Key Differences in D2C and B2B supply chains transactions
Growing businesses, especially in industries such as food & beverage and consumer goods, face a dilemma they didn not have just a few years ago.
Should they pursue a traditional B2B supply chain, shipping their product to wholesalers, supermarkets, or even specialist drugstores and niche retailers who sell to the consumer on their behalf? Or should they instead focus on strong brand and a community following that opens the door to enabling a direct-to-consumer, or DTC supply chain?
What must be mastered to succeed in a D2C supply chain model?
At first glance it may seem attractive to be able to have direct access to your customers. Who wouldn't want to be in control of the entire sales and distribution channel? But while technology now makes this possible for brands and retailers of all sizes, it does not mean that it will be an easy ride to successfully implement it.
Let's take a closer look at why this is, and what must be considered if you are to succeed at managing your extended supply chain.
At the end of the article, you should be well enough informed to make up your own mind whether you wish to pursue a DTC channel strategy.
What is a direct-to-consumer model?
Direct to consumer or “DTC” is the type of supply arrangement where a product is sold directly to the end consumer without a middleman such as third-party retailers or wholesalers. It describes when a transaction is executed directly with the end consumer. This can be done by means of both offline and online processes and fulfilment operations.
What's the difference between B2C and DTC?
B2C, or business-to-consumer, describes the process of selling goods or services to a consumer (as opposed to selling business-to-business, or B2B for short).
For the most obvious example, let's take global soft drinks brand Coca Cola. As an individual consumer, you can't go online and order a bottle of Coke directly from The Coca Cola Company. You have to buy it from a supermarket (or local store, petrol station, bar etc).
The supermarket is fulfilling a B2C transaction. You're the consumer, and you're going to the supermarket to purchase the goods.
The Coca Cola Company operates a B2B business model. It only sells its products through wholesalers and distributors. It doesn't have a channel that physically supplies its product to you as the individual, even though their marketing is targeting you as the end consumer.
Some businesses serve both other businesses and consumers i.e. they offer B2B and B2C models. The most obvious example I can think of are banks. They offer both business banking services, as well as retail banking for private individuals.
Direct-to-consumer, on the other hand, is when the brand themselves is shipping directly to the end consumer, without a middleman in the form of a distributor or wholesaler.
Who could benefit from brand or manufacturer-to-consumer distribution?
Let's consider two different consumer goods manufacturers and how a B2C vs. a DTC channel could look.
In this example, we'll take the more complex supply chain distribution requirements of a soap manufacturer, and compare this with the more simple distribution channels of a small, organic chocolate manufacturer.
As you can probably tell, a DTC distribution model is likely to benefit the organic chocolate manufacturer more. They would otherwise be dependent on a few large supermarkets and chains of organic retailers.
The balance of power in any commercial negotiation would be well and truly in the hands of the retailers. Plus, they're having to compete against multinational confectionery corporations such as Nestlé and Mondelez for the available shelf space in supermarkets.
What are the advantages of a DTC sales model?
Cutting out the middlemen and their cut of the profits is not the only benefit of pursuing a DTC strategy.
Below are just a few of the other advantages of selling directly to the consumer:
- You fully understand your cost-per-acquisition (CPA)
- It's much easier to measure the success of marketing campaigns, especially Facebook and Google Ads
- You can build a large database to fully understand your customer persona
- Customer email and postal addresses give you a ready-made, low-cost means to execute direct marketing campaigns
Why not just sell through Amazon?
This, of course begs the question: why should a growing niche brand invest time and effort in a direct-to-consumer supply chain? Isn't it just easier to let a company who has invested billions of dollars into tech, warehousing and final mile logistics do the order fulfilment for you?
Well yes, of course it's easier. But that's the whole reason why you should not rely on Amazon as your sole direct-to-consumer sales channel.
I would argue that it's fine to consider Amazon as part of a wider channel strategy. But take heed of the wise words: don't build your business on rented land.
Here are 7 reasons why selling through Amazon is not good for your business:
- You have to pay them a commission for every sale, which eats into your margins
- It's brutally competitive because the barriers to entry for selling on the platform are so low
- You don't get the customer's contact details or email address for any future marketing campaigns
- There are certain KPIs you will never be able to track because Amazon doesn't share their data with you (customer lifetime revenue, acquisition cost, loyalty etc)
- Your account could get banned. This will destroy your business if you're overly reliant on this as a distribution channel.
- It's a David vs. Goliath business relationship, with zero negotiation potential on your side
- There is always a risk that they will white label your product and steal your customers. Because if you sell on Amazon, they're not really your customers.
Is Amazon a DTC?
Kind of. You could make a case that it is, or it isn't.
Amazon certainly enables you to ship directly to the end consumer and does a great job in handling the extended supply chain and last mile logistics.
Where I would argue that it's not a true DTC channel is that your end customer is ultimately Amazon, not the consumer. They are the entity with whom you have a business relationship. They pay you and dictate the terms and conditions upon you doing business on their platform.
How to optimise a direct-to-consumer supply chain
OK, so we've outlined the reasons why a traditional B2B brand or manufacturer could benefit from implementing a DTC channel.
