C O R R A D O C E R R U T I
LOGISTICS & SUPPLY CHAIN MANAGEMENT
Part 3
Designing Distribution Networks
Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011 Capitolo I. Il concetto di strategia
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
Ex: P&G has chosen to distribute directly to large
supermarket chains while obligating smaller players to buy
P&G products from distributors (double distribution
channel).
Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011 Capitolo I. Il concetto di strategia
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
Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011 Capitolo I. Il concetto di strategia
Factors Influencing
Distribution Network Design
1.
Elements of customer service influenced by network structure:
Response time (amount of time it takes for a customer to receive an order)
Product variety (number of different products/configurations offered by the distribution network)
Product availability (probability of having a product in stock)
Customer experience (how easy is the placing and receiving of an order)
Order visibility (ability of customer to track their orders along the pipeline)
Returnability (the ease with which a customer can return unsatisfactory merchandising)
Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011 Capitolo I. Il concetto di strategia
Factors Influencing
Distribution Network Design
2.
Supply chain costs affected by network structure:
Inventories
Transportation
Facilities and handling
Information
Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011 Capitolo I. Il concetto di strategia
Service and Number of Facilities
Number of Facilities
Response Time
Increasing the number of facilities moves them closer to the end consumer.
This reduces the response time.
As Amazon has built warehouses, the average time from the warehouse to the end consumer has decreased.
Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011 Capitolo I. Il concetto di strategia
Inventory Costs and Number of Facilities
Inventory Costs
Number of facilities
Inventory costs increase as we increase the number of facilities.
To decrease inventory costs, firms try to consolidate and limit the number of facilities in their supply network.
Ex: with fewer facilities, Amazon is able to turn its inventory about 12 times at year.
Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011 Capitolo I. Il concetto di strategia
Transportation Costs and Number of Facilities
Transportation Costs
Number of facilities
Increasing the number of warehouses locations, decreases the average outbound distance to the end customer and makes outbound transportation distance a smaller fraction of the total distance traveled by the product. Thus, as long as inbound transportation economies of scale are maintained, Total Transportation costs decrease as we increase the number of facilities.
Response Time
Variation in Logistics Costs and Response Time with Number of Facilities
Number of Facilities
Total Logistics Costs
Each firm should have at least the number of facilities that minimize total logistics costs and provide the desired response time.
The responsiveness improves as we increase the number of facilities. A supply chain should always operate above the lowest cost point. Operating beyond that point makes sense if the revenue generated from better responsiveness exceeds the cost of better responsiveness.
Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011 Capitolo I. Il concetto di strategia
Design Options for a Distribution Network
Managers must make two key decisions when designing a distribution network:
o Will product be delivered to the customer location or picked up from a preordained site?
o Will product flow through an intermediary (or intermediate location)?
Distinct distribution network 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 or Distributor Storage with Customer Pickup
6) Retail Storage with Customer Pickup
Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011 Capitolo I. Il concetto di strategia
1. Manufacturer Storage with Direct Shipping
Manufacturer
Retailer
Customers
Product is shipped directly from the manufacturer to end customer, bypassing the retailer (who takes the order and initiates the delivery request). This option is also referred as DROP-SHIPPING. The retailer carries no inventories.
Information flows from the customer, via the retailer, to the manufacturer (ex.
on-line retailers use this option, such as eBags)
Cost factor Performance
Inventory
Lower costs because of aggregation. Benefits of aggregation are highest fro low-demand, high-value items. Benefits are very large if product customization can be posponed 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
Performance characteristics of
Drop-Shipping (1)
Performance characteristics of Drop-Shipping (2)
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 very 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 manufaturers 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
Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011 Capitolo I. Il concetto di strategia
2. Manufacturer Storage with Direct Shipping and In-Transit Merge Network
Factories
Retailer In-Transit Merge
by Carrier
Customers This option combines pieces of the order coming from different locations so that the customer gests a single delivery (it has been used by direct sellers such as Dell). When a customer orders a Dell PC along with a Sony monitor, the package carrier picks up the pc from the Dell factory and the monitor from Sony factory. It then merges the two together at a HUB before making a single delivery to the customer.
