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“Education in Pursuit of Supply Chain Leadership”

Chapter 2

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Distribution Management Environment

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• Define inventory management

• Define inventory management objectives

• Describe what inventory management does

• Describe the different classes of inventory

• Identify the different levels of inventory management

• Review the characteristics of inventory in the supply chain

• Detail the strategic inventory management process

• Balance demand and supply objectives

Learning Objectives

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• Contrast the conflicting objectives of inventory management among marketing/sales, finance, and operations

• Understand inventory trade-off decisions

• Describe inventory and demand flows

• Define supply chain inventory and demand flows

• Describe inventory dynamics

• Understand how inventory provides value

• Determine whether inventory is an asset or a liability

• Assess the financial impact of inventory management

Learning Objectives (cont.)

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Inventory Management Basics

Chapter 2Distribution Management Environment

Defining the Distribution

Function

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Defining “Distributor”

“A business that does not manufacture its own products but purchases and resells these products.”

APICS Dictionary, 14th edition

“A business and industry that acts as a third party local representative and distribution point for a manufacturing firm. These firms may perform some light assembly or kitting of goods, but generally provides a buffer for finished goods. Distributors typically purchase the goods in quantity from the manufacturer and ship to customers in smaller quantities.”

Council of Supply Chain Management Professionals

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Defining Distribution

The activities associated with the movement of material, usually finished goods or service parts, from the

manufacturer to the customer. These activities encompass the functions of transportation, warehousing, inventory

control, material handling, order administration, site and location analysis, industrial packaging, data processing, and the communications network necessary for effective management. It includes all activities related to physical

distribution, as well as the return of goods to the manufacturer. In many cases, this movement is made

through one or more levels of field warehouses.

APICS Dictionary, 14th edition

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Inventory Management Basics

Chapter 2Distribution Management Environment

Revisiting the Supply Chain

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Supply Chain Constituents

Demand / Information /Payment Flow

Product / Invoicing Flow

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Basic Supply Chain Distribution Formats

Process based

The manufacturer operates as a single value-added delivery chain either delivering factory direct or through company-owned warehouses.

Market based

The manufacturer manages a limited set of logistics functions across a multidivisional or multiple-enterprise channel for joint delivery

Channel basedA manufacturer seeks to manage the distribution process by forming alliance with wholesalers and retailers

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Manufacturer-Based Channel FormatsFactory direct. Product is shipped and serviced directly from the factory’s finished goods warehouse. Product is sold through company catalogues, an internal sales force, or independent agents

Sales branches and offices. Manufacturers who distribute their own products through simple or complex matrices of sales offices and channel warehouses

Manufacturer-owned full-service wholesale distributor. An acquired wholesale distribution company serving the parent's markets.

Manufacturer's outlets. Manufacturer-owned retail outlets located in high-density markets. These stores are primarily used to liquidate seconds and excess inventory

License. A manufacturer contracts with an independent distributor or retailer, granting product and marketing exclusivity for a specific period of time

Consignment-locker inventories. The plant ships finished goods to a point of consumption, but title does not pass until the goods are consumed

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Merchant Wholesaler Channel FormatsFull-service wholesalers. Independent enterprises that buy finished products from producers and other wholesalers and sell to companies for resale or manufacturing consumption

Industrial distributors. Wholesale merchants who sell products exclusively to manufacturers

Limited-service wholesalers. Independent enterprises that offer a limited range of products and services to their customers

Cash-and-carry wholesalers. Normally stocks a limited line of fast-moving products that are sold to small retailers

Truck wholesalers. Performs primarily a selling and delivery function only

Rack Jobbers. Provides highly advertised, brand-name nonfood products and accompanying services to grocery, convenience, and drug stores

Drop shippers. Operates in industries associated with commodities handled in bulk, such as building materials, coal, lumber, and paper-based products

Mail-order wholesaler. Depends on the sale of products from a catalog

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Distribution Service Channel FormatsBrokers. Serve as intermediaries, matching buyers with sellers and assisting in price, product, and delivery negotiations

Manufacturer’s agents. Also termed manufacturers' representatives, these independent agents usually represent two or more manufacturers that produce complimentary product lines

Selling agents. Contracted by a manufacturer to sell the firm's entire production output

