Chapter 8: Distribution Strategies

Problem 1: Consider a large discount store. Discuss some products and suppliers for which
the discount store should use a cross-docking strategy; some products and suppliers better
suited to a direct-shipment strategy; and, finally, some products and suppliers for which
the discount store should utilize a change to; "traditional warehousing strategy."

Answer:

Cross Docking strategy is useful for the retail stores that deal with multiple products. Since they
need to maintain lowest level of inventories in their warehouses for all specific items and must
be able to ship them at the right time to their retail outlets. The best example of the
implementation of cross-docking strategy is Wal-Mart. Wal-Mart generally handles thousands of
products in their retail outlets. Hence requires cross – docking strategy for general day to day
purpose products such as soaps, cosmetics, vegetables and other food items such as bread,
cereals, dairy etc. that have reasonable perishable times.
Direct shipping is generally suited for products such as electronic items, bikes, accessories such
as school bags, laptop bags that do not have high day to day demand. Here the companies can
use the retail outlets for the promotion and sales purpose; but should be able to manage sales by
directly shipping from their warehouses. For example electronic items such as calculators, flash
– drives, air-conditioners etc. and watches. Generally items that require installation and service
could go for direct shipment.
Traditional warehousing should be utilized for products such as clothes, utensils, stationary,
books etc. These products have longer life periods and the demand can be managed easily by the
discount stores. And in case of high demand products, the company can purchase the products in
wholesale from the distributor. Also in case of traditional warehouses the warehouses are spread
across multiple locations that are logistically correct, the lead-time should not be a concern for
the discount stores.

Problem 2: Consider the following supply chains. For each one, list specific advantages of
centralized and decentralized management, and centralized and local facilities:

a. Milk and dairy products

b. Newspapers
c. MP3 players
d. Cars
e. Jeans

Answer:

a). Milk and Dairy Products:

Advantages of Centralized Management:

1. Less inventory holding cost.
2. Lesser lead-Times. Faster Transportation.
3. Accurate Demand information.
4. Advantage due to centralized risk-pooling.

Advantages due to Decentralized Management:

1. Limited inventory carrying cost.
2. Faster shipment of products to the retail outlets.
3. Retailer’s demand specific warehouses. This implies functioning of warehouses with
regards to the retailer’s demand on one to one basis.
4. Local Optimization.

Advantages of Centralized and Local Facilities:

1. Higher service levels.
2. Higher sales. And could improve product promotion and brand value.

b). Newspaper:

Advantages of Centralized Management:

1. Lesser inventory costs due to the accurate demand estimations. Since could involve in
correct estimation of demand due to available inventory models such as news-vendor.
Also, availability of historical data.
2. Wholesale discounts to the customers.

Advantages due to Decentralized Management:

1. Faster delivery time.
2. More sales. Because of higher safety stock at each retailer and distributor.
3. Can answer unexpected or variability in demand.

Advantages of Centralized and Local Facilities:

1. More customers.
2. Higher sales.

c). MP3 Players:

Advantages of Centralized Management:

1. Maximum utilization of information systems. Both in terms of shipments and ordering.
2. Lower inventory costs.
3. Lower inventory levels.
4. Reduction in over-all system costs due to Centralized risk – pooling.

Advantages due to Decentralized Management:

1. Reduced shipment times.
2. Direct shipments.
3. High service levels.
4. Higher safety stocks.

Advantages of Centralized and Local Facilities:

1. Increase in sales due to availability of products near local areas.
2. Promotion.

d). Cars:

Advantages of Centralized Management:

1. Overall reduction in system costs due to risk pooling.
2. Lower safety stocks.
3. Higher sales to the dealer at a point in time.
4. Lesser warehouses.
5. Information sharing among dealers. Good for the parent company sales.

