Distribution & Inventory Strategies

1. Distribution & Inventory Strategies ISQA 458/558 Mellie Pullman

2. Topics • Distribution Strategies • Bricks & Mortar • Internet Systems • Inventory & Shipping Strategies • Strategies for mixing Internet & Traditional Retail Channels • Strategies for delivering Internet Orders

3. Vision of the Internet • Promise of lowering of prices to the customer • In theory, why should goods & service prices be lower to the consumer from an internet-based firm relative to a traditional “brick & mortar” firm? • Promise of more variety • Implications that retail stores would be crushed.

4. Cost Differences • “Bricks” • Taxes • Inventory and personnel • Logistics

5. Inventory • Safety stock for N “brick” stores • Say we want 95% of customers to find what they want during an order cycle L (z=1.645) • Safety stock for 1 Store (units)= z sL Where sL is the standard deviation of demand during that order cycle or lead time • Safety stock for N Stores = N z sL

6. One Central Location replacing N stores worth of safety stock (“square root law”) • Variance of demand of the one central location is: • (sL)2 (central)= (sL)2 (store 1)+ (sL)2 (store 2)+ (sL)2 (store 3)+…+ (sL)2 (store N) • (sL)2 (central)= N(sL)2any one store • (sL) (central)= N0.5(sL) any one store • Safety stock= z N0.5(sL) any one store

7. Example: Consider replacing a chain of 1000 stores with one website • Given a 95% Service level on Salty Snack that sells a mean of 15 packages, standard deviation of 3 during the lead time. • Stores: • Stocking 15 * 1000 for mean demand • Safety stock = z sL (N) = 1.645 *3* 1000 or total of 19,935 packages stocked • Internet: • Same 15,000 stocking for mean demand • Safety stock = z sL Sqrt (N) = 1.645*3*31.6 = 156 or total of 15,156 packages stocked

8. Other Inventory Issues • Inventory Record Accuracy • retailers hold more inventory due to uncertainty of actual inventory position • check any CD or book store to see how well system matches actual (“phantom stock-outs”) • customer theft • customer misfiling • shipment miscounts • phantom stock-outs are 19% of stock-outs • Most successful retailers have inaccurate records on 71% of products

9. Personnel • Fewer personnel needed on website • Store may only need 5 people on average but 7 for busy time of day. • Utilization =5/7 or 71% on average • What’s the benefit of combining all stores on one website?

10. Logistics/Distribution Strategies • Traditional • Arborescent distribution strategy • flow going from fewer and larger facilities to more numerous and smaller facilities • cost per unit shipping is cheap due to bulk • Internet Prototype • products sent directly to customers often one at a time

11. Traditional versus Internet distribution strategies

12. Bricks Internet Cost Comparisons

13. Emerging Model: Combined internet/traditional • Hard to integrate the 2 systems • Distribution Centers • Trad: Forklift friendly: wide & high aisles (40 ft) for pallet loads, use of palletizers, integration with trucks, etc. • Internet: Pick-and-pack or human friendly: narrow and short aisles, open boxes, and made for picking one item at a time. Packing individual items for UPS pickup.

14. Combined Internet and Traditional Retailers

15. Options for Delivering Internet Orders “last mile” or to customer’s home is highly expensive !