Title: Chopra and Meindl 6e
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Copyright 2016 Pearson Education, Inc. 1 1Copyright 2016 Pearson Education, Inc. 4 1
PowerPoint presentation
to accompany
Chopra and Meindl
Supply Chain Management, 6e
PowerPoint presentation
to accompany
Chopra and Meindl
Supply Chain Management, 6e
# 4 Designing Distribution Networks
> Copyright 2016 Pearson Education, Inc. 12Copyright 2016 Pearson Education, Inc. 42
# Learning Objectives
1. Identify the key factors to be considered
when designing a distribution network.
2. Introduce various distribution networks .
3. Discuss the strengths and weaknesses of
various distribution networks .
> Copyright 2016 Pearson Education, Inc. 13Copyright 2016 Pearson Education, Inc. 43
## 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
## Drives profitability by directly affecting supply chain
cost and the customer value
## Choice of distribution network can achieve supply
chain objectives from low cost to high responsiveness .
## The distribution cost in different industries includes 20
to 50 % of the total cost
> Copyright 2016 Pearson Education, Inc. 14Copyright 2016 Pearson Education, Inc. 44
## The Role of Distribution
## in the Supply Chain
- Until 2007 , Dell distributed its PCs directly to end consumers,
whereas companies such as HP distributed through resellers .
- In the late 1990 s, Gateway opened Gateway Country stores, wherein
customers could examine the products and have salespeople help
them configure a PC that suited their needs . Gateway, however, chose
to sell no products at the stores ; all PCs were shipped directly from the
factory to the customer . By April 2004 , Gateway had closed all its
stores because of their poor financial performance .
- Apple Computer, in contrast, has opened many retail stores that sell
computers .
- P&G has chosen to distribute directly to large supermarket chains
while obligating smaller players to buy P&G products from distributors .Copyright 2016 Pearson Education, Inc. 1 5Copyright 2016 Pearson Education, Inc. 4 5
## The Role of Distribution
## in the Supply Chain
- Texas Instruments, which once used only direct sales, now sells
about 30 percent of its volume to 98 percent of its customers through
distributors, while serving the remaining 2 percent of customers with
70 percent of the volume directly .
- W.W. Grainger stocks about 300 ,000 SKUs that can be sent to
customers within a day of order placement . The remaining products
are not stocked but instead are shipped directly from the
manufacturer when a customer places an order . It takes several days
for the customer to receive the product in such cases .
- An inappropriate network can have a significant negative effect on
the profitability of the firm, as is evident in the failure of companies
such as Blockbuster and Webvan .
> Copyright 2016 Pearson Education, Inc. 16Copyright 2016 Pearson Education, Inc. 46
## Factors Influencing
## Distribution Network Design
# Distribution network performance evaluated
along two dimensions
1. Value provided to the customer
2. Cost of meeting customer needs
# Evaluate the impact on customer service and
cost for different distribution network options
# Profitability of the delivery network
determined by revenue from met customer
needs and network costs
> Copyright 2016 Pearson Education, Inc. 17Copyright 2016 Pearson Education, Inc. 47
## Factors Influencing
## Distribution Network Design
# Elements of customer service
influenced by network structure:
1. Response time
2. Product variety
3. Product availability
4. Customer experience
5. Time to market
6. Order visibility
7. Returnability
> Copyright 2016 Pearson Education, Inc. 18Copyright 2016 Pearson Education, Inc. 48
## Factors Influencing
## Distribution Network Design
# Elements of customer service
influenced by network structure:
1. Response time
amount of time it takes for a customer to
receive an order
2. Product variety
number of different products or
configurations that are offered
3. Product availability
probability of having a product in stock
when a customer order arrives Copyright 2016 Pearson Education, Inc. 1 9Copyright 2016 Pearson Education, Inc. 4 9
## Factors Influencing
## Distribution Network Design
# Elements of customer service influenced
by network structure:
4. Customer experience
the easiness of placing and receiving an order,
customization extent,
5. Time to market
the time it takes to bring a new product
6. Order visibility
the ability of customers to track their orders
from placement to delivery
7. Returnability
the easiness of returning unsatisfactory
merchandise
> Copyright 2016 Pearson Education, Inc. 110 Copyright 2016 Pearson Education, Inc. 410
## Desired Response Time and
## Number of Facilities
FIGURE 4 -1
Barnes & Noble provides its customers with books
on the same day but requires hundreds of stores to
achieve this goal for most of the United States .
