Supply Chain Management

Module 2 Designing the Supply Chain Network

Outline
The Role of Distribution in the Supply Chain Factors Influencing Distribution Network Design Design Options for a Distribution Network E-Business and the Distribution Network Distribution Networks in Practice Summary of Learning Objectives

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.

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 Inventories Transportation Facilities and handling Information

Supply chain costs affected by network structure:

Service and Number of Facilities

Number of Facilities
The number of facilities determines the response time to meet customers demand. It is not correct to assume that customers always want their order to be fulfilled immediately.

Response Time

Inventory Costs and Number of Facilities

Inventory Costs

As the number of facilities in supply chain increases, the inventory and inventory related costs are also increase.

Number of facilities

Transportation Costs and Number of Facilities

Transportation Costs
Increasing the number of warehouse locations decreases the average outbound distance to the customer and makes outbound transportation distance a smaller fraction of the total distance traveled by the product.

Number of facilities
Inbound TC: Costs incurred in bringing material into a facility Outbound TC: Costs of sending material out of facility.

Facility Costs and Number of Facilities

Facility Costs

Facility cost decreases as the number of facilities is reduced because a consolidation of facilities allows a firm to exploit economies of scale.

Number of facilities

Variation in Logistics Costs and Response Time with Number of Facilities

Response Time

Total Logistics Costs

Number of Facilities

Network Design Options for a Distribution Network

To design and set up the distribution network a firm has to consider issues of how many depots would be needed and where to locate them. Here the focus is on designing a logistics strategy to transport products from plants to depots. There are many types of options to design a distribution network in the present time, but each varies according to the need.

Network Design Options for a Distribution Network

Before designing a distribution system it is essential to consider the most important questions such as: Whether the product will be delivered to the customer location or picked up from a preordained site? Whether the product flow will be through an intermediary? Based on the choices for the two decisions, there are 6 distinct distribution network that are classified as:

Network Design Options for a Distribution Network

Manufacturer Storage with Direct Shipping Manufacturer Storage with Direct Shipping and InTransit Merge Distributor Storage with Carrier Delivery Distributor Storage with Last Mile Delivery Manufacturer or Distributor Storage with Consumer Pickup Retail Storage with Consumer Pickup

1. Manufacturer Storage with Direct Shipping

Manufacturer

Retailer

Customers

Product Flow Information Flow

Advantages & Disadvantages

1. 2. 3. 4. 1. 2. 3. 4. Advantages: Centralized inventories at the Manufacturer Cost of storage can be minimized High level of product variety to be made available Handling cost can be significantly reduced. Disadvantages: Transportation cost is high because of average outbound distance Good information infrastructure required to provide product availability information Response time is more Handling returns may be difficult: a) Customer to return the product to the manufacturer > Incurs High Transportation & coordination cost b) Retailer to set-up a separate facility to handle returns > Requires investment in a facility to handle returns.

2. In-Transit Merge Network

Factories

Retailer

In-Transit Merge by Carrier

Customers

It combines pieces of the order coming from different locations so that customer gets a single delivery.

Product Flow Information Flow

Advantages & Disadvantages

Advantages: The main advantage of in transit merge over direct shipping is the somewhat lower transportation cost and improved customer experience. Disadvantages: 1. Additional efforts during the merge, so this can be best suited only for low and medium demands. 2. Compared to direct shipping, in transit merge requires a higher volume from each manufacturer to be effective. If there are too many sources, in-transit merge can be very difficult to coordinate and implement.

3. Distributor Storage with Carrier Delivery

In this alternative, inventory is not held by manufacturers at the factories but its held by distributors/retailers in intermediate warehouses & package carriers are used to transport products from the intermediate location to the final consumer.

Factories

Warehouse Storage by Distributor/Retailer

Customers
Product Flow Information Flow

Advantages & Disadvantages

Advantages: 1. Transportation costs are somewhat lower 2. The information infrastructure required is significantly less complex 3. Response time with distributor storage is better than with the manufacturer storage 4. Customer convenience is high 5. Order visibility is easier & Return ability is better. Disadvantages: 1. Facility costs and Processing costs are higher 2. Real-time visibility between the customer & the manufacturer is not present.

4. Distributor Storage with Last Mile Delivery

Refers to the distributor/retailer delivering the product to the customers home instead of using a package carrier.

Factories

Distributor/Retailer Warehouse

Customers
Product Flow Information Flow

Advantages & Disadvantages

Advantages: 1. Return ability is best with last mile delivery because trucks making deliveries can also pick up returns from customers. 2. Response time is faster than the use of package carriers. 3. The customer experience is very good using this option. 4. Order visibility is less of an issue & Order tracking becomes important in case of incomplete or undelivered orders. 1. 2. 3. Disadvantages: Transportation costs are higher Facility and processing costs are higher In areas with high labor cost, it is very hard to justify distributor storage with last mile delivery.

5.Manufacturer or Distributor Storage with Customer Pickup

Factories

Retailer

Cross Dock DC

Pickup Sites

Customers Customer Flow Product Flow Information Flow

5.Manufacturer or Distributor Storage with

Customer Pickup

In this approach, inventory is stored at the manufacturer or distributor warehouse but customer place their orders online or on the phone & then come to designate pick-up points to collect their orders. Orders are shipped from the storage site to the pick up points as needed.

Advantages & Disadvantages

1. 2. 3. Advantages Lower delivery and inventory costs For customers, returning the product will be easy Less response time comparable to the use of package carriers.

