Module 3 - SCM Notes.docx.pdf

JSS Mahavidyapeetha
JSS Academy of Technical Education, Bengaluru
"C:UsersD N RoopaDesktopcourse fileAug 2022-Aug 2023even semesterSCMModule 3 - SCM
Notes.docx"
Course Code 18ME653 (Supply Chain Management) CIE Marks 40
Teaching Hours/Week (L:T:P) 3:0:0 SEE Marks 60
Credits 03 Exam Hours 03
Common to: CSE/ISE/ECE/EIE/CV
MODULE – 3
Warehouse Management Stores management-stores systems and procedures-incoming materials control stores
accounting and stock verification Obsolete, surplus, and scrap-value analysis-material handling transportation and
traffic management -operational efficiency-productivity-cost effectiveness-performance measurement.
Supply Chain Network Distribution: Network Design – Role - Factors Influencing Options, Value Addition –
Distribution Strategies - Models for Facility Location and Capacity allocation. Distribution Center Location
Models.
After learning this module, you should be able to answer the following questions:
CO3 Plan the demand, inventory and supply and optimize supply chain network. L3
Question Bank Module 3
1. Explain the significance of inventory management in supply chain.
2. Network operations planning is important for effective supply chain management.
3. List and explain types of inventory supply chain.
4. Explain the role of network design in supply chain
5. Enumerate the factors influencing network design decisions.
6. List the purchasing procedure in chronological order
7. Write about waste management in detail.
8. Describe the method of valuation
9. With the help of network diagram, explain the network design having Manufacturer storage with direct
shipping.
10. With the help of network diagram, explain the network design having retail storage with customer.
11. With the help of network diagram, explain the network design having Manufacturer storage with direct
shipping and in-transit merge.
12. With the help of network diagram, explain the network design having Distributor storage with carrier
delivery
13. With the help of network diagram, explain the network design having Distributor storage with last-
mile delivery
14. With the help of network diagram, explain the network design having Manufacturer/distributor
storage with customer pickup
15. Explain the model for facility location and capacity location.

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Introduction:
Warehouse management
Warehouse is an essential limb of any business unit. It is the depository of all materials
required by the business unit and supplies materials as when required. Warehouse is a
storage structure constructed for the protection of the quality and quantity of the stored
product.
The types of warehouses could be, Private warehouse, public warehouse, automated
warehouse, climate-controlled warehouse, distribution center.
Warehouse will be outside the industry; May be distribution channel or in another city to
help customers to get products delivered fast.
Whereas, Stores is inhouse facility to help manufacturing activities, such as incoming and
outgoing also stored in stores. Stores always indicates the place of raw material storing.
Significance of Inventory Management in Supply Chain:
A typical supply chain consists of multiple items and stock points, where each stock point has
a customer and supplier. These series of stock points connected by processes (conversion
processes and transportation processes). Each stock point has demand process and supply
process. Keeping in mind the demand and supply characteristics of customers and suppliers, a
decision maker at stock points decides
• How much to order?
• When to order?
• Where to hold inventory?
• When to review?
– Continuous review systems (Fixed order quantity)
– Periodic review systems
Inventory at stock point are:
1. Cycle stock: The inventory resulting from the production or purchase in batches is
called cycle stocks to take advantage of economies of scale. (Logic: Economies of
scale)

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2. Safety Stock: Stocks which are maintained as a safeguard against uncertainties of
demand and supply is called safety stock. (Logic: Uncertainty in demand and supply)
3. Decoupling stock: In most organization internal supply chain is divided into three
decision units, materials, manufacturing and distributions which take care of the buy,
make and deliver functions, respectively. Some organizations hold inventories at
organizational as well as departmental boundaries, this is called decoupling stocks.
4. Anticipation inventory: Anticipation inventories consists of stock accumulated in
advance of expected peak in sales or that which takes care of some special event that
does not occur on a regular basis.
a. Seasonal stock (Logic: Mismatch between demand and supply rate)
b. Speculation stock (Logic: Uncertainty in price of material)
5. Pipeline inventory (Transit Inventory): Production and transportation activities take
certain finite time, firms need to carry pipeline or in-transit stock. Pipeline inventory
consists of materials actually being worked or being moved from one location to
another in the chain. (Logic: Lead-time in production/transportation process)
6. Dead stock: Dead stock refers to that part of the no-moving inventory that is unlikely
to be of any further use in supply chain operations or markets. Dead stock essentially
includes items that have become obsolete because of changes in customer taste, design
or production processes. (Logic: Judgmental error/ Change in economic or
technological environment)
To manage inventory, we must consider the cost associated with it:
• Ordering cost/setup cost: It include all fixed cost associated with placing an order,
Administration costs involved in placing the order, Transportation cost, Receiving cost
• Inventory carrying cost: It capture all the actual and opportunity costs that are
incurred because of holding inventory
– Financing cost,
– Storage and handing cost
– Inventory risk
• Stockout cost: It captures the economical consequences of running out of stock
– Lost sale cost
– Backorder cost

