Supply Chain Distribution Mechanics

Distribution Networks

• Designing distribution networks involves understanding the relationships between suppliers, manufacturers, distributors, retailers, and customers.
• The diagram shows a complex network linking these elements.
• The diagram suggests multiple paths for product flow.

Learning Objectives

• Describe functions and types of distribution networks.
• Explain contributing factors, strategies, and tools in designing distribution networks.
• Apply distribution network planning and configuration models to solve problems.

Role of Distribution in Supply Chain

• Distribution encompasses the steps needed to move and store products from suppliers to customers within a supply chain.
• Distribution activities impact profitability through costs and customer value.
• Distribution networks can optimize supply chain objectives, ranging from low cost to high responsiveness.

Reasons for Distribution Networks

• Distributors offer expertise, specialization, and reduce costs associated with inventory, order processing, transportation, and customer service.
• Reduced transaction costs by having a single distributor.
• Companies can focus on key customers rather than many.

Types of Distribution Networks

• Two fundamental types, industrial and consumer, exist, alongside variations.
• Industrial networks involve manufacturers and industrial customers connected through intermediaries like distributors and representatives.
• Consumer networks link manufacturers through wholesalers, retailers, and sometimes jobbers to consumers.

Typical Food Distribution Network

• Presents a network example for food products in the manufacturing industry.
• Illustrates multiple distribution channels.
• Shows intermediaries such as food service distributors, grocery wholesalers, and food brokers, linking manufacturers to various market segments (restaurants, retailers, etc.).

Factors Influencing Distribution Network Design

• Distribution network performance is evaluated along two main dimensions:
  1. Value provided to the customer.
  2. Cost of meeting customer needs.
• The impact customer service and costs have on different distribution options are analyzed.
• The profitability of delivery networks is driven by revenue meeting customer needs and network costs.

Elements of Customer Service

• Network structure influences customer service:
• Response time
• Product variety
• Product availability
• Customer experience
• Time to market
• Order visibility
• Returnability

Supply Chain Costs

• Network structure affects costs associated with supply chains:
• Inventories
• Transportation
• Facilities and handling
• Information

Desired Response Time and Number of Facilities

• Graph illustrating the inverse relationship between the required number of facilities and desired response time.
• Fast response time requires increased facilities, leading to rise in cost.

Inventory Costs and Number of Facilities

• Graph illustrating a positive relationship between inventory costs and the number of facilities.
• Increased facilities generally increase storage and holding costs (inventory).

Transportation Costs and Number of Facilities

• Chart showcasing the relationship between transportation costs and the number of facilities. Shows optimum point for lowest transportation costs.

Facility Costs and Number of Facilities

• Graph showing increasing facility costs associated with a rising number of facilities.
• Adding facilities increases overall fixed costs.

Logistics Cost, Response Time, and Number of Facilities

• Illustrates the relationships between these three factors. There is a balance, with high facilities implying short response times, but increasing total costs.

Distribution Network Design Options

• Decisions focus on whether a product is delivered or picked up and whether an intermediary handles it.
• Options include direct shipping, in-transit merge, distributor storage, last-mile delivery, and retail storage with customer pickup.

Network Design Options - Manufacturer Storage with Direct Shipping

• Cost Factors: Inventory is lower due to aggregation; transportation is higher; facilities are lower; and information investment is high.
• Performance: Response time is long, product variety is high, product availability is high, customer experience is good, time to market is fast, order visibility is difficult, and returnability is expensive and difficult to implement.

Network Design Options - In-Transit Merge

• Cost Factors: Inventory is similar to drop shipping; transportation is lower; facilities and handling are high; and information investment is somewhat higher.
• Performance: Response time is similar to drop shipping, variety is similar, availability is similar, customer experience is better, time to market is similar, order visibility is similar, and returnability is similar.

Network Design Options - Distributor Storage with Carrier Delivery

• Cost Factors: Inventory is higher; transportation is lower; facility handling is somewhat higher; and information systems are simpler.
• Performance: Response is faster, lower variety, higher availability, better customer experience, higher time to market, easier order visibility, and easier returnability compared to manufacturer storage.

