Chapter 4 Designing the Distribution Network in a Supply Chain

1. Chapter 4Designing the Distribution Network in a Supply Chain Supply Chain Management(3rd Edition)

2. Outline • The Role of Distribution in the Supply Chain • Factors Influencing Distribution Network Design • Design Options for a Distribution Network • The Value of Distributors in the Supply Chain • Distribution Networks in Practice • Summary of Learning Objectives

3. Goal Given: • Product Characteristics • Markets Served What is the appropriate distribution network?

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

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

6. Factors InfluencingDistribution Network Design • Distribution network performance is evaluated along two dimensions at the highest level: • Customer needs that are met • Cost of meeting customer needs • Distribution network design options must therefore be compared according to their impact on customer service and the cost to provide this level of service

7. Factors InfluencingDistribution Network Design • Elements of customer service influenced by network structure: • Response time • Product variety • Product availability • Customer experience • Order visibility • Returnability • Supply chain costs affected by network structure: • Inventories • Transportation • Facilities and handling • Information Priority among these is important!

8. Service and Number of Facilities (Fig. 4.1) Response Time Number of Facilities

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

10. Inventory Costs and Numberof Facilities (Fig. 4.2) Inventory Costs Number of facilities

11. 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.

12. Transportation Costs andNumber of Facilities (Fig. 4.3) Transportation Costs Number of facilities

13. Facility Costs and Numberof Facilities (Fig. 4.4) Facility Costs Number of facilities

14. Total Costs Related to Number of Facilities Total Costs Total Costs Facilities Inventory Transportation Number of Facilities

15. Variation in Logistics Costs and Response Time with Number of Facilities (Fig. 4.5) Response Time Total Logistics Costs Number of Facilities

16. Key Decisions in Designing a Distribution Network • Will product be delivered to the customer location or picked up from a preordinated site? • Will product flow through an intermediary location?

17. Design Options for a Distribution Network • Manufacturer Storage with Direct Shipping • Manufacturer Storage with Direct Shipping and In-Transit Merge • Distributor Storage with Carrier Delivery • Distributor Storage with Last Mile Delivery • Manufacturer or Distributor Storage with Consumer Pickup • Retail Storage with Consumer Pickup

18. Manufacturer Storage withDirect (Drop) Shipping (Fig. 4.6) Manufacturer Retailer Customers Product Flow Information Flow

19. Drop Shipping • Centralization is beneficial if there is high variety, high value items with low and unpredictable demand. • Centralized inventories leading to high product availability, low inventory levels (higher inventory turnovers), better forecasts. • Manufacturer can postpone customization until order arrival. • 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

20. Performance Characteristics:Drop Shipping

21. In-Transit Merge Network (Fig. 4.7) Factories In-Transit Merge by Carrier Retailer Customers Product Flow Information Flow

22. In-Transit Merge Network • 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. • Beneficial for high value items with low to medium demand, 4-5 sources. • Main advantage over drop shipping: Lower transportation cost and improved customer experience!

23. Performance Characteristics:In-Transit Merge Network

24. Distributor Storage withCarrier Delivery (Fig. 4.8) Factories Warehouse Storage by Distributor/Retailer Customers Product Flow Information Flow

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

26. Performance Characteristics:Distributor Storage with Carrier Delivery

27. Distributor Storage withLast Mile Delivery (Fig. 4.9) Factories Distributor/Retailer Warehouse Customers Product Flow Information Flow

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

29. Performance Characteristics:Distributor Storage with Last Mile Delivery

30. Manufacturer or Distributor Storage with Customer Pickup (Fig. 4.10) Factories Cross Dock DC Retailer Pickup Sites Customers Customer Flow Product Flow Information Flow

31. Manufacturer or Distributor Storage with Customer Pickup • 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 • Inventory and transportation costs are low due to appropriate aggregation

32. Performance Characteristics:Manufacturer or Distributor Storage with Customer Pickup

33. Retail Storage with Customer Pickup • 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

34. Performance Characteristics:Retailer Storage with Customer Pickup

35. Comparative Performance of Delivery Network Designs (Table 4.7) Retail Storage with Customer Pickup 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 1 4 4 3 2 4 Response Time Product Variety 4 1 1 2 3 1 Product Availability 2 3 4 1 1 1 5 5 Customer Experience 4 3 2 1 5 1 4 3 2 6 Order Visibility 1 5 5 4 3 2 Returnability 4 1 1 2 3 1 Inventory 1 4 3 2 5 1 Transportation 6 1 2 3 4 5 Facility & Handling 1 3 Information 4 4 2 5

36. Manufacturer Storage with Direct Shipping 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 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 Linking Product Characteristics and Customer Preferences to Network Design -2 -1 0 +1 -1 +2 -1 0 +1 0 0 +1 +1 0 +1 -1 +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

37. The Value of Distributorsin the Supply Chain • 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 • 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 • 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.

38. Value of Distributors • Distributors add value to the SC when • Demand is large in small quantities • There are several manufacturers. • 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

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

40. E-Business and the Distribution Network • Impact of E-Business on Customer Service • Impact of E-Business on Cost • Using E-Business: Dell, Amazon, Peapod, Grainger

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

42. Summary of Learning Objectives • What are the key factors to be considered when designing the distribution network? • What are the strengths and weaknesses of various distribution options? • What roles do distributors play in the supply chain?