Strategy for Direct to Store Delivery Authors: Amit Panditrao and Kishore Adiraju Advisor: Dr. Chris Caplice Sponsor: Niagara Bottling, LLC

Agenda Introduction Methodology Data analysis Transportation model Safety stock model Recommendations Future research MIT SCM ResearchFest

Where do these products come from? MIT SCM ResearchFest

DC Delivery Pitfalls Bulky and fast selling products Warehousing costs Getting products to the store is an age old question for the retailer MIT SCM ResearchFest

Direct To Store (DTS) delivery Benefits Sales growth Competitive advantage Better in-stock levels Reduction in total supply chain cost Getting products to the store is an age old question for the retailer MIT SCM ResearchFest

Thesis focus Research question Sponsor company What is the impact of DTS on supply chain costs? What is the best supply chain strategy to rollout DTS? Sponsor company Largest private label bottled water manufacturer in the US MIT SCM ResearchFest

Methodology MIT SCM ResearchFest

Methodology – Overview Data collection Sample selection Data analysis Models Transportation Inventory Sensitivity analyses Results MIT SCM ResearchFest

Methodology – DTS scenarios 100% DC Partial DC and DTS Multi-retailer 100% DTS Single-retailer 100% DTS MIT SCM ResearchFest

Data Analysis MIT SCM ResearchFest

Data analysis – Network and stores AZ, CA, NV 473 stores 4 DCs 1 Plant Plant DCs Geographical dispersion of stores of Customer A MIT SCM ResearchFest

Data analysis – Demand POS data of two product families Mean: 630 cases Median: 560 cases Range: 0 – 5,124 cases Standard Dev: 370 cases DTS demand: Lognormal (6.31, 0.54) MIT SCM ResearchFest

Transportation model MIT SCM ResearchFest

Transportation model Monte Carlo Simulation Annual cost and capacity estimates Basic period – one week Assumptions Rate per mile Stop-off charge Truck speeds Loading/Unloading times Order size / Stop distribution MIT SCM ResearchFest

Transportation cost estimation 3 Components: Line haul, local tour, stop-off Stop-off Line haul Local tour Stop-off Plant Stop-off Store cluster 13 store clusters in AZ, NV and CA MIT SCM ResearchFest

Transportation cost 42% increase MIT SCM ResearchFest

Multi-customer delivery Transportation cost reduces by 4% Local trip cost Stores more closely spaced MIT SCM ResearchFest

Sensitivity – Order size Stop-off contributes the maximum MIT SCM ResearchFest

Transportation vs Safety stock MIT SCM ResearchFest

Safety stock model MIT SCM ResearchFest

Niagara’s safety stock model Inputs Demand per store Customer response time (CRT) – Time window in which the manufacturer must deliver product to the store Manufacturing lead time distribution (MLT) Customer response time Probability (MLT > CRT) Manufacturing lead time Manufacturing lead time Order receipt On-time shipment Delivery date Back order MIT SCM ResearchFest

Retailer’s safety stock model LTDC SLDC LTStore SLStore LTDTS Safety Stock1Store Retailer’s Safety Stock SLStore Safety StockDC Safety Stock2Store MIT SCM ResearchFest

Niagara’s safety stock Inputs DC CRT = 5 days DTS CRT = 3 days Service level = 98.5% 76% increase MIT SCM ResearchFest

Retailer’s safety stock Inputs DC to store = 1 day Niagara to DC =5 days Niagara to Store =3 days DC service level = 75% Store service level = 99% 65% increase MIT SCM ResearchFest

Recommendations MIT SCM ResearchFest

Recommendations Large order sizes Multi-customer delivery Less complexity in scheduling store delivery Transportation cost savings vs. inventory cost increase Multi-customer delivery Confidentiality issues Additional truck loading/unloading time Lead time reduction Lesser safety stock in the system Trade-off with transportation cost MIT SCM ResearchFest

Recommendations Faster and flexible production Fulfill smaller and frequent DTS orders Manufacture within customer response time Collaborative partnership Forecasting, Promotion planning, Store ordering Share benefits Change Management Internally – Sales, Logistics, Inventory planning, Demand planning, IT Externally – Retailer (Merchandising, Stores, Supply chain), Carrier management MIT SCM ResearchFest

Future research For a manufacturer For a retailer Re-design network - Should the warehouse be located closer to metro areas? Own transportation fleet – With increased truck utilization, is owning a fleet worthwhile? Develop production flexibility – How much flexibility is needed for frequent and smaller DTS orders? For a retailer Evaluation methods for DTS proposal MIT SCM ResearchFest

Q&A MIT SCM ResearchFest