module 2- designing the supply chain network
TRANSCRIPT
Module 2Designing the Supply Chain
Network
Supply Chain Management
Outline
The 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 Summary of Learning Objectives
The Role of Distributionin 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
Distribution directly affects cost and the customer experience and therefore drives profitability
Choice of distribution network can achieve supply chain objectives from low cost to high responsiveness
Examples: Wal-Mart, Dell, Proctor & Gamble.
Factors InfluencingDistribution Network Design
Distribution network performance evaluated along two dimensions at the highest level:– Customer needs that are met– Cost of meeting customer needs
Distribution network design options must therefore be compared according to their impact on customer service and the cost to provide this level of service
Factors InfluencingDistribution Network Design
Elements of customer service influenced by network structure:– Response time– Product variety– Product availability– Customer experience– Order visibility– Returnability
Supply chain costs affected by network structure:– Inventories– Transportation– Facilities and handling– Information
Service and Number of Facilities
Number of Facilities
Response Time
The number of facilities determines the response time to meet customers demand. It is not correct to assume that customers
always want their order to be fulfilled immediately.
Inventory Costs and Numberof Facilities
Inventory Costs
Number of facilities
As the number of facilities in supply chain increases, the inventory and inventory
related costs are also increase.
Transportation Costs andNumber of Facilities
TransportationCosts
Number of facilities
Increasing the number of warehouse locations decreases the average outbound
distance to the customer and makes outbound transportation distance a smaller fraction of the total distance traveled by the
product.
Inbound TC: Costs incurred in bringing material into a facilityOutbound TC: Costs of sending material out of facility.
Facility Costs and Numberof Facilities
FacilityCosts
Number of facilities
Facility cost decreases as the number of facilities is reduced because a
consolidation of facilities allows a firm to exploit economies of scale.
Response TimeResponse Time
Variation in Logistics Costs and Response Time with Number of Facilities
Number of FacilitiesNumber of Facilities
Total Logistics CostsTotal Logistics Costs
Network Design Options for a Distribution Network
To design and set up the distribution network a firm has to consider issues of how many depots would be needed and where to locate them.
Here the focus is on designing a logistics strategy to transport products from plants to depots.
There are many types of options to design a distribution network in the present time, but each varies according to the need.
Network Design Options for a Distribution Network
Before designing a distribution system it is essential to consider the most important questions such as:
Whether the product will be delivered to the customer location or picked up from a preordained site?
Whether the product flow will be through an intermediary?
Based on the choices for the two decisions, there are 6 distinct distribution network that are classified as:
Network Design Options for a Distribution Network
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 Consumer
Pickup Retail Storage with Consumer Pickup
1. Manufacturer Storage withDirect Shipping
Manufacturer
Retailer
Customers
Product Flow
Information Flow
Advantages & Disadvantages
Advantages:1. Centralized inventories at the Manufacturer2. Cost of storage can be minimized3. High level of product variety to be made available 4. Handling cost can be significantly reduced.
Disadvantages:1. Transportation cost is high because of average outbound distance2. Good information infrastructure required to provide product availability
information3. Response time is more4. Handling returns may be difficult:
a) Customer to return the product to the manufacturer > Incurs High Transportation & coordination costb) Retailer to set-up a separate facility to handle returns > Requires investment in a facility to handle returns.
2. In-Transit Merge Network Factories
Retailer
Product Flow
Information Flow
In-Transit Merge by Carrier
Customers
It combines pieces of the order coming from different
locations so that customer gets a single delivery.
Advantages:The main advantage of in transit merge over direct shipping is the somewhat lower transportation cost and improved customer experience.
Disadvantages:1. Additional efforts during the merge, so this can be best suited
only for low and medium demands.2. Compared to direct shipping, in transit merge requires a
higher volume from each manufacturer to be effective. If there are too many sources, in-transit merge can be very difficult to coordinate and implement.