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By the above understanding of inventory, we can infer that inventories as being
controllable rather than as an evil to be avoided in the supply chain.
Objectives of Warehouse and Stores:
Stores or Warehouse is a place where following activities are carefully undertaken:
Receipt of goods, timely procurement of materials, accounting the transactions,
minimizing obsolescence, surplus & scrap by proper identification and using correct
preservation methods, ensuring good housekeeping by accurately and timely updation,
issue of receipts, ensuring issues and other documentation and handling other issues
pertaining to storage and cleanliness.
In some cases, the procurement and optimization of inventory is also added to the
functions of stores.For example, the store’s manager may be given the additional
powers to procure urgently required items.
In other words, the functions of stores can be classified as follows:
(a) To receive raw materials, components, tools, equipment and other items and account
for them,
(b) To provide adequate and proper storage and preservation to the various items,
(c) To meet the demands of the user departments by proper issues and account for
the consumption,
(d) To minimize obsolescence, surplus and scrap through proper codification,
preservation, and handling,
(e) To highlight stock accumulation, discrepancies and abnormal consumption and
evolve effective control measures,
(f) To ensure good housekeeping so that material handling, material preservation,
stocking, receipt and issue can be done adequately, and
(g) To assist in verification and provide supporting information for effective purchase
action.
Stores systems and procedures
The systems and procedures in stores can be broadly studied under four heads:

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1. Identification system.: Development of an unambiguous and efficient identification
system to facilitate clear internal communication. Methods used are
a. Arbitrary approach,
b. The symbolic approach: This is a very systematic approach to the design
of codification system. The codes assigned to different parts may be numeric
or mnemonic (alpha numeric). A numerical system assigns a six to ten digit
code number to each item to develop the classification from broader to
specific categories. This is illustrated with the help of following example:
The code number of an item is 1 52 43 25; the explanation is as follows:
First digit 1 General-class
Next two digits 52 Generic class
Next two digits 43 Subclass
Last two digits 25 Specific item numbers
This code is based on the assumption that there are maximum 10 general
classes, 100 generic classes, 100 sub-classes in each generic class and
100 specific items in each sub class.
c. The use of engineering drawing number: The number in the engineering
drawing at times is used as an identification number in the stores. This has
the advantage of better internal communication as this number is used by
other departments. But it has the major limitation that it can be only for
manufactured items. For bought out items a separate system is to be devised.
2. Receipt system.: The stores department receives the stores both from outside suppliers
and internal divisions and accordingly there are separate receipt systems. The system
of receipt starts much before the physical receipt of the materials in the stores. It starts
with the placement of purchase order by the purchasing department, a copy of which is
sent to stores. This is maintained in chronological order. This give an idea at any time
about the volume of receipt, and helps in the planning of receipt, unloading, unpacking
and other related activities. The suppliers send an advice note to the stores. This
contains information regarding the date of dispatch, carrier details, description of the
consignment and value. Another document known as `consignment note' is prepared by

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the transport carrier and is sent to the stores concerned. These documents help the stores
manager to organize and plan for quick clearance of materials to minimize costly
demurrages. Receiving department unpacks the goods received and checks quantity and
condition of goods. A ‘Provisional Goods Inward Note’ (PGI) or a `Materials Received
Report' is prepared as soon as the materials are cleared from the receiving sections and
sent for inspections. Results of the inspection are indicated in special testing report and
a `Clearance Report' or `Rejection Note' is prepared and sent by inspection department
to purchase, Production and Accounting departments. This forms the basis for the
preparation of `Final Goods Inward Note' (FGI).
3. Storage system.: A Physical Systems: The design of proper shortage system is very
important for easy location, proper identification, and speedy issue to the consuming
department. The commonly followed systems for physically controlling stores
materials are: closed stores system, open stores system and random access stores
system. A single firm can follow a combination of these systems depending upon the
nature of production operation and the use of materials.
4. Issue system.: This is the last stage in the stores system. Issues can be of two kinds,
i.e., issues to consuming departments, and issues to outside supplies for processing. In
both the cases there are certain common requirements. The control of issues is regulated
by production programmers. Based on the programme and the bill of materials work
orders are prepared, listing for each material quantity to be issued and the corresponding
quantity of the component to be manufactured. Any material requirement over and
above indicated in the work order quantity means excessive wastage and scrapping
usually, the junior stores personnel are not authorized to issue beyond the work order
quantity which brings an inbuilt control.
The overall system of store functioning along with the major input-output documents at
each state is shown in Figure. A substantial amount of information is required, at every stage,
for checking, controlling and feedback purposes.

