations, he says. “In a world where social media plays a dominant role in how people shop, they have unspoken expectations—I will get my order quickly and I will not pay for shipping and handling,” Jones says. “Manufacturers and retailers have to adapt.”

Zurvita, a Houston-based manufacturer of wellness and healthcare products, recently selected Saddle Creek to provide direct-to-consumer fulfillment services. The company operates as a “direct seller” with consultants across the country selling products directly to the public.

“We work with two layers of customers—the consultants as well as the customers who purchase the products,” says Jones. “That adds another dimension to work through. The plan calls for Zurvita corporate to process the orders, and then pass them on to us to fulfill.”

While operations will initially be handled from Saddle Creek’s 1.54-million-square-foot Fort Worth facility, the 3PL’s nationwide network of 43 distribution centers gives Zurvita the option to add locations in the future.

“Over the past five years, we’ve grown from $3 million to $100 million in revenue, and we’re planning for significant growth in 2017,” says Tanya Frantz, vice president, supply chain and distribution at Zurvita. “Stepping up our fulfillment game is critical.”

BRING IT INSIDE

Some companies are taking a different road to DTC satisfaction by handling fulfillment operations entirely in-house.

For example, in November 2016, former Tonight Show host and long-time car buff Jay Leno unveiled a new line of auto care products—Jay Leno’s Garage Advanced Vehicle Care—for direct delivery to customers across the country.

The company’s waxes, polishes, and other products are compounded around the country and then shipped to Denver, where they are bottled, labeled, warehoused, and distributed out of the same facility via FedEx and the U.S. Postal Service, according to Nick Mertz, the company’s chief operating officer.

“It was Jay’s plan from the start to skirt the retail chains by selling via the Internet and going direct to the consumer,” Mertz says. “People want instant gratification and better products at a better price. The best way to achieve that is to eliminate the middleman in an effort to cut costs. That’s not going to change.”

Exploiting the advantages of centralized distribution of quality products with brand name recognition directly to customers, “has added up to steady growth in our business since we sold our first product in November 2016,” says Mertz. “We have a vision to utilize e-commerce and additional distribution centers to deliver directly to our customers. We feel strongly that that track will make us the top brand in the market within the next 10 years.”

The 800-pound gorilla in the room, is, and will remain for now, Amazon, which is climbing the ladder to near total domination of direct-to-consumer order fulfillment.

In March 2017, Amazon invited top-level executives from several major consumer packaged goods (CPG) companies to a three-day meeting to discuss “a major shift in thinking.” Amazon wanted to explore how its suppliers could speed delivery of their products and meet the needs of increasingly demanding consumers by bypassing retailers such as Walmart and Target and dealing directly with them.

The invitation to the event read, in part: “Times are changing. Amazon strongly believes that supply chains designed to serve the direct-to-consumer business have the power to bring improved customer experiences and global efficiency.”

With Amazon setting the pace for how goods move between supplier and seller, the question is whether there will be an eventual “Amazonization” of domestic, and even global, supply chains.

Transplace’s McGuigan doesn’t think so. “We’re not seeing wide-scale adoption of online shopping for grocery products and CPG items,” he says. “Despite recent developments, people still like to see and touch things,” alluding to Amazon’s almost counter-intuitive opening of brick-and-mortar bookstores in five states and plans to introduce additional stores in California, Massachusetts, Washington, New Jersey, and New York City.

That visceral need to touch and feel has created a “delicate equilibrium between what consumers see on a computer screen and what they want to see, touch, and feel before they buy,” he says. “I don’t think they’ve found that balance yet.”

Does Amazon have the fulfillment capability to put pressure on those retail outlets?

“Without a doubt,” says McGuigan. “They already are. But, if you look at retail shopping, dollars spent are up, while foot traffic is down. Some companies are being pushed out of business while others are holding their own and trying to remain competitive by coming up with their own e-commerce strategies.”

The direct-to-consumer strategy “isn’t quite refined,” he says. “It doesn’t have its fine edges just yet. I do see some definition though, as there appears to be no end in sight to what’s possible.”

