What Are the Best Delivery Options for Small Format Stores?

The MIT CTL researchers tested and compared various delivery policies for a large, multinational retail corporation to find the optimal multi-temperature delivery strategy for small format stores

By Mayurpankhi Barooah and Seung Hwan Shin

July 16, 2015

Editor’s Note: Every year, 40 or so students in the MIT Center for Transportation & Logistics’ (MIT CTL) Master of Supply Chain Management (SCM) program complete one-year thesis research projects. The students are early-career business professionals from multiple countries with 2 to 10 years of experience in the industry. The research projects are sponsored by and carried out in collaboration with multinational corporations. Joint teams of company people, MIT SCM students, and MIT CTL faculty work on real-world problems chosen by the sponsoring companies. In this monthly, series we summarize a selection of the latest SCM research. The researchers for the project described below, Mayurpankhi Barooah and Seung Hwan Shin, analyzed store delivery methods for their SCM thesis Optimal Multi-Temperature Delivery Frequency for Small Format Stores. The work was carried out for a major retailer, and the project was supervised by MIT CTL’s Dr. Chris Caplice, Dr. Francisco Jauffred, and Dr. Edgar Blanco. For more information on the program, visit http://scm.mit.edu/program.

In response to demographic trends and slower growth in existing market segments, large retail companies are opening smaller format stores.

The optimal strategy for delivering goods from distribution centers (DCs) to these smaller outlets differs from that for larger stores, owing to the smaller volumes involved. This is particularly the case for groceries that need to be delivered at different temperatures, i.e. ambient, refrigerated, or frozen. The need to cater for these three types of shipments adds complexity and lowers item volumes.

The MIT CTL researchers tested and compared various delivery policies for a large, multinational retail corporation to find the optimal multi-temperature delivery strategy for small format stores

More stops, more complexity

The retailer, referred to as RetailCo, operates several large discount department stores and warehouse stores. The typical size of its small format stores is approximately 40,000 ft2, compared to traditional outlets that are approximately four times as large. RetailCo expects a significant part of its future growth to come from these smaller stores.

Currently, grocery items are delivered to the small format stores in exactly the same way as for larger outlets. Trucks pick up grocery products from a DC and deliver the items to different stores in a sequential manner. However, since the volumes are low for small format stores, this method translates into a large number of stops. In addition to making the delivery process more complicated, increasing the number of stops can cause drivers’ to run out of allowable work hours as permitted by government regulations.

One way to address these inefficiencies is to ‘mix’ products at different temperatures in multi-temperature trailers. This approach might help to consolidate demand, thereby reducing the number of stops.
The researchers examined this method, and considered which delivery frequencies and days of service worked best for different kinds of products.

Multi-temp excels

Using multi-temperature trailers with multiple stops showed the lowest cost per pallet, as well as higher trailer utilization rate and higher delivery frequency compared to other delivery configurations. The next best option was using multi-temperature trailers with dedicated, single-store delivery. The current policy of using single-temperature trailers making multiple stops was one of the least cost effective options owing to the higher cost of delivery.

In addition to this base scenario, the analysis considered several other scenarios that provided further insights into the best mix of delivery options. For example, the primary factors that influence the choice of multi-temperature trailers over single-temperature types were demand volume by product category, distances between the DC and stores, and delivery frequency.

In short, smaller volumes, longer distances, and more frequent deliveries increased the benefits of using multi-temperature trailers for delivery.