Designing the Distribution Network in a Supply Chain

The Role of Distribution in 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- art! Dell! "roctor # $amble

Factors Influencing Distribution 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 Influencing Distribution Network Design

Elements of customer service influenced by network structure:

% % % % % % &esponse time "roduct variety "roduct availability Customer experience 'rder visibility &eturnability )nventories *ransportation +acilities and handling )nformation

(upply chain costs affected by network structure:

% % % %

Service and Number of Facilities

,umber of +acilities

&esponse *ime

The Cost Response Time Frontier

Hi
-ocal +$ ix &egional +$

Cost

-ocal W)" Central +$ Central W)" Central &aw aterial and Custom production Custom production with raw material at suppliers

Low Low &esponse *ime Hi

Inventory Costs and Number of Facilities

)nventory Costs

,umber of facilities

Transportation Costs and Number of Facilities

*ransportation Costs

,umber of facilities

Facility Costs and Number of Facilities

+acility Costs

,umber of facilities

Total Costs Related to Number of Facilities

Total Costs

Total Costs

Facilities Inventory Transportation

Number of Facilities

!ariation in "ogistics Costs and Response Time with Number of Facilities

Response Time

Total Logistics Costs

Number of Facilities

Design #ptions for a Distribution Network

anufacturer (torage with Direct (hipping anufacturer (torage with Direct (hipping and )n*ransit erge Distributor (torage with Carrier Delivery Distributor (torage with -ast ile Delivery anufacturer or Distributor (torage with Consumer "ickup &etail (torage with Consumer "ickup (electing a Distribution ,etwork Design

$anufacturer Storage with Direct Shipping

Manufacturer

Retailer

Customers Product Flow Information Flow

In Transit $erge Network

Factories

Retailer

In-Transit Merge by Carrier

Customers

Product Flow Information Flow

Distributor Storage with Carrier Delivery

Factories

Warehouse Storage by Distributor Retailer

Customers Product Flow Information Flow

Distributor Storage with "ast $ile Delivery

Factories

Distributor Retailer Warehouse

Customers Product Flow Information Flow

$anufacturer or Distributor Storage with Customer %ickup

Factories

Retailer

Cross Doc" DC

!ic"u# Sites Customers Customer Flow Product Flow Information Flow

Comparative %erformance of Delivery Network Designs

Retail "torage with Customer Pic up Manufacturer "torage with !irect "hipping Manufacturer "torage with In# Transit Merge !istributor "torage with Pac age Carrier !elivery !istributor storage with last mile delivery Manufacturer storage with pic up

&esponse *ime "roduct /ariety "roduct 0vailability Customer Experience 'rder /isibility &eturnability )nventory *ransportation +acility # .andling )nformation

1 4 4 5 1 1 4 1 6 1

4 1 1 4 5 5 1 4 1 4

4 1 1 3 4 5 1 3 2 4

3 2 2 2 3 4 2 2 3 3

2 3 3 1 2 3 3 5 4 2

4 1 1 5 6 2 1 1 5 5

"inking %roduct Characteristics and Customer %references to Network Design

Retail "torage with Customer Pic up Manufacturer "torage with !irect "hipping Manufacturer "torage with In# Transit Merge !istributor "torage with Pac age Carrier !elivery !istributor storage with last mile delivery Manufacturer storage with pic up

.igh demand product edium demand product -ow demand product /ery low demand product any product sources .igh product value 7uick desired response .igh product variety -ow customer effort

82 81 -1 -2 81 -1 82 -1 -2

-2 -1 81 82 -1 82 -2 82 81

-1 9 9 81 -1 81 -2 9 82

9 81 81 9 82 81 -1 81 82

81 9 -1 -2 81 9 81 9 82

-1 9 81 81 9 -2 -2 82 -1

Distribution Networks in %ractice

*he

ownership structure of the distribution network can have as big as an impact as the type of distribution network *he choice of a distribution network has very longterm conse:uences Consider whether an exclusive distribution strategy is advantageous "roduct! price! commoditi;ation! and criticality have an impact on the type of distribution system preferred by customers