DRAWING THE LINE

Within the next three to five years, McGuigan predicts we will see “clearer lines of engagement on the differences between e-commerce and walk-in retail and the market shift in building supply chains to more effectively serve increasingly demanding customers; fewer full truckload shipments into the large distribution centers that serve large retail outlets; and different channels with smaller movements going to local DTC-configured fulfillment centers with online buying for everything from toothbrushes and shaving cream to waffle makers and computer peripherals.”

One major challenge in maintaining the heated pace DTC demands have set is the issue of “having to maintain maximum inventory in place, as well as the capability to move it quickly both in and out,” says Spend Management Expert’s Runge.

“Rather than a large shipment to a large retail store, there is a resulting movement toward ‘single pick,'” she says. “Product handling automation and more efficient inventory control and warehousing systems will be increasingly crucial to fulfilling customer orders.”

Businesses “will continue to see the demand for same-day delivery increase,” Runge adds. “But eventually, consumers will realize that it’s just not possible to deliver everything the same day they order it.

“We will reach a plateau when people realize what is realistic and what isn’t. The market will drive that,” she says. “Trucks will get caught in traffic jams, flights will be delayed, drones will fail. Believe it or not, there are some situations even Amazon can’t control.”

Amazon is the new Walmart

Amazon is the new Walmart: the e-commerce giant is increasingly becoming a symbol for everything wrong with big business

Fish's EddyA New York City store recently displayed a sign reading “F*ck Amazon.”Sarah Jacobs/Business Insider
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Walmart was once considered the symbol of everything that was wrong with the retail industry.

Now, Amazon is taking on that undesirable role.

Fish’s Eddy recently put a sign in its window reading “F*ck Amazon: Fish’s Eddy is prime!”The founder of the quirky New York City store assured Business Insider that the sign was meant as a joke highlighting the struggles of small businesses.

However, for many, anti-Amazon feelings are more intense.

In July, Birkenstock CEO David Kahan sent sellers of the brand’s shoes a brutal five-page email that accused Amazon of launching an “assault on decency.” Birkenstock had encountered issues with the ecommerce giant selling counterfeit shoes, The Washington Post reported.

“This is a middle finger to all brands, not just Birkenstock,” Kahan told The Post in an interview.

Amazon Jobs DayPeople line up, hoping to get hired, on Amazon Jobs Day.Sarah Jacobs

Amazon has coasted on its progressive reputation. The company has hovered near the top of Fortune’s list of most respected brands for years.

However, the tide seems to be turning — at least among some groups.

An online anti-Trump movement has been encouraging people to boycott Amazon until the ecommerce giant stops selling Trump-related products and running ads on the far-right website Breitbart News.

At the same time, Trump supporters have threatened to boycott Amazon after news broke that it would support Washington State in a federal lawsuit challenging Trump’s executive order barring people from seven majority-Muslim countries from entering the US. And, in June, Trump tweeted that the “Amazon Washington Post” is “FAKE NEWS.”

Then there’s the question of Amazon’s treatment of its employees.

Amazon Jobs DaySarah Jacobs

While Amazon has been applauded for its impressive benefits, the company has been criticized following reports of long hours and poor working conditions in warehouses. Some white-collar workers have described a brutal working environment where people cry at their desks after being pushed to their breaking point. 

In 2014, Salon published an article with the headline “Worse than Wal-Mart: Amazon’s sick brutality and secret history of ruthlessly intimidating workers,” something that highlights both Amazon’s internal issues and how synonymous Walmart has become with everything that’s wrong with big business.

Basically, Amazon’s reputation is taking hits from all sides.

Small businesses – as well as bigger retailers — say that the ecommerce giant is threatening their survival. Progressive activists see the company as funding hate speech, while conservatives say it undermines the president. Workers’ rights activists paint a picture of a company that prioritizes profit over people.

Many companies do similar things — and worse than what Amazon’s critics have described. However, Amazon is a prime target because of its size, just like Walmart has long been. When the company makes a misstep, it impacts many people, as the company employed 341,000 people as of February, according to GeekWire. 

Criticism grows as Amazon grows — and its current market cap is $482.19 billion.