DESIGNING THE SUPPLY

CHAIN NETWORK
BY SATYA PRAKASH JOSHI
THE ROLE OF DISTRIBUTION IN SUPPLY CHAIN

• Distribution refers to the steps to move and store a product from

the supplier stage to customer stage in the supply chain.
• Distribution occurs between every pair of stages in the supply chain.
• Raw materials and components are moved from suppliers to
manufacturers, whereas finished products are moved from the
manufacture to end customer.
• Distribution is a key driver of the overall profitability of a firm
because it affects both the supply chain cost and the customer
experience directly.
I.E

• Worlds most profitable companies, Wal-Mart and 7-Eleven Japan,

have built the success of their entire business around outstanding
distribution design and operation.
• Wal-Mart, distribution allows the company to provide high
availability levels of relatively common products at a very low cost.
• In Case of 7-eleven Japan, effective distribution provides a very high
level of customer responsiveness at a reasonable cost.
FACTORS INFLUENCING DISTRIBUTION NETWORK
DESIGN

• Distribution should be evaluated along two dimension

• Customer needs that are met (Responsiveness)
• Cost of meeting customer needs. (Efficiency)

• Firm must evaluate the impact on customer service and cost as it

compares different network options.
 CONT…

• Elements of customer service influenced by network

structure:
• Response time – receive order
• Product variety – different kind
• Product availability – stock (inventory)
• Customer experience – customers requirement and other
experience.
• Order visibility – track of order placement to delivery.
• Returnability – handling of unsatisfactory things.
CONT…

• Supply chain costs affected by network structure:

• Inventories – high inventory increase cost, low inventory low
inventory cost
• Transportation
• Inbound transportation cost
• Outbound transportation cost always must be high
• Facilities and handling
• Increasing the facilities decrease total transportation cost.
• Information
DESIGN OPTIONS FOR A DISTRIBUTION NETWORK

Distribution Network choice from the manufacturer to the end

customer.
Managers must make two key decisions,
• Will product to be delivered to the customer location or picked up
from specific side.
• Will product flow through an intermediate location.
CONT…

Based on industry answer of those above question will be,

• 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
MANUFACTURER STORAGE WITH DIRECT SHIPPING

• Also referred to as drop-shipping, with product delivered directly

from the manufacturer to the customer.
• No inventories of retailers, only flows information to manufacturer.
• Supply chain is able to provide high level of product availability with
lower level of inventories.
• Drop-shipping provides a good customer experience in the form of
delivery to the customer location.
Manufacturer Storage with Direct Shipping
(Drop Shipping)

Mfr

Retailer

Customer Product Flow

Information
Flow
 Performance Characteristics of Manufacturer Storage
with Direct Shipping Network

Cost Factor Performance

Inventory Lower costs because of aggregation. Benefits of
aggregation are highest for low demand, high value items.
Benefits are very large if product customization can be
postponed ate manufacturer.
Transportation Higher transportation costs because of increased distance
and disaggregate shipping.
Facilities and Lower facility costs because of aggregation. Some saving
handling on handling costs if manufacturer can manage small
shipments or ship from production line.
Information Significant investment in information infrastructure to
integrate manufacturer and retailer.
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Service Factor Performance

Response Time Long response time of one to two weeks because of
increased distance and two stages for order processing.
Response time may vary by product, thus complicating
receiving.
Product Variety Easy to provide a very high level of variety.
Product Availability Easy to provide a high level of product availability
because of aggregation at manufacturer.
Customer Experience Good in terms of home delivery but can suffer if order
from several manufacturers is sent as partial shipments.
Time to market Fast, with the product available as soon as the first unit is
produced.
Order visibility More difficult but also more important from a customer
service perspective.
Returnability Expensive and difficult to implement.
MANUFACTURER STORAGE WITH DIRECT SHIPPING
AND IN-TRANSIT MERGE

• It is like a drop shipping. In-transit merge combines pieces of the order

coming from different locations so that the customer gets a single
delivery.
• For eg, when a customer orders a PC from Dell along with a Sony
monitor, the package carrier picks up the PC from the Dell factory and the
monitor from the Sony factory; it then merges the two together at a hub
before making a single delivery to the customer.
• This approach has the greatest benefits for products with high value
whose demand is difficult to forecast.
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In-transit merge Net work

SONY HP Dell

Factorie
s

In-transit merge
Retailer By Carrier

Customers Customers
Product Flow
Information
Flow
Performance Characteristics of In-Transit Merge
Cost Factor Performance
Inventory Similar to drop shipping.
Transportation Somewhat lower transportation costs than drop shipping.

