Objectives of Chapters 4, 5, 6

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1 Objectives of Chapters 4, 5, 6 Designing the SC Network: (Ch4,5,6) Ch4 Explores how to design a distribution network Ch5 Considers facility related decisions to be made when design a SC network. Ch6 Methodologies for evaluation of network design decisions under uncertainty are discussed. 4-

2 Supply Chain Management (3rd Edition) Chapter 4 Designing the Distribution Network in a Supply Chain 4-2

3 Outline The Role of Distribution in the Supply Chain Factors Influencing Distribution Network Design Design Options for a Distribution Network Distribution Networks in Practice 4-3

4 The Role of Distribution in 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-0.5% of the US economy and 20% of the cost of manufacturing Choice of distribution network can achieve supply chain objectives from low cost to high responsiveness Examples: Wal-Mart, Dell, Proctor & Gamble Appropriate choice of distribution network results in customer being satisfied at the lowest price possible Different performance measures need to be considered when designing the distribution network 4-4

5 Factors Influencing Distribution Network Design Distribution network performance 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 4-5

6 Factors Influencing Distribution Network Design Elements of customer service influenced by network structure: Response time Product variety Product availability Customer experience Time to market Order visibility Returnability Supply chain costs affected by network structure: Inventories Transportation Facilities and handling Information 4-6

7 Service and Number of Facilities (Fig. 4.) Number of Facilities Response Time 4-7

8 Inventory Costs and Number of Facilities (Fig. 4.2) Inventory Costs Number of facilities 4-8

9 Transportation Costs and Number of Facilities (Fig. 4.3) Transportation Costs Inbound vs. outbound transportation costs Number of facilities 4-9

10 Facility Costs and Number of Facilities (Fig. 4.4) Facility Costs Number of facilities 4-0

11 Total logistics Costs Related to Number of Facilities Total Costs Total Costs Facilities Inventory Transportation Number of Facilities 4-

12 Variation in Total Logistics Costs and Response Time with Number of Facilities (Fig. 4.5) Response Time Total Logistics Costs Number of Facilities 4-2

13 Design Options for a Distribution Network Managers must make two key decisions when designing a distribution network: Will the product be delivered to the customer location or picked up from a preordained site? Will product flow through an intermediate location? Six distinct distribution network designs may be used to move product from factory to customer 4-3

14 Design Options for a Distribution Network. Manufacturer Storage with Direct Shipping 2. Manufacturer Storage with Direct Shipping and In- Transit Merge 3. Distributor Storage with package Carrier Delivery 4. Distributor Storage with Last Mile Delivery 5. Manufacturer or Distributor Storage with Consumer Pickup 6. Retail Storage with Consumer Pickup 4-4

15 Manufacturer Storage with Direct Shipping- aka Drop-Shipping (Fig. 4.6) Manufacturer Retailer Customers Product Flow Information Flow 4-5

16 Manufacturer Storage with Direct Shipping Supply chain costs affected by this network structure: Inventories Lower costs because of aggregation. (Low demand high value items, postponed customization) Transportation Higher transportation costs because of disaggregate shipping + long distances. Facilities and handling Lower facility costs because of aggregation and centralized inventory. Some saving on handling if small shipments capability. Information Significant investment in information infrastructure to integrate manufacturer and retailer. Elements of customer service influenced by this network structure: Response time: Long( to 2 weeks) because of long distance and two stage for order processing. Multiple partial shipments complicate receiving. Product variety: Easy to provide a very high variety Product availability: Easy to provide a high level of product availability because of aggregation at manufacturer Customer experience: Home delivery but possible partial shipments Order visibility: More difficult but very important for customers Returnability: Expensive and difficult to implement 4-6

17 In-Transit Merge Network (Fig. 4.7) Factories Retailer In-Transit Merge by Carrier Customers Product Flow Information Flow 4-7

18 In-Transit Merge Network Supply chain costs affected by this network structure: Inventories: Similar to drop-shipping Transportation: Somewhat lower costs than drop-shipping Facilities and handling: Handling costs higher than drop-shipping at carrier; receiving cost lower at customer. Overall somewhat more expensive. Information: Investment is somewhat higher than for drop-shipping. Elements of customer service influenced by this network structure: Response time: Similar or marginally higher than drop-shipping Product variety: Similar to drop shipping Product availability: Similar to drop shipping Customer experience: Better because single delivery Order visibility: Similar to drop shipping Returnability: Similar to drop shipping 4-8

19 Distributor Storage with Carrier Delivery (Fig. 4.8) Factories Warehouse Storage by Distributor/Retailer Customers Product Flow Information Flow 4-9

20 Distributor Storage with Carrier Delivery Supply chain costs affected by this network structure: Inventories: Higher than manufacturer storage. Transportation: Lower than manufacturer storage. Facilities and handling: Somewhat higher than manufacturer storage. Not appropriate for extremely slow moving items. Information: Simpler infrastructure compared to manufacturer storage. Elements of customer service influenced by this network structure: Response time: Faster than manufacturer storage Product variety: Lower than manufacturer storage Product availability: Higher cost to provide the same level of availability as manufacturer storage Customer experience: Better Order visibility: Easier Returnability: Easier 4-20

21 Distributor Storage with Last Mile Delivery (Fig. 4.9) Factories Distributor/Retailer Warehouse Customers Product Flow Information Flow 4-2

22 Distributor Storage with Last Mile Delivery Supply chain costs affected by this network structure: Inventories: Higher than distributor storage with package delivery Transportation: Very high cost (low economies of scale). Higher than any other distribution option. Facilities and handling: Higher than manufacturer storage or distributor storage with package carrier delivery. Information: Similar to distributor storage with carrier delivery, but require delivery scheduling. Elements of customer service influenced by this network structure: Response time: Very quick Product variety: Somewhat less than distributor storage with package carrier delivery. Product availability: More expensive to provide availability than any other option. Customer experience: Very good. Time to market: Slightly higher than distributor storage with package carrier delivery. Order visibility: Easy to implement Returnability: easier to implement than previous options. 4-22

23 Manufacturer or Distributor Storage with Customer Pickup (Fig. 4.0) Factories Retailer Cross Dock DC Pickup Sites Customers Customer Flow Product Flow Information Flow 4-23

24 Manufacturer or Distributor Storage with Customer Pickup Supply chain costs affected by this network structure: Inventories: Can match any other option, depending on the location of inventory Transportation: lower than the use of package carriers Facilities and handling: High is new facilities are used, low if existing facilities. Increased handling cost at pick up locations Information: Significant investment Elements of customer service influenced by this network structure: Response time: Similar to package delivery with manufacturer or distributor storage. Product variety: Similar to other manufacturer or distributor storage options Product availability: Similar to other manufacturer or distributor storage options Customer experience: Lower than other options (no home delivery) Order visibility: difficult Returnability: somewhat easier 4-24

25 Retail Storage With Customer Pickup Traditional type of SC. Inventory stored locally at retail stores. Customer walk into the store or place an order over the phone/internet and pick it up at the retail store. 4-25

26 Retail Storage With Customer Pickup Supply chain costs affected by network structure: Inventories: Higher than all other options Transportation: Lower than all other options Facilities and handling: Higher than all other options Information: Some investment for online and phone orders Elements of customer service influenced by network structure: Response time: same day Product variety: Lower than all other options Product availability: More expensive to provide than all other options Customer experience: Depending on customer Order visibility: Trivial for in-store orders. Difficult but essential for phone and online orders. Returnability: Easier than other options. 4-26

27 Selecting a Distribution Network Design One or a combination of these networks may be chosen depending on: Product characteristics Network requirements The strategic position that the firm is targeting 4-27

28 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 storage with pickup Response Time Product Variety Product Availability Customer Experience Order Visibility Returnability Inventory Transportation Facility & Handling Information corresponds to the strongest performance and 6 to the weakest 4-28

29 Linking Product Characteristics and Customer Preferences to Network Design 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 storage with 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 Key +2: very suitable; +:somewhat suitable; 0: neutral; -: somewhat unsuitable; -2=very unsuitable 4-29

30 E-Business and the Distribution Network Impact of E-Business on Customer Service Response time Product variety Product availability Customer experience Faster time to market Order visibility Returnability Direct sales to customers Flexible pricing, product portfolio, and promotions Efficient funds transfer Impact of E-Business on Cost Using E-Business: Dell, Amazon, Peapod, Grainger 4-30

31 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 Integrate the internet with the existing physical network. 4-3

32 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? Understand how e-business has affected both customer service and costs in a SC 4-32

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