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    5DistStrat.ppt 5DistStrat.ppt Presentation Transcript

    • Distribution Strategies Jerry Banks
    • Supply network design
      • Centralized versus decentralized control
      • Distribution strategies
      • Push versus pull systems
    • Centralized versus decentralized control
      • Centralized
        • Decisions are made at a central location for the entire supply chain network
        • Minimizes total system cost subject to service-level requirements
        • Global optimization
    • Centralized versus decentralized control
      • Decentralized
        • Each facility identifies its most effective strategy
        • Local optimization
    • Effect of information
      • When each facility can access only its own information, centralized strategy is not possible
      • But, information technology makes information sharing possible
    • Distribution strategies
      • Direct shipment
        • Items shipped from the supplier to retail store without going through distribution centers
      • Warehousing
        • The classical strategy
      • Cross-docking
        • Items are distributed continuously from suppliers through warehouses to customers
        • However, they are kept at the warehouse for only 8 to 12 hours
    • Direct shipment
      • Advantages
        • No cost for operating distribution centers
        • Lead times are reduced
      • Disadvantages
        • Risk-pooling effects are negated
        • Manufacturer and distributor transportation costs increase because smaller trucks are sent to more locations
    • Direct shipment
      • Used when the retail store requires full truck loads
      • Useful when perishable goods are involved
        • Grocery industry
    • JC Penney uses a direct shipping strategy
      • Sells through 1000 stores and millions of catalogs
      • 200,000 items from more than 20,000 suppliers
      • Each store has total accountability for sales, inventories, and profits
      • Each store is responsible for sales forecasts and ordering
    • JC Penney uses a direct shipping strategy
      • Orders are communicated to buyers who coordinate the shipment with distribution personnel to ensure quick response
      • Internal control and tracking system monitors flow of materials
      • In most cases, products are shipped directly to Penney’s stores
    • Cross-docking
      • Made famous by Wal-Mart
        • Warehouses function as inventory coordination points
        • Goods arrive at warehouses from the manufacturer
        • Transferred to vehicles serving the retailers
        • Goods spend less than 12 hours at the warehouse
        • System limits inventory costs and decreases lead time by decreasing storage time
    • Cross-docking
      • Expensive to start up and difficult to manage
        • Distribution centers, retailers, and suppliers must be linked with advanced information systems to ensure that all pickups and deliveries are made within the required time windows
        • Must have a fast and responsive transportation system
    • Cross-docking
      • Expensive to start up and difficult to manage
        • Forecasts are critical – information must be shared
        • Effective only for large distribution systems
          • Large number of vehicles are delivering and picking up goods at the cross-dock facility
          • Shipments of fully loaded trucks every day from suppliers to warehouses
          • Large demands exist so full truckloads result
    • Wal-Mart specifics
      • Largest and highest-profit retailer in the world
      • 85% of its goods are cross-docked
        • 50% for K-Mart
      • Private satellite communications system that sends POS data to all its vendors
      • Dedicated fleet of 2000 trucks
      • Stores are replenished twice/week
    • Wal-Mart specifics
      • Wal-Mart purchases full truckloads
      • Reduced safety stock
      • Cost of sales cut by 3%
    • Questions to answer in groups
      • Describe a retail environment that is not amenable to cross docking
      • A firm distributes to large urban retailers as well as small ones. If the firm uses cross-docking, does service to the two types of retailers differ?
      • If a firm uses cross-docking to reduce inventory holding costs, aren’t they simply pushing the inventory (and safety stock) further up the supply chain? What is the net gain?
    • RFID Radio Frequency Identification
    • RFID
      • First appeared in 1980s
      • Non-contact reading
      • Hostile environments
      • Wide range of applications
        • Cattle ID
        • Automated vehicles broadcasting their locations
        • Etc.