Facilities and handling Handling costs higher than drop shipping at carrier; receiving costs
lower at customer.
Information Investment is somewhat higher than for drop shipping.

Service Factor Performance

Response Time Similar to drop-shipping; may be marginally higher.
Product variety Similar to drop shipping.
Product Availability Similar to drop-shipping.
Customer experience Better than drop-shipping because a single order has to be received.

Time to market Similar to drop-shipping.

Order visibility Similar to drop-shipping.
Returnability Similar to drop-shipping.
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DISTRIBUTOR STORAGE WITH CARRIER DELIVERY

• Under this, inventory is not held by manufacturers at the factories but is held by
distributors/retailers in intermediate warehouses.
• Package carriers are used to transport products from the intermediate location to
the final customer.
• I.e Amazon, as well industrial distributors such as W.W. Grainger and McMaster-
Carr, have used this approach combined with drop-shipping from a manufacturer.
• Higher inventory, demand uncertainty.
• It is well suited for medium-to-fast moving items.
 Factorie
s
Distributor Storage

Customers

Product Flow
Information Flow
 Performance Characteristics of Distributor storage with Carrier Delivery
Cost Factor Performance
Inventory Higher than manufacturer storage. Difference is not large for faster-moving items.

Transportation Lower than manufacturer storage. Reduction is highest for faster-moving items.

Facilities and handling Somewhat higher than manufacturer storage. The difference can be large for very slow-
moving items.

Information Simpler infrastructure compared to manufacturer storage.

Service Factor Performance

Response Time Faster than manufacturer storage.
Product variety Lower than manufacturer storage.
Product availability Higher cost to provide the same level of availability as manufacturer storage.

Customer experience Better than manufacturer storage with drop-shipping.

Time to market Higher than manufacturer storage.

Order visibility Easier than manufacturer storage.
Returnability Easier than manufacturer storage
DISTRIBUTOR STORAGE WITH LAST MILE DELIVERY

• Last-mile delivery refers to the distributor/retailer delivering the product

to the customer’s home instead of using a package carrier.
• Webvan, Peapod, Albertsons have used last-mile delivery in the grocery
industry.
• Kozmo and Urbanfetch tried to set up home-delivery network for a variety
of products but failed to survive.
• The automotive spare parts industry is one where distributor storage with
last-mile delivery is the dominant model. It is very expensive for dealers to
carry all spare parts in inventory.
CONT…

• Unlike package carrier delivery, last mile delivery requires the

distributor warehouse to be much closer to the customer
• because limited radius can be served with last-mile.
• Distributor higher inventory than others
 Factories

Distributor/
Retailer
Warehouse

Product Flow
Information
Flow
 Performance Characteristics of Distributor Storage
with Last-Mile Delivery
Cost Factor Performance

Inventory Higher than distributor storage with package carrier delivery.

Transportation Very high cost given minimal scale economies. Higher than
any other distribution option.

Facilities and handling Facility costs higher than manufacturer storage or distributor
storage with package carrier delivery, but lower than a chain
of retail stores.

Information Similar to distributor storage with package carrier delivery.

Service factor Performance

Response time Very quick. Same day to next-day delivery.

Product variety Somewhat less than distributor storage with package carrier
delivery but larger than retail stores.
Product availability More expensive to provide availability than any other option
except retail stores.
Customer experience Very good, particularly for bulky items.