Advantages & Disadvantages
3. Distributor Storage with Carrier Delivery
Factories
Customers
Product FlowInformation Flow
Warehouse Storage by Distributor/Retailer
In this alternative, inventory is not held by manufacturers at the factories but its held by distributors/retailers in intermediate warehouses & package carriers are used to transport products from the intermediate location to the final consumer.
Advantages:1. Transportation costs are somewhat lower2. The information infrastructure required is significantly less
complex3. Response time with distributor storage is better than with the
manufacturer storage4. Customer convenience is high5. Order visibility is easier & Return ability is better.
Disadvantages:1. Facility costs and Processing costs are higher2. Real-time visibility between the customer & the manufacturer
is not present.
Advantages & Disadvantages
4. Distributor Storage with Last Mile Delivery
Factories
Customers
Product Flow
Information Flow
Distributor/Retailer Warehouse
Refers to the distributor/retailer delivering the product to the customers home instead of using a package carrier.
Advantages:1. Return ability is best with last mile delivery because trucks
making deliveries can also pick up returns from customers.2. Response time is faster than the use of package carriers.3. The customer experience is very good using this option.4. Order visibility is less of an issue & Order tracking becomes
important in case of incomplete or undelivered orders.
Disadvantages:1. Transportation costs are higher2. Facility and processing costs are higher3. In areas with high labor cost, it is very hard to justify distributor
storage with last mile delivery.
Advantages & Disadvantages
5.Manufacturer or Distributor Storage with Customer Pickup
Factories
Retailer
Pickup Sites
Product FlowInformation Flow
Cross Dock DC
Customer Flow
Customers
In this approach, inventory is stored at the manufacturer or distributor warehouse but customer place their orders online or on the phone & then come to designate pick-up points to collect their orders.
Orders are shipped from the storage site to the pick up points as needed.
5.Manufacturer or Distributor Storage with Customer Pickup
Advantages & Disadvantages Advantages1. Lower delivery and inventory costs2. For customers, returning the product will be easy3. Less response time comparable to the use of package carriers.
Disadvantages1. The major hurdle is the increased handling cost at the pick up
site.2. Facility costs are high if new pick up sites have to be built.3. More processing costs because each order must be matched with
a specific customer when they arrive4. A significant information infrastructure is needed to provide
visibility of the order until the customer picks it up.
Distribution Networks in Practice The ownership structure of the distribution network
can have as big as an impact as the type of distribution network
The choice of a distribution network has very long-term consequences
Consider whether an exclusive distribution strategy is advantageous
Product, price, commoditization, and criticality have an impact on the type of distribution system preferred by customers
Issues to be considered in Distribution Networks in Practice
Centralization VS. Regionalization Energy Flexibility Global Marketplace Government Involvement Information Systems Accountability Reverse Logistics
Centralization VS. Regionalization In distribution network planning, there is a well established relationship between
the number of distribution points, transportation costs and customer service targets.
In a graphical sense, the point at which these three entities merge is the optimum balance of facility and transportation costs to develop a low-cost, high service distribution network.
Normally, as distribution networks become more centralized, so do the internal support structures such as facility management, order entry, customer service and data processing.
Depending on the degree of centralization achieved in support staffs, it is not uncommon to see cost savings of 50% or higher over decentralized networks.
The service levels, limitations on total facility size; risk mitigation and throughput peaks must be factored into the decision matrix.
Energy
Any significant shift in the cost of energy could have an impact on operating costs and distribution.
Many distribution projects that are otherwise viable fail once the cost of energy becomes a factor.
This is especially true for energy-intensive facilities such as refrigerated warehouses.
For this reason, it is crucial to work with all energy providers to determine the load that a prospective operation would put on the local energy system and develop solutions that conserve energy while achieving goals.