Cost factor Performance
Inventory
Lower costs because of aggregation. Benefits of aggregation are highest fro low-demand, high-value items. Benefits are very large if product customization can be posponed at the manufacturer
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 (very sophisticated information infrastructure)
Performance characteristics of
In-Transit merge (1)
Performance characteristics of In-Transit merge (2)
Service factor Performance
Response time Similar to drop-shipping; may be marginally higher
Product variety Similar to drop-shipping: easy to provide a very high level of variety
Product
availability Similar to drop-shipping: easy to provide a high level of product availability because of aggregation at manufacturer Customer
experience Better than drop-shipping because only a single delivery has to be received
Time to market Similar to drop-shipping: fast, with the product available as soon as the first unit is produced
Order visibility Similar to drop-shipping: more difficult but also more important from a customer service perspective
Returnability Similar to drop-shipping: expensive and difficult to implement
Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011 Capitolo I. Il concetto di strategia
3. Distributor Storage with Carrier Delivery
Factories
Customers Warehouse Storage by Distributor/Retailer
Under this option, inventory is not held by manufacturers at the factories but is held by distributors/retailers in intermediate warehouses, and package carriers are used to transport products from the intermediate location to the final customer (ex. Amazon). Distributor storage required a higher level of inventory as the distributor/retailer warehouse generally aggregates demand uncertanty at a lower level than the manufacturer that is able to aggregate demand across all distributors/retailers.
Cost factor Performance
Inventory
Higher than manufacturer storage. Difference is not large for faster-moving items (high demand)
Transportation
Lower than manufacturer storage because an economic mode of transportation (truckloads) can be employed fro inbound shipments to the warehouse which is closer to the customer.
Reduction is highest for faster-moving items
Facilities and
handling
Somewhat higher than manufacturer storage because of a loss of aggregation. The difference can be large for very slow-moving items
Information
Simpler infrastructure compared to manufacturer storage
Performance characteristics of
Distributor Storage with Carrier Delivery(1)
Service factor Performance
Response time Faster than manufacturer storage because distributor warehouses are on average closer to customers and the entire order is aggregated before being shipped
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 because of the need to stock another stage in the supply chain
Order visibility Easier than manufacturer storage because there is a single shipment from the warehouse to the customer and only one stage of the sc is involved directly in filling the customer order
Returnability Easier than manufacturer storage (all returns can be processed at the warehouse itself
Performance characteristics of
Distributor Storage with Carrier Delivery (2)
Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011 Capitolo I. Il concetto di strategia
4. Distributor Storage with Last Mile Delivery
Factories
Customers
Distributor/Retailer Warehouse
This option refers to the distributor/retailer delivering the product to the customer’s home instead of using a package carrier (very common in the grocery industry). 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 the case when package delivery is used.
Cost factor Performance
Inventory
Higher than distributor storage with package carrier delivery because of a lower level of aggregation
Transportation
Very high cost given minimal scale economies.
Higher than any other distribution option
Facilities and
handling
Facility costs high given the large number of facilities required
Information
Simpler infrastructure compared to manufacturer storage. It requires the additional capability of scheduling delivery
Performance characteristics of
Distributor Storage with Last Mile Delivery (1)
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 (more comfortable for the customer to have them delivered home)
Time to market Slightly higher than distributor storage with package carrier delivery (the new product need to penetrate deeper the supply chain before it is available to the customers)
Order visibility It is less of an issue given the deliveries are made within 24 hours.
Order-tracking feature does become important to handle exceptions in case of incomplete or undelivered orders
Returnability Easier to implement than other options (the distributor warehouse is close to the customer)
Performance characteristics of
Distributor Storage with Last Mile Delivery (2)
Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011 Capitolo I. Il concetto di strategia
5. Manufacturer or Distributor Storage with Customer Pickup
Retailer Factories
Pickup Sites
DCs
Customers
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.
Cost factor Performance
Inventory They can be kept low with either manufacturer or distributor storage to exploit aggregation
Transportation Lower costs than the use of package carriers because significant aggregation is possible when delivering orders to a pickup site (inbound transportation)
Facilities and
handling Facility costs can be very high if new facilities have to be built. Costs are lower if existing facilities are used
Information Significant investment in infrastructure are required to provide visibility of the order until the customer picks it up
Performance characteristics of Manufacturer or
Distributor Storage with Customer Pickup (1)
Service factor Performance
Response time 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. In areas with high density of population, loss of convenience may be small (customers are close to the pickup point)
Time to market Similar to other manufacturer or distributor storage options Order visibility Difficult but essential. It require integration of several stages
in the supply chain.
Returnability Somewhat easier given that pickup location can handle returns
Performance characteristics of Manufacturer or
Distributor Storage with Customer Pickup (2)
Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011 Capitolo I. Il concetto di strategia
6. Retail Storage with Customer Pickup
The most traditional: inventory is stored locally at retail stores.
Customers walk into the retail store or place an order online and pick it up at the retail store
The main advantage of this option is that it can lower delivery costs and provide a faster response than other networks
The major disadvantage is the increased inventory and facility costs
Such a network is best suited for fast-moving items or
items for which customers value rapid response
Cost factor Performance
Inventory Higher than all other options. Lack of aggregation increases inventory costs. For fast-moving items there is a marginal increase in inventory even in this case
Transportation Lower than all other options because less expensive modes of transportation can be used to replenish product at the retail store
Facilities and
handling Higher than other options because many local facilities are needed. 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
Performance characteristics of Retail
Storage with Customer Pickup (1)
Service factor Performance
Response time Same-day (immediate) pickup possible for items stored locally at pickup site
Product variety Lower than all other options because it is more expensive Product
availability More expensive to be provided Customer
experience Related to whether shopping is viewed as a positive or negative experience by customer
Time to market Longer than the other options because the new product has to penetrate through the entire supply chain before it is available to customer
Order visibility Trivial for in-store orders. Difficult, but essential, for online and phone orders
Returnability Very easy given that pickup location can handle returns
Performance characteristics of Retail
Storage with Customer Pickup (2)
Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011 Capitolo I. Il concetto di strategia
E-Business and the Distribution Network
It is important to
understand what drove the succesfull
introduction of e-business in some
networks and not others, and how these
networks are likely to
evolve….
Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011 Capitolo I. Il concetto di strategia
Impact of E-Business on Customer Service - 1
Response time: e-business without a physical retail outlet takes longer to fulfill the customer request than a retail store.
However, there is no delay (shipping time) for products that can be downloaded
Product variety: e-business finds it easier to offer a larger selection of products than a traditional retail store because the physical space is not a constraint
Inventory: e-business increases the speed with which information on customer demand is disseminated throughout the sc. This improves the accuracy of forecasting and rationalizes the inventory decisions.
Customer experience: it benefits from more access (out of
regular business hours), customization and convenience.
Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011 Capitolo I. Il concetto di strategia
Time to market: introduction of new products is much quicker. A new product can be made available as soon as the first unit is ready to be produced
Returnability: it is harder with online orders, which typically arrive from a centralized location. The proportion of returns is also likely to be much higher because customer are unable to touch and feel product before their purchase
Direct sales to customers: this enhances revenues of manufacturer by bypassing intermediaries (thereby collecting the intermediary’s incremental revenue)
Flexible Pricing, Product Portfolio, and Promotions: an e- business can easily alter prices. This maximizes revenues by setting prices based on current inventories and demand.
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Impact of E-Business on Customer Service - 2
Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011 Capitolo I. Il concetto di strategia