Time to market Slightly higher than distributor storage with package carrier
delivery.
Order traceability Less of an issue and easier to implement than manufacturer
storage or distributor storage with package carrier delivery.
Returnability Easier to implement than other options. Harder and more
expensive than a retail network.
MANUFACTURER OR DISTRIBUTOR STORAGE WITH
CUSTOMER PICKUP

• In this approach, inventory is stored at the manufacturer or

distributor warehouse but customers place their orders online or on
the phone and then travel to designated pickup points to collect
their merchandise.
• Orders are shipped from the storage site to the pickup points as
needed.
• Such a network is likely to be most effective if existing locations
such as coffee shops, convenience stores, or grocery stores are used
as pickup sites, because this type of network improves the
economies from existing infrastructure.
I.E

• 7dream.com and otoriyose-bin, operated by 7-Eleven Japan, which

allows customer to pick up online orders at designated store.
• B2B W.W. Grainger, whose customers can pick up their orders at
one of the W.W. Grainger retail outlets.
• Walmart launched its “site to store) service that allows customer to
order thousands of products online at Walmart.com and have them
shipped in stores (seven to 10 business days)
Customer Flow Informatio
Product n Flow Factories
Flow
Performance Characteristics of Network with Consumer Pickup sites

Cost Factor Performance

Inventory Can match any other option, depending on the location of

inventory.
Transportation Lower than the use of package carriers, especially if using an
existing delivery network.

Facilities and handling Facility costs can be very high if new facilities have to be built.
Costs are lower if existing facilities are used. The increase in
handling cost at the pickup site can be significant.

Information Significant investment in infrastructure required.

Service Factor Performance

Response time Similar to package carrier delivery with manufacturer or distributor

storage. Same day delivery possible for items stored locally at pick-
up sites.

Product variety Similar to other manufacturer or distributor storage options.

Product availability Similar to other manufacturer or distributor storage options.

Customer experience Lower than other options because of the lack of home delivery. In
areas with high density of population, loss of convenience may be
small.
Time to market Similar to manufacturer storage options.

Order visibility Difficult but essential.

Returnability Somewhat easier given that pickup location can handle returns.
RETAILER STORAGE WITH CUSTOMER PICKUP

• Inventory is stored locally at retail stores.

• Customers walk into the retail store or place an order online or by
phone and pick it up at the retail store.
• It is best suited for fast-moving items or items for which customers
value rapid response.
 Performance Characteristics of Local storage at Consumer Pickup sites
Cost Factor Performance
Inventory Higher than all other options.
Transportation Lower than all other options.
Facilities and handling Higher than other options. The increase in handling cost at pickup site can be
significant for online and phone orders.
Information Some investment in infrastructure required for online and phone orders.
Service Factor Performance
Response time Same-day pickup possible for items stored locally at pickup site.
Product variety Lower than all other options.
Product availability More expensive to provide than all other options.

Customer experience Related to whether shopping is viewed as a positive or negative experience by

customer.
Time to market Highest among distribution options.
Order visibility Trivial for in-store orders. Difficult, but essential, for online & phone orders.
Returnability Easier than other options given that pickup location can handle returns.
E-BUSINESS AND DISTRIBUTION NETWORK
IMPACT OF E-BUSINESS ON CUSTOMER SERVICE

RESPONSE TIME
• In selling physical product that cannot be downloaded.
• Customer may not use internet to order a product.
• Customer requires a short response time.
PRODUCT VARIETY
• Offering the same selection at a retail store would require a huge
location with a correspondingly large amount of inventory.
PRODUCT AVAILABILITY

• Depends of orders of customer and their demands giving rise to

more accurate forecasts.

CUSTOMER EXPERIENCE
• Allow access to customers who may not be able to place orders
during regular business hours.
FASTER TIME TO MARKET

• A firm can use e-business to introduce a new product much more

quickly that a firm that uses physical channel.

ORDER VISIBILITY
• The internet makes it possible to provide visibility of order status.
Order info, company info, location info.
RETURN ABILITY

• Return ability is harder with online orders.

• It is much easier to return a product purchased from a retail store.

DIRECT SALES TO CUSTOMER

• An e-business allows manufactures and other members of the
supply chain that do not have direct contact with customer in
traditional channels to enhance business.
FLEXIBILITY PRICING, PRODUCT PORTFOLIO AND
PROMOTION

• Database linked with websites.

