Distribution Network

Design in SCM
 Network Design

Plant Plant Plant

DC1
DC DC
1 2
DC DC DC
1 2 3

Customer
 Observations
Overall capacity is same in all three cases
No. of DCs increases from left to right
Size (capacity) of DCs decreases from left to right
DCs are located near to customer from left to right

Trade-off: between Supply chain cost and

customer service level
Supply chain cost includes: inventory cost,
facility cost and transportation cost
 Observations
For increasing customer service level,
No of facilities will increase and located near to customer base
inventory level will increase by keeping more variety

Effect of more number of facilities:

Inventory cost will increase
Facility cost will increase
Inbound transportation cost will increase
Outbound transpiration cost will decrease

Trade-off between efficiency and responsiveness

 Example- Gateway
Gateway

Founded in 1985
Direct PC sale manufacturer, no retail
Late 1990s- opened retail stores in US with no finished goods
inventory
In 1996- Gateway become first online PC seller
Stores helped customers select right configuration
PCs manufactured to order and shipped from assembly plants
From $80/share late 1990s to $4/share in 2002
In 2004, Gateway closed its business and sold to Acer, Taiwan
 Example- Apple
Apple

In 2001, 1st retail store opened

Around 300 retail stores worldwide
Stores carried product inventory
Given product design, low variety
2013- 415 stores, $20B sales

What strategy lead to the success of the Apple compared to

Gateway?
 Warehousing
A large building where raw materials or manufactured goods
may be stored prior to their distribution for sale.

They usually have loading docks to load and unload goods

from trucks. Sometimes warehouses are designed for the
loading and unloading of goods directly from railways,
airports, or seaports.

Stored goods can include any raw materials, packing

materials, spare parts, components, or finished goods
associated with agriculture, manufacturing and production.
 Function of warehouse
Material storage : Store material until final
delivery to end customer
i. Material Hold
ii. Consolidation
iii. Break Bulk
iv. Cross-Docking
v. Postponement
vi. Packing
 Material Hold
Depending upon the demand, order booking pattern
and delivery schedule promised, the goods are
dispatched from the warehouse.

Manufacturing Warehouse Customer

Plant (Finished goods)

Proper record of material is maintained to know the

inventory level at any point of time.
 Consolidation
Aggregating the small lots of materials at a central
point for combining and sending into large shipment
to the customer.
The consolidation will ensure cost saving on freight.
Vendor 1 Buyer 1

Vendor 2 Warehouse Buyer 2

(consolidation)

Vendor 3 Buyer 3
 Break Bulk
Materials arriving in bulk is divided into small
shipments for delivering to the end customer.
Example- The bulk cargo of fertilizers, oil, chemicals
coming from source is broken into small
consignments as required.
Customer 1

Manufacturing Warehouse Customer 2

Plant (Break-Bulk)

Customer 3
 Cross-Docking
The material coming from different plants will be stored at
warehouse for shorter period of time and dispatched in mixed
form as per requirement.
Example Cross docking is prevalent in retail chains where
materials are received from different suppliers into warehouse
and finally distributed to the retailers as required.

Plant 1 Customer 1

Plant 2 Warehouse Customer 2

(Mixing)

Plant 3 Customer 3
 Postponement
Delaying in final assembly of the product till
the last minute.
Final assembly is kept on hold till the customer
places or modifies the order.
Helps in cost saving and risk minimization.
 Packing
Repackaging of the materials after bulk break
as per customer requirement.
The packs are labeled and marked as per the
packaging regulations or as required by the
customer.
It provide safety against damage and
convenience in transportation.
 A logistical challenge of warehousing
Role of warehousing has been shifted from material
storing facility to switching facility within supply
chain.

High emphasis given on providing higher customer

service and low cost operation.

