Designing Distribution Networks and Applications to E-Business Fall, 2014 Supply Chain Management: Strategy, Planning, and Operation Chapter 4 Byung-Hyun Ha

1 Contents  Role of distribution in the supply chain  Factors influencing distribution network design  Design options for a distribution network  E-business and the distribution network  Distribution networks in practice

2 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  Affecting the cost and the customer experience, and therefore driving profitability Efficiency vs. responsiveness  Different choice for similar distribution  Examples Wal-Mart, Seven-Eleven Japan, Webvan Dell, Gateway, Apple Proctor & Gamble  Terms  SKU, truckload (TL), less-than-truckload (LTL), package-load  Inventory turnover, fast-moving, slow-moving

3 Factors Influencing Network Design  Dimensions for evaluating network performance  Customer needs that are met  Cost of meeting customer needs  Tradeoff  customer service vs. cost to provide this level of service  Customer service influenced by network structure  Response time  Product variety  Product availability  Customer experience  Order visibility  Returnability

4 Factors Influencing Network Design  Relationship to the number of facilities

5 Factors Influencing Network Design  Inventory costs and number of facilities Response Time Number of Facilities Total Logistics Costs

6 Design Options for Distribution Network  Two key decisions  Delivered or customer pickup?  Intermediate locations or not?  Classification  Retail storage with customer pickup  Manufacturer storage with direct shipping  Manufacturer storage with direct shipping and in-transit merge  Distributor storage with carrier delivery  Distributor storage with last-mile delivery  Manufacturer or distributor storage with customer pickup  and others

7 Design Options for Distribution Network  Retail (manufacturer) storage with customer pickup Retailers (manufacturers) Suppliers/distributers Customers

8 Design Options for Distribution Network  Manufacturer storage with direct shipping

9 Design Options for Distribution Network  Manufacturer storage with direct shipping (cont’d)  Characteristics Slow-moving items Mixed with other type of networks for fast-moving items Aggregation Ownership structure of inventory at manufacturers Postponement and customization Build-to-order Usually employing package carriers  Performance Inventory, transportation, facilities and handling, information Response time, product variety, product availability, customer experience, time to market, order visibility, returnability  Best for low-demand and high-value items, customers who are willing to wait for delivery and accept several partial shipment

10 Design Options for Distribution Network  Manufacturer storage with direct shipping and in-transit merge

11 Design Options for Distribution Network  Manufacturer storage with direct shipping and in-transit merge (cont’d)  e.g., Dell + Sony  Using package carrier  Very sophisticated information infrastructure

12 Design Options for Distribution Network  Distributor storage with carrier delivery

13 Design Options for Distribution Network  Distributor storage with carrier delivery (cont’d)  e.g., Amazon  Slow-moving items in factories, fast-moving items in warehouse

14 Design Options for Distribution Network  Distributor storage with last mile delivery

15 Design Options for Distribution Network  Distributor storage with last mile delivery (cont’d)  e.g., Webvan, Peapod, Albertson, automotive spare parts industry  More warehouses are required (need to be close to customers)  Higher transportation cost Package carriers can aggregate delivery across retailer. Less expensive in large, dense cities Best if large quantity purchasing  Processing cost Much higher because all customer participation is eliminated Higher labor cost  Information handling Scheduling

16 Design Options for Distribution Network  Manufacturer or distributor storage with customer pickup

17 Design Options for Distribution Network  Selecting a distribution network design Retail storage with customer pickup Manufacturer storage with direct shipping Manufacturer storage with in-transit merge Distributor storage with carrier delivery Distributor storage with last-mile delivery Manufacturer storage with customer pickup Response time Product variety Product availability Time to market 1 to Customer experience Order visibility Returnability Inventory Transportation Facility and handling Information * 1: strongest, 6: weakest (relatively)

18 Design Options for Distribution Network  Selecting a distribution network design Retail storage with customer pickup Manufacturer storage with direct shipping Manufacturer storage with in-transit merge Distributor storage with carrier delivery Distributor storage with last-mile delivery Manufacturer storage with customer pickup High-demand product +2 22 11 0+1 11 Medium-demand product +1 1 Low-demand product 11 +10 11 Very-low- demand product 2 Many product sources +1 11 1 High product value 1 Quick desired response +2 22 22 11 +1 22 High product variety 1 Low customer effort 2 11 * +2: very suitable,  2: very unsuitable (relatively)

19 E-business and Distribution Network  E-business  online sales  Impact of e-business on customer service  Response time  Product variety  Product availability  Customer experience Personalized buying experience  Time to market  Order visibility  Returnability  Direct sales to customers  Flexible pricing, product portfolio, and promotions  Efficient funds transfer

20 E-business and Distribution Network  Impact of e-business on cost  Inventory  Facilities  Transportation  Information  Cases  Dell  Amazon  Peapod

21 Distribution Networks in Practice  Ownership structure of distribution network  As big an impact as the type of distribution network e.g., a 3PL who pursuits its own profit  Long-term consequences of choice of network type  e.g., car dealers  Exclusive distribution strategy or not  Customer preference on network type  Product price, commoditization, criticality  Integration of Internet and existing physical network