1. Slides 6 Distribution Strategies
Global Supply Chain Management
Distribution Strategies

2. Distribution Strategies
Introduction
Various distribution strategies, and the opportunities and challenges associated with these strategies.
Two fundamental distribution strategies:
Items can be directly shipped from the supplier or manufacturer to the retail stores or end customer
Use intermediate inventory storage points (typically warehouses and/or distribution centers).
Issues with warehouses and distribution centers
The inventory policy and associated inventory turn ratio
The number of warehouses or distribution centers
Ownership: a single firm or a variety of firms
Internally managed vs. outside
Distribution Strategies

3. Direct Shipment Strategies
Advantages:
Retailer avoids expenses of operating a distribution center
Lead times are reduced
Disadvantages:
Risk-pooling (location, time) effects are negated
Transportation costs increase, less EoS advantages
Common example:
Direct shipments to retailers are prevalent in perishable goods (grocery industry), where lead time and little handling is critical
Distribution Strategies

4. Intermediate Inventory Storage Point Strategies
Three generic strategies with IISPs:
Traditional warehousing strategy
distribution centers and warehouses hold stock/inventory
provide their downstream customers with inventory as needed.
Cross-docking strategy
warehouses and distribution centers serve as transfer points for inventory
no inventory is held at these transfer points.
Centralized pooling and transshipment strategies
retailers hold stock and transship when being asked to do so
useful when there is a large variety of different products
Distribution Strategies

5. Traditional Warehousing
Inventory management is critical (Q, R)
Risk pooling option (location, time) is a key advantage
Associated decisions
Centralized vs Decentralized Management
Centralized vs Decentralized Facilities (often called Central versus Local)
Distribution Strategies

6. Centralized vs Decentralized Management
Decentralized system
Each facility identifies its most effective strategy without considering the impact on the other facilities in the supply chain.
Leads to local optimization.
Centralized system
Decisions are made at a central location for the entire supply network.
Typical objective: minimize the total cost of the system subject to satisfying some service-level requirements.
Centralized control leads to global optimization.
At least as effective as the decentralized system.
If system cannot be centralized ?
It is often helpful to form partnerships in order to approach the advantages of a centralized system.
Distribution Strategies

7. Central vs. Local Facilities
Centralized facilities as opposed to Local
Requires fewer warehouses and distribution centers
Facilities are located further from customers.
Other fact
Safety stock: lower with centralization
Service level: higher service level for the same inventory investment with centralization
Overhead costs: higher in decentralized system
Customer lead time: response times lower in the decentralized system
Transportation costs: not clear. Consider outbound and inbound costs.
Distribution Strategies

8. Distribution Strategies
A Hybrid Decision
For some products we can use a centralized strategy, for others a de-centralized one
Varying degrees of centralization and localization due to the varying levels of advantages and disadvantages
So: not an either or decision
Distribution Strategies

9. Distribution Strategies
Cross-Docking
Popularized by Wal-Mart
Warehouses function as inventory coordination points (DCs) rather than inventory storage points:
Goods arriving from the manufacturer:
are transferred to vehicles serving the retailers
are delivered to the retailers as rapidly as possible.
See:
Goods spend little time in storage at warehouse
Usually less than half a day
Limits inventory costs
They are pure DCs, hardly without a warehouse.
Distribution Strategies

10. Issues with Cross-Docking
Requires a significant start-up investment
Is difficult to manage
Supply chain partners must be linked with advanced information systems for coordination
Requires fast and responsive transport systems
Good demand forecasts are critical
And so is the sharing of that information
Effective only for large distribution systems
Sufficient volume every day to allow shipments of fully loaded trucks from the suppliers to the warehouses.
Sufficient demand at retail outlets to receive full truckload quantities
Distribution Strategies

11. Inventory Pooling at GM
GM experienced 10% loss of sales because cars were not available (Cadillacs)
A program was introduced
To improve customer service
To boost sales
About 1,500 Cadillacs parked at a regional distribution center in Orlando were waiting delivery to Florida dealers within 24 hours
This is an example of Inventory Pooling
Dealers have inventories of second hand cars and typically pool them
Distribution Strategies

12. Other Inventory Pooling Issues
Will GM sell more cars to GM dealers?
Total number of cars ordered by dealers will not necessarily increase, even as customer service increases.
What about the dealers?
Dealers have access to more inventory
Potentially can sell more.
It levels out the playing field between dealers.
Small dealers would favor such a system, the competitive advantage of large dealers is wiped out
Distribution Strategies

13. Centralized Pooled Systems Perform Better
For the same overall inventory level, a centralized pooled system provides:
higher service level
higher prices, higher sales volume -> higher income
Push-pull supply chain
Moving from a push supply chain
Dealers have to order before the demand is realized
To a push-pull supply chain
Dealers pull from regional distribution centers upon need.
Implications:
End consumers will see better customer service
And more cars are in fact available to them.
Distribution Strategies

14. Risk Pooling Aggregating demand across locations through centralized management
Total number of cars when inventory is centrally pooled
Number of cars when inventory is not centrally pooled
Expected demand
Realized
demand
Unsold cars
Realized demand 80 76 4 10 8 2 12 -2 5 13 -3 14 -4 6
Distribution Strategies

15. Distribution Strategies
Transshipment
Shipment of items between different facilities at the same level in the supply chain to meet some immediate need
Occurs mostly at the retail level
Can be achieved:
with advanced information systems
Shipping costs are reasonable
Retailers have same owner
Example:
Distribution Strategies

16. Retailers with different owners
May not want to do transshipments
Integration strategies may have to be adopted by the distributor
Not clear policy regarding inventory levels
A retailer’s strategy will depend on its competitors’ strategies, competitors can benefit from you holding stock
Distribution Strategies

17. Which Strategy to Adopt?
Different approaches for different products
Factors:
Customer demand, its variability
Service level vs. costs (for example transportation and inventory costs)
Lead time, is associated with both above
Product being highly differentiated or not
Economies of scale in transportation/storage
Distribution Strategies

18. Summary of Distribution Strategies
Strategy →
Attribute ↓
Direct shipment
Cross-docking
Inventory at warehouses
Risk pooling
Take advantage
Transportation costs
Reduced inbound costs
Holding costs
No warehouse cost
No holding costs
Allocation
Delayed
Distribution Strategies

19. Distribution Strategies
Summary
Critical to implement effective distribution strategies regardless of the total level of supply chain integration.
Strategies:
direct shipping
warehouses or distribution centers
Traditional warehousing strategy
Cross-docking strategy
Centralized pooling and transshipment strategies
Related decisions
Should there be many or only a few warehouses or DC’s?
Should inventory be held at these locations, or transshipped?
As a retailer, does it make sense to participate in a centralized inventory pooling system, in transshipments?
Distribution Strategies