Supply Chain Management 3 rd Edition Chapter 4

Supply Chain Management (3 rd Edition) Chapter 4 Designing the Distribution Network in a Supply Chain © 2007 Pearson Education 4 -1

Outline u. The Role of Distribution in the Supply Chain u. Factors Influencing Distribution Network Design u. Design Options for a Distribution Network u. The Value of Distributors in the Supply Chain u. Distribution Networks in Practice u. Summary of Learning Objectives © 2007 Pearson Education 4 -2

Goal Given: u Product Characteristics u Markets Served © 2007 Pearson Education What is the appropriate distribution network? 4 -3

The Role of Distribution in the Supply Chain u. Distribution: the steps taken to move and store a product from the supplier stage to the customer stage in a supply chain u. Distribution directly affects cost and the customer experience and therefore drives profitability u. Choice of distribution network can achieve supply chain objectives from low cost to high responsiveness u. Examples: Wal-Mart, Dell, HP, Proctor & Gamble © 2007 Pearson Education 4 -4

Some key questions? ? u. Which distribution network is the best? u. What value does each distributor provide? u. When should a new distributor be added? u. E-business killes distributors, so? u. Why are distributors more significant in some countries, like India? © 2007 Pearson Education 4 -5

Factors Influencing Distribution Network Design u. Distribution network performance is evaluated along two dimensions at the highest level: – Customer needs that are met – Cost of meeting customer needs u. Distribution network design options must therefore be compared according to their impact on customer service and the cost to provide this level of service © 2007 Pearson Education 4 -6

Factors Influencing Distribution Network Design u Elements of customer service influenced by network structure: – – – Response time Product variety Product availability Customer experience Order visibility Returnability Priority among these is important! u Supply chain costs affected by network structure: – – Inventories Transportation Facilities and handling Information © 2007 Pearson Education 4 -7

Service and Number of Facilities (Fig. 4. 1) Response Time Number of Facilities © 2007 Pearson Education 4 -8

The Cost-Response Time Frontier High Local FG Mix Regional FG Local WIP Cost Central FG Central WIP Central Raw Material and Custom production with raw material at suppliers Low © 2007 Pearson Education Response Time High 4 -9

Inventory Costs and Number of Facilities (Fig. 4. 2) Inventory Costs Number of facilities © 2007 Pearson Education 4 -10

Transportation costs Inbound transportation costs: cost of bringing the material into a facility Outbound transportation costs: cost of sending material out of a facility § Since lot size is larger in the inbound, usually Outbound transportation cost/unit > Inbound transportation cost/unit § As # distribution centers increases, average outbound distance decreases, thus the fraction of outbound transportation cost decreases. © 2007 Pearson Education 4 -11

Transportation Costs and Number of Facilities (Fig. 4. 3) Transportation Costs Number of facilities © 2007 Pearson Education 4 -12

Facility Costs and Number of Facilities (Fig. 4. 4) Facility Costs Number of facilities © 2007 Pearson Education 4 -13

Total Costs Related to Number of Facilities Total Costs Facilities Inventory Transportation Number of Facilities © 2007 Pearson Education 4 -14

Variation in Logistics Costs and Response Time with Number of Facilities (Fig. 4. 5) Response Time Total Logistics Costs Number of Facilities © 2007 Pearson Education 4 -15

Key Decisions in Designing a Distribution Network 1. Will product be delivered to the customer location or picked up from a preordinated site? 2. Will product flow through an intermediary location? © 2007 Pearson Education 4 -16

Design Options for a Distribution Network u. Manufacturer Storage with Direct Shipping and In. Transit Merge u. Distributor Storage with Carrier Delivery u. Distributor Storage with Last Mile Delivery u. Manufacturer or Distributor Storage with Consumer Pickup u. Retail Storage with Consumer Pickup © 2007 Pearson Education 4 -17

Manufacturer Storage with Direct (Drop) Shipping (Fig. 4. 6) Manufacturer Retailer Customers Product Flow Information Flow © 2007 Pearson Education 4 -18

Drop Shipping q Centralization is beneficial if there is high variety, high value items with low and unpredictable demand. q Centralized inventories leading to high product availability, low inventory levels (higher inventory turnovers), better forecasts. q Manufacturer can postpone customization until order arrival. q Partial shipments introduce complexity, hard to implement if there are more than 20 -30 sourcing locations Ex: Furniture orders from both Kelebek Mobilya and Sauders © 2007 Pearson Education 4 -19

Performance Characteristics: Drop Shipping Cost Factor Inventory Lower due to aggregation. Benefit is larger if low demand, high value items, if there is postponement Transportation Higher due to increased distances and partial shipping Facilities and handling Lower fixed costs. Better handling costs if direct shipment from production line. Information Higher, since info flow is essential b/w manuf. and retailer. Response time High response time, worse if there is partial shipment Product variety Easy to provide high level of variety Product availability Higher due to aggregation Service Customer experience factor Good since there is home delivery but partial shipments may increase complexity. Order visibility Very important for customer but more difficult since an integration of retailer and manuf. info systems is needed Returnability Expensive and difficult. Return to manuf. vs. return to seperate facility. © 2007 Pearson Education 4 -20