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Incoming materials control:
Any organization, big or small, shall look for quality input (materials) from suppliers to have
the desired output or use. For this reason, it devises ways to control the incoming materials by
having a check system on quantity, quality and readiness for use. Control on incoming
materials is exercised through Inspection by the purchaser. It is necessary to ensure that the
incoming materials of right quality are procured for use. The word quality has numerous
meanings. The most appropriate meaning of quality in the present context is
“CONFORMANCE TO ORDERED SPECIFICATION & FITNESS FOR USE”, whether for
products or services. Depending upon the nature, criticality & value of items, inspection is
conducted either at supplier’s premises or at plant stores.
Stores accounting and stock verification
Stores Accounting Systems (Methods of Valuation)
Stores accounting is important from the point of view of estimating the cost of the product for
pricing decisions. The costing of material has to be done both for the materials consumed in
the production and estimating the value of materials held in stock.
For the purpose of costing the receipt of materials, the factors that should be included are
material price, freight charges, insurance, duties, taxes, packaging charges etc.
The prices quoted and accepted in purchase order may often be stated in various ways such as

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net prices, prices with discount terms, free on board, cost, insurance, freight, etc. All these
factors should be appropriately accounted while costing for the incoming materials.
Another important accounting is to be done for the issue to production and of the stocks held
at the end of accounting period.
Methods:
a) FIFO System: This system known as First in First Out System is based on the assumption
that the oldest stock is depleted first. Therefore, at the time of issue the rate pertaining to that
will be applied. There is no `profit' or `loss' in the pricing arrangements. The value of the stocks
held on hand is the money that has been paid for that amount of stock at latest price levels. In
case of too many changes in price levels the FIFO System becomes not easy to manage.
Another limitation of this system is that it fails to provide a satisfactory answer to costing-
returns from stores.
b) LIFO System: This system known as `Last in First Out' System is based on the assumption
that the most recent receipts are issued first. As the latest prices are charged in this system, it
leads to lower reported profits in the periods of rising prices and this offers savings in taxes. In
case of wide fluctuations in prices this system tends to immunize unrealized gains or losses in
inventory. It has almost the same limitations as that of FIFO System.
c) Average Cost System: This is based on the assumption that issues to production department
are equally made from different shipments in stock, i.e. an average cost of shipment in stores
is charged. It stabilizes the cost figures. The average is to be calculated by dividing the total
cost with the number of items and is to be updated with every new purchase.
d) Market Value System: This is also known as replacement rate costing, in which the
materials issued are charged the prevailing market rates. This system underestimates the stock
on hand in the case of price increase, whereas it overestimates the stock on hand in the case of
price decrease. This may in turn lead to writing off huge amount to make it realistic. Moreover,
a continuous monitoring of the market rates for all materials makes the system cumbersome.
e) Standard Cost System: In this system a detailed analysis of market price and trends is
carried out to determine a standard rate for a fixed period, say six months or so. This standard
rate is charged to materials issued during this period irrespective of the actual rate. After the
period is over the standard rate is reviewed and updated. This system reflects the efficient use

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of materials as the fluctuation in rates is not considered in accounting. Moreover, it adds to
clerical efficiency as the fresh rates are not to be obtained every time. However, similar to
Market Value Approach, this also leads to underestimating or overestimating stocks on hand
in case of rising and falling prices respectively.
f) System of Costing the Closing Stock: The general guideline for this purpose is to use
market price or stock at cost, whichever is less. The cost of closing stock is governed mainly
by price units, obsolescence and deterioration.
Stock Verification Systems:
Some discrepancies between the actual and the book balances of inventories are bound to occur
despite the diligent store keeping. The process of stock verification is carried out for following
purposes:
i) To reconcile the store records and documents for their accuracy and usefulness,
ii) Identification of areas deserving tighter document control,
iii) To back-up the balance sheet stock figures, and
iv) To minimize the pilferage and fraudulent practices.
Most companies keep an "inventory short and over" account to absorb such discrepancies,
which is eventually closed into the manufacturing overheads account.
Some of the systems of physical stock taking are as follows:
a) Annual or Periodic Physical Verification: In this system the entire inventory is physically
verified at the end of a period, usually the accounting period. That is, normally at the end of
fiscal year. Stocks are closed for a few days. This may necessitate the shut down of production
operations. A special crew of store inspectors and stores verifying officers, usually from the
material audit, physically check each item and compare the entries on bin card and stores
ledger. This leads to the formation of a list of surplus or short items. Damaged and obsolete
items are traced and recorded.
b) Perpetual Inventory and Continuous Stock Taking System: In case of large firms dealing
with a large number of items the final inventory system may take a lot of time and it may not
be possible to shut down the whole plant. The perpetual inventory system is a more appropriate
method for large plants. In this method the stock verification is done continuously throughout
the year. Different methods are adopted by different firms for continuous verification. Some

