Slides 6

Distribution Strategies

Global Supply Chain Management

1Distribution Strategies

Introduction Various distribution strategies, and the opportunities

and challenges associated with these strategies. Two fundamental distribution strategies:

– Items can be directly shipped from the supplier or manufacturer to the retail stores or end customer

– Use intermediate inventory storage points (typically warehouses and/or distribution centers).

Issues with warehouses and distribution centers

– The inventory policy and associated inventory turn ratio– The number of warehouses or distribution centers

– Ownership: a single firm or a variety of firms– Internally managed vs. outside

Distribution Strategies Slide 2

Direct Shipment Strategies Advantages:

– Retailer avoids expenses of operating a distribution center– Lead times are reduced

Disadvantages:– Risk-pooling (location, time) effects are negated– Transportation costs increase, less EoS advantages

Common example: – Direct shipments to retailers are prevalent in perishable

goods (grocery industry), where lead time and little handling is critical

Distribution Strategies Slide 3

Intermediate Inventory Storage Point Strategies

Three generic strategies with IISPs:– Traditional warehousing strategy

• distribution centers and warehouses hold stock/inventory• provide their downstream customers with inventory as

needed. – Cross-docking strategy

• warehouses and distribution centers serve as transfer points for inventory

• no inventory is held at these transfer points.– Centralized pooling and transshipment strategies

• retailers hold stock and transship when being asked to do so • useful when there is a large variety of different products

Distribution Strategies Slide 4

Traditional Warehousing

Inventory management is critical (Q, R) Risk pooling option (location, time) is a

key advantage Associated decisions

– Centralized vs Decentralized Management– Centralized vs Decentralized Facilities

(often called Central versus Local)

Distribution Strategies Slide 5

Centralized vs Decentralized Management

Decentralized system– Each facility identifies its most effective strategy without

considering the impact on the other facilities in the supply chain.– Leads to local optimization.

Centralized system– Decisions are made at a central location for the entire supply

network. – Typical objective: minimize the total cost of the system subject

to satisfying some service-level requirements. – Centralized control leads to global optimization. – At least as effective as the decentralized system.

If system cannot be centralized ?– It is often helpful to form partnerships in order to approach the

advantages of a centralized system.

Distribution Strategies Slide 6

Central vs. Local Facilities Centralized facilities as opposed to Local

– Requires fewer warehouses and distribution centers– Facilities are located further from customers.

Other fact– Safety stock: lower with centralization– Service level: higher service level for the same

inventory investment with centralization– Overhead costs: higher in decentralized system– Customer lead time: response times lower in the

decentralized system– Transportation costs: not clear. Consider outbound

and inbound costs.

Distribution Strategies Slide 7

A Hybrid Decision

For some products we can use a centralized strategy, for others a de-centralized one

Varying degrees of centralization and localization due to the varying levels of advantages and disadvantages

So: not an either or decision

Distribution Strategies Slide 8

Cross-Docking

Popularized by Wal-Mart Warehouses function as inventory coordination

points (DCs) rather than inventory storage points: Goods arriving from the manufacturer:

– are transferred to vehicles serving the retailers– are delivered to the retailers as rapidly as possible. – See: http://www.youtube.com/watch?v=OS5CrureJoE

Goods spend little time in storage at warehouse– Usually less than half a day– Limits inventory costs

They are pure DCs, hardly without a warehouse.

Distribution Strategies Slide 9

Issues with Cross-Docking Requires a significant start-up investment Is difficult to manage Supply chain partners must be linked with

advanced information systems for coordination Requires fast and responsive transport systems Good demand forecasts are critical And so is the sharing of that information Effective only for large distribution systems

– Sufficient volume every day to allow shipments of fully loaded trucks from the suppliers to the warehouses.

– Sufficient demand at retail outlets to receive full truckload quantities

Distribution Strategies Slide 10

Inventory Pooling at GM GM experienced 10% loss of sales because

cars were not available (Cadillacs) A program was introduced

– To improve customer service – To boost sales

About 1,500 Cadillacs parked at a regional distribution center in Orlando were waiting delivery to Florida dealers within 24 hours

This is an example of Inventory Pooling Dealers have inventories of second hand cars

and typically pool themDistribution Strategies Slide 11

Other Inventory Pooling Issues Will GM sell more cars to GM dealers?

– Total number of cars ordered by dealers will not necessarily increase, even as customer service increases.

What about the dealers? – Dealers have access to more inventory

• Potentially can sell more. – It levels out the playing field between dealers.

• Small dealers would favor such a system, the competitive advantage of large dealers is wiped out

Distribution Strategies Slide 12

Centralized Pooled Systems Perform Better

For the same overall inventory level, a centralized pooled system provides:– higher service level– higher prices, higher sales volume -> higher income

Push-pull supply chain– Moving from a push supply chain

• Dealers have to order before the demand is realized– To a push-pull supply chain

• Dealers pull from regional distribution centers upon need.

Implications:– End consumers will see better customer service – And more cars are in fact available to them.

Distribution Strategies Slide 13

Distribution Strategies Slide 14

Total number of cars when inventory is centrally pooled

Number of cars when inventory is not centrally pooled

Expected demand

Realizeddemand

Unsold cars

Expected demand

Realized demand

Unsold cars

80 76 4

10 8 2

10 12 -2

10 5 5

10 13 -3

10 12 -2

10 14 -4

10 6 4

10 6 4

Risk Pooling Aggregating demand across locations

through centralized management

Transshipment Shipment of items between different

facilities at the same level in the supply chain to meet some immediate need

Occurs mostly at the retail level Can be achieved:

– with advanced information systems– Shipping costs are reasonable– Retailers have same owner

Example:http://www.toyota.nl/occasions/index.tmex#

Distribution Strategies Slide 15

Retailers with different owners

May not want to do transshipments Integration strategies may have to be

adopted by the distributor Not clear policy regarding inventory levels

– A retailer’s strategy will depend on its competitors’ strategies, competitors can benefit from you holding stock

Distribution Strategies Slide 16

Which Strategy to Adopt?

Different approaches for different products Factors:

– Customer demand, its variability– Service level vs. costs (for example

transportation and inventory costs)– Lead time, is associated with both above – Product being highly differentiated or not– Economies of scale in transportation/storage

Distribution Strategies Slide 17

Summary of Distribution Strategies

Strategy →Attribute ↓

Direct shipment Cross-docking

Inventory at warehouses

Risk pooling Take advantage

Transportation costs

Reduced inbound costs

Reduced inbound costs

Holding costs No warehouse cost

No holding costs

Allocation Delayed Delayed

Distribution Strategies Slide 18

Summary Critical to implement effective distribution

strategies regardless of the total level of supply chain integration.

Strategies:– direct shipping – warehouses or distribution centers

• Traditional warehousing strategy• Cross-docking strategy• Centralized pooling and transshipment strategies

Related decisions – Should there be many or only a few warehouses or DC’s?

– Should inventory be held at these locations, or

transshipped? – As a retailer, does it make sense to participate in a

centralized inventory pooling system, in transshipments? Distribution Strategies Slide 19