Hence, location and layout of warehouse plays an

important role.
 Important Points
Following points are considered for effective use of
warehouse:
Maximum utilization of storage space
Higher labour productivity
Maximum asset utilization
Reduce material handling
Reduce operating cost
Increase inventory turnover
Reduce order filling time
 Warehouse site selection
Site selection decision is taken based on two major objectives:
i. Customer service (high)
ii. Cost of operation (low)

Factors influencing site selection decision:

Infrastructure
Market proximity
Transportation cost
Cheaper location
Product type
Regulations
Local levies
 Operation Cost Vs No. of warehouse

Cost
Warehousing cost

Transportation cost

No. of Warehouse
 Facility Location model
i. Load-distance method
ii. Centre of gravity method
iii. Break even analysis method
iv. Factor rating method
 Load Distance Method

A mathematical model used to evaluate locations

based on proximity factors.
Objective : To select a location that minimizes total
weighted loads moving in and out of the facility.

Methods for calculating distance:

i. Euclidian method
ii. Rectilinear method
 Geographic Representation
Distance between locations is measured in two
ways:
Euclidian method It is a straight line distance or
shortest possible path between two points.
using Pythagorean theorem

dij ( xi x j ) ( yi y j )
2

2 1/ 2

Rectilinear method It is the distance between two

points with a series of 90 degree turn.
more like a grid travel in a city, where we move at
right angle.
dij xi x j yi y j
 Geographic Representation
Location on a Plane
Y

Destination j
Yj Euclidean

dij ( xi x j ) 2 ( yi y j ) 2
1/ 2

Origin i
Yi

Rectilinear
dij xi x j yi y j
0 X
Xi Xj
 Load Distance Method
In this method, various locations are evaluated using a load-
distance value that is a measure of weight and distance
For a single potential location, a load-distance value is
computed as follows:

LD = =1

Where, Li = load expressed as a weight, number of trips, or units

being shipped from the proposed site to location i
di = the distance between the proposed site and location i
 Example-1
Q: A small manufacturing facility is being planned to be located
either at M(325,200) and N(450,350) to feed parts to three heavy
manufacturing facilities. The location of current plants with their
coordinates and volume requirements are given below:
Plant Coordinates Volume
Location (x,y) (Parts per year)
A 300, 320 4000
B 375, 470 6000
C 470, 180 3000

Use load-distance method to evaluate the better location. Apply

rectilinear method for distance calculation.
 Center of Gravity method

It is defined as the location that minimizes the weighted

distance between two locations (warehouse and distribution
points).

Center of Gravity is given by:

X* = Lx Y* = LY
L L
 Grid-Map Coordinates
y n n
xiWi yiWi
2 (x2, y2), W2 i=1 i=1
y2 x= n y= n
Wi Wi
1 (x1, y1), W1 i=1 i=1
y1
where,
x, y = coordinates of new facility at
3 (x3, y3), W3 center of gravity
y3 xi, yi = coordinates of existing facility i
Wi = annual weight shipped from
facility i

x1 x2 x3 x
 Example- 2
Q: A small manufacturing facility is being planned that will feed
parts to three heavy manufacturing facilities. The location of
current plants with their coordinates and volume requirements are
given below:
Plant Coordinates Volume
Location (x,y) (Parts per year)
A 300, 320 4000
B 375, 470 6000
C 470, 180 3000

Use center of gravity method to determine a location for this new

facility.
 Factor Rating Method
It is a method of assigning quantitative values to all
the factors related to decision alternatives and derive
a composite score for comparison among available
locations.
The weighted score is calculated for each locations
and the highest weighted score alternative will be the
right choice.

It allows decision maker to assign values to the

factors as per his choice.
 Example- Factor Rating
SCORES (0 TO 100)
LOCATION FACTOR WEIGHT Site 1 Site 2 Site 3
Labor pool and climate .30 80 65 90
Proximity to suppliers .20 100 91 75
Wage rates .15 60 95 72
Community environment .15 75 80 80
Proximity to customers .10 65 90 95
Shipping modes .05 85 92 65
Air service .05 50 65 90

Weighted Score for Labor pool and climate for

Site 1 = (0.30)(80) = 24
Example- Factor Rating
WEIGHTED SCORES
Site 1 Site 2 Site 3
24.00 19.50 27.00
20.00 18.20 15.00
Site 3 has the
9.00 14.25 10.80
highest factor rating
11.25 12.00 12.00
6.50 9.00 9.50
4.25 4.60 3.25
2.50 3.25 4.50
77.50 80.80 82.05
 Example-3
A new storage facility is proposed to be located in Delhi. The
location factors, weights and scores (1 = poor and 5 =
excellent) for two potential sites are given. What is the
weighted score for these sites and which is the best location?