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firms divide the whole inventory into fifty-two equal parts. Each part is verified every week.
Some firms record store balances after every receipt and issue, and a number of items are
counted daily or at frequent intervals and checked with the bin cards and stores ledger.
Discrepancies found, if any, owing to incorrect entries, breakage pilferage, over-issue, placing
of items in wrong bins, etc., are investigated and corrected accordingly.
The significant advantages of this system are as follows:
i) The shut down of the plant is not necessary for stock checking/taking.
ii) The method is less costly, less tiring, less cumbersome and hence is more accurate.
iii) Discrepancies and defects in stores are readily detected and are not carried over throughout
the year. This prevents damages and losses.
iv) Slow moving stocks can be noted and proper action can be initiated in time.
v) The stock items are kept within the limits.
c) Low Point Inventory System: Some companies take the physical inventory, i.e. the stock
level of stores is checked generally when it reaches its minimum level.
Obsolete, surplus and scrap:
Industrial wastes and scraps include spoiled raw materials, defective parts, rejected
components, production wastes, etc. that holds a commercial value, and therefore, they should
be discarded at periodic intervals and the amount should be accurately recorded into the books
of accounts. Therefore, waste management plays a key role in proper management of
operations. Waste materials can be classified into three categories:
• Obsolete – These materials / equipment hold an economic value and are not damaged,
but are not useful to the company for a longer duration for its operations on account of
reasons, such as changes in process, product line, materials, etc.
• Surplus – These materials / equipment do not have immediate use, but have been
amassed due to faulty planning and purchasing. But they do have a usage value in the
future.
• Scrap – This refers to the process wastage, such as borings, turnings, flashes and
borings, which have an end use and hold commercial values. So, they need to be
discarded periodically.
Reasons for generating and accumulating Obsolete, Surplus and Scrap Items:

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• Changes in Product Design – This can result into some of the items becoming invalid
as far as the final product is concerned. Consequently, the entire stock of such items
becomes either surplus or obsolete.
• Rationalization – At times, raw materials are rationalized in order to reduce variety
and simplify the procurement process. The process of rationalization regards some
items to be surplus or obsolete.
• Cannibalization – At times, it is possible to troubleshoot a machinery breakdown by
using parts of a similar machine not functioning owing to several reasons. The process
of cannibalization is prevalent in many project-oriented industries. If not checked on
continual basis, it can result into obsolete or scrap items.
• Faulty Planning – In the event the marketing department has made a wrong projection
on sales that could be on the higher side, material planning needs to focus on sales
forecasts that can lead to generating surplus items. Another cause of accumulation could
be wrong indenting through user departments.
• Wrong Purchase Practices – Sub-optimizing decisions taken without having to taken
care of related factors also lead to obsolete and surplus stock items. For instance, buying
products in bulk quantities to compensate for discounts and economic transportation
without considering factors like their shelf life, storage space requirements and
technological changes again, can leader to accumulating surplus and obsolete stock
items.
• Other reasons – Some of the items are stored in the form of insurable spares for long
periods even if they are not in use. Faulty stored methods without their proper
preservation, often leads to spoilage, owing to poor materials handling, improper
codification and poor manufacturing methods, and consequently, result into obsolete,
surplus and scrap items. Such poor maintenance of machine tools can also lead to their
excessive wear and more scrap.

