Session 6- Distribution strategies

Debriefing

Distribution strategies
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 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

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Distribution Design Examples

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 Factors Influencing
Distribution Network Design

• Distribution network performance evaluated along two dimensions

1. Customer needs that are met
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

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 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

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 Factors Influencing
Distribution Network Design
• Supply chain costs affected by
network structure:
– Inventories
– Transportation
– Facilities and handling(Operations)

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 Desired Response Time and
Number of Facilities

Chopra and Meindl, 2007

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 Inventory Costs and
Number of Facilities

Chopra and Meindl, 2007

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 Transportation Costs and
Number of Facilities

Chopra and Meindl, 2007

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 Facility Costs and
Number of Facilities

Chopra and Meindl, 2007

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Logistics Cost, Response Time, and
Number of Facilities

Chopra and Meindl, 2007

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 Distribution Strategies
• Various distribution strategies
– How the products are distributed from one supply entity to
another till the product reaches to the ultimate customer
• Challenges and opportunities of these strategies

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 Distribution Strategies

Through intermediate
Directly shipped inventory storage
point(s)

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 Direct Shipment Network
to Single Destination

Chopra and Meindl, 2007

• For products with high volume and low demand uncertainty

• Economies of scale: FTL shipments
• Provide good customer experience
• High level of cycle stock
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 Direct Shipment Distribution
Strategies
• Advantages:
– The retailer avoids the expenses of operating a distribution center
– Lead times are reduced.
• Disadvantages:
– Risk-pooling effects are negated
• Commonly used scenarios:
– Retail store requires fully loaded trucks
– Often mandated by powerful retailers
– Lead time is critical.
– Prevalent in the grocery industry
• lead times are critical because of perishable goods.

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Direct Shipping with Milk Runs

• This system has been used in various industries and the

automobile manufacturing companies
• Ex. Toyota

• Type of distribution system is designed for suppliers or retailers

located near each other

• The use of milk runs allows deliveries to multiple locations to be

consolidated on a single truck, resulting in better utilization of the
truck and somewhat lower costs

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Direct Shipping with Milk Runs

Chopra and Meindl, 2007

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 Through intermediate inventory storage
point(s)

Traditional
Cross docking
warehousing

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 Traditional Warehousing
• Distribution centers or warehouses hold stock/ inventory
• Provides goods to downstream customers as and when
needed
• Risk pooling can be applied

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 Central Vs. local facility

• Number of warehouses/distribution
centers
• How far located from customers

Number, location and size of each

facility

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 Central vs. Local Facilities

• Centralized facilities
– Employ both fewer warehouses and distribution centers
– Facilities are located further from customers.
• Other factors:
– Safety stock. Lower safety stock levels with centralized facilities
– Overhead. Lower total overhead cost with centralized facilities
– Economies of scale. Greater economies of scale with centralized facilities
– Lead time. Lead time to market reduced with local facilities
– Service.
• Utilization of risk pooling better with centralized
• Shipping times better with local
– Transportation costs.
• Costs between production facilities and warehouses higher with local
• Costs from warehouses to retailers lesser with local

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 A Hybrid Decision

• Some products use centralized strategy while others use

local strategy

– Low-volume with high demand uncertainty

– High-volume and low demand uncertainty

• Not an either or decision

• Varying degrees of centralization and localization due to
the varying levels of advantages and disadvantages

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 Cross-Docking

• Popularized by Wal-Mart
• Warehouses function as inventory coordination points
rather than as inventory storage points.
• Goods arriving at warehouses from the manufacturer:
– are transferred to vehicles serving the retailers
– are delivered to the retailers as rapidly as possible.
• Goods spend very little time in storage at the warehouse
– Often less than 12 hours
– Limits inventory costs and decreases lead times

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 Cross-Docking

Chopra and Meindl, 2007

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https://www.youtube.com/watch?v=P57D4F0yFNA

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 Issues with Cross-Docking

• Require a significant start-up investment and are very difficult to manage

• Supply chain partners must be linked with advanced information systems for
coordination

• A fast and responsive transportation system is necessary

• Forecasts are critical, necessitating the sharing of information.

• Effective only for large distribution systems

– Sufficient volume every day to allow shipments of fully loaded trucks from the
suppliers to the warehouses.
– Sufficient demand at retail outlets to receive full truckload quantities

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 Which Strategy to Adopt?
• Different approaches for different products
• Factors:
– Customer demand and location
– Service level
– Costs => transportation & inventory costs
– Demand Variability

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Comparing Distribution Strategies
Network Structure Pros Cons

Direct shipping No intermediate warehouse High inventories (due to

Simple to coordinate large lot size)
Direct shipping with Lower transportation costs for small lots Increased coordination
milk runs Lower inventories complexity
All shipments via Lower inbound transportation cost High outbound
central DC with through consolidation transportation cost
inventory storage Lower inventory due to risk pooling
All shipments via local Lower outbound transportation cost Increased inventory cost
DC with inventory
storage
All shipments via Low inventory requirement Increased coordination
central DC with cross- Lower transportation cost through complexity
dock consolidation
Tailored network Transportation choice best matches Highest coordination
needs of individual product and store complexity

