Chapter 7: DistributionStrategies7-1
7-1 Chapter 7: Distribution Strategies
7.1 IntroductionFocus on the distribution functionVariouspossible distribution strategies,andtheopportunities and challenges associated withthesestrategiesTwofundamental distribution strategiesItemscanbedirectlyshippedfromthesupplierormanufacturertotheretailstoresorendcustomerUseintermediateinventorystoragepoints(typicallywarehousesand/ordistributioncenters)IssueswithwarehousesManufacturingstrategy(make-to-stockvs.make-to-order)NumberofwarehousesInventorypolicyInventoryturn overratioInternalwarehousesvs.outsidedistributorOwnedbyasinglefirmorbyavarietyoffirms7-2
7-2 7.1 Introduction ⚫ Focus on the distribution function. ⚫ Various possible distribution strategies, and the opportunities and challenges associated with these strategies. ⚫ Two fundamental distribution strategies: ⚫ Items can be directly shipped from the supplier or manufacturer to the retail stores or end customer ⚫ Use intermediate inventory storage points (typically warehouses and/or distribution centers). ⚫ Issues with warehouses ⚫ Manufacturing strategy (make-to-stock vs. make-to-order) ⚫ Number of warehouses ⚫ Inventory policy ⚫ Inventory turn over ratio ⚫ Internal warehouses vs. outside distributor ⚫ Owned by a single firm or by a variety of firms
7.2 Direct Shipment DistributionStrategiesAdvantages:The retailer avoids the expenses of operating a distributioncenterLead times are reducedDisadvantages:Risk-pooling effects arenegatedManufacturer and distributor transportationcostsincreaseCommonly used scenarios:Retail store requiresfullyloaded trucksOftenmandatedbypowerful retailersLead time is criticalManufacturer may be reluctant but mayhave no choicePrevalent inthegroceryindustryleadtimesarecriticalbecauseofperishablegoods7-3
7-3 7.2 Direct Shipment Distribution Strategies ⚫ Advantages: ⚫ The retailer avoids the expenses of operating a distribution center ⚫ Lead times are reduced. ⚫ Disadvantages: ⚫ Risk-pooling effects are negated ⚫ Manufacturer and distributor transportation costs increase ⚫ Commonly used scenarios: ⚫ Retail store requires fully loaded trucks ⚫ Often mandated by powerful retailers ⚫ Lead time is critical. ⚫ Manufacturer may be reluctant but may have no choice ⚫ Prevalent in the grocery industry ⚫ lead times are critical because of perishable goods
7.3. Intermediate InventoryStoragePoint StrategiesVariety of characteristics distinguishdifferentstrategiesLengthoftimeinventoryisstored atwarehousesanddistribution centersStrategies:Traditional warehousing strategydistributioncenters and warehouseshold stock inventoryprovidetheirdownstreamcustomerswith inventoryasneededCross-docking strategywarehousesand distributioncentersserveas transferpointsforinventorynoinventoryisheldatthesetransferpointsCentralized pooling andtransshipmentstrategiesmaybeuseful whenthere is a large varietyofdifferentproducts7-4
7-4 7.3. Intermediate Inventory Storage Point Strategies ⚫ Variety of characteristics distinguish different strategies. ⚫ Length of time inventory is stored at warehouses and distribution centers. ⚫ Strategies: ⚫ Traditional warehousing strategy ⚫ distribution centers and warehouses hold stock inventory ⚫ provide their downstream customers with inventory as needed. ⚫ Cross-docking strategy ⚫ warehouses and distribution centers serve as transfer points for inventory ⚫ no inventory is held at these transfer points. ⚫ Centralized pooling and transshipment strategies ⚫ may be useful when there is a large variety of different products
Traditional WarehousingInventory managementand risk poolingkeyfactorsOtherfactorsalsoplayasignificantroleCentralizedvsDecentralized ManagementCentralvsLocalFacilities7-5
7-5 Traditional Warehousing ⚫ Inventory management and risk pooling key factors ⚫ Other factors also play a significant role ⚫ Centralized vs Decentralized Management ⚫ Central vs Local Facilities
Centralized vsDecentralizedManagementDecentralized systemEachfacility identifies its most effective strategy withoutconsidering the impact on the other facilities inthe supplychain.Leadstolocal optimizationCentralizedsystemdecisions are made at a central location for the entiresupplynetwork.Typical objective:minimize thetotal cost of the systemsubject to satisfying some service-level requirementsCentralized control leads toglobal optimizationAtleastaseffectiveasthedecentralized systemAllowuseofcoordinated strategiesIfsystemcannotbecentralizedoftenhelpfultoformpartnershipstoapproach theadvantagesof a centralized system7-6