    • RFID includes
      • Antenna
      • Transceiver (with decoder)
      • Transponder (RF tag) electronically programmed with unique information
    • How RFID’s work
      • When an RFID tag passes through the electromagnetic zone, it detects the reader's activation signal
      • The reader decodes the data encoded in the tag's chip and the data is passed to the host computer for processing
    • Active and passive
      • Active
        • Powered by an internal battery and are typically read/write
      • Passive
        • Operate without a separate external power source and obtain operating power generated from the reader
        • Much lighter than active tags, less expensive, and offer a virtually unlimited operational lifetime
        • But, they have shorter read ranges than active tags and require a higher-powered reader
    • Advantage over barcodes
      • Noncontact, non-line-of-sight nature of the technology
        • Tags can be read through a variety of substances such as snow, fog, ice, paint, crusted grime, and other visually and environmentally challenging conditions, where barcodes or other optically read technologies would be useless
    • Growth of RFID technology
      • Highly unlikely that the technology will ultimately replace barcode
        • Will never be as cost-effective as a barcode label 
        • RFID will continue to grow in its established niches where barcode or other optical technologies are not effective
    • Logistics Today , June 2004
      • Numerous articles on the RFID deadline
      • The essence of these articles will be discussed
    • “ Wal-Mart holds firm on RFID deadline ”
      • In early 2003, Wal-Mart sent shockwaves through the entire logistics field when it announced that its suppliers should adopt RFID by January, 2005
      • In the past year, any firm with products remotely suggestive of RFID has helped revive the given-up-for-dead technology marketplace
    • “ Wal-Mart holds firm on RFID deadline ”
      • Now, suppliers are asking for answers
    • “ Wal-Mart holds firm on RFID deadline ”
      • Will Wal-Mart be reading RFID tags at POS terminals in January, 2005?
        • No, says Wal-Mart
    • “ Wal-Mart holds firm on RFID deadline ”
      • Will Wal-Mart be placing readers in every one of its DCs by January, 2005?
        • No, says Wal-Mart
    • “ Wal-Mart holds firm on RFID deadline ”
      • Is Wal-Mart slowing down the time table?
        • No, says Wal-Mart
    • “ Wal-Mart holds firm on RFID deadline ”
      • Wal-Mart’s intention is to pick one geographic area – a DC, a group of stores – in which to begin
      • Wal-Mart’s intention is to have all domestic suppliers compliant by 2006
    • “ Wal-Mart holds firm on RFID deadline ”
      • Since Wal-Mart announced its RFID initiative, other organizations have announced similar projects
        • US DoD
        • Target
        • Home Depot
        • German-based Metro
        • UK-based Tesco
    • “Logistics executives question benefits of RFID”
      • Serious doubts about how firms will be able to achieve any internal benefits
      • Sit back and wait mentality
      • No way to justify the high cost of US$0.30 to US$0.40 per tag
      • It will take time for the RFID initiatives to begin driving cost out of the supply chain
    • “ RFID’s impact on market growth larger than expected”
      • Inbound Logistics , May 2004
      • The market size and compound annual growth rate was originally estimated to rise by 21% annually between 2003 and 2005
      • The near-term annual growth rate for RFID software and systems is now expected to surpass 37%
    • “ Prospective RFID users face supply chain challenges”
      • Inbound Logistics , May 2004
      • From a US$1 billion market in 2004 to a US$3 billion in 2008
      • If the cost of an RFID tag decreases
      • US$.50 today, but may drop to US$.05 in one or two years
    • “ Prospective RFID users face supply chain challenges”
      • Supply chains with all items tagged, moving and visible will be very positive
      • But, done wrong it could be a nightmare
    • “ New FCC rule improves RFID systems used for container security”
      • Inbound Logistics , May 2004
      • FCC = Federal Communications Commission
      • Enabling the contents of containers to be rapidly inventoried will help users determine whether tampering with their contents has occurred during shipping says the FCC
    • “Cultural problems slow RFID momentum overseas”
      • A widespread interest exists, but it appears to be shallow
      • Two factors contribute to the reluctance
        • Technical problems
          • Read rates are too slow
          • Difficulties in affixing tags to products
    • “Cultural problems slow RFID momentum overseas”
      • Cultural problems
        • Stronger than the technical problems
        • Internal distrust and animosity toward the IT departments
        • Fear of change within the organization
    • “Cultural problems slow RFID momentum overseas”
      • However, there is a great interest at many levels in RFID adoption
      • Belief that there will be some benefit in actual work and return on investment over the next five years
    • Prediction
      • If some standards commonality is achieved - whereby RFID equipment from different manufacturers can be used interchangeably - the market will very likely grow exponentially
    • What factors influence distribution strategies?