In-Transit Merge Network (Fig. 4. 7) Factories Retailer In-Transit Merge by Carrier Customers Product Flow Information Flow © 2007 Pearson Education 4 -21

In-Transit Merge Network u In-transit merge combines pieces of order coming from different locations, so the customer receives the order by single delivery. Ex: Order a Dell pc with a Sony Monitor. u Beneficial for high value items with low to medium demand, 4 -5 sources. u Main advantage over drop shipping: Lower transportation cost and improved customer experience! © 2007 Pearson Education 4 -22

Performance Characteristics: In-Transit Merge Network Cost Factor Inventory Similar to drop shipping Transportation Somewhat lower than drop shipping Facilities and handling Higher handling costs than drop shipping; lower receiving costs at customer Information Higher than drop shipping Response time Similar to or higher than drop shipping Product variety Similar to drop shipping Service Product availability factor Customer experience Similar to drop shipping Better due to single delivery Order visibility Similar to drop shipping (or somewhat more difficult) Returnability Similar to drop shipping © 2007 Pearson Education 4 -23

Distributor Storage with Carrier Delivery (Fig. 4. 8) Factories Warehouse Storage by Distributor/Retailer Customers Product Flow Information Flow © 2007 Pearson Education 4 -24

Distributor Storage with Carrier Delivery u Inventory is not held by the manufacturers, but is held by distributor/retailer in intermediate warehouses. u Package carriers are used to transport items from the retailer to the customer. Ex: Amazon u Higher inventory capacity is needed than the manufacturer, since demand uncertainty is aggregated at a lower level! u Better for medium to fast moving items. Better response time, lower transportation costs when compared to manufacturer storage. u Distributor storage can handle somewhat lower variety than manufacturer storage but it is better than a chain of retailers. © 2007 Pearson Education 4 -25

Performance Characteristics: Distributor Storage with Carrier Delivery Cost Factor Service factor Inventory Higher than manufacturer storage. Difference is not large for fast moving items. Transportation Lower than manufacturer storage. Reduction is highest for fast moving items. Facilities and handling Somewhat higher than manufacturer storage Information Simpler structure compared to manufacturer storage. Response time Faster than manufacturer storage. Product variety Lower than manufacturer storage. Product availability Lower than manufacturer storage. Extra investment is needed forlarger availability Customer experience Better than manufacturer storage with drop shipping. Order visibility Easier than manufacturer storage. Returnability Easier than manufacturer storage. © 2007 Pearson Education 4 -26

Distributor Storage with Last Mile Delivery (Fig. 4. 9) Factories Distributor/Retailer Warehouse Customers Product Flow Information Flow © 2007 Pearson Education 4 -27

Distributor Storage with Last Mile Delivery u Disributor/retailer delivers the product to the customer’s home instead of using a package carrier. u Requires distributor warehouse to be very close to the customer, so more warehouses are needed when compared to package delivery. u Suitable for fast moving items where disaggregation does not lead to significant increase of inventory. u Hard to justify this option when labor cost is high. u Can only be justified when there is large customer demand at this higher price. Very short response time, better customer experience and returnability. u Last mile delivery should be integrated with the existing distribution network. © 2007 Pearson Education 4 -28

Performance Characteristics: Distributor Storage with Last Mile Delivery Cost Factor Inventory Higher than distributer storage with package delivery, since uncertainty is aggregated in lower level with larger # of distributers Transportation Higher than any other distribution option. Maybe somewhat cheaper in large and dense cities Facilities and handling Higher than all options but lower than chain of retail stores. Information Similar to distributor storage with package carrier delivery. Response time Very quick, in 1 day. Product variety Somewhat less than distributor storage but larger than retail. Product availability Lower than other options except retail stores. Extra investment is needed for larger availability Service factor Customer experience Very good Order visibility Easier than manufacturer storage or distributor with carrier delivery. Returnability Easier than other options, more expensive and difficult than retail network. © 2007 Pearson Education 4 -29

Manufacturer or Distributor Storage with Customer Pickup (Fig. 4. 10) Factories Retailer Cross Dock DC Pickup Sites Customers © 2007 Pearson Education Customer Flow Product Flow Information Flow 4 -30

Manufacturer or Distributor Storage with Customer Pickup u Inventory is stored at the manufacturer or distributor warehouse (cross dock), customer place orders on line or via call center and come to designated pickup points to collect their orders. Ex: 7 -Eleven Japan u Inventory and transportation costs are low due to appropriate aggregation © 2007 Pearson Education 4 -31

Performance Characteristics: Manufacturer or Distributor Storage with Customer Pickup Cost Factor Inventory Can be as low as possible by appropriate aggregation Transportation Lower than the use of package carriers Facilities and handling Can be very high if new facilities have to be built. The increase in the handling cost at the pickup site can be large. Information High investment is required Response time Similar to packae carrier delivery with manufacturer or distributor storage. Same day delivery is possible for items stored at crossdoc site Product variety Similar to other manufacturer or distributor storage options. Service Product availability factor Customer experience Similar to other manufacturer or distributor storage options. Lower than other options due to absence of home delivery. Discrepency is less if pickup points are dense. Order visibility Essentially required but difficult Returnability Easy if pickup points can handle returns. © 2007 Pearson Education 4 -32

