Distribution Strategies

Chap 05 王仁宏 助理教授

國立中正大學企業管理學系

©Copyright 2001 製商整合科技中心

Centralized vs. Decentralized Control

• Decentralized system: local optimization

• Centralized system: global optimization– using advanced IT, all facilities in a

centralized system can have access to the same data

– to form partnerships to approach the advantages of a centralized system

Distribution Strategies

• Direct Shipping– No DC needed– Lead times reduced– “smaller trucks”– no risk pooling effects

• Warehousing• Cross-docking: warehouses rarely keep

items for more than 10 to 15 hours

Cross Docking

In 1979, Kmart was the king of the retail industry with 1891 stores and average revenues per store of $7.25 million

• At that time Wal-Mart was a small niche retailer in the South with only 229 stores and average revenues about half of those Kmart stores.

• Ten years later, Wal-Mart transformed itself; it has the highest sales per square foot, inventory turnover and operating profit of any discount retailer. Today Wal-Mart is the largest and highest profit retailer in the world.

What accounts for Wal-Mart’s remarkable success

• The starting point was a relentless focus on satisfying customer needs; Wal-Mart’s goal was simply to provide customers access to goods when and where they want them and to develop cost structures that enable competitive pricing

• The key to achieving this goal was to make the way the company replenished inventory the centerpiece of its strategy.

What accounts for Wal-Mart’s remarkable success?

• This was obtained by using a logistics technique known as cross-docking. Here goods are continuously delivered to Wal-Mart’s warehouses where they are dispatched to stores without ever sitting in inventory.

• This strategy reduced Wal-Mart’s cost of sales significantly and made it possible to offer everyday low prices to their customers.

Characteristics of Cross-Docking:

• Goods spend at most 48 hours in the warehouse,

• Avoids inventory and handling costs,

• Wal-Mart delivers about 85% of its goods through its warehouse system, compared to about 50% for Kmart,

• Stores trigger orders for products.

System Characteristics: (1/2)

• Very difficult to manage• Requires linking Wal-Mart’s distribution

centers, suppliers and stores to guarantee that any order is processed and executed in a matter of hours.

• Wal-Mart operates a private satellite-communications system that sends point-of-sale data to all its vendors allowing them to have a clear vision of sales at the stores

System Characteristics: (2/2)

• Need a fast and responsive transportation system:– Wal-Mart has a dedicated fleet of 2000

truck that serve their 19 warehouses• This allows them to

– ship goods from warehouses to stores in less than 48 hours

– replenish stores twice a week on average.

Distribution Strategies

StrategyAttribute

DirectShipment

CrossDocking

Inventory atWarehouses

RiskPooling

TakeAdvantage

TransportationCosts

ReducedInbound Costs

ReducedInbound Costs

HoldingCosts

No WarehouseCosts

No HoldingCosts

DemandVariability

DelayedAllocation

DelayedAllocation

Transshipment

• Definition: Shipment of items between different facilities at the same level in the supply chain to meet some immediate need.

• Most at the retail level• What is the value of this? Risk pooling• What tools are needed?

– Communication– transportation

• What if the system is decentralized?

Central vs. Local Facilities

• Safety Stock: risk pooling

• Overhead

• Economies of Scale

• Lead Time

• Service

• Transportation Costs

Pull Vs. Push Strategies

Push Strategies• Production decisions based on forecasts• Manual purchase orders and invoices are

employed• Ordering decisions based on inventory &

forecasts.

Push Strategies• Single retailer, single manufacturer.

– Retailer observes customer demand, Retailer orders qt from manufacturer.

RetailerManufacturer External demandproduct

Orders

• Excess finished goods inventory • Larger and more variable production batches• Unacceptable service level• Product obsolescence• Inefficiency

- Excess capacity

- Low utilization of resources

- High transportation cost

Problems with Push Strategies:

Pull Strategies

• Single retailer, single manufacturer.– Retailer observes customer demand– Retailer orders from manufacturer.

RetailerManufacturer External demandproduct

POS data

• Production is demand driven• Faster information flow mechanisms are used• Decrease in:

– lead time– inventory at the retailers and manufacturers– variability in the system

• Distribution facilities are transformed from storage points to coordinators of flow.

• But: – Harder to leverage economies of scale– Doesn’t work in all cases

Pull Strategies

Push and Pull Systems

• To take advantage of both

• How can this be accomplished? … Chap 8

Memo