Advantages due to Decentralized Management:

1. Higher safety stocks.
2. Higher service levels.
3. Lower lead times.
4. Higher sales.

Advantages of Centralized and Local Facilities:

1. Higher service levels. As the customer can approach other dealer in case of unavailability
of a car.
2. Optimal solution for a car making company.
3. Increase in sales.

e). Jeans:

Advantages of Centralized Management:

1. Lower inventory.
2. Lower Inventory costs.
3. Accurate demand estimations using efficient information systems.

Advantages due to Decentralized Management:

1. Faster delivery.
2. Lead-Time Reduction.
3. Higher safety stock.
4. Wholesale discounts.

Advantages of Centralized and Local Facilities:

1. Promotion of products and leverage of brand value.
2. More sales due to more customers.
3. Availability of the product nearer to the customer.

Problem 3: What companies or supply chains can you think of that use an inventory
pooling strategy?

Answer:
Inventory pooling is the capability of the companies to serve several marketplaces each with
their own uncertain demand– from a single stock of inventory (centralized warehouse, common
components, delayed differentiation, product/component substitution, e-tailing, etc.). Companies
that serve multiple products to multiple markets can use inventory pooling strategy such as
fashion apparel companies.

Problem 4: What companies or supply chains can you think of that use transshipment
strategies?

Answer:

Transshipment is the shipment of goods or containers to an intermediate destination, then to yet

another destination. Companies that require the cheapest route of bringing goods from one
location to another, use the transshipment. The transshipment strategy is recommended for
companies like IKEA (designs and sells ready-to-assemble furniture, appliances, and home
accessories) where the goods are easy to assemble or disassemble by the customers themselves.
It requires an export license to carry transshipped goods unless it comes under certain
exemptions. It usually takes place between two different countries. The transshipped goods
however do not undergo a customs check as it will deter it from being an efficient means
of transportation. This makes it more susceptible to illegal activities.

Problem 5: List two similarities between inventory pooling and transshipment strategies.
List two differences. Why might one or the other be appropriate for a particular supply
chain?

Answer:
The similarities between the inventory pooling and the transshipment strategies are:
1. Both the methodologies reduce the risk of the retailer, as the lost in sale can be
compensated either by ordering higher than required as in the case of inventory pooling
or by sharing the inventory from the other retailer as in the case of transshipment.
2. Higher service levels.
3. Lesser lead times.
4. Sharing the risks.

The differences between the inventory pooling and the transshipment strategies are:
1. No need to share information with the other dealers in the case of inventory pooling since
if there is a lack of inventory then the dealer could directly get it from the manufacturer.
But in the case of transshipment the dealers need to share information.
2. Inventory pooling involves high holding cost but the transshipment involves lesser
holding cost.

Considering the customer search concept into consideration it’s better to opt for transshipment
with decentralized system through obtaining the ‘Nash Equilibrium’. Also using the
transshipment methodology will reduce the lead times and increase the profits of the dealers.

Problem 6: Discuss how companies or dealers can encourage search.

Answer:

Companies can encourage search by estimating the percentage of customers searching for other
dealers, from the dealer who has lost the sale. This information is important for the company
because the company can estimate the estimated loss in sales for the particular dealer and could
accommodate this percentage to the orders he has made.
Dealers can encourage search to gain customer good-will in providing the car to the customer
from the other dealer (Competitor) to compensate for the lost sale, reduce lead times and
optimize the profits between the dealers through sharing their inventory information.

Problem 7: Discuss how dealers might discourage search. Why might dealers want to
discourage search.

Answer:

Dealers might discourage search, since they need to share the information with their competitors.
As it appears; due to the final sales from either of the dealers the manufacturer benefits, but the
lost in sale to one dealer is an advantage to its competitor. Moreover this is more risky to the
independent dealers or retailers when compared to the company owned retail outlets.

Problem 8: Answer the following questions about amazon case at the start of the chapter.

a) What expansion options should Amazon Europe select? Expand into other countries? Launch
Marketplace activities?

Answer a):

b) What distribution network configuration should Amazon Europe adopt?

