Chapter 4 Designing the Distribution Network in a Supply Chain Supply Chain Management Chapter 4 Designing the Distribution Network in a Supply Chain

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 Choice of distribution network can achieve supply chain objectives from low cost to high responsiveness Examples: Wal-Mart, Dell, Proctor & Gamble, Grainger

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

Factors Influencing Distribution 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

The Cost-Response Time Frontier Hi Local FG Mix Regional FG Local WIP Cost Central FG Central WIP Central Raw Material and Custom production Notes: As the customer is willing to tolerate longer lead times, the pull phase of the supply chain increases. The supply chain design must try and exploit this increase by centralizing assets to the extent possible. Local finished goods: Borders (Immediate response) Mix: W.W. Grainger (same day to next day response) Regional: McMaster Carr (next day response) Local WIP: PC assembler in India Central FG/WIP: Dell Central Raw Material and custom production: furniture manufacture (Amish in particular) Custom production with raw material at suppliers Low Low Hi Response Time

Service and Number of Facilities (Fig. 4.1) Notes: Increasing the number of facilities moves them closer to the end consumer. This reduces the response time. As Amazon has built warehouses, the average time from the warehouse to the end consumer has decreased. McMaster-Carr provides 1-2 day coverage of most of the U.S from 6 facilities. W.W. Grainger is able to increase coverage to same day delivery using about 370 facilities. Response Time

Where inventory needs to be for a one week order response time - typical results --> 1 DC Customer DC

Where inventory needs to be for a 5 day order response time - typical results --> 2 DCs Customer DC

Where inventory needs to be for a 3 day order response time - typical results --> 5 DCs Customer DC

Where inventory needs to be for a next day order response time - typical results --> 13 DCs Customer DC

Where inventory needs to be for a same day / next day order response time - typical results --> 26 DCs Customer DC

Inventory Costs and Number of Facilities (Fig. 4.2) Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities. Number of facilities

Transportation Costs and Number of Facilities (Fig. 4.3) Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities. Number of facilities

Facility Costs and Number of Facilities (Fig. 4.4) Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities. Number of facilities

Total Costs Related to Number of Facilities Inventory Notes: Total costs decrease and then increase as we increase the number of facilities. The responsiveness improves as we increase the number of facilities. A supply chain should always operate above the lowest cost point. Operating beyond that point makes sense if the revenue generated from better responsiveness exceeds the cost of better responsiveness. Transportation Number of Facilities

Variation in Logistics Costs and Response Time with Number of Facilities (Fig. 4.5) Total Logistics Costs Notes: Total costs decrease and then increase as we increase the number of facilities. The responsiveness improves as we increase the number of facilities. A supply chain should always operate above the lowest cost point. Operating beyond that point makes sense if the revenue generated from better responsiveness exceeds the cost of better responsiveness. Number of Facilities

Cost Buildup as a Function of Facilities Total Costs Percent Service Level Within Promised Time Cost of Operations Facilities Inventory Notes: Transportation Labor Number of Facilities 5-17

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 Selecting a Distribution Network Design

Manufacturer Storage with Direct Shipping Retailer Customers Information Flow Product Flow Aggregation of inventories, Opportunity to postpone customization, Keep inventories at the component level, Low facility costs, Easy to provide variety and availability High transportation costs, Long response times, High investment in information systems

In-Transit Merge Network Factories In-Transit Merge by Carrier Retailer Customers Product Flow Information Flow

Distributor Storage with Carrier Delivery Factories Warehouse Storage by Distributor/Retailer Customers Product Flow Information Flow

Distributor Storage with Last Mile Delivery Factories Distributor/Retailer Warehouse Customers Product Flow Information Flow

Manufacturer or Distributor Storage with Customer Pickup Factories Cross Dock DC Retailer Pickup Sites Customers Customer Flow Product Flow Information Flow

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 1 4 4 3 2 4 Product Variety 4 1 1 2 3 1 Product Availability 2 3 4 1 1 1 Customer Experience 5 5 4 3 2 1 5 Order Visibility 1 4 3 2 6 Identify the best and worst network along various dimensions. Response time: (B) retail stores (W) Manufacturer storage with direct ship Product variety: (W) retail stores (B) Manufacturer storage with direct ship Product availability: (W) retail store (B) Manufacturer storage Inventory: (W) retail store (B) manufacturer storage Transportation: (B) retail store (W) last mile delivery Facility: (W) retail store (B) manufacturer storage Handling: (W) Distributor storage with last mile delivery (B) Information: Retail stores may be less complex; manufacturer storage with pickup may be very complex Returnability 1 5 5 4 3 2 Inventory 4 1 1 2 3 1 Transportation 1 4 3 2 5 1 Facility & Handling 6 1 2 3 4 5 Information 1 4 4 3 2 5

Linking Product Characteristics and Customer Preferences to Network Design Low customer effort High product variety Quick desired response High product value Many product sources Very low demand product Low demand product Medium demand product High demand product Manufacturer storage with pickup Distributor storage with last mile delivery Distributor Storage with Package Carrier Delivery Manufacturer Storage with In-Transit Merge Manufacturer Storage with Direct Shipping Retail Storage with Customer Pickup +2 -2 -1 +1 -1 +1 -1 +1 -1 +1 +1 -1 +1 -2 +2 +1 -2 +1 +1 -1 -1 +2 +1 When designing the delivery network we should account for product and market characteristics. High demand products will have transportation cost play a significant role. Use network with good transportation cost (retail stores) Very low demand products will have inventory play a significant role. Use network with low inventory costs (direct shipping) Many product sources: transportation + information plays a role. Distributor storage with package carrier Few product sources but high customization: manufacturer storage with merge in transit High product variety: inventory cost will be significant. Use distributor storage Low customer effort: Distributor storage with package carrier delivery or last mile delivery depending upon desired response time -1 +2 +1 +1 -2 +2 -2 -2 -1 +1 -2 -1 +2 +1 +2 -2 +1 +2 +2 +2 -1

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

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