objectives of chapters 4, 5, 6 - al akhawayn universitya.berrado/mgt5309/mgt5309_ch04.pdfcustomer...

4-1© 2007 Pearson Education

Objectives of Chapters 4, 5, 6

�Designing the SC Network: (Ch4,5,6)

– Ch4� Explores how to design a distribution network

– Ch5� Considers facility related decisions to be made when design a SC network.

– Ch6� Methodologies for evaluation of network design decisions under uncertainty are discussed.


Chapter 4Designing the Distribution

Network in a Supply Chain

Supply Chain Management(3rd Edition)


Outline

�The Role of Distribution in the Supply Chain

�Factors Influencing Distribution Network Design

�Design Options for a Distribution Network

�Distribution Networks in Practice


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-10.5% of the US economy and 20% of the cost of manufacturing

�Choice of distribution network can achieve supply chain objectives from low cost to high responsiveness

�Examples: Wal-Mart, Dell, Proctor & Gamble

�Appropriate choice of distribution network results in customer being satisfied at the lowest price possible

�Different performance measures need to be considered when designing the distribution network


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

– Time to market

– Order visibility

– Returnability

�Supply chain costs affected by network structure:

– Inventories

– Transportation

– Facilities and handling

– Information


Service and Number of Facilities

(Fig. 4.1)

Number of

Facilities

Response Time


Inventory Costs and Number

of Facilities (Fig. 4.2)

Inventory

Costs

Number of facilities


Transportation Costs and

Number of Facilities (Fig. 4.3)

Transportation

Costs


Inbound vs.

outbound

transportation

costs


Facility Costs and Number

of Facilities (Fig. 4.4)

Facility

Costs



TransportationTransportation

Total logistics Costs Related to

Number of Facilities

Tota

l C

ost

sT

ota

l C

ost

s

Number of FacilitiesNumber of Facilities

InventoryInventory

FacilitiesFacilities

Total CostsTotal Costs


Response TimeResponse Time

Variation in Total Logistics Costs and Response Time with Number of Facilities

(Fig. 4.5)

Number of FacilitiesNumber of Facilities

Total Logistics CostsTotal Logistics Costs


Design Options for a Distribution Network

�Managers must make two key decisions when

designing a distribution network:

– Will the product be delivered to the customer location or

picked up from a preordained site?

– Will product flow through an intermediate location?

�Six distinct distribution network designs may be used

to move product from factory to customer


Design Options for a

Distribution Network

1. Manufacturer Storage with Direct Shipping

2. Manufacturer Storage with Direct Shipping and In-

Transit Merge

3. Distributor Storage with package Carrier Delivery

4. Distributor Storage with Last Mile Delivery

5. Manufacturer or Distributor Storage with Consumer

Pickup

6. Retail Storage with Consumer Pickup


Manufacturer Storage with

Direct Shipping- aka Drop-Shipping (Fig. 4.6)

Manufacturer

Retailer

Customers

Product Flow

Information Flow


Manufacturer Storage with

Direct Shipping� Supply chain costs affected by this network structure:

– Inventories� Lower costs because of aggregation. (Low demand high value items, postponed customization)

– Transportation �Higher transportation costs because of disaggregate shipping + long distances.

– Facilities and handling� Lower facility costs because of aggregation and centralized inventory. Some saving on handling if small shipments capability.

– Information� Significant investment in information infrastructure to integrate manufacturer and retailer.

� Elements of customer service influenced by this network structure:

– Response time: Long( 1 to 2 weeks) because of long distance and two stage for order processing. Multiple partial shipments complicate receiving.

– Product variety: Easy to provide a very high variety

– Product availability: Easy to provide a high level of product availability because of aggregation at manufacturer

– Customer experience: Home delivery but possible partial shipments

– Order visibility: More difficult but very important for customers

– Returnability: Expensive and difficult to implement


In-Transit Merge Network (Fig. 4.7)

Factories

Retailer

Product Flow

Information Flow

In-Transit Merge by

Carrier

Customers


In-Transit Merge Network

� Supply chain costs affected by this network structure:

– Inventories: Similar to drop-shipping

– Transportation: Somewhat lower costs than drop-shipping

– Facilities and handling: Handling costs higher than drop-shipping at carrier; receiving cost lower at customer. Overall somewhat moreexpensive.

– Information: Investment is somewhat higher than for drop-shipping.


– Response time: Similar or marginally higher than drop-shipping

– Product variety: Similar to drop shipping

– Product availability: Similar to drop shipping

– Customer experience: Better because single delivery

– Order visibility: Similar to drop shipping

– Returnability: Similar to drop shipping


Distributor Storage with

Carrier Delivery (Fig. 4.8)

Factories

Customers

Product Flow

Information Flow

Warehouse Storage by

Distributor/Retailer



Carrier Delivery


– Inventories: Higher than manufacturer storage.

– Transportation: Lower than manufacturer storage.

– Facilities and handling: Somewhat higher than manufacturer storage. Not appropriate for extremely slow moving items.