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Supply Chain Network
ROLE OF DISTRIBUTION IN THE SUPPLY CHAIN
Distribution refers to the steps taken to move and store a product from the supplier stage to a
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 manufacturer to the end consumer.
Distribution is a key driver of the overall profitability of a firm because it affects both the
supply chain cost and the customer value directly.
Choice of distribution network can achieve supply chain objective from low cost to high
responsiveness.
Examples:
Wal-Mart and Seven-Eleven Japan, have built the success of their entire business around
outstanding distribution design and operation.
Dell distributed its PCs directly to end consumers, whereas companies such as HP distributed
through resellers.
Proctor & Gamble (P&G) has chosen to distribute directly to large supermarket chains while
obligating smaller players to buy P&G products from distributors.
The process of designing a distribution network has two broad phases.
In the first phase, the broad structure of the supply chain network is visualized. This stage

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includes decisions such as whether the product will be sold directly or go through an
intermediary.
The second phase then takes the broad structure and converts it into specific locations and their
capability, capacity, and demand allocation.
The appropriate choice of distribution network grows the supply chain surplus by satisfying
customer needs at the lowest possible cost.
FACTORS INFLUENCING DISTRIBUTION NETWORK DESIGN
Performance of a distribution network should be evaluated along two dimensions:
1. Customer needs that are met (Service Factor)
2. Cost of meeting customer needs (Cost Factor)
Meeting the customer’s demands on time affect the revenues of the company at large, which
along with the costs together affect the overall profitability of the network and the company
as a whole. There are various components that affect both customer service and the
distribution network at large.
Service factors
1. Response time
2. Product variety
3. Product availability
4. Customer experience
5. Time to market
6. Order visibility
7. Returnability
Response time is the amount of time it takes for a customer to receive an order.
Product variety is the number of different products/configurations that are offered by the
distribution network.
Product availability is the probability of having a product in stock when a customer order
arrives.

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Customer experience includes the ease with which customers can place and receive orders
and the extent to which this experience is customized. It also includes purely experiential
aspects, such as the possibility of getting a cup of coffee and the value that the sales staff
provides.
Time to market is the time it takes to bring a new product to the market.
Order visibility is the ability of customers to track their orders from placement to delivery.
Returnability is the ease with which a customer can return unsatisfactory merchandise and the
ability of the network to handle such returns.
Cost Factors:
Changing the distribution network design affects the following supply chain
costs:
1. Inventories
2. Transportation
3. Facilities and handling
4. Information
Relationship between desired response time and required number of Facilities:
Firms that target customers who can tolerate a long response time require only a few locations
that may be far from the customer. These companies can focus on increasing the capacity of
each location. In contrast, firms that target customers who value short response times need to
locate facilities close to them. These firms must have many facilities, each with a low capacity.
Thus, a decrease in the response time customers desire increases the number of facilities
required in the network, as shown in Figure:

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Relationship between No. of Facilities and Inventory Cost:
To decrease inventory costs, firms try to consolidate and limit the number of facilities in their
supply chain network. For example, with fewer facilities, Amazon is able to turn its inventory
about 12 times a year, whereas Borders, with about 400 facilities, achieves only about two turns
per year.
Relationship between No. of Facilities and transportation cost
Transportation costs are of two types. These costs are called Inbound transportation costs and
Outbound Transportation costs. Inbound transportation costs are those costs that are incurred
while bringing the material into the company facility. On the other hand, outbound
transportation costs are those that are incurred while sending the products outside the facility.
It is observed that the inbound transportation costs are lesser than the outbound transportation
ones because these include bringing of raw material that is in bulk, therefore the per unit
transportation costs tend to decrease. On the other hand, the outbound transportation costs are
higher because products may need to be transported in smaller lots to different locations and
the cost per unit tends to be higher than the inbound transportation costs.

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Relationship between No. of Facilities and Facility cost:
Facilities cost is nothing but the cost that is incurred in setting up a facility. Facility costs
decrease as the number of facilities is reduced, as shown in Figure. Because a consolidation of
facilities allows a firm to exploit economies of scale.
Relationship between No. of Facilities Response Time and Logistics Cost:
Total Logistics Cost = Inventory Costs + Transportation Costs + Facility Costs. response time
more effectively, then it may increase the number of facilities, which would also lead to an
increase in the total logistics costs after the minimum point. It is important to note that
companies would like to exercise such increase in the number of facilities only if they are
confident that the increase in revenues because of better responsiveness is more than the
increase in the costs due to the additional facilities.
Note: The customer service and cost components listed earlier are the primary measures used
to evaluate different delivery network designs. In general, no distribution network will
outperform others along all dimensions. Thus, it is important to ensure that the strengths of the
distribution network fit with the strategic position of the firm.

