Published on

  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide


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