• Social medias and details

EFFICIENT FUNDS TRANSFER

• Transaction and revenues speeds up
IMPACT OF E-BUSINESS ON COST

• Inventory
• Facilities
• Transportation = Downloadable Product (Music and Movies)
• Information
THE ROLE OF NETWORK DESIGN IN SUPPLY CHAIN

Facility role, location of manufacturing, storage or transportation-

related facilities, and the allocation of capacity.
• Facility role – What role should each facility play? What processes
are performed at each facility?
• Facility location – Where should facilities be located?
• Capacity allocation – How much capacity should be allocated to
each facility?
• Market and supply allocation – What markets should each facility
serve? Which supply sources should feed each facility?
FACTORS INFLUENCING NETWORK DESIGN DECISIONS
STRATEGIC FACTOR

• A firm’s competitive strategy has a significant impact on network

design decisions within the supply chain.
• Firms that focus on cost leadership tend to find the lowest cost
location for their manufacturing facilities, even if that means
locating very far from the markets they serve.
• Firms that focus on responsiveness and efficiency tend to locate
facilities closer to the market and may select a high-cost location if
this choice allows the firm to react quickly to changing market
needs.
ROLE OF STRATEGIC FACTOR
OFFSHORE FACILITY: LOW COST FACILITY FOR EXPORT PRODUCTION

• An offshore facility serve the role of being a low cost supply source
for market.
• The location selected for an offshore facility should have low labor
and other costs to facilitate low-cost production.
SOURCE FACILITY: LOW-COST FACILITY FOR
GLOBAL PRODUCTION

• Its primary objective is low-cost. Its strategic roles are broader than
that of an offshore facility.
• A source facility is often a primary source of product for the entire
global network.
• Source facility tend to be located in places where production costs
are relatively low, infrastructure is well developed, and a skilled
workforce is available.
• Good offshore facility migrate over time into source facility.
SERVER FACILITY : REGIONAL PRODUCTION
FACILITY

• A server facility is built because of tax incentives, local content

requirement, tariff barriers, or high logistic cost to supply the region
from elsewhere.

CONTRIBUTOR FACILITY: REGIONAL PRODUCTION

FACILITY WITH DEVELOPMENT SKILLS
• It serve where the market is located.
• Also assumes responsibility for product customization, process
improvements, product modifications or product development
OUTPOST FACILITY: REGIONAL PRODUCTION FACILITY
BUILT TO GAIN LOCAL SKILLS.

• Located primarily to obtain access to knowledge or skills that may

exist within a certain region.

LEAD FACILITY: FACILITY THAT LEADS IN

DEVELOPMENT AND PROCESS TECHNOLOGIES
• Creates new products, processes and technologies for the entire
network.
TECHNOLOGICAL FACTOR

• Important for production, high capacity are most effectivity.

• Lower fix cost and local facilities can help lower transportation cost.

MACROECONOMIC FACTORS
• Tax, tariffs, exchange rates and other economics factors for global
trade
POLITICAL FACTORS

• Company prefer to locate facilities in politically stable countries,

where the rules of commerce and ownership are well defined.
INFRASTRUCTURE FACTORS

• Key element of network design, labor, transportation, terminals and

rails airports, seaports, highway.

COMPETITIVE FACTORS
• Cares about competitors strategy, size and location.
• To locate their facilities close to competitors or far from them.
• Competition on raw material, labor and production.
Frame work for Network design Decisions

Competitive Strategy Phase

1 Global Competition
Internal Constraints SC
Capital, Growth Strategy
Strategy Tariffs & Tax
Production Phase Incentives
Technologies Cost, 2
scale/scope impact Reg Regional Demand
Competitive Facility Size, growth,
Environment Conifig homogeneity
Phase 3 Political, Exchange
Aggregate Factors
Desirabl Rate and Demand
and Logistic s costs
e sites Risk
Available Infra
Production Methods
structure

Factor costs Phase Logistics Cost

4
Locatio
n
Choices
NETWORK OPTIMIZATION MODELS

GRAVITY LOCATION MODEL

• Geographic location identification
• Gravity models are used to find locations that minimize the cost of
transporting, raw materials from suppliers and finished goods to the
markets served.
CAPACITATED PLANT LOCATION MODEL

• Following inputs are required, most focus on profit maximization and

minimizing the cost.
• N = number of potential plant locations/capacity
• M= number of markets or demand points
• Dj = annual demand from market j
• Kj = potential capacity of plan I
• Fj = annualized fixed cost of keeping factory i open.
• Cij= cost of production and shipping unit from factory I to market j.