      • Customer demand
      • Customer location
      • Service level
      • Transportation costs
      • Inventory costs
    • Interplay between inventory and transportation costs
      • Both depend on shipment size
        • But in opposite ways
        • Increasing lot sizes reduces the delivery frequency and enables the shipper to take advantage of price breaks in shipping volume
          • Reduces transportation costs
        • However, large lot sizes increase inventory cost per item
          • Items remain in inventory longer
    • Demand variability
      • Also impacts distribution strategy
      • Larger the variability, the more stock needed
      • Stock held at the warehouse provides protection against demand variability
      • Due to risk pooling, the more warehouses a distributor has, the more safety stock is needed
    • However, if cross-docking or direct shipping is used
        • More safety stock is needed in the distribution system
        • Because each store needs to keep enough safety stock
        • Mitigated by distribution strategies that enable better demand strategies and smaller safety stocks and transshipment
        • Must also consider lead time, volume requirements, and capital investment
    • Distribution strategies Delayed Delayed Made early Allocation Decision (to retail outlet) No holding costs No ware- house costs Holding Costs Reduced inbound costs Reduced inbound costs Transportation Costs Takes advantage Risk Pooling Warehouses Cross Docking Direct Shipment Strategy Attribute
    • Transshipment
      • Shipment of items between different facilities at the same level in the supply chain to meet an immediate need
      • Customers demand is met from another retailer
      • Retailers must know what other retailers have in inventory
        • Information system is needed
    • Transshipment
      • Since all inventories are available, this takes advantage of risk pooling
      • If retailers are independently owned, this doesn’t work as well
        • Helps competitors
    • Central versus local facilities
      • First consideration: Safety stock
        • Consolidating warehouses allows the vendor to take advantage of risk pooling
        • The more centralized an operation, the lower the safety stock
    • Central versus local facilities
      • Second consideration: Overhead
        • Operating a few large central warehouses leads to lower total overhead costs (compared to operating many smaller warehouses)
    • Central versus local facilities
      • Third consideration: Economies of scale
        • In manufacturing, it is often less expensive to have one central manufacturing facility than many smaller ones
    • Central versus local facilities
      • Fourth consideration: Lead time
        • Can often be reduced if a large number of warehouses exist (they might be closer to the market areas)
    • Central versus local facilities
      • Fifth consideration: Service
        • Centralized warehousing enables risk pooling so orders can be met (and with a lower total inventory level)
        • But, shipping time from the warehouse to the retailer will be longer
    • Central versus local facilities
      • Sixth consideration: Transportation costs
        • As the number of warehouses increases, transportation costs go up because total distance traveled is greater
        • And, quantity discounts are less likely to apply
        • However, transportation costs from the warehouses to the retailers are likely to fall as the warehouses are closer to the retailers
    • Push versus pull systems
      • Push-based supply chain
        • Based on long-term forecasts
      • Pull-based supply chain
        • Production is demand driven
    • Push system Manufacturer Product Retailer Orders External Demand
    • Push system
      • Based on long-term forecasts
      • Takes time to react to a change in demand leading to
        • Inability to meet changing demand patterns
        • Obsolescence of supply chain inventory as demand for some products disappears
    • Push system
      • Bullwhip effect is more pronounced leading to
        • Excessive inventories
          • Larger safety stocks are needed
        • Larger production lots
          • And more variable
        • Decreased service levels
    • Push system
      • Production capacity
        • Should it be based on peak demand?
          • Results in lots of idle capacity
      • Transportation capacity
        • Should it be based on peak demand?
          • Results in lots of idle capacity
        • Should it be based on average demand?
          • Results in expensive spot costs
    • Pull system Manufacturer Product Retailer Orders External Demand
    • Pull system
      • Coordinated with actual customer demand
        • For example, POS data
      • This leads to
        • Decrease in lead times
          • Due to better anticipation of incoming orders from the retailers
        • Decrease in inventories at the retailers
          • Shorter lead times decrease inventories
    • Pull system
      • This leads to
        • Decrease in variability in the system
          • Specially, variability faced by manufacturers
            • Due to lead time reduction
          • Decreased inventory at the manufacturer
            • Due to reduction in variability
    • Hybrid systems
      • Postponement or delayed differentiation
        • Initial stages of the supply chain are push
        • Final stages are pull
        • Interface is called the push-pull boundary
        • Discussed later
    • End