Answer b): In Europe, as seen from the given case, Amazon has 3 independent Distribution
Centers (DCs), in the UK, Germany & France. Here, we have seen the location of the inventory
to be geographically determined. However, we believe that Amazon could adopt the concept of a
European Distribution Network (EDN), where the location of the inventory could be strategically
determined.
 Chapter 9: Global Logistics and Risk Management

Problem 1: Discuss situations in which each of these supply chains might be the appropriate choice for a
firm:
a. International distribution systems.
b. International suppliers.
c. Offshore manufacturing.
d. Fully integrated global supply chain.

Answer (a): Domestic production with international distribution is typical for small businesses that
attempt to expand to serve global markets. For instance, Mavi Jeans manufactures its products in two
facilities in Istanbul, Turkey, but sells them in more than 3,000 locations worldwide. (See Mavi Jeans
(2003).)
Answer (b): The product(s) may be so complex that the necessary expertise and resources to
manufacture different components are spread across the world. For instance, Boeing has more than
15,000 suppliers in 81 countries. (See The Boeing Company (2003).)
Answer (c): Typically, high labor cost in labor-intensive industries causes manufacturing operations to
shift offshore. For instance, consider Nike, which subcontracts its manufacturing to approximately 350
factories in the Asia-Pacific region employing nearly 400,000 workers. (See Nike (2003).)
Answer (d): A fully integrated supply chain is crucial for companies that implement flexible global
supply chain strategies in a highly variable environment, e.g., for companies that intend to shift
production from country to country in order to reduce costs or risk. The PC manufacturing industry is a
good example of this.

Problem 2: Discuss a recent example of an unknown-unknown risk that proved damaging to a supply chain.
Explain specifically how each of the following strategies might have mitigated this risk:
a. Invest in redundancy.
b. Increase velocity in sensing and responding.
c. Create an adaptive supply chain community.

Answer:

One of the previously mentioned unknown-unknown risks to a supply chain was natural
disasters. Natural disasters are difficult to predict and cannot be controlled. For example, these
days, the global supply chain is dirupted by COVID-19.
a. governments and companies should invest in redundancy. More suppliers and more
inventory can make the global manufacturing process a little less efficient, but these
redundancies increase reliability and resiliency, benefiting benefits countries, companies
and consumers
b. Increase velocity in sensing and responding
COVID-19 is not a typical risk event. The scale of its impact eclipses anything most
supply chain leaders will have seen before. The speed of the escalation requires
continuous end-to-end assessment, optimization and monitoring. Companies need to
respond rapidly and confidently to shape and execute a short-term tactical plan that will
mitigate the risks to human health and protect the functioning of global supply chains
c. Create an adaptive supply chain community
 COVID-19 has impacted the way we do business in a more significant way than any
other event in recent history. Within the supply chain, traditional ways of approaching
customer relationships, efficiency and product leadership need to be—and are being--
revisited. What we are seeing now is that the ability to adapt to our current reality and
seizing upon the opportunities being presented will be at the heart of each supply chain
stakeholder’s success. A strong supply chain addresses changing variables in how
goods are moved from one place to another. a supply chain that has been able to adapt,
change, and even transform, to assure the continuous flow of goods.

Problem 3. You are the CEO of a small electronics manufacturing firm that is about to develop a global
strategy. Would you prefer a speculative strategy, a hedge strategy, or a flexible strategy? Would your
answer to this question change if you were the CEO of a large electronics firm?

Answer:

Although the specific answer depends on the management style, resources and long-term strategies of
the firm, a hedge strategy seems more appropriate for a small firm. Following a speculative strategy
may be disastrous if the company does not have the size and financial strength to absorb potential
losses associated with a speculative strategy. On the other hand, following a flexible strategy may
require a significant amount of additional investment in infrastructure to ensure the necessary
coordination, and for the re-design of products and processes. The resources necessary to implement a
flexible strategy successfully may not be available to a small rm. Clearly, for a large firm, the financial
and resource 29 constraints may be much less relevant than for a small firm, and the global strategy to
be employed may be any of the three strategies mentioned above depending on the specifics of the
situation.