Amazon , in contrast, takes a few days to deliver a
book to its U.S. customers, but it uses only about
forty locations to store its books .
> Copyright 2016 Pearson Education, Inc. 111 Copyright 2016 Pearson Education, Inc. 411
## Factors Influencing
## Distribution Network Design
# Supply chain costs affected by network
structure:
Inventories
Transportation
Facilities and handling
Information
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## Inventory Costs and
## Number of Facilities
FIGURE 4 -2Copyright 2016 Pearson Education, Inc. 1 13 Copyright 2016 Pearson Education, Inc. 4 13
## Transportation Costs and
## Number of Facilities
FIGURE 4 -3
Inbound transportation costs are the costs incurred in bringing material
into a facility.
Outbound transportation costs are the costs of sending material out of a
facility.
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 .
If the number of facilities is increased to a point at which inbound lot
sizes are also very small and result in a significant loss of economies of
scale in inbound transportation, increasing the number of facilities
increases total transportation cost
Total transportation cots
Inbound transportation cots
Outbound transportation cots
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## Facility Costs and
## Number of Facilities
FIGURE 4 -4
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## Logistics Cost, Response Time, and
## Number of Facilities
FIGURE 4 -5
Total logistics costs are the sum of inventory, transportation, and facility
costs .
As the number of facilities increases , total logistics costs first decrease and
then increase .
If a firm wants to reduce the response time to its customers further, it may
have to increase the number of facilities beyond the point that minimizes
logistics costs .
Question to be answered : If the increase in revenues because of better
responsiveness will be greater than the increase in costs because of the
additional facilities?
> Copyright 2016 Pearson Education, Inc. 116 Copyright 2016 Pearson Education, Inc. 416
## Design Options for a
## Distribution Network
# Distribution network choices from the
manufacturer to the end consumer
# Two key decisions
1. Will product be delivered to the customer
location or picked up from a prearranged site ?
2. Will product flow through an intermediary (or
intermediate location )? Copyright 2016 Pearson Education, Inc. 1 17 Copyright 2016 Pearson Education, Inc. 4 17
## Design Options for a
## Distribution Network
# One of 6 designs may be used
1. Manufacturer storage with direct shipping
2. Manufacturer storage with direct shipping and
in -transit merge
3. Distributor storage with carrier delivery
4. Distributor storage with last -mile delivery
5. Manufacturer /distributor storage with customer
pickup
6. Retail storage with customer pickup
> Copyright 2016 Pearson Education, Inc. 118 Copyright 2016 Pearson Education, Inc. 418
## Design Options For a Distribution Network
Manufacturer storage with direct shipping Manufacturer storage with direct shipping and
in -transit merge
Distributor storage with carrier delivery
Distributor storage with last -mile delivery Manufacturer/distributor storage
with customer pickup
Retail storage with customer pickup
> Copyright 2016 Pearson Education, Inc. 119 Copyright 2016 Pearson Education, Inc. 419
## Manufacturer Storage with
## Direct Shipping
FIGURE 4 -6
Product is shipped directly from the manufacturer to the end customer , bypassing
the retailer (who takes the order and initiates the delivery request). This option is also
referred to as drop -shipping .
Online retailers such as eBags and Nordstrom.com use drop -shipping to deliver goods to
the end consumer.
Effective for high
value, large variety,
slow -moving , low
demand products
> Copyright 2016 Pearson Education, Inc. 120 Copyright 2016 Pearson Education, Inc. 420
## Manufacturer Storage with Direct
## Shipping Network
Cost Factor Performance
Inventory Lower costs because of aggregation . Benefits of
aggregation are highest for low -demand, high -value
items. Benefits are large if product customization can be
postponed at the manufacturer.
Transportation Higher transportation costs because of increased
distance and disaggregate shipping .