Purchasing agents. A product expert who, besides obtaining for the customer the best goods and prices available, provides consultative services

Commission merchants. Takes possession of goods from the producer and then sells them in the marketplace for the best price

Value-added reseller (VAR). A company that employs designers, engineers, or consultants that joint venture or have arrangements with manufacturers to sell and service equipment or products

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Distribution Retail FormatsFranchise. Product, brand recognition, and marketing expertise are sold to small entrepreneurs who in turn execute the functions of sales and delivery

Buying clubs. Provides manufacturers with the opportunity to penetrate certain niche markets or experiment with product variations

Mail-order/catalog. Non-store selling is performed through catalog literature

Food retailer. Sells a wide range of foodstuffs, health and beauty aids, and general merchandise bought from manufacturers and wholesalers

Department stores. National retailers that stock a broad mix of soft goods (clothing, food, and linens) and hard goods (appliance and hardware)

Specialty store. Offers a deep selection of merchandise in one line, such as women's apparel or electronics

Mass merchandisers. Similar to department stores, except product selection is broader and prices are usually low

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Export/Import Channel FormatsInternational trading company. performs functions such as the purchasing and selling of goods, arrangement of logistics services between exporters and importers, managing currency conversion and rate fluctuations, assisting with consulting advice, and other marketing and logistics issues

Export merchants. Similar to domestic merchant wholesalers, they purchase goods from manufacturers and wholesalers and then ship them to distribution points in foreign markets

Resident buyers. Employees of a company resident directly in an exporting country

Export commission house. Performs the same functions as a resident buyer but is not a company employee

Export management company. acts as a product line or foreign market specialist who represents that export for one or a group of noncompeting manufacturers and/or distributors

Allied manufacturer. Manufacturing firm that exports and imports products by using a foreign business partner

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Buyer-Initiated FormatsProducer’s cooperatives. Distribution organization formed by companies, usually in the same industry, that create an organization in which each member is a shareholder. The organization uses the combined strength of the members to leverage economies of scale so that smaller companies can compete with larger businesses

Buying groups. Similar to a producer's co-op, with the exception that it is less structured. Members can belong to multiple buying groups. A group can buy direct through manufacturers or through wholesale distribution channels. Buying groups use this format to purchase low volume items

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e-Business Formats

Business-to-business (B2B) channel formats

Independent trading exchanges (ITX). many-to-many marketplaces composed of buyers and sellers networked through an independent intermediary

Consortia trading exchange (CTX). some-to-many network consisting of a few powerful companies organized into a consortium along with their trading partners

Private trading exchange (PTX). Web-based trading communities hosted by a single company that recommends or requires trading partners participate as a condition of doing business

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e-Business Formats (cont.)

Business-to-customer (B2C) channel formats

e-Stores and e-tailers. This format seeks to simulate an actual shopping experience where consumers can browse through catalogs or use search mechanisms to locate, price compare, and order goods to be shipped directly to their homes

Third-party catalog services. Composed of multiple suppliers that provide a catalog for a group of customers frequenting a certain place, such as airline in-flight magazines and catalogs and in-room hotel publications

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Delivery Network FacilitatorsFinancial institutions. Provides a wide-range of banking functions ranging from cash management and lending to taxes, currency exchange, and payment. Other specialists in this area will handle other services like insurance and stock buying and selling

Marketing and advertizing agencies. Provides major marketing, advertising, and promotional campaigns

Technology services. Provides sophisticated technology tools that support ease of information transmission through the availability of wide-band data, voice, video, and text information transfer

Logistics service providers. Provides logistics (global trade services, inbound/outbound delivery, supplier management, inventory management, and payment); transportation (package delivery, intermodal transport, track and trace, fleet management, and equipment leasing);Warehousing (storage, pick/pack, cross-docking, delivery); special services (direct delivery, import/export/customs functions, financial services); and technology EDI, satellite/wireless communications, web enablement, and software solutions hosting)

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Inventory Management BasicsRole of Distribution

Channels

Chapter 2Distribution Management Environment

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Three Essential Distribution Problems

Functional performance

Reduced complexity

Specialization

Increasing the efficiency of time, place, and delivery utilities

Reducing the amount of transactions by routinization of business functions around common goals, channel arrangements, and expectations

Use of channel specialists to increase the velocity of goods and value-added services by reducing costs associated with selling, sorting, transporting, carrying inventory, order processing, and financial settlement

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Reducing Channel Transaction Complexity

PP P

CC C C C

ProducerP

C Customer

# transactions= P x C= 3 X 5 = 15

PP P

I

CC C C C

I Intermediary

# transactions= P + C= 3 + 5 = 8

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Sorting process

Sorting out

Accumulation

Allocation

Assorting

Separating a heterogeneous group of products, often acquired from multiple suppliers, into homogeneous subgroups.