Location Factor Weightage Score Score

(%) (Location-1) (Location-2)

Facility Utilization 25 3 5
Quality of labor 25 4 3
Transportation cost 25 3 3
Proximity to market 15 1 2
Land and construction cost 10 5 3
 Break-Even Analysis
It helps in comparing the locations based on cost.
It helps in determining the ranges over which particular
alternative is best.
Break-even analysis can be used for location analysis
especially when the costs of each location are known

Procedure :
i. Determine the variable cost and fixed cost for each site
ii. Plot the total cost line curve for all the sites
iii. Identify the approximate ranges for each locations has the lowest
cost
iv. Solve for the break even points over the relevant ranges
 Break-Even Analysis
Break even equations used for total cost calculation of each
location and for calculating the breakeven quantity Q.
Total cost = F + cQ
Total revenue = pQ
Break-even is where Total Revenue = Total Cost
Q = F/(p-c)
Q = break-even quantity
p = selling price/unit
c = variable cost/unit
F = total fixed cost
 Example- 4
The search for new facility location are confined to region
A,B,C. The annual fixed cost and variable costs are given
below:
Region Fixed cost ($)/Yr Var-cost/unit ($)
A 150,000 62
B 300,000 38
C 500,000 24

Plot the total cost curve for all the regions and identify the
approximate range over which each region provides the lowest
cost? If the expected demand is 15,000 units which is the best
location?
 Logistics
Logistics management is the part of supply chain
management that plans, implements, and controls the
efficient, effective flow and storage of goods, services,
and related information between the point of origin and
the point of consumption.

An art and science of obtaining, producing, and

distributing materials and products in right place and in
right quantity.

Management stands for managing movement of materials

as desired by customer.
 7Rs of Logistics
i. Right Product
ii. Right Quantity
iii. Right Condition
iv. Right Place
v. Right Time
vi. Right Customer
vii. Right Price
 Supply Chain Community

Raw Manufa
Distributer Wholeseller Retailer Customer
Materials cturer

Movement of Materials

Movement of Information
 Logistics Function
1. Transportation

2. Warehousing

3. 3PLs and 4PLs

4. Reverse Logistics
 Logistics Function cont...
5. Order processing

6. Inventory control

7. Material handling

8. Packaging

9. Information
 Logistics phase and cost
Inbound logistics
Process logistics
Outbound logistics

Process logistics cost

Increasing cost
Inbound logistics cost
Outbound logistics cost
 Logistics objective
1) Inventory reduction

2) On-time delivery

3) Freight economy

4) Minimum product damage

5) Quick response
 Scope of logistics
Logistics scope include all the material
movement activities from procurement of
material to final delivery to the customer.
Country Logistics cost/GDP
China 15-18 (%)
India 11-13 (%)
US 8 (%)
Europe 7 (%)
Japan 11.4 (%)
 Customer Service
A set of activities implemented by business to make the
customers buying experience rewarding.
This makes them happy and loyal towards company.

It includes:
Competence
Reliability
Responsiveness
Transaction security
Trustworthiness
Access
 Competence Information offered by the firm about the service offerings
of the firm.

Reliability delivery of the product/service in terms of place, time and

quality of the product.

Responsiveness promptness in response to customer.

Transaction security the confidentiality of customer information and

transaction.

Trustworthiness built through warranty, guarantee and return policies on

product.

Access ease with which customer have access to the information about
the product before placing an order.
 Service Attributes
1. Order processing time

2. Delivery consistency

3. Delivery frequency

4. Stock availability
1. Order process time time between the placement of
order by the buyer and supply of material by the
seller.

2. Delivery consistency - maintaining the same

delivery period for delivering the material over a
period of time.

3. Delivery frequency frequent delivery of materials

in small lots.

4. Stock availability materials stock should be

available to meet uncertainty.
 Role of Logistics in Supply Chain
Logistics bridges the gap between demand and supply.

It requires proper function of warehousing network,

transportation network, inventory control system and
information system.

The efficiency and responsiveness of supply chain depends

upon logistics.

Hence, the success of supply chain depends upon the

movement of materials (logistics) enabled with information
and communication technology.