– Information: Simpler infrastructure compared to manufacturer storage.


– 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

– Order visibility: Easier

– Returnability: Easier



Last Mile Delivery (Fig. 4.9)

Factories

Customers

Product Flow

Information Flow

Distributor/Retailer

Warehouse



Last Mile Delivery� Supply chain costs affected by this network structure:

– Inventories: Higher than distributor storage with package delivery

– Transportation: Very high cost (low economies of scale). Higher than any other distribution option.

– Facilities and handling: Higher than manufacturer storage or distributor storage with package carrier delivery.

– Information: Similar to distributor storage with carrier delivery, but require delivery scheduling.


– Response time: Very quick

– Product variety: Somewhat less than distributor storage with package carrier delivery.

– Product availability: More expensive to provide availability than any other option.

– Customer experience: Very good.

– Time to market: Slightly higher than distributor storage with package carrier delivery.

– Order visibility: Easy to implement

– Returnability: easier to implement than previous options.


Manufacturer or Distributor Storage

with Customer Pickup (Fig. 4.10)

Factories

Retailer

Pickup Sites

Product Flow

Information Flow

Cross Dock DC

Customer Flow

Customers


Manufacturer or Distributor Storage with Customer Pickup


– Inventories: Can match any other option, depending on the location of inventory

– Transportation: lower than the use of package carriers

– Facilities and handling: High is new facilities are used, low if existing facilities. Increased handling cost at pick up locations

– Information: Significant investment


– Response time: Similar to package delivery with manufacturer or distributor storage.

– 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 (no home delivery)

– Order visibility: difficult

– Returnability: somewhat easier


Retail Storage With Customer Pickup

�Traditional type of SC.

�Inventory stored locally at retail stores.

�Customer walk into the store or place an order over

the phone/internet and pick it up at the retail store.


Retail Storage With Customer

Pickup

�Supply chain costs affected by network structure:– Inventories: Higher than all other options

– Transportation: Lower than all other options

– Facilities and handling: Higher than all other options

– Information: Some investment for online and phone orders

�Elements of customer service influenced by network structure:– Response time: same day

– Product variety: Lower than all other options

– Product availability: More expensive to provide than all other options

– Customer experience: Depending on customer

– Order visibility: Trivial for in-store orders. Difficult but essential for phone and online orders.

– Returnability: Easier than other options.


Selecting a Distribution Network Design

�One or a combination of these networks may

be chosen depending on:

– Product characteristics

– Network requirements

– The strategic position that the firm is targeting


Comparative Performance of Delivery

Network Designs (Table 4.7)

Information

Facility & Handling

Transportation

Inventory

Returnability

Order Visibility

Customer Experience

Product Availability

Product Variety

Response Time

Manufacturer

storage with pickup

Distributor

storage with last

mile delivery

Distributor Storage

with Package

Carrier Delivery

Manufacturer

Storage with In-

Transit Merge

Manufacturer

Storage with Direct

Shipping

Retail Storage

with Customer

Pickup

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

2

2

2

2

2

2

2

2

2

2

3

3

3

3

3

3

3

3

3

3

4

4

4

4

4

4

4

4

4

4

4

4

4

5

5

5

5

55

5

6

6

5

1 corresponds to the strongest performance and 6 to the weakest


Linking Product Characteristics and

Customer Preferences to Network Design

Low customer effort

High product variety

Quick desired response

High product value

Many product sources

Very low demand product

Low demand product

Medium demand product

High demand product

Manufacturer

storage with

pickup

Distributor storage

with last mile delivery

Distributor Storage

with Package Carrier

Delivery

Manufacturer

Storage with In-

Transit Merge

Manufacturer

Storage with

Direct Shipping

Retail Storage

with

Customer

Pickup

+2

+2

+2

+2

+2

+2

+2 +2 +2

+2

+1

+1

+1

+1

+1

+1

+1

+1

+1

+1

+1

+1

+1

+1

+1

0

0

0

0

0

0

0

0 0

0

-1

-1

-1

-1

-1 -1

-1

-1

-1

-1

-1

-2 -2

-2

-2

-2

-2 -2

-2

Key +2: very suitable; +1:somewhat suitable; 0: neutral;

-1: somewhat unsuitable; -2=very unsuitable


E-Business and the Distribution

Network

� Impact of E-Business on Customer Service

– Response time

– Product variety

– Product availability

– Customer experience

– Faster time to market

– Order visibility

– Returnability

– Direct sales to customers

– Flexible pricing, product portfolio, and promotions

– Efficient funds transfer

� Impact of E-Business on Cost

�Using E-Business: Dell, Amazon, Peapod, Grainger


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 long-term

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

�Integrate the internet with the existing physical network.


Summary of Learning Objectives

�What are the key factors to be considered

when designing the distribution network?

�What are the strengths and weaknesses of

various distribution options?

�Understand how e-business has affected

both customer service and costs in a SC

objectives of chapters 4, 5, 6 - al akhawayn universitya.berrado/mgt5309/mgt5309_ch04.pdfcustomer...

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