Network Design Decisions

+acility

role +acility location Capacity allocation arket and supply allocation

Factors Influencing Network Design Decisions

(trategic *echnological

acroeconomic "olitical )nfrastructure Competitive -ogistics and facility costs

$here inventory needs to be for a one wee order response time # typical results ##% & !C

Customer !C

$here inventory needs to be for a ' day order response time # typical results ##% ( !Cs

Customer !C

$here inventory needs to be for a ) day order response time # typical results ##% ' !Cs

Customer !C

$here inventory needs to be for a ne*t day order response time # typical results ##% &) !Cs

Customer !C

$here inventory needs to be for a same day + ne*t day order response time # typical results ##% (, !Cs

Customer !C

Cost &uildup as a Function of Facilities

Total Costs

Cost of -perations

"ercent (ervice -evel Within "romised *ime

Facilities Inventory Transportation Labor

Number of Facilities

' Framework for (lobal Site "ocation

Competitive (*&0*E$< ),*E&,0- C',(*&0),*( Capital! growth strategy! existing network "&'D=C*)', *EC.,'-'$)E( Cost! (cale>(cope impact! support re:uired! flexibility C' "E*)*)/E E,/)&', E,* $-'?0- C' "E*)*)',

".0(E ) (upply Chain (trategy

*0&)++( 0,D *0@ ),CE,*)/E( &E$)',0- DE 0,D (i;e! growth! homogeneity! local specifications "'-)*)C0-! E@C.0,$E &0*E 0,D DE 0,D &)(A

".0(E )) &egional +acility Configuration

".0(E ))) Desirable (ites

"&'D=C*)', E*.'D( (kill needs! response time +0C*'& C'(*( -abor! materials! site specific

0/0)-0?-E ),+&0(*&=C*=&E

".0(E )/ -ocation Choices

-'$)(*)C( C'(*( *ransport! inventory! coordination

Conventional Network
/endor DC aterials DC +inished $oods DC Customer DC Customer (tore Customer (tore "lant Warehouse Components DC +inished $oods DC Customer DC Customer DC Customer (tore Customer (tore Customer (tore

/endor DC

Component anufacturing

/endor DC

+inal 0ssembly

Tailored Network) Finished (oods Network

&egional +inished $oods DC ,ational +inished $oods DC &egional +inished $oods DC -ocal DC Cross-Dock (tore 1 Customer 1 DC (tore 1 (tore 2 (tore 2 (tore 3 (tore 3

-ocal DC Cross-Dock Customer 2 DC -ocal DC Cross-Dock

(ravity $ethods for "ocation

*on

ile-Center (olution

% x!y: Warehouse Coordinates % xn! yn : Coordinates of delivery

location n

d n = C x x nB + C y y nB
i =1

xi F i Fi
n

% dn : Distance to delivery location

n

x=

Fi di

% +n : 0nnual tonnage to delivery

location n

i =1

di Fi di

i =1

yi F i
n

2 C y B2 Min F i C xi xB + y i

y=

i =1

Fi

di

Network #ptimi*ation $odels

0llocating

demand to production facilities -ocating facilities and allocating capacity

.ey Costs: D +ixed facility cost D *ransportation cost D "roduction cost D )nventory cost D Coordination cost Which #lants to establish$ How to configure the networ"$

Demand 'llocation $odel

Which market is served by which plantE Which supply sources are used by a plantE xij = Quantity shipped from plant site i to customer j

Min cij xij

i =1 j =1

n m

sFtF
i =1 m

xij = D j xij K i
j =1

xij 9

%lant "ocation with $ultiple Sourcing

yi G 1 if plant is located at site i! 9 otherwise xij G 7uantity shipped from plant site i to customer j

Min f i y i + cij xij

i =1 i =1 j =1

n m

sFtF
i =1 n

xij = D j xij K i y i
j =1 m

i =1

y i k J y i I9!1H