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  • 1. Distribution Strategies Jerry Banks
  • 2. Supply network design
    • Centralized versus decentralized control
    • Distribution strategies
    • Push versus pull systems
  • 3. 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
  • 4. Centralized versus decentralized control
    • Decentralized
      • Each facility identifies its most effective strategy
      • Local optimization
  • 5. Effect of information
    • When each facility can access only its own information, centralized strategy is not possible
    • But, information technology makes information sharing possible
  • 6. 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
  • 7. 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
  • 8. Direct shipment
    • Used when the retail store requires full truck loads
    • Useful when perishable goods are involved
      • Grocery industry
  • 9. 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
  • 10. 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
  • 11. 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
  • 12. 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
  • 13. 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
  • 14. 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
  • 15. Wal-Mart specifics
    • Wal-Mart purchases full truckloads
    • Reduced safety stock
    • Cost of sales cut by 3%
  • 16. 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?
  • 17. RFID Radio Frequency Identification
  • 18. RFID
    • First appeared in 1980s
    • Non-contact reading
    • Hostile environments
    • Wide range of applications
      • Cattle ID
      • Automated vehicles broadcasting their locations
      • Etc.
  • 19. RFID includes
    • Antenna
    • Transceiver (with decoder)
    • Transponder (RF tag) electronically programmed with unique information
  • 20. 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
  • 21. 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
  • 22. 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
  • 23. 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
  • 24. Logistics Today , June 2004
    • Numerous articles on the RFID deadline
    • The essence of these articles will be discussed
  • 25. “ 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
  • 26. “ Wal-Mart holds firm on RFID deadline ”
    • Now, suppliers are asking for answers
  • 27. “ Wal-Mart holds firm on RFID deadline ”
    • Will Wal-Mart be reading RFID tags at POS terminals in January, 2005?
      • No, says Wal-Mart
  • 28. “ 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
  • 29. “ Wal-Mart holds firm on RFID deadline ”
    • Is Wal-Mart slowing down the time table?
      • No, says Wal-Mart
  • 30. “ 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
  • 31. “ 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
  • 32. “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
  • 33. “ 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%
  • 34. “ 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
  • 35. “ 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
  • 36. “ 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
  • 37. “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
  • 38. “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
  • 39. “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
  • 40. Prediction
    • If some standards commonality is achieved - whereby RFID equipment from different manufacturers can be used interchangeably - the market will very likely grow exponentially
  • 41. What factors influence distribution strategies?
    • Customer demand
    • Customer location
    • Service level
    • Transportation costs
    • Inventory costs
  • 42. 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
  • 43. 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
  • 44. 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
  • 45. 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
  • 46. 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
  • 47. 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
  • 48. 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
  • 49. 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)
  • 50. 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
  • 51. 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)
  • 52. 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
  • 53. 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
  • 54. Push versus pull systems
    • Push-based supply chain
      • Based on long-term forecasts
    • Pull-based supply chain
      • Production is demand driven
  • 55. Push system Manufacturer Product Retailer Orders External Demand
  • 56. 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
  • 57. 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
  • 58. 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
  • 59. Pull system Manufacturer Product Retailer Orders External Demand
  • 60. 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
  • 61. 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
  • 62. 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
  • 63. End