Network Design Options - Distributor Storage with Last-Mile Delivery

• Cost Factors: Inventory is higher; transportation is very high; facilities and handling are somewhat higher; and information is similar to distributor storage.
• Performance: Response time is very quick; variety is somewhat less than distributor storage with package carrier; product availability is expensive; customer experience is very good; time to market is slightly higher; order visibility is less of an issue; and returnability is easier.

Network Design Options - Manufacturer/Distributor Storage with Customer Pickup

• Cost Factors: Inventory can match other options; transportation is lower than using package carriers; facilities handling costs can be high depending on facilities choice, and information investment is significant.
• Performance: Response time is similar to package carrier delivery; product variety is similar; availability is similar; customer experience has lower home delivery; time market is similar; order visibility is difficult, but essential in the current model; returnability is somewhat easier.

Network Design Options - Retail Storage with Customer Pickup

• Cost Factors: Inventory is higher; transportation is lower; facility handling is higher impacting online cost, and information systems investment is required for online/phone orders.
• Performance: Response time is same day; variety is lower, availability is more expensive, customer experience is related to a positive customer perspective; time to market is high; order visibility is trivial for in-store; and returnability is easier.

Comparative Performance of Delivery Network Designs

• Table contrasting various delivery options based on response time, product variety, availability, customer experience, time to market, order visibility, returnability, inventory, transportation, facility handling, and information.

Delivery Networks for Different Product/Customer Characteristics

• Table illustrating how different distribution network options perform best for different product types and customer characteristics, such as high-demand, low-demand, product variety, or product value.

Issues, Strategies, and Tools

• Distribution management strategies (e.g. JIT, CPFR) utilizing planning tools (e.g. MRP, DRP) are crucial.
• Location, number of distribution centers (DCs), Stock Keeping Units (SKUs) are key strategic aspects.

What is DRP?

• DRP (Distribution Resource Planning) builds on MRP, creating a time-phased plan to distribute products from manufacturing locations to customers.
• DRP begins with customer demand and works backward.

DRP Requirements

• Forecast demand for each SKU
• Current inventory levels for each SKU
• Target safety stock
• Recommended replenishment quantity
• Replenishment lead times

Customer Order Promising (ATP/CTP/PTP)

• These promise-based systems involve product availability and delivery dates, prioritizing the most profitable options.

Inventory at Multiple Locations and Consolidation

• Inventory consolidation for multiple locations aims to reduce total inventory while maintaining customer service levels, as dictated by the "square root law".

The Square Root Law

• Calculates the total inventory needed in future facilities by factoring in existing facility inventory and numbers of facilities.
• Formula: X₂ = (X₁) * √(n₂/n₁) where n₁ = existing facilities and n₂ = future facilities.

Centralized vs. Decentralized Warehouses/DCs

• Centralized warehouses focus on risk pooling and lower overhead, but pose longer delivery times.
• Decentralized warehouses ensure quicker delivery but incur higher inventory costs.

Distribution Network Planning

• Involves data collection, modeling, and finding an optimal solution that minimizes distribution costs while adhering to service levels.

Data Collection

• Key data for distribution network planning (e.g., customer locations, warehouse data).

Data Aggregation

• Data aggregation (clustering/grouping similar data) can simplify complex data sets.

Model and Data Validation

• Validate models by comparing their forecasts to existing data, and through what-if scenarios (e.g., testing the impact of closing a warehouse).

Solution Techniques (to optimize networks)

• Mathematical optimization techniques include exact algorithms (linear programming for guaranteed optimal solutions).
• Heuristics find good, but not necessarily optimal, solutions (e.g., grid technique).
• Simulation provides a way to evaluate different network configurations.

Distribution Example

• A case study showcasing a distribution planning problem.
• Example: how several plants, warehouses, and customer demand regions can be optimized.

Heuristic Solutions

• Illustrates various approaches (e.g., selecting the cheapest warehouse to meet customer demand), to solve the distribution problem.

Linear Programming (LP) Model

• Introduces a mathematical approach to find an optimal distribution plan.

Distribution Networks in Practice

• Practical implications and factors impacting distribution network design in real-world scenarios (e.g., ownership, adaptability, pricing considerations, and the role of the Internet).