Facilities and handling Lower facility costs because of aggregation . Some saving
on handling costs if manufacturer can manage small
shipments or ship from production line.
Information Significant investment in information infrastructure to
integrate manufacturer and retailer.
TABLE 4 -1Copyright 2016 Pearson Education, Inc. 1 21 Copyright 2016 Pearson Education, Inc. 4 21
## Manufacturer Storage with Direct
## Shipping Network
Service Factor Performance
Response time Long response time of one to two weeks because of increased
distance and two stages for order processing. Response time
may vary by product, thus complicating receiving.
Product variety Easy to provide a high level of variety .
Product availability Easy to provide a high level of product availability because of
aggregation at manufacturer.
Customer experience Good in terms of home delivery but can suffer if order from several
manufacturers is sent as partial shipments.
Time to market Fast , with the product available as soon as the first unit is produced.
Order visibility More difficult but also more important from a customer service
perspective.
Returnability Expensive and difficult to implement.
TABLE 4 -1 continued
> Copyright 2016 Pearson Education, Inc. 122 Copyright 2016 Pearson Education, Inc. 422
# In -Transit Merge Network
FIGURE 4 -7
In -transit merge combines pieces of the order coming from different locations so the
customer gets a single delivery .
Example: the package carrier picked up the PC from the Dell factory and the monitor from
the Sony factory
Example: Furniture retailers merge couches and coffee tables produced by different
manufacturers decreases transportation costs relative to drop -shipping by aggregating the
final delivery . In -transit merge allowed Dell
and Sony to hold all their
inventories at the factory .
The greatest benefits for
products with high value
whose demand is difficult to
forecast
> Copyright 2016 Pearson Education, Inc. 123 Copyright 2016 Pearson Education, Inc. 423
# In -Transit Merge
Cost Factor Performance
Inventory Similar to drop -shipping.
Transportation Somewhat lower transportation costs than drop -
shipping .
Facilities and handling Handling costs higher than drop -shipping at
carrier; receiving costs lower at customer .
Information Investment is somewhat higher than for drop -
shipping.
TABLE 4 -2
> Copyright 2016 Pearson Education, Inc. 124 Copyright 2016 Pearson Education, Inc. 424
# In -Transit Merge
Service Factor Performance
Response time Similar to drop -shipping; may be marginally higher.
Product variety Similar to drop -shipping.
Product availability Similar to drop -shipping.
Customer experience Better than drop -shipping because only a single delivery
is received .
Time to market Similar to drop -shipping.
Order visibility Similar to drop -shipping.
Returnability Similar to drop -shipping.
TABLE 4 -2 continued Copyright 2016 Pearson Education, Inc. 1 25 Copyright 2016 Pearson Education, Inc. 4 25
## Distributor Storage with
## Carrier Delivery
FIGURE 4 -8
Inventory is held not by manufacturers at the factories, but by distributors/retailers in
intermediate warehouses , and package carriers are used to transport products from the
intermediate location to the final customer.
Amazon and industrial distributors such as W.W.Grainger and McMaster -Carr have used this
approach combined with drop -shipping from a manufacturer (or distributor).
With respect to direct shipping
Inventory aggregation is less
Higher inventory costs
Facility costs are higher
Less information to track
Warehouses are physically closer to
consumers which leads to
Faster response time
Lower transportation cost
> Copyright 2016 Pearson Education, Inc. 126 Copyright 2016 Pearson Education, Inc. 426
## Distributor Storage with
## Carrier Delivery
Cost Factor Performance
Inventory Higher than manufacturer storage . Difference is
not large for faster moving items but can be large
for very slow -moving items .
Transportation Lower than manufacturer storage . Reduction is
highest for faster moving items.
Facilities and handling Somewhat higher than manufacturer storage . The
difference can be large for very slow -moving
items.
Information Simpler infrastructure compared to manufacturer
storage.
TABLE 4 -3
> Copyright 2016 Pearson Education, Inc. 127 Copyright 2016 Pearson Education, Inc. 427
## Distributor Storage with
## Carrier Delivery
Service Factor Performance
Response time Faster than manufacturer storage.