Combining homogeneous stocks of products into larger groups of supply

Breaking down large lots of products into smaller lots for sale

Mixing similar or functionally related items into assortments to meet customer demand

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Channel Service Outputs

Bulk-breaking

Spatial convenience

Wait and delivery time

Product variety/ assortments

Breaking-down large lot quantities into a small quantity of a large number of diverse products

Locating products and services close to the customer satisfy customers' requirements to reduce search time and transportation cost

Reducing the length of time spanning the point when a customer enters an order and when it is received from the supplier

Purchasing related product families from multiple producers and then assembling the right combination of products and lot sizes to meet the requirements of the retailer and deliver it in a cost-effective manner

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Other Distribution Channel Functions

Selling and Promoting

Postponement

Transportation

Warehousing

Sequencing

Marketing Information

Using of internal and third-party partners to market, direct sell, inventory, and deliver products and services

Transforming semi-finished goods into their final form through the processes of sorting, labeling, blending, kitting, packaging, and light final assembly

Moving goods from one node in the supply channel to another to achieve time and place utilities

Ensure that the supply channel possesses sufficient stock to satisfy customer requirements and to act as a buffer guarding against uncertainties in supply and demand

Sorting goods into unique configurations necessary to fit the requirements of specific customers

Receiving information regarding product, marketplace issues, and competitors’ activities from the channel

MerchandizingPlacing products into special packaging or assembling in a display unit determined by marketing and sales campaigns

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Postponement Advantages

Reduced channel costs

Lead-time reduction

Inventory reduction

Customer response and

flexibility

Material handling

Cutting costs to have intermediaries perform value-added tasks by performing them internally

Removal of time products must spend in the supply channel being processed by intermediaries

Storage in the channel in a semi-finished state until final differentiation by the customer order, means much less finished goods in the supply pipeline

By moving semi-finished goods to downstream distribution facilities, customer response flexibility can be expanded without increasing inventory investment

Postponement targeted at unitization can help reduce labor and material handling costs while accelerating product movement

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Inventory Management BasicsDistribution Channel Transaction Flows

Chapter 2Distribution Management Environment

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Channel Transaction Functions

Product possession

Selling and promoting

Ownership

Risk

Negotiations

Channel activities associated with product warehousing and transportation

Selling to a global and local markets, creating brand awareness and market share, and broadcasting transaction data, sales plans, and promotions

Assuming ownership of goods and use of consignment selling

Taking ownership of goods incurs risk of financial loss. Also assuming responsibility for product failures, warranties, and price fluctuations

Attaining agreement of price and other sales terms. Should always be supportive of the overall competitiveness of the channel system

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Channel Transaction Functions (cont.)

Ordering flow

Payment flow

Financing

Information services

Management services/ consulting

The placement of customer and channel replenishment orders occur at all echelons levels in the supply chain

The flow of cash payment proceeds through the distribution channel from the customer back to the manufacturer

Purchasing inventories, providing for transportation, managing accounts receivables, and extending credit to their channel customers

Contract with channel specialists who possess the necessary equipment and technical skills to manage multiple facets of channel financial management

Assisting channel partners rationalize transaction processes by providing expert advice

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Transaction Flow Types

Movement of goods and services from the supplier to the customer

Movement of information and payment from the customer to the supplier

Functions that facilitate the buying and selling of goods and services

Functions that facilitate the transportation and storage of goods

Functions necessary to complete financial exchange and logistics transfer

Forward

Backward

Exchange

Logistics

Facilitating

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Levels of Channel Structures

Manufacturer

Customer

Distributor

Retailer

Distributor Distributor

Zero-echelonchannel

Two-echelonchannel

RegionalWarehouse Regional

Warehouse

Retailer

Retailer

Three-echelonchannel

Retailer

One-echelonchannel

Four-echelonchannel

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Inventory Management BasicsDistribution Channel Transaction Flows