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DESIGN OPTIONS FOR A DISTRIBUTION NETWORK:
We must make two key decisions when designing a distribution network:
1. Will product be delivered to the customer location or picked up from a prearranged
site?
2. Will product flow through an intermediary (or intermediate location)?
Based on the choices for the two decisions, there are six classification of distribution network
designs as follows.
1. Manufacturer storage with direct shipping
2. Manufacturer storage with direct shipping and in-transit merge
3. Distributor storage with carrier delivery
4. Distributor storage with last-mile delivery
5. Manufacturer/distributor storage with customer pickup
6. Retail storage with customer pickup
1) Manufacturer Storage with Direct Shipping: This option is also referred to as drop-
shipping.
Product is shipped directly from the manufacturer to the end customer, bypassing the retailer
(who takes the order and initiates the delivery request). This option is also referred to as drop
shipping. Ex: Dell, the manufacturer sells directly to the customer.
Advantage: Ability to centralize inventories at the manufacturer.
Examples: Online retailers such as eBags and Nordstrom.com use drop-shipping to deliver
goods to the end consumer. eBags holds few bags in inventory. Nordstrom carries some
products in inventory and uses the drop-ship model for slow-moving footwear. The biggest

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advantage of drop-shipping is the ability to centralize inventories at the manufacturer who can
aggregate demand across all retailers that it supplies.
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 large if product customization can be postponed at the
manufacturer.
Transportation Higher transportation costs because of increased distance and disaggregate shipping.
Facilities and
Handling
Lower facility costs because of aggregation. Some saving 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.
Service factors 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 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.
2) Manufacturer Storage with Direct Shipping and In-Transit Merge
It combines pieces of the order coming from different locations manufacturers, so that the
customer gets a single delivery. In-transit merge design has been used by Dell and can be used
by companies implementing drop-shipping. 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 at a hub before making a single delivery to the
customer.

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Performance Characteristics of Manufacturer Storage with Direct Shipping and In-
Transit Merge
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.
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 only a single delivery has to be received.
Time to market Similar to drop-shipping
Order visibility Similar to drop-shipping
Returnability Similar to drop-shipping
3) Distributor Storage with Carrier Delivery
Under this option, inventory is not held by manufacturers at the factories but is held by
distributors / retailers in intermediate warehouses and package carriers are used to transport
products from the intermediate location to the final customer. Amazon.com as well as industrial
distributors like W.W. Grainger and McMaster-Carr have used this approach combined with
drop-shipping from a manufacturer (or distributor).

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The performance characteristics of distributor storage with carrier delivery
Inventory Higher than manufacturer storage. Difference is not large for faster moving items but can be
large for very slow-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.
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.
4) Distributor Storage with Last-Mile Delivery
By ‘last mile delivery’ we mean that the distributor or retailer provides delivery of the
demanded product up to the customer’s place. This delivery is made without using a carrier. It
is very important to note that companies opting for the distributor storage with last mile
delivery design option have their warehouses placed very close to the customer. Ex: Webvan,
Peapod, and Albertsons have used last-mile delivery in the grocery industry.

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The performance characteristics of distributor storage with last-mile delivery.
Inventory Higher than manufacturer storage. Difference is not large for faster moving items but can be
large for very slow-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.
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.
5) Manufacturer or Distributor Storage with Customer Pickup
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. Examples
include 7dream.com and Otoriyose-bin, operated by Seven-Eleven Japan, which allow
customers to pick up online orders at a designated store. A business-to-business (B2B) example
is W.W. Grainger, whose customers can pick up their orders at one of the W.W.Grainger retail
outlets.

JSS Mahavidyapeetha
Notes.docx"
The performance characteristics of manufacturer or distributor storage with consumer
pickup:
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 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.
Response Time Similar to package carrier delivery with manufacturer or distributor storage. Same-day
delivery possible for items stored locally at pickup site.
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. Experience is sensitive to
capability of pickup location.
Time to market Similar to manufacturer storage options.
Order visibility Difficult but essential.
Returnability Somewhat easier given that pickup location can handle returns.
6) Retail Storage with Customer Pickup
Under the retail storage option, the inventory is stored at the retail outlets. Desirous customers
may come to these retail outlets anytime and purchase the desired products. They may also
apply online or call up any of the company’s hot line numbers to place their orders and then
pick it up from a retail store. Ex: A B2B example is W.W. Grainger. Customers can order
online, by phone, or in person and pick up their order at one of W.W. Grainger’s retail outlets.
Albertsons keeps its inventory at the pickup location itself. W.W. Grainger stores some items
at the pickup locations, whereas others may come from a central location.