Retail Storage with Customer Pickup u u Inventory is stored locally at retail stores. Customers walk into the retail store or place an order online or by phone and pick it up at the retail store. Best for fast moving items Very short response time due to local storage, lower transportation cost Increased inventory and facility costs © 2007 Pearson Education 4 -33

Performance Characteristics: Retailer Storage with Customer Pickup Cost Factor Inventory Higher than all options Transportation Lower than all other options Facilities and handling Higher than other options. The increase in the handling cost at the pickup site can be large. Information High investment is required for online and phone orders Response time Same day, very quick Product variety Lower than all other options. Product availability Very expensive to provide high levels Service factor Customer experience Assesed according to customer request Order visibility Trivial for in-store orders. Essentially required for online and phone orders. Returnability Easy if pickup points can handle returns. © 2007 Pearson Education 4 -34

Comparative Performance of Delivery Network Designs (Table 4. 7) Manufacturer Storage with Direct Shipping Manufacturer Storage with In. Transit Merge Distributor Storage with Package Carrier Delivery Distributor storage with last mile delivery Manufacturer or distributor storage with pickup Retail Storage with Customer Pickup 4 4 3 2 4 1 1 1 2 3 1 4 Customer Experience 4 3 2 1 5 5 Order Visibility 5 4 3 2 6 1 Returnability 5 5 4 3 2 1 Inventory 1 1 2 3 1 4 Transportation 4 3 2 5 1 1 Facility & Handling 1 2 3 4 5 6 Information 4 4 3 2 5 1 Response Time Product Variety Product Availability © 2007 Pearson Education 4 -35

Linking Product Characteristics and Customer Preferences to Network Design Manufacturer Storage with Direct Shipping High demand product Medium demand product Low demand product Very low demand product Many product sources High product value Quick desired response High product variety Low customer effort © 2007 Pearson Education Manufacturer Storage with In-Transit Merge Distributor Storage with Package Carrier Delivery Distributor storage with last mile delivery Manufacturer storage with pickup Retail Storage with Customer Pickup -2 -1 0 +1 -1 +2 -1 0 +1 0 0 +1 +1 0 +1 -1 +2 +1 0 -2 +1 -2 -1 -1 +2 +1 0 +1 +2 +1 +1 0 -2 -1 -2 -2 -1 +1 -2 +2 +2 0 +1 0 +2 -1 +1 +2 +2 +2 -1 -2 4 -36

The Value of Distributors in the Supply Chain u Distributing Consumer Goods in India – Selling fast moving consumer goods with large # retailers, – Distributors close to retailers is crutial to reduce transportation costs and reduce response time u Distributing MRO (maintenance, repair, operations) Products – Demand is uncertain, low product value, high variety – Distributors close to customers is crutial to reduce transportation costs and reduce response time – Keep aggregate safety inventory u Distributing Electronic Components – Intel, Texas Inst. , Motorola are few suppliers for large # of original equipment manufacturers (OIMs). – 80: 20 applies so sell directly to big OIMs. – Use distributors for small OIMs. © 2007 Pearson Education 4 -37

Value of Distributors u Distributors add value to the SC when – Demand is large in small quantities – There are several manufacturers. u SC performance improves due to – Reduced inbound transportation cost due to TL shipments from manufacturer to distributor. – Reduced outbound trans. cost since several retailers are satisfied in one shipment. – Reduction in inventory costs by keeping aggregate safety stocks as compared to retailer stocks. – Stable orders from manufacturer to retailer. – Better response time than manufacturers. – High product variety at one large store © 2007 Pearson Education 4 -38

Distribution Networks in Practice u. The ownership structure of the distribution network can have as big as an impact as the type of distribution network u. The choice of a distribution network has very longterm consequences u. Consider whether an exclusive distribution strategy is advantageous u. Product, price, commoditization, and criticality have an impact on the type of distribution system preferred by customers © 2007 Pearson Education 4 -39

E-Business and the Distribution Network u. Impact of E-Business on Customer Service u. Impact of E-Business on Cost u. Using E-Business: Dell, Amazon, Peapod, Grainger © 2007 Pearson Education 4 -40

Distribution Networks in Practice u. The ownership structure of the distribution network can have as big as an impact as the type of distribution network u. The choice of a distribution network has very longterm consequences u. Consider whether an exclusive distribution strategy is advantageous u. Product, price, commoditization, and criticality have an impact on the type of distribution system preferred by customers © 2007 Pearson Education 4 -41

Summary of Learning Objectives u. What are the key factors to be considered when designing the distribution network? u. What are the strengths and weaknesses of various distribution options? u. What roles do distributors play in the supply chain? © 2007 Pearson Education 4 -42