Product variety Lower than manufacturer storage.
Product availability Higher cost to provide the same level of availability as
manufacturer storage.
Customer experience Better than manufacturer storage with drop -shipping.
Time to market Higher than manufacturer storage.
Order visibility Easier than manufacturer storage.
Returnability Easier than manufacturer storage.
TABLE 4 -3 continued
> Copyright 2016 Pearson Education, Inc. 128 Copyright 2016 Pearson Education, Inc. 428
## Distributor Storage with
## Last Mile Delivery
FIGURE 4 -9
the distributor/retailer delivering the product to the customers home instead of using a
package carrier.
AmazonFresh , Peapod, and Tesco ( Milk delivery, Grocery delivery ) have used last -mile delivery
in the grocery industry .
The automotive spare parts industry is one in which distributor storage with last -mile delivery
is the dominant model .
distribution center is responsible for delivering needed parts to a set of dealers and makes
multiple deliveries per day . Unlike package carrier
delivery , last -mile delivery
requires the distributor
warehouse to be much closer
to the customer .
Given the limited radius that
can be served with
last -mile delivery, more
warehouses are required
compared to when package
delivery is used .Copyright 2016 Pearson Education, Inc. 1 29 Copyright 2016 Pearson Education, Inc. 4 29
## Distributor Storage with
## Last Mile Delivery
Cost Factor Performance
Inventory Higher than distributor storage with package
carrier delivery.
Transportation Very high cost given minimal scale economies.
Higher than any other distribution option.
Facilities and handling Facility costs higher than manufacturer storage or
distributor storage with package carrier delivery,
but lower than a chain of retail stores .
Information Similar to distributor storage with package carrier
delivery.
TABLE 4 -4
> Copyright 2016 Pearson Education, Inc. 130 Copyright 2016 Pearson Education, Inc. 430
## Distributor Storage with
## Last Mile Delivery
Service Factor Performance
Response time Very quick . Same day to next -day delivery.
Product variety Somewhat less than distributor storage with package
carrier delivery but larger than retail stores.
Product availability More expensive to provide availability than any other
option except retail stores.
Customer experience Very good , particularly for bulky items.
Time to market Slightly higher than distributor storage with package
carrier delivery.
Order visibility Less of an issue and easier to implement than
manufacturer storage or distributor storage with package
carrier delivery.
Returnability Easier to implement than other previous options. Harder
and more expensive than a retail network .
TABLE 4 -4 continued
> Copyright 2016 Pearson Education, Inc. 131 Copyright 2016 Pearson Education, Inc. 431
## Manufacturer or Distributor Storage
## with Customer Pickup
FIGURE 4 -10
inventory is stored at the manufacturer or distributor warehouse , but customers
place their orders online or on the phone and then travel to designated pickup points to
collect their merchandise. Orders are shipped from the storage site to the pickup points as
needed.
The main advantages are that it
can lower the delivery cost and
expand the set of products sold
and customers served online.
The major obstacle is the
increased handling cost and
complexity at the pickup site.
Example: 7dream.com
> Copyright 2016 Pearson Education, Inc. 132 Copyright 2016 Pearson Education, Inc. 432
## Manufacturer or Distributor Storage
## with Customer Pickup
Cost Factor Performance
Inventory Can compete with any other option, depending
on the location of inventory.
Transportation Lower than the use of package carriers , especially
if using an existing delivery network.
Facilities and handling Facility costs can be high if new facilities have to
be built. Costs are lower if existing facilities are
used. The increase in handling cost at the pickup
site can be significant.
Information Significant investment in infrastructure required.
TABLE 4-5Copyright 2016 Pearson Education, Inc. 1 33 Copyright 2016 Pearson Education, Inc. 4 33
## Manufacturer or Distributor Storage
## with Customer Pickup
Service Factor Performance
Response time Similar to package carrier delivery with manufacturer or
distributor storage. Same -day delivery possible for items
stored locally at pickup site.
Product variety Similar to other manufacturer or distributor storage
options.
Product availability Similar to other manufacturer or distributor storage
options.
Customer experience Lower than other options because of the lack of home
delivery. Experience is sensitive to capability of pickup
location .