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Performance Characteristics of Retail Storage at Consumer Pickup Sites.
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 the pickup site can be significant
for online and phone orders.
Information Some investment in infrastructure required for online and phone orders.
Response Time Same-day (immediate) 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 and phone orders.
Returnability Easier than other options because retail store can provide a substitute.
SELECTING A DISTRIBUTION NETWORK DESIGN:
When deciding on the appropriate delivery network, A network designer needs to consider the
following points,
• Product characteristics
• Network requirements
following table shall tell us which type of network design is best suited for a particular product.
Retail
storage
with
consumer
pickup
Manufacturer
storage with
direct
shipping
Manufacturer
storage with
In-transit
merge
Distributor
storage
with
package
carrier
delivery
Distributor
storage
with last
mile
delivery
Manufacturer
storage with
pickup
Response Time 1 4 4 3 2 4
Product Variety 4 1 1 2 3 1
Product Availability 4 1 1 2 3 1
Customer experience Varies
from 1
to 5
4 3 2 1 5
Time to market 4 1 1 2 3 1
Order visibility 1 5 4 3 2 6
Returnability 1 5 5 4 3 2
Inventory 4 1 1 2 3 1
Transportation 1 4 3 2 5 1
Facilities and Handling 6 1 2 3 4 5
Information 1 4 4 3 2 5

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Only niche companies end up using a single distribution network. Most companies are best
served by a combination of delivery networks. The combination used depends on product
characteristics and the strategic position that the firm is targeting. The suitability of different
delivery designs (from a supply chain perspective) in various situations is shown in Table.
Retail
storage
with
consumer
pickup
Manufacturer
storage with
direct
shipping
Manufacturer
storage with
In-transit
merge
Distributor
storage
with
package
carrier
delivery
Distributor
storage
with last
mile
delivery
Manufacturer
storage with
pickup
High demand
product
+2 -2 +-1 0 +1 -1
Medium demand
product
+1 -1 0 +1 0 0
Low demand
product
-1 +1 0 +1 -1 +1
Very low demand
product
-2 +2 +1 0 -2 +1
Many product
sources
+1 -1 -1 +2 +1 0
High product
value
-1 +2 +1 +1 0 +2
Quick desired
response
+2 -2 -2 -1 +1 -2
High product
variety
-1 +2 0 +1 0 +2
Low customer
effort
-2 +1 +2 +2 +2 -1
+2 = very suitable, +1 = some what suitable, 0 = neutral, -1 = some what unsuitable, -2 = very unsuitable
THE ROLE OF NETWORK DESIGN IN THE SUPPLY CHAIN
Supply chain network design decisions include the assignment of facility role; location of
manufacturing, storage, or transportation-related facilities; and the allocation of capacity and
markets to each facility.
Supply chain network design decisions are classified as follows:
1. Facility role:
What role should each facility play?
What processes are performed at each facility?
2. Facility location: Where should facilities be located?
3. Capacity allocation: How much capacity should be allocated to each facility?
4. Market and supply allocation:

JSS Mahavidyapeetha
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What markets should each facility serve?
Which supply sources should feed each facility?
Facility role: Decisions concerning the role of each facility are significant because they
determine the amount of flexibility the supply chain has in changing the way it meets demand.
Facility location: Facility location decisions have a long-term impact on a supply chain's
performance because it is very expensive to shut down a facility or move it to a different
location.
Capacity allocation: Capacity allocation has a significant impact on the supply chain’s
performance. This is because capacity of any facility can be altered easily as compared to the
location of the facility. However, even these decisions need to be made correctly, as proper
allocation of capacity to a facility helps to maintain or reduce costs and thereby optimum
utilization of the facility can be achieved. But, if more capacity is allocated to a facility or even
less capacity is allocated, then it becomes difficult for a company to satisfy the demand of the
customers that are closer or further from the facility.
Market and supply allocation: The allocation of the various supply sources and also the
allocation of particular markets for a particular facility has a significant impact on the supply
chain performance. This in turn it affects the production and transportation costs and also the
inventory that a supply chain must serve in order to satisfy the customer demand. Thus, this
decision must be reviewed from time to time so that the allocation of capacity, markets and
supply sources can be altered as and when the demand arises. The whole supply chain
configuration can be altered on the basis of the decisions made on the supply chain network
design. These decisions also help to prepare restrictions within which the inventories,
transportation and most importantly, information can be utilized to increase or decrease the
supply chain responsiveness and the supply chain costs. These decisions can help a company
figure out which facility performs better, is cheaper for them or is more responsive to its
customers and how these facilities will work for the future.
FRAMEWORK FOR NETWORK DESIGN DECISIONS
The goal when designing a supply chain network is to maximize the firm's profits while
satisfying customer needs in terms of demand and responsiveness. Global network design
decisions are made in 4 phases.

