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1. Unit-3 Designing the Distribution Network in a Supply Chain Mr. Divesh Dutt Assistant Professor

2. The Role of Distribution in the Supply Chain Distribution : the steps taken to move and store a product from the supplier stage to the customer stage in a supply chain Distribution directly affects cost and the customer experience and therefore drives profitability Choice of distribution network can achieve supply chain objectives from low cost to high responsiveness Examples: Wal-Mart, Dell, Proctor & Gamble 15 August 2024 2

3. Factors Influencing Distribution Network Design Distribution network performance evaluated along two dimensions at the highest level: Customer needs that are met Cost of meeting customer needs Distribution network design options must therefore be compared according to their impact on customer service and the cost to provide this level of service 15 August 2024 3

4. Factors Influencing Distribution Network Design Elements of customer service influenced by network structure: Response time Product variety Product availability Customer experience Order visibility Returnability Supply chain costs affected by network structure: Inventories Transportation Facilities and handling Information 15 August 2024 4

5. Service and Number of Facilities 15 August 2024 5 Number of Facilities Response Time

6. Implications: 15 August 2024 6 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.

7. Inventory Costs and Number of Facilities 15 August 2024 7 Inventory Costs Number of facilities Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities.

8. Transportation Costs and Number of Facilities 15 August 2024 8 Transportation Costs Number of facilities Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities.

9. Facility Costs and Number of Facilities 15 August 2024 9 Facility Costs Number of facilities Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities.

10. Transportation Total Costs Number of Facilities Inventory Facilities Total Costs Total Costs Related to Number of Facilities 15 August 2024 10

11. implications 15 August 2024 11 Total costs decrease and then increase as we increase the number of facilities. The responsiveness improves as we increase the number of facilities. A supply chain should always operate above the lowest cost point. Operating beyond that point makes sense if the revenue generated from better responsiveness exceeds the cost of better responsiveness.

12. Response Time Variation in Logistics Costs and Response Time with Number of Facilities Number of Facilities Total Logistics Costs 15 August 2024 12 Total Costs

13. Implications: 15 August 2024 13 Total costs decrease and then increase as we increase the number of facilities. The responsiveness improves as we increase the number of facilities. A supply chain should always operate above the lowest cost point. Operating beyond that point makes sense if the revenue generated from better responsiveness exceeds the cost of better responsiveness.

14. Design Options for a Distribution Network Manufacturer Storage with Direct Shipping Manufacturer Storage with Direct Shipping and In-Transit Merge Distributor Storage with Carrier Delivery Distributor Storage with Last Mile Delivery Manufacturer or Distributor Storage with Consumer Pickup Retail Storage with Consumer Pickup Selecting a Distribution Network Design 15 August 2024 14

15. Manufacturer Storage with Direct Shipping 15 August 2024 15 Manufacturer Retailer Customers Product Flow Information Flow

16. Performance characteristics of manufacturer storage with direct shipping network 15 August 2024 16 Cost Factor Performance Inventory Lower cost because of aggregation. Highest Benefits for low demand and high value items and largest when product customization can be postponed by manufacturer Transportation Higher transportation cost because of increased distance and disaggregate shipping. Facilities and Handling Lower facility cost because of aggregation. Saves handling cost if manufacturer can manage small shipments Information Significant investment in information infrastructure to integrate manufacturer and retailer

17. 15 August 2024 17 Service Factor Performance Response time Longer response time of 1-2 weeks due to increased distance and 2 stages for order processing. Response time may vary by product. 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 shipment Time to market Fast, with the product available as soon as the first unit is produced. Order visibility More difficult but also more important for a customer service perspective Returnability Expensive and difficult to implement. Performance characteristics of manufacturer storage with direct shipping network

18. In-Transit Merge Network 15 August 2024 18 Factories Retailer Product Flow Information Flow In-Transit Merge by Carrier Customers

19. Performance characteristics of in-transit merge 15 August 2024 19 Cost Factor Performance Inventory Similar to drop shipping Transportation Somewhat lower transportation cost than drop shipping Facilities and handling Handling cost higher than drop shipping, receiving cost lower at customer Information Investment is somewhat higher than drop shipping Service Factor Performance Response time Similar to drop-shipping, may be higher Product variety Similar to drop-shipping Product availability Similar to drop-shipping Customer experience Better than drop-shipping, because single delivery has to be received Time to market Similar to drop-shipping Order visibility Similar to drop-shipping Returnability Similar to drop-shipping

20. Distributor Storage with Carrier Delivery 15 August 2024 20 Factories Customers Product Flow Information Flow Warehouse Storage by Distributor/Retailer

21. Performance characteristics of distributor storage with carrier delivery 15 August 2024 21 Cost Factor Performance Inventory Higher than manufacturer storage. Difference is not large for faster moving items but can large for slow moving items Transportation Lower than manufacturer storage. Reduction is higher for faster moving items Facilities and handling Somewhat higher than manufacturer storage. The difference can be large for very large for slow moving items Information Simple infrastructure compared to manufacturer storage Service Factor Performance 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