Time to market Similar to manufacturer storage options.
Order visibility Difficult but essential .
Returnability Somewhat easier , given that pickup location can handle
returns.
TABLE 4 -5 continued Copyright 2016 Pearson Education, Inc. 1 34 Copyright 2016 Pearson Education, Inc. 4 34
## Retail Storage with Customer Pickup
Customers pick up product from
retailers
Low transportation cost
High facility cost
Relative easy returnability
Increased inventory cost
No order tracking necessary
If the product is available at the
retailer, the consumer buys.
Otherwise goes to another
retailer
Effective for fast moving items
Example: Retail stores such as
Wal -Mart and JCPenney
the most traditional type of supply chain , inventory is stored locally at retail stores .
Customers walk into the retail store or place an order online or by phone and pick it up
at the retail store .
Retailer
Manufacturers
Consumers
Retailer Retailer
> Copyright 2016 Pearson Education, Inc. 135 Copyright 2016 Pearson Education, Inc. 435
## Retail Storage with Customer Pickup
Cost Factor Performance
Inventory Higher than all other options .
Transportation Lower than all other options .
Facilities and handling Higher than other options . The increase in
handling cost at the pickup site can be significant
for online and phone orders.
Information Some investment in infrastructure required for
online and phone orders.
TABLE 4 -6
Retailer
Manufacturers
Consumers
Retailer Retailer
> Copyright 2016 Pearson Education, Inc. 136 Copyright 2016 Pearson Education, Inc. 436
## Retail Storage with Customer Pickup
Service Factor Performance
Response time Same -day (immediate) pickup possible for items stored
locally at pickup site.
Product variety Lower than all other options.
Product availability More expensive to provide than all other options.
Customer experience Related to whether shopping is viewed as a positive or
negative experience by customer.
Time to market Highest among distribution options.
Order visibility Trivial for in -store orders. Difficult , but essential, for
online and phone orders.
Returnability Easier than other options because retail store can provide
a substitute.
TABLE 4 -6 continued Copyright 2016 Pearson Education, Inc. 1 37 Copyright 2016 Pearson Education, Inc. 4 37
## Design Options For a Distribution Network
Manufacturer storage with direct shipping Manufacturer storage with direct shipping and
in -transit merge
Distributor storage with carrier delivery
Distributor storage with last -mile delivery Manufacturer/distributor storage
with customer pickup
Retail storage with customer pickup
> Copyright 2016 Pearson Education, Inc. 138 Copyright 2016 Pearson Education, Inc. 438
## Comparative Performance of
## Delivery Network Designs
TABLE 4 -7
> Copyright 2016 Pearson Education, Inc. 139 Copyright 2016 Pearson Education, Inc. 439
## Comparative Performance of
## Delivery Network Designs
Dimension Best Worst
Response Time Retail Store with customer pick -up Manufacturer storage with direct ship
Product Variety Manufacturer storage with direct ship Retail Store with customer pick -up
Product Availability Manufacturer storage with direct ship Retail Store with customer pick -up
Customer Experience Last mile delivery Manufacturer storage with pick -up
Time to Market Manufacturer storage with direct ship Retail Store with customer pick -up
Order Visibility Retail Store with customer pick -up Manufacturer storage with pick -up
Returnability Retail Store with customer pick -up Manufacturer storage with pick -up
Inventory Manufacturer storage with direct ship Retail Store with customer pick -up
Transportation Retail Store with customer pick -up Last mile delivery
Facility & Handling Manufacturer storage with direct ship Retail Store with customer pick -up
Handling Last mile delivery
Information Retail Store with customer pick -up Manufacturer storage with pick -up
> Copyright 2016 Pearson Education, Inc. 140 Copyright 2016 Pearson Education, Inc. 440
## Delivery Networks for Different Product /
## Customer Characteristics
TABLE 4 -8Copyright 2016 Pearson Education, Inc. 1 41 Copyright 2016 Pearson Education, Inc. 4 41
# Summary of Learning Objectives
1. Identify the key factors to be considered
when designing a distribution network.
2. Discuss the strengths and weaknesses of
various distribution options .