Disadvantages 1. The major hurdle is the increased handling cost at the pick up site. 2. Facility costs are high if new pick up sites have to be built. 3. More processing costs because each order must be matched with a specific customer when they arrive 4. A significant information infrastructure is needed to provide visibility of the order until the customer picks it up.

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 longterm 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

Issues to be considered in Distribution Networks in Practice

Centralization VS. Regionalization Energy Flexibility Global Marketplace Government Involvement Information Systems Accountability Reverse Logistics

Centralization VS. Regionalization

In distribution network planning, there is a well established relationship between the number of distribution points, transportation costs and customer service targets. In a graphical sense, the point at which these three entities merge is the optimum balance of facility and transportation costs to develop a low-cost, high service distribution network. Normally, as distribution networks become more centralized, so do the internal support structures such as facility management, order entry, customer service and data processing. Depending on the degree of centralization achieved in support staffs, it is not uncommon to see cost savings of 50% or higher over decentralized networks.

The service levels, limitations on total facility size; risk mitigation and throughput peaks must be factored into the decision matrix.

Energy
Any significant shift in the cost of energy could have an impact on operating costs and distribution. Many distribution projects that are otherwise viable fail once the cost of energy becomes a factor. This is especially true for energy-intensive facilities such as refrigerated warehouses. For this reason, it is crucial to work with all energy providers to determine the load that a prospective operation would put on the local energy system and develop solutions that conserve energy while achieving goals.

Some interesting energy solutions are:

Abatement Programs:
Many energy providers provide incentives to users who cut back their usage during defined high load periods. This could be as simple as running the facility on minimal power during off-shifts or as complicated as metering the use of the facility or using a secondary power source (high power generator or solar power) to run normally on a reduced energy load.

High-Efficiency Units:
Many companies install high-efficiency appliances and fixtures in a facility to conserve energy usage with no performance penalty. There is some investment required, but the payback is often reduced rates and/or a lower monthly bill.

Flexibility
It is a key to continued success for some and survival for others. When designing a distribution facility, specifying versatile equipment is a critical requirement. The latest technology may look nice at start up, but if it cannot keep pace with unpredictable events, it is simply a waste of money. Planning for likely (and unlikely) changes in the distribution profile should drive the warehouse design and equipment specifications. For the majority of distribution operations, flexible equipment is the more practical choice.

Global Marketplace
In the ever-changing supply chain, global impact must always be considered. This could be as minor as a domestic customer wanting direct shipments to an international location, or as major as an acquisition by a global company or addition of a key global account. Successful distribution operations are ready for this type of change. Transportation systems should be designed with exports in mind; there should be contingencies for customs documentation and international shipping paperwork. Operations should be designed in a manner that product re-labelling or special packaging for international customers can be accomplished easily. Facilities may need to accommodate inbound or outbound airfreight or ocean freight containers. Customer service functions may need to operate in 24- hour mode to assist customers in all time zones. Preparedness is the critical element in a global marketplace. If you are not a global company today, your success drive into that marketplace is questioned sooner.

Government Involvement
Just as government involvement has an impact on distribution, distribution leadership has an obligation to be involved and aware of legislation that involves their industry. Many decisions are made daily at a local, state, and federal level that impact distribution operations. Taxes, labour regulations, transportation restrictions, and infrastructure decisions are continually up for review and discussion at every level of government. Without proper input, uninformed decisions often have a dramatic effect on the distribution community. In addition, involvement in professional societies is an effective way to track the pulse of legislative movement and also an ideal forum to make our concerns known. For some ambitious souls, a direct role in local or municipal government may be an effective and fulfilling way to make an impact. By being proactive, distribution leaders can ensure that distribution and government entities can collaborate to provide benefit to both sides without unpleasant surprises.

Information Systems
In todays e-enabled world, timely and accurate information is a requirement. The days of keypunching in daily distribution activity and rightly updates to host financial systems are becoming a distant memory for successful distribution operations. Todays reality is that distribution execution systems must be: Real-Time : Customer requirements are moving toward being able to instantly track an order through every step of the fulfilment process to delivery. Optimally, this information is linked to an Internet front-end where a customer can easily log in and see the exact status of their order. Real-time interfaces and host system updates enable this customer-focused initiative. Standardized : With the high growth associated with a successful distribution operation, many of these companies are finding that the investment to develop and maintain an in-house system no longer is viable. Standardized, industrytailored software is now the rule rather than the exception. Software companies leverage their client base to continually update their product, adding far more base functionality than inflexible legacy systems.

Accountability
A successful distribution operation must have accountability. Accountability is made possible by effective leadership, clear communications, and efficient systems and equipment to enable productive operations and a fulfilling work environment. Accountability requires that leadership make difficult decisions while maintaining the commitment of the organization. Accountability requires establishing standards, identifying improvement opportunities and measuring performance. Also required is some form of a reward process that answers the inevitable question, What is in this for me? Care must be taken that any rewards are tied to something that can be quantified as a true benefit to the organization; rewards without a basis will result in lack of credibility and a process that will ultimately fail.

Reverse Logistics
How to handle the products that are coming back into the operation as well as any returnable packaging that must be accounted for on a regular basis is a challenge. The decision on whether to accept the product, whether a refused shipment, an authorized customer return, or an unexpected return must be planned for and communicated with the distribution operation as well as the receiving and handling process for the product will likely ensue.