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Class Exercise

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 Question 1:

 
ODS Electronics is an Australian manufacturer of electronics equipment. The company has a single
manufacturing facility in Sydney. Australia has seven main regions and so ODS Electronics distributes its
products through seven regional warehouses located in Sydney (New South Wales), Brisbane (Queensland),
Darwin (Northern Territory), Melbourne (Victoria), Perth (Western Australia), Hobart (Tasmania), and
Adelaide (South Australia). Each of these regions is a separate market served by a single regional
warehouse. Customers are retail outlets and they receive products directly from the regional warehouse in
their region. Each customer is assigned to a single market and receives deliveries only from the one regional
warehouse in this state.
 
The regional warehouses receive items directly from the manufacturing facility. Typically, it takes about two
weeks to satisfy an order placed by any of the regional warehouses.
 
Over the past five years ODS has been under increasing pressure from competitors. Customers are putting
pressure on ODS Electronics to improve the service level and lower costs. To achieve these objectives of
improving service levels and lowering costs, ODS Electronics is considering an alternative distribution
strategy in which the seven regional warehouses are replaced with a single, central, warehouse that will be
in charge of all customer orders.
 
 
• Explain how you would design a new logistics network consisting of only one warehouse.

• Explain the strategic advantages and disadvantages of the new suggested distribution strategy compared
to the existing strategy.
 
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 Question 2:

You are the Supply Chain Manager of a mobile phone company. Your products are bundled with purchasing
phone “plans”. Customers may receive one of your phones as part of that plan. The customer must
receive the phone – delivered to their door - within 24 hours of placing their order. The phones are small,
and manufactured in Malaysia.
 
Assuming that customers are all in Singapore, sketch a distribution network that will meet these
requirements. Provide 2 advantages of the structure you have selected, and also 2 issues that must be
managed in maintaining profit and service levels.
 
Assuming that customers are all in Australia, sketch a distribution network that will meet these
requirements. Provide 2 advantages of the structure you have selected, and also 2 issues that must be
managed in maintaining profit and service levels.
 

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 Question 3:

ABC is a manufacturer of consumer products based in Singapore. They currently source most of their raw
materials and components from extremely reliable suppliers in Singapore. Overall, they order 26,000
components from 1,400 suppliers. Deliveries are frequent and in small batches and ABC does not hold much
inventory. However, in the last five years there has been increasing cost pressure and ABC is aware that they
can source many of these materials at much lower costs from other countries (such as China).

The ABC Supply Chain Manager believes they manage two basic categories of products:

• 'Basic' consumer products which have steady sales each year, where the product designs only change every two
or three years. There are relatively low profit margins on the products. Sales can be predicted with a high degree
of accuracy.
• 'Luxury' consumer products which are carefully branded and considered highly desirable by consumers. The
products undergo frequent and significant design changes each year. There are higher profit margins on the
products. Sales fluctuate and are difficult to forecast. Significant sales may occur on the release of new designs
but quickly decrease to a more stable level after introduction.
 
These products are manufactured in Singapore and then sold to retail store chains around SE Asia and Australia
(such as JB Hi-Fi and Dick Smith Electronics in Australia). Currently, ABC distributes these products to the retail
store chains. ABC holds inventory in a network of warehouses/distribution centres over South East Asia and
Australia. The Supply Chain Manager is keen to evaluate other distribution strategies.

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 Question 3(Continue):

• How does the proliferation of different product models with different

features make the supply chain more difficult to manage?
 
• Demand uncertainty influences supply chain design. Evaluate the
opportunity for ABC to benefit from the two distinct classifications of
products ('basic' or 'luxury' items).
 
• How can the Supply Chain Manager change arrangements with suppliers
and/or customers to benefit from the concept of 'risk pooling'?
 
 
• Evaluate the opportunity for ABC to use direct shipment to serve
customers, instead of the current approach.
 

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Question 4:(FCG Game: we will do it in Lab
session today)
The objectives of the exercise:
Learn about cross functional trade-offs
Create more understanding of the TFC case
 
The exercise can be made in 2 steps:
1. Explore trade-offs
2. Present trade-offs per role
 
3. Explore trade offs
 
Make new teams by grouping the same roles together, so all VP sales in one group etc…
Per role make a list of the most important decisions for that role
Prioritize and choose the top 3
For this top 3 explore the trade offs
If I am going to change this decision it will influence … because …
Try to think about as many influences as possible per decision
They will find out that most influences are outside their own department (cross functional trade-offs)
 
2. Present trade-offs per role
 
Present the trade offs to the other teams, so every role-team makes a presentation to the rest
 
The question that will arise is: how to manage all these trade-offs?
 
For managing the trade-offs, you need to have a strategy!

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