Distribution Network Design and Customer Experience

Distribution Networks

• Distribution networks connect suppliers, manufacturers, distributors, retailers, and customers.
• The diagram illustrates the interconnectedness of these entities.

Learning Objectives

• Understanding the function and types of distribution is crucial.
• Key factors, strategies, and design tools for distribution are vital.
• Applying planning and configuration models to address distribution challenges is important.

Role of Distribution in Supply Chain

• Distribution involves the movement and storage of products from suppliers to customers.
• It directly affects supply chain cost and customer value.
• Distribution network selection can achieve low-cost or high-responsiveness supply chain objectives.

Reasons for Distribution Networks

• Distributors handle contacts, expertise, and specialization.
• Reducing inventory, order processing, and customer service costs is a major function of distributors.
• Transaction contacts are reduced by distributors from 9 to 6 contacts.
• Companies focus more on key customers with distributors.

Types of Distribution Networks

• Industrial distribution networks involve manufacturers, industrial customers, distributors, and possibly a manufacturer representative.
• Consumer distribution networks include manufacturers, wholesalers, retailers, and possibly a jobber.

Typical Food Distribution Network

• Foods often have multiple interconnected channels in their distribution network.
• This example diagram shows a network involving food manufacturers, food service distributors, grocery wholesalers, food brokers, internet (direct), restaurants, specialty retailers (airlines etc), retailer and institutional buyers, retail chains, and internet retailers.

Factors Influencing Distribution Network Design

• Distribution network performance assessed based on customer value and cost of meeting customer needs.
• Customer service factors affected by network design include response time, product variety, product availability, customer experience, time to market, order visibility, and returnability.
• Supply chain costs affected by network design include inventories, transportation costs, facility and handling costs, and information costs.

Graphs

• Graphs show inverse relationships between required number of facilities and desired response time and between inventory costs and number of facilities.
• Graphs show inverse relationships between transportation costs and number of facilities, between facility costs and number of facilities.

Design Options for a Distribution Network

• Decisions need to be made about product delivery (to customer location or pickup point) and intermediary use.
• Six potential designs include direct shipping, in-transit merge, carrier delivery, last-mile delivery, customer pickup at manufacturer/distributor, and customer pickup at a retail storage facility.

Manufacturer Storage Options with Direct Shipping

• This option has lower costs due to aggregation.
• It has higher transportation costs.
• Facility costs are lower.
• Investment in information infrastructure is needed.

In-Transit Merge Network

• Similar to drop shipping, with lower transportation costs.
• Handling costs are higher than drop shipping.
• Information investment is somewhat higher.

Distributor Storage with Carrier Delivery

• Higher inventory cost compared to manufacturer storage; less for faster-moving items.
• Lower transportation cost than manufacturer storage.
• Moderate facility costs; higher for slow-moving items.
• Simpler infrastructure than manufacturer storage.

Distributor Storage with Last Mile Delivery

• Higher inventory cost than distributor storage with package carrier delivery.
• Very high transportation cost.
• Higher facility costs than other options.
• Information needs are similar to distributor storage with package carrier delivery.

Manufacturer or Distributor Storage with Customer Pickup

• Inventory fits other options; depends on location.
• Using an existing delivery network is cheaper.
• Facility costs can be higher if new facilities required.
• Information infrastructure investment is significant.

Retail Storage with Customer Pickup

• Inventory costs are higher.
• Transportation and facility costs lower, but significant handling costs at the pickup location.
• Information infrastructure investment needed.

Comparative Performance of Delivery Network Designs

• A table provides a comparative performance analysis of different delivery network designs based on factors like response time, order visibility, etc.

Delivery Networks for Different Product/Customer Characteristics

• A table categorizes factors influencing delivery network decisions based on product and customer characteristics.

Issues, Strategies, and Tools in Distribution Management

• Strategies like Just-in-time (JIT), Collaborative Planning, Forecasting & Replenishment (CPFR) use tools like MRP, MRPII, and DRP.
• The number of distribution centers, stock keeping units (SKUs), and strategic positioning affect inventory.

What is DRP?

• Material Requirements Planning (MRP) determines total production requirements.
• Distribution Resource Planning (DRP) uses customer demand to work backwards.
• DRP creates a phased plan to deliver from plants and warehouses.

DRP Requirements

• Forecasting of product demand.
• Current product inventory levels.
• Target safety stock levels.
• Replenishment quantity recommendations.
• Lead times for replenishment.

DRP Table for Food Products

• DRP example uses a table to project demand, inventory, replenishment needs, and costs for a food product across different months.

Combining DRP Tables for all DCs

• DRP tables help gather and analyze data for different distribution centers.
• Information concerning demands from each center is aggregated to the plant or a centralized control station for forecasting needs for each center.

Customer Order Promising

• Available-to-promise (ATP):
• Capable-to-promise (CTP):
• Profitable-to-promise (PTP).

Inventory at Multiple Locations and Consolidation

• Reducing inventory across multiple locations.
• Inventory increase with locations.
• Square root law estimates total inventory.

Square Root Law

• Formula for estimating total inventory.
• This has a fixed ratio compared to facilities.

Square Root Law Example

• Example uses a formula to determine the inventory needed when the facility count is reduced by a certain factor.

Square Root Assumptions

• Assumption of constant transfer rates
• Assumptions of invariant lead times and consistent customer demand.

Centralized Versus Decentralized Warehouses/DCs

• Centralized warehouses have lower safety stock and overhead.
• Decentralized warehouses have higher safety stock and provide shorter lead times.

Distribution Network Planning

• Data gathering, modelling of distribution problems, and solution implementation for minimum cost while maintaining customer expectations.

Data Collection

• Data needed for planning include customer locations, retailer locations, existing facilities, volumes, product types, transport needs, annual demand for each product at each location and cost of delivery and operational requirements, service expectations.

Data Aggregation

• Aggregating or grouping data to reduce complexity and increase efficiency when numerous points of distribution need to be considered.
• Gathering data for products delivered to specific zones.

Model and Data Validation

• Validating and making the data useful and in accordance with the companies specific processes
• Model and data validation is done by reconstructing the existing configuration and comparing with the models data.
• What-if scenarios are developed to test changes and their impact.

Solution Techniques

• Mathematical optimization techniques: Exact algorithms (guaranteed optimal solutions) like linear or integer programming, or heuristic algorithms (approximations) like Grid technique.
• Simulation models: Provide mechanisms to evaluate alternative designs.

Distribution Example

• Example shows how to select a distribution plan based on costs.

Heuristic Solution #1

• Finding the cheapest warehouse to supply customers and the cheapest plant for each warehouse.

Heuristic Solution #2

• Choosing the cheapest warehouse to supply customers considering both inbound and outbound costs.

Linear Programming (LP) Model

• Using an LP model.
• Variables and constraints for finding the optimal solution.

Summary of Key Learning Points

• Identifying key factors in distributing products
• Understanding different distribution options and their attributes
• Effectively using distribution planning and configuration models.
• How online sales affect the design of distribution networks.

Distribution Networks in Practice

• Consideration of factors like ownership structure, flexibility, product characteristics (price, commoditization), and customer preferences.
• Integrating internet capabilities with in-person services or direct retail distribution.

This quiz explores key concepts of distribution network design and its influence on customer service, supply chain costs, and inventory management. Test your knowledge on how different elements like facility numbers and transportation methods impact the overall efficiency and customer experience in distribution networks.