Problem 4: Discuss some examples of regional products and of true global products. What is it about the
products that makes them better suited to being regional or global products?

Answer:

Some of the factors that affect whether a product can be sold globally without modification are
discussed below:
1. Brand recognition. Some brands have developed a global image of quality and desirability that they
do not have to be customized to regional and national tastes. This is especially true for luxury brands,
such as Ferrari that sells the same cars globally.
2. Cultural differences. Some products reflect long-term traditions and/or a certain regional taste
developed over time, and fit into the regional category. A lot of food products fall here, and it is much
harder for these products to get accepted globally. For instance, it is hard to think of kabobs that are
very popular in the Middle East to be sold in global chain restaurants. An exception in this category is
pizza, for instance.
3. Standardization. In consumer electronics and computer manufacturing there are plenty of examples
of global products. The complexity of such products requires standardization throughout the world, and
makes them global products. However, note that exceptions exist. For instance, TV systems in the US
and Europe are different, and the same TV set cannot be sold in both markets. Medical products also fit
into this category as long as they satisfy differences in health regulations in different countries.

Problem 5:
You are the manager of a regional bakery. Contrast the issues you would face if your firm is located in
each of the following countries:
a. Belgium
b. Russia
c. Singapore
d. Canada
e. Argentina
f. Nigeria

Answer:

In Belgium and Canada, the most important issue would be keeping the costs down. Bakery production
is labor-intensive and requires relatively unskilled labor. However, unskilled labor costs in the First
World countries are typically very high compared to the rest of the world. In the emerging nations, such
as Russia, Singapore and Argentina, logistics issues would be most important since the necessary
infrastructure may not be in place. On-time delivery of bakery products is crucial because they are
perishable items, and there is a time window they need to reach the bakeries in order to be sold. For
instance, if the fresh products arrive at noon, instead of early in the morning, most of these items may
be left on the shelves at the end of the day. In a Third World country, such as Nigeria, in addition to the
logistics problems mentioned above for the emerging nations, environmental conditions may not be
sufficient to ensure a healthy production of bakery products. For instance, water may not be clean, etc.

Problem 6:
Answer these questions about the article at the beginning of this chapter:
(a) Other than a need to expand, what other reasons would Wal-Mart have for opening stores globally?
(b) Why would it be beneficial for Wal-Mart to have suppliers in different countries?
(c) Why would Wal-Mart want strong centralized control of its stores? Why would Wal-Mart want strong
local control of stores?
(d) What pitfalls and opportunities, other than those mentioned in this article, will Wal-Mart face over the
next few years?

Answer (a): Possible reasons for Wal-Mart to start international operations include:
1. Domestic revenues do not increase at a pace Wal-Mart wants them to. Therefore, Wal-Mart intends
to achieve a high growth rate in foreign countries to hedge against the slow business in the domestic
markets.
2. A rival European chain, Carrefour SA, has already a strong presence in the South American market.
Wal-Mart could lose the market totally if it did not respond quickly.
3. Foreign operations would also help Wal-Mart identify potential new low-cost suppliers for domestic
operations.
Answer (b): Having many suppliers in different countries would enhance Wal-Marts everyday low
pricing formula by allowing it to hedge against cost increases due to economic and/or political
conditions in a given country.
Answer (c): Strong centralized control is helpful for aligning local operations with the overall corporate
objectives. Additionally, Wal-Marts years of domestic expertise in retail operations, e.g., distribution
systems, can best be leveraged to improve distribution in South America if strong centralized control is
implemented. On the other hand, it may be impossible to analyze customer preferences and understand
cultural differences unless local managers control certain aspects of the business.
Answer (d): In general, political instability is a major concern in South American countries. For instance,
due to the recent downfall of the Argentine economy, Wal-Mart may experience difficulties if the
Argentine government starts to employ policies that favor domestic producers rather than foreign
companies. Also, if the dollar continues to gain in value against major South American currencies such as
the Argentine Peso and Brazilian Real, American exports into these countries will be expensive
compared to their local competitors, which will negatively impact Wal-Marts margins.