So, how exactly are you going to ensure this is a success and what specifically are going to be the critical aspects of implementation and successful delivery.
Last mile logistics
Logistics is way more complex for managing direct deliveries than wholesale shipments. The size and frequency of deliveries is going to throw up way more permutations than shipping in bulk.
If your current third party logistics (3PL) suppliers are shipping in full truck loads (FTL) or part truck loads (LTL), the distribution model for DTC is going to be vastly different. You're going to need a logistics partner who's an expert in parcel freight.
You will also very likely need to consider outsourcing of picking, packing, deliveries, returns and order tracking on your behalf.
You will need more administrative resource who can handle all of the transactional work associated with returns. Either that, or you'll need to outsource this operation to a 3PL.
Your warehouse operations will also need to distinguish between goods being shipped out for the first time vs. stock being returned from customers. You will also need to factor in the cost of dealing with returns and the impact this will have on your overall profit margin.
How experienced is your current procurement team? Because you're going to need an A-Team to pull this one off. Your success at DTC will rest to a large extent with your choice of suppliers and how you manage and measure them.
That's the job of Procurement. Not IT, not Logistics. They are not commercial contract negotiation experts, even though they may think they are. You wouldn't send them to lead a sales meeting, would you? So why are you allowing them to negotiate with suppliers?
It will also require a lot of joined up teamwork and cross-functional project management.
Smaller order quantities
Your incumbent logistics partners may not be able to fulfil the requirements of DTC. You will be moving from a predominantly bulk shipment model to a parcel freight model. Procuring these two types of services means two very different pricing models and sets of KPIs for measuring success.
You will need to source better technology to handle all the increased day-to-day administration of dealing with lower value sales orders and a higher complexity in logistics operations. This will include both robotic process automation (RPA) for order processing, as well as some warehouse automation technology.
You may also need some temporary labour to deal with peak season (Black Friday, Christmas etc), or freelance consulting expertise to deal with complex logistics projects.
Why is technology vital in DTC supply chains?
According to a recent article by shipping line Maersk, European e-commerce retailers spend between 20-40% of their turnover on logistics. Passing on the costs of increased logistics costs of a direct-to-consumer supply chain could result in loss of business. As the article states, there are over 800,000 online stores in Europe alone.
The only way this can be minimized is through utilizing technology in some of the many areas that a DTC supply chain will touch upon.
- Customer experience
You want to be able to delight your customers through giving them the opportunity to directly track their shipments and providing them an easy way to handle returns
- Order fulfilment and handling returns
A DTC supply chain means smaller shipment quantities per order and lower average sales order values than wholesale distribution channels. The technology to manage the seamless communication between finance, inventory management, logistics and the end customer's transaction through your e-commerce store will be vital.
Consumers are increasingly demanding of their retailers to be environmentally conscious. For some, it's a key decision factor when it comes to who they buy from. Technology can be deployed to reduce the size of packaging, optimise the transport carbon footprint and reduce the end-to-end shipping time.
- Automating manual processes
There's no getting around the fact that a DTC model is going to increase the amount of transactional work incumbent on you as the brand or the retailer. Technology can automate many of the manual tasks currently being performed. For example, data entry into various non-connected systems. Procuros eliminates this laborious admin task through automation of the order-to-pay process. Our technology connects directly to your ERP system, and seamlessly enters any data without the need for manual entry. Whether this is from your e-shop, fulfilment partner, or third party logistics company. This frees up your sales and customer service team to spend more time on added value tasks. Using this time instead to actively reduce the number of returns or customer complaints will contribute to your business's top and bottom lines.
- Maximising sales & marketing potential through customer data
Vertical integration of supply chain, sales and marketing is perhaps the biggest advantage of implementing a direct-to-consumer channel. Ensuring you have the right marketing tech and the analysts to crunch all the data you're going to get is the key. You want to ensure that the investment delivers profitable growth, with the least amount of waste.
How do your competitors manage their extended supply chain?
Due diligence is important, just like everything.
Are any of your competitors in this space yet? What are they doing?
Obviously, your direct competitors aren't going to share their insights. But are you able to tap into the knowledge of other industry sectors?
Maybe your investors or your local startup incubator knows brands who have been successful, or perhaps have made some of the same mistakes you're potentially about to make.
Conclusion: DTC is very attractive, but getting it right isn't easy
So, to round off our article, we truly believe that a direct-to-consumer supply chain is a powerful channel to build. It allows you an unparalleled understanding of your customer's purchasing habits and enables you to be in full control of pricing and logistics.
If you get it right, you'll have both an amazing supply chain and incredible insights into your customers.
However, the necessary tech investments, supply chain expertise and planning mean that it's a highly complex project. You should resist the temptation to undertake it without the right commitment, strategic thinking and budget to ensure it has the best chance of success.
At this point, we want to go with your suggestion to address what we are doing with Procuros. Not talking so much about RPA but using tech to automate some of the manual tasks and free up time for what matters most for their business. Automating the order-to-pay process, and connecting directly to the ERP system can be key points here. Get in touch to learn more.