7-6 Centralized vs Decentralized Management ⚫ Decentralized system ⚫ Each facility identifies its most effective strategy without considering the impact on the other facilities in the supply chain. ⚫ Leads to local optimization. ⚫ Centralized system ⚫ decisions are made at a central location for the entire supply network. ⚫ Typical objective: minimize the total cost of the system subject to satisfying some service-level requirements. ⚫ Centralized control leads to global optimization. ⚫ At least as effective as the decentralized system. ⚫ Allow use of coordinated strategies ⚫ If system cannot be centralized ⚫ often helpful to form partnerships to approach the advantages of a centralized system
Central vs.Local FacilitiesCentralizedfacilitiesEmploybothfewerwarehouses anddistributioncentersFacilitiesare located furtherfromcustomersOtherfactors:Safetystock.Lower safetystocklevelswithcentralizedfacilitiesOverhead.Lowertotaloverhead cost with centralized facilitiesEconomies of scale.Greatereconomies of scalewithcentralized facilitiesLead time. Lead time to market reduced with local facilitiesService.Utilizationof riskpoolingbetterwithcentralizedShippingtimesbetterwithlocalTransportationcostsCostsbetweenproductionfacilitiesandwarehouseshigherwithlocalCostsfromwarehousestoretailerslesserwithlocal7-7
7-7 Central vs. Local Facilities ⚫ Centralized facilities ⚫ Employ both fewer warehouses and distribution centers ⚫ Facilities are located further from customers. ⚫ Other factors: ⚫ Safety stock. Lower safety stock levels with centralized facilities ⚫ Overhead. Lower total overhead cost with centralized facilities ⚫ Economies of scale. Greater economies of scale with centralized facilities ⚫ Lead time. Lead time to market reduced with local facilities ⚫ Service. ⚫ Utilization of risk pooling better with centralized ⚫ Shipping times better with local ⚫ Transportation costs. ⚫ Costs between production facilities and warehouses higher with local ⚫ Costs from warehouses to retailers lesser with local
A Hybrid DecisionSome products use centralized strategywhile others use local strategyNotaneitherordecisionVaryingdegreesofcentralizationandlocalizationduetothevaryinglevelsofadvantages and disadvantages7-8
7-8 A Hybrid Decision ⚫ Some products use centralized strategy while others use local strategy ⚫ Not an either or decision ⚫ Varying degrees of centralization and localization due to the varying levels of advantages and disadvantages
Cross-DockingPopularizedbyWal-MartWarehouses function as inventory coordinationpoints rather than as inventory storage pointsGoodsarriving at warehousesfromthemanufacturer:are transferredto vehicles serving theretailersare delivered to the retailers as rapidly as possibleGoodsspend very little time in storage at thewarehouseOftenlessthan12hoursLimits inventory costs and decreases lead times7-9
7-9 Cross-Docking ⚫ Popularized by Wal-Mart ⚫ Warehouses function as inventory coordination points rather than as inventory storage points. ⚫ Goods arriving at warehouses from the manufacturer: ⚫ are transferred to vehicles serving the retailers ⚫ are delivered to the retailers as rapidly as possible. ⚫ Goods spend very little time in storage at the warehouse ⚫ Often less than 12 hours ⚫ Limits inventory costs and decreases lead times
Issues with Cross-DockingRequire a significant start-up investment and arevery difficult to manageSupplychainpartners mustbe linked withadvancedinformationsystems for coordinationAfast and responsive transportation system isnecessaryForecasts are critical,necessitating the sharingofinformationEffective onlyforlarge distribution systemsSufficientvolume every day to allow shipments of fullyloaded trucksfromthesupplierstothewarehousesSufficient demand at retail outlets to receive fulltruckload quantities7-10
7-10 Issues with Cross-Docking ⚫ Require a significant start-up investment and are very difficult to manage ⚫ Supply chain partners must be linked with advanced information systems for coordination ⚫ A fast and responsive transportation system is necessary ⚫ Forecasts are critical, necessitating the sharing of information. ⚫ Effective only for large distribution systems ⚫ Sufficient volume every day to allow shipments of fully loaded trucks from the suppliers to the warehouses. ⚫ Sufficient demand at retail outlets to receive full truckload quantities