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Chapter 4Designing Distribution Networks and Applications to Online SalesCopyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraLearning ObjectivesIdentify the key factors to be considered when designing a distribution network

Discuss the strengths and weaknesses of various distribution options

Understand how online sales have affected the design of distribution networks in different industriesCopyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraThe Role of Distribution in the Supply ChainDistribution: The steps taken to move and store a product from the supplier stage to the customer stage in a supply chain

Drives profitability by directly affecting supply chain cost and the customer experience

Choice of distribution network can achieve supply chain objectives from low cost to high responsivenessCopyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraFactors InfluencingDistribution Network DesignDistribution network performance is evaluated along two dimensionsCustomer needs that are metCost of meeting customer needs

Evaluate the impact on customer service and cost for different distribution network options

Profitability of the delivery network determined by revenue from met customer needs and network costsCopyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraFactors InfluencingDistribution Network DesignElements of customer service influenced by network structure:Response timeProduct varietyProduct availabilityCustomer experienceOrder visibilityReturnabilityCopyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraFactors InfluencingDistribution Network DesignSupply chain costs affected by network structure:InventoriesTransportationFacilities and handlingInformationCopyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraDesired Response Time and Number of FacilitiesFigure 4-1

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraNotes: Increasing the number of facilities moves them closer to the end consumer. This reduces the response time. As Amazon has built warehouses, the average time from the warehouse to the end consumer has decreased. McMaster-Carr provides 1-2 day coverage of most of the U.S from 6 facilities. W.W. Grainger is able to increase coverage to same day delivery using about 370 facilities.Inventory Costs and Number of Facilities

Figure 4-2Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraNotes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities.

Transportation Costs andNumber of FacilitiesFigure 4-3Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraNotes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities.Facility Costs and Number of FacilitiesFigure 4-4

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraNotes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities.Logistics Cost, Response Time, and Number of FacilitiesFigure 4-5

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraDesign Options for a Distribution NetworkDistribution network choices from the manufacturer to the end consumer

Two key decisionsWill product be delivered to the customer location or picked up from a prearranged site?Will product flow through an intermediary (or intermediate location)?Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraDesign Options for a Distribution NetworkOne of six designs may be usedManufacturer storage with direct shippingManufacturer storage with direct shipping and in-transit mergeDistributor storage with carrier deliveryDistributor storage with last-mile deliveryManufacturer/distributor storage with customer pickupRetail storage with customer pickupCopyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraManufacturer Storage withDirect Shipping

Figure 4-6Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraIn-Transit Merge NetworkFigure 4-7

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraIn-Transit MergeCost FactorPerformanceInventorySimilar to drop-shipping. TransportationSomewhat lower transportation costs than drop-shipping.Facilities and handlingHandling costs higher than drop-shipping at carrier; receiving costs lower at customer.InformationInvestment is somewhat higher than for drop-shipping.Table 4-2Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra

Distributor Storage withCarrier DeliveryFigure 4-8Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraDistributor Storage withLast Mile Delivery

Figure 4-9Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra

Manufacturer or Distributor Storage with Customer PickupFigure 4-10Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraComparative Performance of Delivery Network Designs

Table 4-7Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraDelivery Networks for Different Product/ Customer Characteristics

Table 4-8Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraImpact of Online Sales on Customer ServiceResponse time to customersPhysical products take longer to fulfill than retail storeNo delay for information goods

Product varietyEasier to offer larger selection

Product availabilityAggregating inventory and better information on customer preferences improves product availabilityCopyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraImpact of Online Sales on Customer ServiceCustomer experienceImproved access, customization, and convenience

Faster time to market

Order visibility

ReturnabilityHarder with online ordersProportion of returns likely to be much higherCopyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraImpact of Online Sales on Customer ServiceDirect sales to customersSocial networking channels allow firms to directly pitch products and promotion

Flexible pricing, product portfolio, and promotionsManage revenues from product portfolio more effectively than traditional channelsPromotion information can be conveyed to customers quickly and inexpensively

Efficient funds transferCopyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraImpact of Online Sales on CostInventoryLower inventory levels if customers will waitPostpone variety until after the customer order is received

FacilitiesCosts related to the number and location of facilities in a networkCosts associated with the operations in these facilitiesCopyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraImpact of Online Sales on CostTransportationLower cost of transporting information goods in digital formFor non digital, aggregating inventories increases outbound transportation

