Looking for a New Bag

Looking for a New Bag

Copyright 2002, Traffic World, Inc.

Lost luggage is not an obvious starting place for a web-based distribution business but that is where Traverse City, Mich.-based Distribution Solutions International got its start.

This year the company will post double-digit growth and expects to improve on this performance in 2003. The purchase of a 127,000-square-foot warehouse in Memphis marks the beginning of an expansion program that will take it into other markets.

In 1998 DSI developed a program for Delta Airlines that "would do a better job for mishandled baggage," said spokesman Tim Watkins. At the time the airline's arrangements for retrieving baggage that had gone astray were messy and expensive. "They flew into 128 cities and each one has four or more vendors delivering baggage," said Watkins. Moreover, this was not exactly a premium service. "If you owned a pickup truck you could deliver mishandled baggage," he said.

Such a fragmented distribution system was bad enough; in addition the carrier's bill-paying procedures were costing it a fortune. The airline was paying vendors by check and since it cost an estimated $40 to $45 to write each bit of paper, on an annual basis "$708,000 was just flying out of the door," Watkins said.

DSI came up with a way to eliminate much of this paper and standardize the way mishandled baggage was delivered across the carrier's area of operation. The web-based system automatically queries Delta for lost baggage orders. DSI manages a network of independent vendors that pick up and deliver the items, "and the vendors log into our system and update the electronic version of the baggage delivery order," he explained. The vendors bill DSI electronically and are paid in the same way within 15 days, said Watkins. Similarly, DSI sends paperless invoices - consolidated to two a month - to Delta and the airline has seven days to pay. The system also helps Delta comply with FAA rules that require airlines to submit monthly status reports of baggage movements. Vendors keep baggage delivery orders for 90 days and DTI carries out random audits to verify that the passenger documents match the details stored in the system.

Delta has since been joined by other airlines as users of the system, including US Air, Northwest and Southwest. British Airways has just joined the client list. "We are the only company in the world doing this," Watkins said.

The company has adapted the system to its pharmaceuticals business. Here the freight is not mislaid baggage but the huge quantities of drug samples that manufacturers send out to their sales representatives. The basic problems are similar: a multitude of small-package movements spread over a wide geographic area. But there are a number of new wrinkles in this heavily regulated industry. For example, it is crucial that proof-of-delivery documents are signed and collected for each package.

Also important is delivering the samples on time. According to one industry estimate, it costs about $1,300 an hour to keep a pharmaceutical rep in the field and drug companies do not want to spend that kind of money to keep sales staff at home waiting for a delivery of samples. DSI's network of 140-plus vendor carriers deliver according to prearranged appointments made with individual reps. Watkins said a drug industry salesperson can receive as much as 200 pounds of freight a month. Pharmaceutical manufacturers including Merck, Eli Lilly and Pfizer use the system and are able to "dial in and locate any shipment down to the lot number and see where it is," he said. They also can track which reps have made what appointments for deliveries. Vendors must update the system within 24 hours of a delivery and the average time to provide updated status details is seven hours, he said.

Kathleen Peterson, DSI's chief financial officer, said the biggest impact on pharmaceutical clients from a financial standpoint "is what we call pass-though pricing." DSI does not mark up the cost of vendor services but passes this on along with an administrative fee that covers the management of its web-based system and associated services such as product tracking. Also, DSI negotiated volume discounts when it started the pharmaceutical online program in 2000. "We have delivered over $2 million in end-delivery savings," she said.

Today DSI makes about 100,000 baggage deliveries a month, a business that is supported directly by just four employees. It completes 18,000 freight deliveries a month with seven customer service reps. The company is able to expand its coverage without increasing headcount because its network is computerized, explained Watkins. The system is based on 20-mile freight zones; deliveries within one to 20 miles and 21 miles to 40 miles of a service center are categorized as "A" and "B" deliveries respectively, for example. Adding a strategically located vendor can change a "C" delivery to an "A" fairly easily.

The enterprise now is ready to branch out and has targeted the retail sector. Fortunately it steered clear of providing last-mile services for online retailers at a time when that business model was about to take a big fall. "We could go into anything at this point," said Watkins.