Distribution & Inventory Strategies ISQA 458/558 Mellie Pullman

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

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.

Cost Differences “Bricks” Taxes Inventory and personnel Logistics

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  L Where  L is the standard deviation of demand during that order cycle or lead time –Safety stock for N Stores = N z  L

One Central Location replacing N stores worth of safety stock (“square root law”) –Variance of demand of the one central location is: (  L ) 2 (central)= (  L ) 2 (store 1)+ (  L ) 2 (store 2)+ (  L ) 2 (store 3)+…+ (  L ) 2 (store N) (  L ) 2 (central)= N(  L ) 2 any one store (  L ) (central)= N 0.5 (  L ) any one store –Safety stock= z N 0.5 (  L ) any one store

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  L (N) = *3* 1000 or total of 19,935 packages stocked –Internet: Same 15,000 stocking for mean demand Safety stock = z  L Sqrt (N) = 1.645*3*31.6 = 156 or total of 15,156 packages stocked

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

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?

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

Traditional versus Internet distribution strategies

Cost Comparisons BricksInternet

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.

Combined Internet and Traditional Retailers

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