Some interesting energy solutions are: Abatement Programs:
Many energy providers provide incentives to users who cut back their usage during defined high load periods. This could be as simple as running the facility on minimal power during off-shifts or as complicated as metering the use of the facility or using a secondary power source (high power generator or solar power) to run normally on a reduced energy load.
High-Efficiency Units:
Many companies install high-efficiency appliances and fixtures in a facility to conserve energy usage with no performance penalty. There is some investment required, but the payback is often reduced rates and/or a lower monthly bill.
Flexibility
It is a key to continued success for some and survival for others. When designing a distribution facility, specifying versatile equipment is a critical requirement.
The latest technology may look nice at start up, but if it cannot keep pace with unpredictable events, it is simply a waste of money.
Planning for likely (and unlikely) changes in the distribution profile should drive the warehouse design and equipment specifications.
For the majority of distribution operations, flexible equipment is the more practical choice.
Global Marketplace In the ever-changing supply chain, global impact must always be
considered. This could be as minor as a domestic customer wanting direct shipments to
an international location, or as major as an acquisition by a global company or addition of a key global account. Successful distribution operations are ready for this type of change.
Transportation systems should be designed with exports in mind; there should be contingencies for customs documentation and international shipping paperwork.
Operations should be designed in a manner that product re-labelling or special packaging for international customers can be accomplished easily.
Facilities may need to accommodate inbound or outbound airfreight or ocean freight containers.
Customer service functions may need to operate in 24- hour mode to assist customers in all time zones.
Preparedness is the critical element in a global marketplace. If you are not a global company today, your success drive into that marketplace is questioned sooner.
Government Involvement Just as government involvement has an impact on distribution, distribution
leadership has an obligation to be involved and aware of legislation that involves their industry.
Many decisions are made daily at a local, state, and federal level that impact distribution operations.
Taxes, labour regulations, transportation restrictions, and infrastructure decisions are continually up for review and discussion at every level of government. Without proper input, uninformed decisions often have a dramatic effect on the distribution community.
In addition, involvement in professional societies is an effective way to track the pulse of legislative movement and also an ideal forum to make our concerns known.
For some ambitious souls, a direct role in local or municipal government may be an effective and fulfilling way to make an impact. By being proactive, distribution leaders can ensure that distribution and government entities can collaborate to provide benefit to both sides without unpleasant surprises.
Information Systems
In today’s e-enabled world, timely and accurate information is a requirement. The days of keypunching in daily distribution activity and rightly updates to host financial systems are becoming a distant memory for successful distribution operations. Today’s reality is that distribution execution systems must be:
Real-Time : Customer requirements are moving toward being able to instantly track an order through every step of the fulfilment process to delivery. Optimally, this information is linked to an Internet front-end where a customer can easily log in and see the exact status of their order. Real-time interfaces and host system updates enable this customer-focused initiative.
Standardized : With the high growth associated with a successful distribution operation, many of these companies are finding that the investment to develop and maintain an in-house system no longer is viable. Standardized, industry-tailored software is now the rule rather than the exception. Software companies leverage their client base to continually update their product, adding far more base functionality than inflexible legacy systems.
Accountability
A successful distribution operation must have accountability. Accountability is made possible by effective leadership, clear communications, and efficient systems and equipment to enable productive operations and a fulfilling work environment.
Accountability requires that leadership make difficult decisions while maintaining the commitment of the organization.
Accountability requires establishing standards, identifying improvement opportunities and measuring performance. Also required is some form of a reward process that answers the inevitable question, “What is in this for me?” Care must be taken that any rewards are tied to something that can be quantified as a true benefit to the organization; rewards without a basis will result in lack of credibility and a process that will ultimately fail.
Reverse Logistics How to handle the products that are coming back into
the operation as well as any returnable packaging that must be accounted for on a regular basis is a challenge. The decision on whether to accept the product, whether a refused shipment, an authorized customer return, or an unexpected return must be planned for and communicated with the distribution operation as well as the receiving and handling process for the product will likely ensue.