LOGISTICS & SUPPLY CHAIN MANAGEMENT

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1 LOGISTICS & SUPPLY CHAIN MANAGEMENT Part 3 Designing Distribution Networks C O R R A D O C E R R U T I

2 The Role Capitolo I. of Il concetto Distribution di strategia 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). 2

3 Factors Capitolo I. Il Influencing concetto di strategia 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 3

4 Factors Capitolo I. Il Influencing concetto di strategia 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) 4

5 Factors Capitolo I. Il Influencing concetto di strategia Distribution Network Design 2. Supply chain costs affected by network structure: Inventories Transportation Facilities and handling Information 5

6 Capitolo I. Il concetto di strategia Service and Number of Facilities Number of Facilities 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. Response Time 6

7 Inventory Capitolo Costs I. Il concetto and di strategia Number of Facilities Inventory Costs 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. Number of facilities 7

8 Transportation Costs Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011 Transportation Capitolo I. Il concetto di Costs strategia and 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. Number of facilities 8

9 Variation in Logistics Costs and Response Time with Number of Facilities Response Time 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. Total Logistics Costs Number of Facilities 9

10 Design Capitolo I. Options Il concetto di strategia for a Distribution Network Managers must make two key decisions when designing a distribution network: o o Will product be delivered to the customer location or picked up from a preordained site? 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 10

11 1. Manufacturer Capitolo I. Il concetto Storage di strategia 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) 11

12 Performance characteristics of Drop-Shipping (1) Cost factor Inventory Transportation Facilities and handling Information Performance 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 Higher transportation costs because of increased distance and disaggregate shipping Lower facility costs because of aggregation. Some saving on handling costs if manufacturer can manage small shipments or ship from production line Significant investment in information infrastructure to integrate manufacturer and retailer 12

13 Performance characteristics of Drop-Shipping (2) Service factor Response time Product variety Product availability Customer experience Time to market Order visibility Returnability Performance 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 Easy to provide a very high level of variety Easy to provide a high level of product availability because of aggregation at manufacturer Good in terms of home delivery but can suffer if order from several manufaturers is sent as partial shipments Fast, with the product available as soon as the first unit is produced More difficult but also more important from a customer service perspective Expensive and difficult to implement 13

14 2. Manufacturer Capitolo I. Il concetto Storage di strategia with Direct Shipping and In-Transit Merge Network Factories Retailer In-Transit Merge by Carrier 14 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.

15 Performance characteristics of In-Transit merge (1) Cost factor Inventory Transportation Facilities and handling Information Performance 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 Somewhat lower transportation costs than dropshipping Handling costs higher than drop-shipping at carrier; receiving costs lower at customer Investment is somewhat higher than for dropshipping (very sophisticated information infrastructure) 15

16 Service factor Response time Product variety Product availability Customer experience Time to market Order visibility Performance characteristics of In-Transit merge (2) Performance Similar to drop-shipping; may be marginally higher Similar to drop-shipping: easy to provide a very high level of variety Similar to drop-shipping: easy to provide a high level of product availability because of aggregation at manufacturer Better than drop-shipping because only a single delivery has to be received Similar to drop-shipping: fast, with the product available as soon as the first unit is produced 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 16

17 3. Distributor Capitolo I. Il concetto Storage di strategia with Carrier Delivery Factories Warehouse Storage by Distributor/Retailer Customers 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.

18 Performance characteristics of Distributor Storage with Carrier Delivery(1) Cost factor Inventory Transportation Facilities and handling Information Performance Higher than manufacturer storage. Difference is not large for faster-moving items (high demand) 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 Somewhat higher than manufacturer storage because of a loss of aggregation. The difference can be large for very slow-moving items Simpler infrastructure compared to manufacturer storage 18

19 Performance characteristics of Distributor Storage with Carrier Delivery (2) Service factor Response time Product variety Product availability Customer experience Time to market Order visibility Returnability Performance Faster than manufacturer storage because distributor warehouses are on average closer to customers and the entire order is aggregated before being shipped Lower than manufacturer storage Higher cost to provide the same level of availability as manufacturer storage Better than manufacturer storage with drop-shipping Higher than manufacturer storage because of the need to stock another stage in the supply chain 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 Easier than manufacturer storage (all returns can be processed at the warehouse itself 19

20 4. Distributor Capitolo I. Il concetto Storage di strategia with Last Mile Delivery Factories Distributor/Retailer Warehouse Customers 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.

21 Performance characteristics of Distributor Storage with Last Mile Delivery (1) Cost factor Inventory Transportation Facilities and handling Information Performance Higher than distributor storage with package carrier delivery because of a lower level of aggregation Very high cost given minimal scale economies. Higher than any other distribution option Facility costs high given the large number of facilities required Simpler infrastructure compared to manufacturer storage. It requires the additional capability of scheduling delivery 21

22 Performance characteristics of Distributor Storage with Last Mile Delivery (2) Service factor Response time Product variety Product availability Customer experience Time to market Order visibility Returnability Performance Very quick. Same day to next-day delivery Somewhat less than distributor storage with package carrier delivery but larger than retail stores More expensive to provide availability than any other option except retail stores Very good, particularly for bulky items (more comfortable for the customer to have them delivered home) 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) 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 Easier to implement than other options (the distributor warehouse is close to the customer) 22

23 5. Manufacturer Capitolo I. or Il concetto Distributor di strategia Storage with Customer Pickup Factories DCs Retailer Pickup Sites 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.

24 Performance characteristics of Manufacturer or Distributor Storage with Customer Pickup (1) Cost factor Inventory Performance 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 handling and 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 24

25 Performance characteristics of Manufacturer or Distributor Storage with Customer Pickup (2) Service factor Response time Product variety Product availability Customer experience Time to market Order visibility Returnability Performance Same-day delivery possible for items stored locally at pickup site Similar to other manufacturer or distributor storage options. Similar to other manufacturer or distributor storage options 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) Similar to other manufacturer or distributor storage options Difficult but essential. It require integration of several stages in the supply chain. Somewhat easier given that pickup location can handle returns 25

26 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 26

27 Performance characteristics of Retail Storage with Customer Pickup (1) Cost factor Inventory Transportation Facilities and handling Information Performance 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 Lower than all other options because less expensive modes of transportation can be used to replenish product at the retail store 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 Some investment in infrastructure required for online and phone orders 27

28 Performance characteristics of Retail Storage with Customer Pickup (2) Service factor Response time Product variety Product availability Customer experience Time to market Order visibility Returnability Performance Same-day (immediate) pickup possible for items stored locally at pickup site Lower than all other options because it is more expensive More expensive to be provided Related to whether shopping is viewed as a positive or negative experience by customer Longer than the other options because the new product has to penetrate through the entire supply chain before it is available to customer Trivial for in-store orders. Difficult, but essential, for online and phone orders Very easy given that pickup location can handle returns 28

29 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. 29

30 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. 30

31 Capitolo I. Il concetto di strategia Impact of E-Business on Customer Service - 2 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. 31

32 Capitolo I. Il concetto di strategia Impact of E-Business on Cost Inventory: an e-business can lower inventory levels and inventory cost by improving supply chain coordination and creating a better match between supply and demand Facilities: an e-business can reduce network facility costs by centralizing operations, thereby decreasing the number of facilities required Transportation: if the products can be downloaded, the costs and time for delivery can be reduced. Otherwise, aggregate inventories may result in higher outbound transportation costs per unit Information: visibility, share planning and forecasting can be improved using Internet and Information Technology 32

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