1. Elements of Channel Design: Logistics Distribution Channel Strategy The Sara Lee Case E-266 February 2000

2. Key Case Issues Determining channel location for speculative inventories to serve retail establishments –Chain distribution center warehouse –Supplier warehouse –Both? Difficulty in negotiating logistic changes to minimize total channel costs Need for industry wide standards to minimize logistic costs

3. Generalizations I Postponing (the shipment of goods to transit inventories until they have been shipped) shifts magnifies upstream logistic costs Postponement may reduce, standardize downstream service levels The adoption of JIT logistic systems creates conflict until roles, costs can be stabilized Power in the channel may dictate logistics system structure rather than economics

4. Generalizations II Staple goods are those typically sold over longer periods of time with steady demand Fashion goods are those with irregular or unpredictable demand The closer a good approaches to a staple category type, the less the need for a retail speculative inventory and the greater the potential for an effective JIT logistic systems

5. Speculative Inventories Post sale inventory: Traditional inventory system in which goods are held for sale to first buyer Provide immediate availability Spec inventories incur heavy costs –Major investments for goods, space, labor –Especially when serving small markets (low turns) Upstream spec inventories help diminish downstream inventories by reducing order cycle time

6. A Speculative, Logistic Channel Consumers Retailers Assemblers Parts Producers Deals!!! (Gross Margin Driven) Promotions!!! SI SI = Speculative inventory, buffer stock Local Optimi- zation SI

7. Transit Inventories Definition: Pre-sold inventories comprised of goods whose final destinations have been predetermined Transit inventories are: –typically cross-docked, preticketed –minimize handling, picking expenses –minimize holding costs –may be readily outsourced to transport agencies –require close coordination among channel members

8. Sara Lee’s Fast Flow System Eliminates Hanes spec inventory, picking Shifts SI forward to the retailers’ distribution center (DC) –Hanes benefits from reduced inventories, labor costs, and lesser shipping time from Davie –Eliminates Hanes’ need to mark, track sorted cases Store resupply depends upon retailer’s SI inventory at the DC where repacking occurs Increases inventory costs borne by retailer although stock outs may be reduced

9. Valu-Rite Prepack System Eliminates the need for DC picking and sorting by creating a transit inventory Shifts speculative stocks up the channel –Nearby warehouse stocks no longer available –May cause buyer panic buying when forecasts err at the individual store –Poor forecasts force buyers to buy more frequently and erratically –May increase quantity of goods held at the retail store

10. Competing Channel Designs Puerto Rico Mfg Florida Davie Pick-Pack Chain, DC Pick-Pack Florida-Solid Case Pack Chain, DC Cross Dock EUI Chain, DC Pick-Pack Florida Cross Dock Solid case pack Assorted packs Unipack

11. Supplier Service and Costs I Lower logistic service reduces upstream costs –Direct ship has lowest upstream costs Þ Requires large volume orders Þ Requires longer order cycle –Solid pack channel provides intermediate level of costs, permits smaller orders –Pick-pack channel provides highest costs, but best assortment, time service to EUI

12. Supplier Service and Costs II Shorter factory order cycles –Raise production costs –Reduce need for EUI spec inventory Greater EUI distance from channel factory –Increases order cycle time –Raises need for EUI spec inventory –Shifts spec inventory closer to the end-user –Distance trade-off emerges with opportunity for major reductions in production costs

13. A Quick Response Channel Reduces or eliminate speculative inventories at the EUI and elsewhere in lower channel by: –smaller orders, more frequent deliveries –shorter lead times Leads to shared data, data system protocols –to reduce order transmission lag, errors –better forecasting of consumer demand Drives channel logistics from a common channel view of consumer purchase rates

14. Logistic Conflicts Both channel parties focus upon minimizing costs to their segment of the channel Sara Lee built Fast Flow to provide solid (un-sorted) cases to EUI to reduce its costs –Shifts spec inventory role largely to the EUI –EUI order cycle time must fit manufacturing cycle (or inventory) –Suitable only for volume buyers Delivery of assorted cases to its DC for cross docking reduces inventory costs, increases need for rapid response

15. Relationships in the Soft Goods Channel Intensively distributed goods characterized by multiple relationships –Suppliers sell to many competing EUI –EUI buy from competing suppliers Relationships tend to be governed by: –Short run benefits provided by the supplier –Extensive negotiation over price and discounts –Limited loyalties Negotiations depend heavily upon the relative power of the parties

16. Implications for Governance Industry standard procedures, containers, EDI, bar coding, are often required to reduce problems for automated systems Each channel member oriented to system specialized to its own interests, history Resolution of problems may require a shift to more closed types of distribution channels with tighter controls, close collaboration

17. Implications for Opportunism Opportunism: the exploitation of a channel relationship by actions detrimental to the interests of the less powerful Possible actions by a powerful retailer: –Orders may deviate radically from forecast –Increased variance in order arrival rate –Charging supplier for transit operator failure JIT with retail DC cross-docking may increase supplier vulnerability