22. Distributor Storage with Last Mile Delivery 15 August 2024 22 Factories Customers Product Flow Information Flow Distributor/Retailer Warehouse

23. Performance characteristics of distributor storage with last mile delivery 15 August 2024 23 Cost factor Performance Inventory Higher than distributor storage with package carrier delivery Transportation Very high cost given minimal scale economies. Higher than any other distribution option. Facilities and handling Facility costs higher than manufacturer storage or distributor storage with package carrier delivery, but lower than a chain of retail stores Information Similar to distributor storage with package carrier delivery

24. 15 August 2024 24 Performance characteristics of distributor storage with last mile delivery Service factor Performance Response time Very quick. Same day to next day delivery Product variety Somewhat less than distributor storage with package carrier delivery but larger than retail stores. Product availability More expensive to provide availability than any other option except retail stores. Customer experience Very good, particularly for bulky items. Time to market Slightly higher for distributor storage with package carrier delivery Order visibility Less of an issue and easier to implement than manufacturer storage or distributor storage with package carrier delivery. Returnability Easier to implement than other previous options. Harder and more expensive than retail network

25. Manufacturer or Distributor Storage with Customer Pickup 15 August 2024 25 Factories Retailer Pickup Sites Product Flow Information Flow Cross Dock DC Customer Flow Customers

26. 15 August 2024 26 Performance characteristics of network with consumer pickup sites Cost factor Performance 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 is required

27. 15 August 2024 27 Performance characteristics of distributor storage with last mile delivery Service factor Performance Response time Similar to package carrier delivery with manufacturer or distributor storage. Same day delivery possible for items stored locally at pickup sites 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

28. 15 August 2024 28 Performance characteristics of Retail storage at customer pickup sites Cost factor Performance Inventory Higher than all other options Transportation Lower than all other options Facilities and handling Higher than other options. The increase in handling cost can be significant for online and phone orders. Information Some investment in infrastructure required for online and phone orders

29. 15 August 2024 29 Service factor Performance Response time Same day(immediate) pickup possible for items stored locally at pickup sites 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 stores can provide a substitute. Performance characteristics of Retail storage at customer pickup sites

30. Linking Product Characteristics and Customer Preferences to Network Design 15 August 2024 30 When designing the delivery network we should account for product and market characteristics. High demand products will have transportation cost play a significant role. Use network with good transportation cost (retail stores) Very low demand products will have inventory play a significant role. Use network with low inventory costs (direct shipping) Many product sources: transportation + information plays a role. Distributor storage with package carrier Few product sources but high customization: manufacturer storage with merge in transit High product variety: inventory cost will be significant. Use distributor storage Low customer effort: Distributor storage with package carrier delivery or last mile delivery depending upon desired response time

31. E-Business and the Distribution Network Impact of E-Business on Customer Service Response time to customers Product variety Product availability Customer experience Faster time to market Order visibility Returnability Direct sales to customers Flexible pricing, product portfolio and promotions Efficient fund transfer 15 August 2024 31

32. E-Business and the Distribution Network 15 August 2024 32 Impact of E-Business on Cost Inventory Facilities Transportation Information Using E-Business: Dell, Amazon, Peapod, Grainger

33. Distribution Networks in Practice The ownership structure of the distribution network can have as big as an impact as the type of distribution network The choice of a distribution network has very long-term consequences Consider whether an exclusive distribution strategy is advantageous Product, price, commoditization, and criticality have an impact on the type of distribution system preferred by customers 15 August 2024 33

34. 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; allocation of capacity and markets to each facility. Facility role- what role should each facility play? What processes are performed at each facility? Facility location- where should facilities be located? Capacity allocation- how much capacity be allocated to each facility? Market and supply allocation- what market should each facility serve? Which supply sources should feed each facility? 15 August 2024 34

35. Factors Influencing Network Design Decisions Strategic - firms focusing on low cost leadership tend to find the lowest cost location for their manufacturing facilities. Ex: Electronic goods. Whereas firms focusing on responsiveness tend to locate facilities closer to the market and may select high cost location Ex: apparels which responds quickly to changing fashion trends. Technological -if production technology displays significant economies of scale, a few high capacity locations are most effective. Ex: manufacture of computer chips. Whereas if facilities have lower fixed costs, many local facilities are preferred because this helps in lower transportation costs. Ex: bottling plants for coca cola. Macroeconomic factors- include taxes tariffs, exchange rates, and shipping costs, freight and fuel cost that are not internal to an individual firm. Ex: BMW built its US factory in south Carolina mainly because of tax incentives offered by the state. Political -companies prefer to locate facilities in politically stable countries where the rules of commerce and ownership are well defined 15 August 2024 35

36. Factors Influencing Network Design Decisions 15 August 2024 36 Infrastructure- the availability of good infrastructure is a prerequisite to locating facility in a given area. Poor infrastructure adds on to the cost of doing business from a given location. Key elements include sites and labor, proximity to all transportation terminals and local utilities. Competitive- companies must consider competitors’ strategy, size and location. Fundamental decision firm make is whether to locate their facilities close to or far from competitors. Positive externalities between firms-retails stores tend to locate close to each other because doing so increases overall demand Locating to split the market- when firms do not control price but compete on distance from the customer, they can maximize market share by locating close to each other and splitting the market.

37. 15 August 2024 37 Socioeconomic factors -Govt. of India has promoted industrial development of industrially backward areas like J&K, and northeastern states. Balanced regional development through locational dispersal of industries has been one of the principle objectives of 5 Year Plans. Industrial policy aims to spread industrialization to backward areas on the country. Customer response time and local presence- firms that target customers who value for shorter response time must locate close to them. Most towns have fewer supermarkets than convenience stores. Logistics and facility costs- cost incurred within a supply chain change as a number of facilities, their location and capacity allocation change. Ex: locating the steel factory close to the supply source is preferred because it reduces transportation cost. Total logistics cost are the sum of the inventory, transportation, and facilities cost. Factors Influencing Network Design Decisions

38. The Cost-Response Time Frontier Local FG Mix Regional FG Local WIP Central FG Central WIP Central Raw Material and Custom production Custom production with raw material at suppliers Cost Response Time Hi Low Low Hi 15 August 2024 38

39. Service and Number of Facilities Number of Facilities Response Time 15 August 2024 39

40. Percent Service Level Within Promised Time Transportation COST BUILDUP AS A FUNCTION OF FACILITIES Cost of Operations Number of Facilities Inventory Facilities Total Costs Labor 15 August 2024 40

41. Conventional Network Customer Store Materials DC Component Manufacturing Vendor DC Final Assembly Finished Goods DC Components DC Vendor DC Plant Warehouse Finished Goods DC Customer DC Customer DC Customer DC Customer Store Customer Store Customer Store Customer Store Vendor DC 15 August 2024 41

42. Tailored Network: Multi-Echelon Finished Goods Network Regional Finished Goods DC Regional Finished Goods DC Customer 1 DC Store 1 National Finished Goods DC Local DC Cross-Dock Local DC Cross-Dock Local DC Cross-Dock Customer 2 DC Store 1 Store 2 Store 2 Store 3 Store 3 15 August 2024 42

43. A Framework for network design decisions PHASE I Supply Chain Strategy PHASE II Regional Facility Configuration PHASE III Desirable Sites PHASE IV Location Choices Competitive STRATEGY INTERNAL CONSTRAINTS Capital, growth strategy, existing network PRODUCTION TECHNOLOGIES Cost, Scale/Scope impact, Support, required, flexibility COMPETITIVE ENVIRONMENT PRODUCTION METHODS Skill needs, response time FACTOR COSTS Labor, materials, site specific GLOBAL COMPETITION TARIFFS AND TAX INCENTIVES REGIONAL DEMAND Size, growth, homogeneity, local specifications POLITICAL, EXCHANGE RATE AND DEMAND RISK AVAILABLE INFRASTRUCTURE LOGISTICS COSTS Transport, inventory, coordination 15 August 2024 43 AGGREGATE FACTOR AND LOGISTICS COSTS

44. Models for facility location and capacity allocation 15 August 2024 44 Goal is to maximize the overall profitability while providing customers with appropriate responsiveness. Revenues come from sale of products, whereas cost arises from facilities, labor, transportation, material and inventories. A manager must consider many trade-offs during network design. Ex: building many facilities reduces transportation cost and provides fast response time, but it increases the facility and inventory cost. Managers use network design models in 2 situations: To decide on locations where facilities will be established and the capacity to be assigned to each facility.(long term) Models are used to assign current demand to the available facilities and identify lanes along which product will be transported.(annual basis)

45. Network Optimization Models Allocating demand to production facilities Locating facilities and allocating capacity Which plants to establish? How to configure the network? Key Costs : Fixed facility cost Transportation cost Production cost Inventory cost Coordination cost 15 August 2024 45

46. Example: Quality woolen rugs BIKANEER- PRODUCED AT AUCTION CENTRE BIKANEER 275 KM FROM JAIPUR IN VILLAGES 30-KM AROUND BIKANEER JAIPUR AT DYING HOUSES 5-20KMS FROM HO JAIPUR, 20KMS FROM HO JAIPUR THANAGAZI 110KMS FROM HO NARHET, 60 LOOMS 200 WEAVERS, 25 KMS FROM THANAGAZI BRANCH OFFICE AREA VISITS EVERY 15-20 DAYSTO CHECK PROGRESS THANAGAZI, NAHRET JAIPUR 20KMS FROM HO

47. Thank You