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Shipping Directly From Plant to Customer Is Always Best…Isn’t it?

Direct Plant Shipment (DPS) is shipping finished goods directly from the point of production to your customer’s distribution center. It is commonly thought that DPS is the best route to market, since freight from plant to a regional distribution center and handling at a regional distribution center is eliminated. So it is always best to utilize DPS when possible, right?  To quote college football analyst Lee Corso, “Not so fast, my friend.”

Let’s explore how to determine if DPS is right for your network. Consider a common CPG supply chain that consists of several plants spread across the U.S. with regional distribution centers in the usual locations. The plants ship replenishment shipments to the regional DCs, and the role of the regional DC is to offer your customer a mix of products from all plants on a combined order. The final shipment to the customer is then a shorter haul with predictable transit time, resulting in good customer service. But what if you could ship finished goods directly from the plant to large customers who can order regular truckloads of product that is produced at that plant. This would reduce the landed cost by eliminating the replenishment shipment to the DC and the handling costs at the DC.

Several crucial factors need to be simultaneously evaluated to determine if DPS is appropriate for your supply chain. The most important consideration is that a plant-attached warehouse or near-plant DC is required. Moving finished goods directly from the end of a production line to a customer truck is very difficult, and in most cases impossible (production scheduling complexity, product quarantine/incubation requirements, coordination of customer orders, etc.). Therefore, the product would need to be placed into inventory either at a plant-attached warehouse or near-plant DC. Based on our experience, the capital required to expand a plant to include warehouse space in order to enable DPS is difficult to financially justify. Utilizing a third-party near-plant warehouse can be justified, but will reduce the DPS benefit due to the additional cost of shuttle and handling.

Other factors that need to be considered include:

  • Customer demand for products from that plant must be enough for frequent truckload deliveries. Insufficient demand will result in low delivery frequency and subsequently more inventory held by the customer. Demand should result in full truckload deliveries on at least a bi-weekly basis.
  • Diminished ability to utilize intermodal freight. Many companies do not use intermodal for customer delivery due to the variability of transit time. Long-distance replenishment shipments can more efficiently use intermodal freight due to the high volume of trucks on the lane where delivery schedule adherence is not crucial. Therefore, DPS can actually increase overall freight spend for some long-distance lanes, since intermodal is not used for the long-distance leg to customer.
  • Residual product in regional DC. If a customer is offered DPS for a subset of plants, the resulting shipment profile of remaining regional DC product may be unacceptable. That is, product that will continue to be served through the regional DC my become LTL or infrequent full truckloads.
  • Inventory deployment issues. Additional customer shipping points will increase inventory deployment complexity. Determining how much product to forward deploy to the regional DCs versus how much to buffer at the plant for DPS is crucial for maintaining customer order fill rates. Furthermore, inventory rotation practices must be in place to avoid shelf-life issues in the multi-echelon network.

Finally, a DPS program is implemented to realize supply chain savings. The program will depend on customers agreeing to change their order behavior while potentially carrying more inventory with potentially longer delivery times. As a result, customers will undoubtedly want you to share the savings with them in the form of more favorable trade terms or a DPS allowance. Thus, a holistic, data-driven, lane-level analysis is needed to determine the viability of a DPS program in your network.
–Dave Wheeler, St. Onge Company

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