JSS Mahavidyapeetha
Notes.docx"
• Phase I. Define a Supply Chain Strategy/Design
• Phase II. Define the Regional Facility Configuration
• Phase III. Select a Set of Desirable Potential Sites
• Phase IV. Location Choices
Phase I. Define a Supply Chain Strategy/Design:
Objective: is to define a firm's broad supply chain design. This includes determining the stages
in the supply chain, and whether each supply chain function will be performed in-house or
outsourced.
Clear definition of the firm’s competitive strategy: Phase I starts with a clear definition of
the firm's competitive strategy as the set of customer needs that the supply chain aims to satisfy.
The supply chain strategy then specifies what capabilities the supply chain network must have
to support the competitive strategy.
Forecast the likely evolution of global competition: Managers must forecast the likely

JSS Mahavidyapeetha
Notes.docx"
evolution of global competition and whether competitors in each market will be local or global
players.
Identify constraints on available capital: Managers must also identify constraints on
available capital and whether growth will be accomplished by acquiring existing facilities,
building new facilities, or partnering.
Determine growth strategy: Based on the competitive strategy of the firm, its resulting supply
chain strategy, an analysis of the competition, any economies of scale or scope, and any
constraints, managers must determine the supply chain design for the firm.
Phase II: Define the Regional Facility Configuration
Objective: is to identify regions where facilities will be located, their potential roles, and their
approximate capacity.
Forecast of the demand by country or region: Such a forecast must include a measure of the
size of the demand as well as a determination of whether the customer requirements are
homogenous or variable across different countries. Homogenous requirements favor large
consolidated facilities, whereas requirements that vary across countries favor smaller, localized
facilities.
Economies of scale or scope: economies of scale or scope can play a significant role in
reducing costs, given available production technologies. If economies of scale or scope are
significant, it may be better to have a few facilities serving many markets
Risk: Identify demand risk, exchange-rate risk, political risk, tariffs, requirements for local
production, tax incentives, and export or import restrictions
Identify competitors: Managers must identify competitors in each region and make a case for
whether a facility needs to be located close to or far from a competitor's facility.
Phase III: Select a Set of Desirable Potential Sites
Objective: is to select a set of desirable potential sites within each region where facilities are
to be located. Sites should be selected based on an analysis of infrastructure availability to
support the desired production methodologies.
Hard infrastructure requirements: include the availability of suppliers, transportation

JSS Mahavidyapeetha
Notes.docx"
services, communication, utilities, and warehousing infrastructure.
Soft infrastructure requirements: include the availability of skilled workforce, workforce
turnover, and the community receptivity to business and industry.
Phase IV: Location Choices
Objective: is to select a precise location and capacity allocation for each facility. Attention is
restricted to the desirable potential sites selected in Phase III.
The network is designed to maximize total profits taking into account the expected margin and
demand in each market, various logistics and facility costs, and the taxes and tariffs at each
location.
MODELS FOR FACILITY LOCATION AND CAPACITY ALLOCATION
When locating facilities and allocating capacity should be to maximize the overall profitability
of the resulting supply chain network while providing customers with the appropriate
responsiveness. Revenues come from the sale of product, whereas costs arise from facilities,
labor, transportation, material, and inventories. The profits of the firm are also affected by taxes
and tariffs. Ideally, profits after tariffs and taxes should be maximized when designing a supply
chain network.
We must consider many trade-offs during network design. For example, building many
facilities to serve local markets reduces transportation cost and provides a fast response time,
but it increases the facility and inventory costs incurred by the firm.
We use network design models in two situations.
First, these models are used to decide on locations where facilities will be established and the
capacity to be assigned to each facility. We must make this decision considering a time horizon
over which locations and capacities will not be altered (typically in years).
Second, these models are used to assign current demand to the available facilities and identify
lanes along which product will be transported. We must consider this decision at least on an
annual basis as demand, prices, exchange rates, and tariffs change. In both cases, the goal is to
maximize the profit while satisfying customer needs.
The following information ideally is available in making the design decision:

JSS Mahavidyapeetha
Notes.docx"
• Location of supply sources and markets
• Location of potential facility sites
• Demand forecast by market
• Facility, labor, and material costs by site
• Transportation costs between each pair of sites
• Inventory costs by site and as a function of quantity
• Sale price of product in different regions
• Taxes and tariffs
• Desired response time and other service factors
Given this information, either gravity models or network optimization models may be used to
design the network. We organize the models according to the phase of the network design
framework at which each model is likely to be useful.

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