Chapter 2Distribution Management Environment

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Channel Inventory Flows

ManufacturingOrder

ChannelResupply Order

Return Order/Scrap/Rework

Demand Flow

CustomerOrder

In-transit/Delivery

Obsolete/Damaged/

ReworkStores Production

FinishedGoods

ShippingDocuments

Components/Raw Materials/

MRO

WIPInventories

FinishedGoods

Service Parts

DistributionInventories

Finished GoodsComponents

Raw MaterialsMROInventory Flow

Processes

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Supply Chain Inventory and Demand Flows

ChannelInter-

mediariesRetailer

EndCustomer

DependentDemand

DerivedDemand

IndependentDemand

MaterialsSupplier

Producer

Demand Flow

Inventory Flow

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Supply Chain Demand Types

Derived

Independent

Dependent

Demand for finished goods coming from the end-use customer positioned at the end of the supply chain. While classically a retailer, the purchase point could be a distributor, catalog sales, Internet sales, or a manufacturer

Demand for finished goods originating with the customer-facing channel entity (i.e. retail) and placed on channel intermediaries and producers

Demand for materials and components calculated by a producer’s MRP system. Derived from finished goods bills of material exploded through the MRP system

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Little’s Law

Little’s Law:

Critical principle for measuring inventory throughput. Throughput is the rate at which product is received into and is sold out of stock.

Expressed as:

I (inventory) = D (throughput rate) * T (flow time)

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Substituting Information for Inventory

Supply Chain Integration

Increased Flexibility

Lower Costs

Time-Based Competition

Telescoping the Supply Pipeline

Channel Performance

Achieving the strategic and tactical integration of all channel intermediaries and producers

Increasing channel inventory flow by designing flexible and agile processes

Removing unnecessary buffers that add carrying costs and risk obsolescence

Increasing supply channel delivery speed to increase competiveness and reduce risk

Shrinking channel pipelines to reduce transit times and buffer inventories

Designing metrics that measure the performance of the entire supply chain

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Reverse Logistics Flows

Product Return

Waste Return

Component Return

Information Flows

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Factors Driving Reverse Logistics

Aftermarket savings

Competitive edge

Pressure

Environmental safe products

Environmental awareness

Recovery of precious metals, repaired for continued use, refurbished for resale, disassembled usable components, as well as conscientiously recycled

Ease of return, repair, and recycling adds to a product’s value. Growing “green” consciousness among customers adds to product branding

Consumers, shareholders, governmental legislation, and foreign trade pressuring to make products, processes, and distribution more sustainable

Increasing demand for products that are simple, clean, and less threatening to the environment

Strategies that capture a growing sense of environmental awareness, love of nature, and desire to preserve the health of the nonhuman world

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Reverse Logistics Hierarchy

Last resort: Send unusable, unrecyclable materials and components to a responsible landfill

Recycle

Recover energy

Reduce

Reuse

Recycle

Reuse

Recover energy

Responsible landfill

ReduceReducing resource use is considered to be the most responsible “green” strategy

Design products for reuse of materials and components and with easy upgrades to extend life

Similar to reuse; product materials reprocessed into new products or components

Dispose in responsible landfill

Dispose of product but recover energy in the process; e.g., “trash to energy” plants

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Defining Sustainability

United Nations Global Compact

The management of environmental, social, and economic impacts, and the encouragement of

good governance practice through the lifecycles of goods and services. The objective of supply chain sustainability is to create, protect, and grow long-term environmental, social, and economic value for all stakeholders involved in bringing products

and services to market

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Impact of Sustainability on Business

Good environmental management and sustainability concerns

Focus on organizational efforts to conserve energy, reduce waste and carbon footprints, and pursue the recycling of useable products and wastes

Public opinion and the power of choice

Heightened consumer awareness about protecting the environment, preserving the earth's finite natural resources, and increasing demand for green products

Public opinion and the power of choice

Use of sustainability practices to increase resource efficiency and reduce costs that can improve the financial bottom line across multiple supply channel partners, build a reputation for eco-friendliness, attract talented employees, and inspire customer loyalty

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Chapter 2

End of Session

“Education in Pursuit of Supply Chain Leadership”

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