InformationShare demand, planning, and forecasting information throughout its supply chainAdditional costs to build and maintain the information infrastructureCopyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraUsing Online Sales to Sell Computer Hardware: DellImpact of online sales on customer serviceDelay in fulfilling customer request

Impact of online sales on costReduced inventory costsLower facility costsHigher total transportation costsIncremental increase in information costsCopyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraUsing Online Sales to Sell Computer Hardware: DellA tailored supply chain networkA hybrid model can be very effectiveMore significant as hardware becomes more of a commodityTake advantage of the strengths of both online sales and traditional retail and distribution channelsCopyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraUsing Online Sales to Sell Books: AmazonImpact of online sales on customer serviceInternet has not shortened supply chainsIncreased selection, convenience

Impact of online sales on costReduced inventory costsLower facility costsHigher total transportation costsIncrease in information costsCopyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraUsing Online Sales to Sell Books: AmazonA supply chain network for booksTraditional bookstores pressured from both endsAmazon more efficientCopyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraUsing the Internet to Sell Groceries: PeapodImpact of online sales on customer serviceSell convenience and the time savingsOffers less varietyCreating a personalized shopping experience and customized advertising and promotionsCopyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraUsing the Internet to Sell Groceries: PeapodImpact of online sales on costReduced inventory costsHigher facility costs due to picking operationSignificantly higher total transportation costsIncrease in information costsCopyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraUsing Internet to Sell Groceries: PeapodValue of online sales to a traditional grocery chainComplement the strengths of their existing networkOffer an entire array of services at differing prices based on the amount of work the customer doesCopyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraUsing the Internet to Rent Movies: NetflixImpact of online sales on customer serviceStaggering selection and an excellent recommendation engineVideo streaming through a variety of devicesCustomers received their DVDs within 24 hours of being shippedCopyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraUsing the Internet to Rent Movies: NetflixImpact of online sales on costReduced inventory costsLower facility costsConsiderably higher total transportation costs, increased streaming will reduce transportation costsIncrease in information costsCopyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraDistribution Networks in PracticeThe ownership structure of the distribution network can have as big as an impact as the type of distribution network

It is important to have adaptable distribution networks

Product price, commoditization, and criticality affect the type of distribution system preferred by customers

Integrate the Internet with the existing physical networkCopyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraDistribution Networks in PracticeConsider whether an exclusive distribution strategy is advantageous

Product, price, commoditization, and criticality have an impact on the type of distribution system preferred by customersCopyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraSummary of Learning ObjectivesIdentify the key factors to be considered when designing a distribution network. A manager must consider the customer needs to be met and the cost of meeting these needs when designing the distribution network. Some key customer needs to be considered include response time, product variety/availability, convenience, order visibility, and returnability. Important costs that managers must consider include inventories, transportation, facilities and handling, and information. Increasing the number of facilities decreases the response time and transportation cost but increases inventory and facility cost.

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraSummary of Learning Objectives2. Discuss the strengths and weaknesses of various distribution options. Distribution networks that ship directly to the customer are better suited for a large variety of high-value products that have low and uncertain demand. These networks carry low levels of inventory but incur high transportation cost and provide a slow response time. Distribution networks that carry local inventory are suitable for products with high demand, especially if transportation is a large fraction of total cost. These networks incur higher inventory cost but lower transportation cost and provide a faster response time.

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraSummary of Learning Objectives3. Understand how online sales have affected the design of distribution networks in different industries. The rise of online sales has affected both customer service and costs in supply chains. Online sales allow a firm to offer greater product variety and improve product availability by centralizing inventories. This is especially beneficial for low-volume, high variety products. The online channel also improves the customer experience. Selling a product online, however, increases the response time relative to a retail store. A company selling online reduces facility costs if there is particularly significant for low-value products with predictable demand. Online sales have been most effective for high-value products with uncertain demand, when customers are willing to wait some time before delivery. The Internet is particularly effective for products like music, movies, and books that can be digitized because the two major disadvantages of distributing physical products online-long response times and high transportation cost disappear. Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraGroup work for review next sessionIdentify various SCM decisions made during Distribution Network Design and determine effectiveness evaluation criteria for each decision .

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra