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## Homework Paper 1) Review Chapter 4 “Designing Distribution Networks and Application to Online Sales” power point slides for you will have to write up what

Homework Paper 1) Review Chapter 4 “Designing Distribution Networks and Application to Online Sales” power point slides for you will have to write up what you learned from this chapter. PLEASE EXEMPLIFY HIGH LEVEL ANALYSIS WITH YOUR WRITING (i.e. 3 Paragraphs Minimum)

2) Link for Ted Talk: This will be part of you participation points: (i.e. 3 Paragraphs Minimum): Turning Supply Chains into Prosperity Chains

https://www.youtube.com/watch?v=FlbGNe73L74 Supply Chain Management: Strategy, Planning, and Operation
Seventh Edition
Chapter 4
Designing Distribution Networks and Applications to Omni-Channel Retailing

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1

Learning Objectives
4.1 Identify the key factors to be considered when designing a distribution network.
4.2 Discuss the strengths and weaknesses of various distribution options.
4.3 Describe how omni-channel retail may be structured to be both cost effective and responsive to customer needs.

Distribution – 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 value
Choice of distribution network can achieve supply chain objectives from low cost to high responsiveness

Factors Affecting Distribution Network Design (1 of 3)
Distribution network performance evaluated along two dimensions
Value provided to the customer
Cost 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 costs

Factors Affecting Distribution Network Design (2 of 3)
Elements of customer service influenced by network structure:
Response time
Product variety
Product availability
Customer experience
Time to market
Order visibility
Returnability

Factors Affecting Distribution Network Design (3 of 3)
Supply chain costs affected by network structure:
Inventories
Transportation
Facilities
Information

Desired Response Time and Number of Facilities

Figure 4-1 Relationship Between Desired Response Time and Number of Facilities

Notes: 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

Figure 4-2 Relationship Between Number of Facilities and Inventory Costs

Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities.
8

Transportation Costs and Number of Facilities

Figure 4-3 Relationship Between Number of Facilities and Transportation Cost

Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities.
9

Facility Costs and Number of Facilities

Figure 4-4 Relationship Between Number of Facilities and Facility Costs

Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities.
10

Logistics Cost, Response Time, and Number of Facilities

Figure 4-5 Variation in Logistics Cost and Response Time with Number of Facilities

Summary of Learning Objective 1
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 inventory, transportation, facilities and handling, and information. Increasing the number of facilities decreases the response time and transportation cost but increases inventory and facility cost.

Design Options for a Distribution Network (1 of 2)
Distribution network choices from the manufacturer to the end consumer
Two key decisions
Will product be delivered to the customer location or picked up from a prearranged site?
Will product flow through an intermediary (or intermediate location)?

Design Options for a Distribution Network (2 of 2)
One of six designs may be used
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/distributor storage with customer pickup
Retail storage with customer pickup

Figure 4-6 Manufacturer Storage with Direct Shipping

Manufacturer Storage with Direct Shipping Network (1 of 2)
Table 4-1 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.

Manufacturer Storage with Direct Shipping Network (2 of 2)
Table 4-1 [Continued]

Service Factor 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.

Figure 4-7 In-Transit Merge Network

In-Transit Merge (1 of 2)
Table 4-2 Performance Characteristics of In-Transit Merge

Cost Factor Performance

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.

In-Transit Merge (2 of 2)
Table 4-2 [Continued]

Service Factor Performance

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 is received.

Time to market Similar to drop-shipping.

Order visibility Similar to drop-shipping.

Returnability Similar to drop-shipping.

Figure 4-8 Distributor Storage with Carrier Delivery

Distributor Storage with Carrier Delivery (1 of 2)
Table 4-3 Performance Characteristics of Distributor Storage with Carrier Delivery

Cost Factor Performance

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.

Distributor Storage with Carrier Delivery (2 of 2)
Table 4-3 [Continued]

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.

Figure 4-9 Distributor Storage with Last Mile Delivery

Distributor Storage with Last Mile Delivery (1 of 2)
Table 4-4 Performance Characteristics of Distributor Storage with Last-Mile Delivery

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.

Distributor Storage with Last Mile Delivery (2 of 2)
Table 4-4 [Continued]

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 longer than 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 a retail network.

Figure 4-10 Manufacturer or Distributor Storage with Customer Pickup

Manufacturer or Distributor Storage with Customer Pickup (1 of 2)
Table 4-5 Performance Characteristics of Network with Customer 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 required.

Manufacturer or Distributor Storage with Customer Pickup (2 of 2)
Table 4-5 [Continued]

Service Factor Performance

Response time Similar to package carrier delivery with manufacturer or distributor storage. Same-day pickup is possible for items stored at regional DC.

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 or distributor storage options.

Order visibility Difficult but essential.

Returnability Somewhat easier, given that pickup location can handle returns.

Figure 4-11 Retail Storage with Customer Pickup

Retail Storage with Customer Pickup (1 of 2)
Table 4-6 Performance Characteristics of Retail Storage with 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 at the pickup site can be significant for online and phone orders.

Information Some investment in infrastructure required for online and phone orders.

Retail Storage with Customer Pickup (2 of 2)
Table 4-6 [Continued]

Service Factor Performance

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.

Comparative Performance of Delivery Network Designs (1 of 3)
Table 4-7 Comparative Performance Rank of Delivery Network Designs

Blank Retail
Storage with
Customer
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/
Distributor
Storage with
Customer
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

Identify the best and worst network along various dimensions.

Response time: (B) retail stores (W) Manufacturer storage with direct ship
Product variety: (W) retail stores (B) Manufacturer storage with direct ship
Product availability: (W) retail store (B) Manufacturer storage
Inventory: (W) retail store (B) manufacturer storage
Transportation: (B) retail store (W) last mile delivery
Facility: (W) retail store (B) manufacturer storage
Handling: (W) Distributor storage with last mile delivery (B)
Information: Retail stores may be less complex; manufacturer storage with pickup may be very complex
33

Comparative Performance of Delivery Network Designs (2 of 3)
Table 4-7 [Continued]

Blank Retail
Storage with
Customer
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/
Distributor
Storage with
Customer
Pickup

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

Identify the best and worst network along various dimensions.

Response time: (B) retail stores (W) Manufacturer storage with direct ship
Product variety: (W) retail stores (B) Manufacturer storage with direct ship
Product availability: (W) retail store (B) Manufacturer storage
Inventory: (W) retail store (B) manufacturer storage
Transportation: (B) retail store (W) last mile delivery
Facility: (W) retail store (B) manufacturer storage
Handling: (W) Distributor storage with last mile delivery (B)
Information: Retail stores may be less complex; manufacturer storage with pickup may be very complex
34

Comparative Performance of Delivery Network Designs (3 of 3)
Table 4-7 [Continued]

Blank Retail
Storage with
Customer
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/
Distributor
Storage with
Customer
Pickup

Inventory 4 1 1 2 3 1

Transportation 1 4 3 2 5 1

Facility and handling 6 1 2 3 4 5

Information 1 4 4 3 2 5

Key: 1 corresponds to the best performance and 6 the worst performance.

Identify the best and worst network along various dimensions.

Response time: (B) retail stores (W) Manufacturer storage with direct ship
Product variety: (W) retail stores (B) Manufacturer storage with direct ship
Product availability: (W) retail store (B) Manufacturer storage
Inventory: (W) retail store (B) manufacturer storage
Transportation: (B) retail store (W) last mile delivery
Facility: (W) retail store (B) manufacturer storage
Handling: (W) Distributor storage with last mile delivery (B)
Information: Retail stores may be less complex; manufacturer storage with pickup may be very complex
35

Delivery Networks for Different Product/ Customer Characteristics (1 of 2)
Table 4-8 Performance of Delivery Networks for Different Product/Customer Characteristics

Blank Retail
Storage with
Customer
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/
Distributor
Storage with
Customer
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

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
36

Delivery Networks for Different Product/ Customer Characteristics (2 of 2)
Table 4-8 [Continued]

Blank Retail
Storage with
Customer
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/
Distributor
Storage with
Customer
Pickup

Very-low-demand product −2 +2 +1 0 −2 +1

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

Key: +2 = very suitable; +1 = somewhat suitable; 0 = neutral; −1 = somewhat unsuitable; −2 = very unsuitable.

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
37

Summary of Learning Objective 2
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 incur lower facility costs and 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 facility and inventory cost but lower transportation cost and provide a faster response time.

Online Sales and Omni-Channel Retailing
Omni-channel retailing
The use of multiple channels to interact with customers and fulfill their orders
Three flows
Information
Products
Funds

Figure 4-12 Alternatives in Omni-Channel Retailing

Alternatives in Omni-Channel Retailing (1 of 3)
Face-to-face interaction
Customer leaves with product
Many facilities close to customers
High level of inventory
Low transportation costs

Alternatives in Omni-Channel Retailing (2 of 3)
Showrooms
Face-to-face interaction
Product ordered for later pickup
Low level of inventory
Smaller facilities
More transportation and information infrastructure than traditional retail

Alternatives in Omni-Channel Retailing (3 of 3)
Online Information + Home Delivery
Aggregation of inventories
Few locations
High transportation costs
Online Information + Pickup
Reduces outbound transportation costs
Customer must travel to pickup location

Performance of Channels (1 of 3)
Response time to customers
Picking up physical products faster than other channels
Online channel may be fastest for information goods
Product variety
Easier to offer larger selection remotely
Product availability
Aggregating inventory improves product availability

Performance of Channels (2 of 3)
Customer experience
Channels have complementarity strengths
Faster time to market
Online/showrooms are quicker than retailing
Order Visibility
Critical for showrooms or online
Automatic in retail

Performance of Channels (3 of 3)
Returnability
Easier with physical locations
Proportion of returns likely to be higher when information exchange is remote
Direct Sales to Customers
Efficient Funds Transfer
Internet and smartphones

Performance of Channels in Terms of Cost (1 of 2)
Inventory
Lower inventory levels if customers will wait
Postpone variety until after the customer order is received
Facilities
Costs related to the physical facilities in a network
Costs associated with the operations in these facilities

Performance of Channels in Terms of Cost (2 of 2)
Transportation
Lower cost of “transporting” information goods in digital form
For nondigital, aggregating inventories increases outbound transportation
Information
Investment higher for channels that provide information remotely

Relative Costs for Omni-Channel Alternatives
Table 4-9 Relative Costs for Omni-Channel Alternatives

Retail Showrooms + Home
Delivery Online
Information + Home
Delivery Online
Information + Pickup

Inventory High Low – Medium Low Low – Medium

Facilities High Medium Low Low – Medium

Transportation by retailer Low High High Medium

Transportation
by customer High High Low Medium

Information Low High High High

Framework for Omni-Channel Retailing (1 of 4)
Product characteristics and customer needs influence choice of channel
Product dimensions
Demand uncertainty
Value
Information complexity
Customer dimensions
Willingness to pay
Price conscious/service conscious

Framework for Omni-Channel Retailing (2 of 4)
Table 4-10 Product Demand Uncertainty and Omni-Channel Retailing

Blank Predictable Demand Product Unpredictable Demand Product

Traditional Retail Compete on price Compete on service for high
information complexity products

Showrooms Not suitable Compete on price and variety
for high information complexity
products

Online Information + Home Delivery Compete on service Compete on price and variety

Online Information + Pickup Compete on ability to provide service at a lower price More competitive on price than
home delivery option

Framework for Omni-Channel Retailing (3 of 4)
Table 4-11 Product Value and Omni-Channel Retailing

Blank Low Value Product High Value Product

Traditional Retail Compete on price for predictable demand products Compete on service for products with uncertain demand and high information complexity

Showrooms Compete on high variety at reasonable price for high information complexity Products Compete on price for
customizable, high information
complexity products

Online Information + Home Delivery Compete on service Compete on price and variety

Online Information + Pickup Compete on ability to provide service at a
lower price More competitive on price than
home delivery option

Framework for Omni-Channel Retailing (4 of 4)
Table 4-12 Product Information Complexity and Omni-Channel Retailing

Blank Low Information Complexity Product High Information Complexity
Product

Traditional Retail Compete on price for predictable demand products Compete on service for uncertain
demand products

Showrooms Not suitable Compete on price for uncertain
demand products

Online Information + Home Delivery Compete on price for uncertain demand products Compete on service in terms
of variety and availability for
uncertain demand products

Online Information + Pickup Compete on price for uncertain demand products A slightly cheaper option to
compete on service in terms
of variety and availability for
uncertain demand products

Summary of Learning Objective 3
Omni-channel retailing has the potential to combine the complementary strengths of physical stores and the online channel. Physical stores are good at letting customers experience high information complexity products in person. They are also cost effective at selling products with predictable demand. The online channel, in contrast, is cost effective at selling products with unpredictable demand but cannot let customers experience high information complexity products. An effective portfolio results if brick-and-mortar stores sell predictable demand items, serve as showrooms for high information complexity items with unpredictable demand, and serve as pickup locations for the online channel, while the online channel delivers unpredictable demand items to the customer.