Distribution Strategies

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Distribution Strategies

• Jerry Banks

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Supply network design

• Centralized versus decentralized control
• Distribution strategies
• Push versus pull systems

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Centralized versus decentralized control

• Centralized
• Decisions are made at a central location for the
  entire supply chain network
• Minimizes total system cost subject to
  service-level requirements
• Global optimization

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Centralized versus decentralized control

• Decentralized
• Each facility identifies its most effective
  strategy
• Local optimization

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Effect of information

• When each facility can access only its own
  information, centralized strategy is not possible
• But, information technology makes information
  sharing possible

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Distribution strategies

• Direct shipment
• Items shipped from the supplier to retail store
  without going through distribution centers
• Warehousing
• The classical strategy
• Cross-docking
• Items are distributed continuously from suppliers
  through warehouses to customers
• However, they are kept at the warehouse for only
  8 to 12 hours

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Direct shipment

• Advantages
• No cost for operating distribution centers
• Lead times are reduced
• Disadvantages
• Risk-pooling effects are negated
• Manufacturer and distributor transportation costs
  increase because smaller trucks are sent to more
  locations

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Direct shipment

• Used when the retail store requires full truck
  loads
• Useful when perishable goods are involved
• Grocery industry

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JC Penney uses a direct shipping strategy

• Sells through 1000 stores and millions of
  catalogs
• 200,000 items from more than 20,000 suppliers
• Each store has total accountability for sales,
  inventories, and profits
• Each store is responsible for sales forecasts and
  ordering

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JC Penney uses a direct shipping strategy

• Orders are communicated to buyers who coordinate
  the shipment with distribution personnel to
  ensure quick response
• Internal control and tracking system monitors
  flow of materials
• In most cases, products are shipped directly to
  Penneys stores

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Cross-docking

• Made famous by Wal-Mart
• Warehouses function as inventory coordination
  points
• Goods arrive at warehouses from the manufacturer
• Transferred to vehicles serving the retailers
• Goods spend less than 12 hours at the warehouse
• System limits inventory costs and decreases lead
  time by decreasing storage time

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Cross-docking

• Expensive to start up and difficult to manage
• 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
• Must have a fast and responsive transportation
  system

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Cross-docking

• Expensive to start up and difficult to manage
• Forecasts are critical information must be
  shared
• Effective only for large distribution systems
• Large number of vehicles are delivering and
  picking up goods at the cross-dock facility
• Shipments of fully loaded trucks every day from
  suppliers to warehouses
• Large demands exist so full truckloads result

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Wal-Mart specifics

• Largest and highest-profit retailer in the world
• 85 of its goods are cross-docked
• 50 for K-Mart
• Private satellite communications system that
  sends POS data to all its vendors
• Dedicated fleet of 2000 trucks
• Stores are replenished twice/week

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Wal-Mart specifics

• Wal-Mart purchases full truckloads
• Reduced safety stock
• Cost of sales cut by 3

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Questions to answer in groups

• Describe a retail environment that is not
  amenable to cross docking
• 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?
• If a firm uses cross-docking to reduce inventory
  holding costs, arent they simply pushing the
  inventory (and safety stock) further up the
  supply chain? What is the net gain?

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RFIDRadio Frequency Identification
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RFID

• First appeared in 1980s
• Non-contact reading
• Hostile environments
• Wide range of applications
• Cattle ID
• Automated vehicles broadcasting their locations
• Etc.

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RFID includes

• Antenna
• Transceiver (with decoder)
• Transponder (RF tag) electronically programmed
  with unique information

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How RFIDs work

• When an RFID tag passes through the
  electromagnetic zone, it detects the reader's
  activation signal
• The reader decodes the data encoded in the tag's
  chip and the data is passed to the host computer
  for processing

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Active and passive

• Active
• Powered by an internal battery and are typically
  read/write
• Passive
• Operate without a separate external power source
  and obtain operating power generated from the
  reader
• Much lighter than active tags, less expensive,
  and offer a virtually unlimited operational
  lifetime
• But, they have shorter read ranges than active
  tags and require a higher-powered reader

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Advantage over barcodes

• Noncontact, non-line-of-sight nature of the
  technology
• 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

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Growth of RFID technology

• Highly unlikely that the technology will
  ultimately replace barcode
• Will never be as cost-effective as a barcode
  label 
• RFID will continue to grow in its established
  niches where barcode or other optical
  technologies are not effective

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Logistics Today, June 2004

• Numerous articles on the RFID deadline
• The essence of these articles will be discussed

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Wal-Mart holds firm on RFID deadline

• In early 2003, Wal-Mart sent shockwaves through
  the entire logistics field when it announced that
  its suppliers should adopt RFID by January, 2005
• In the past year, any firm with products remotely
  suggestive of RFID has helped revive the
  given-up-for-dead technology marketplace

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Wal-Mart holds firm on RFID deadline

• Now, suppliers are asking for answers

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Wal-Mart holds firm on RFID deadline

• Will Wal-Mart be reading RFID tags at POS
  terminals in January, 2005?
• No, says Wal-Mart

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Wal-Mart holds firm on RFID deadline

• Will Wal-Mart be placing readers in every one of
  its DCs by January, 2005?
• No, says Wal-Mart

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Wal-Mart holds firm on RFID deadline

• Is Wal-Mart slowing down the time table?
• No, says Wal-Mart

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Wal-Mart holds firm on RFID deadline

• Wal-Marts intention is to pick one geographic
  area a DC, a group of stores in which to
  begin
• Wal-Marts intention is to have all domestic
  suppliers compliant by 2006

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Wal-Mart holds firm on RFID deadline

• Since Wal-Mart announced its RFID initiative,
  other organizations have announced similar
  projects
• US DoD
• Target
• Home Depot
• German-based Metro
• UK-based Tesco

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Logistics executives question benefits of RFID

• Serious doubts about how firms will be able to
  achieve any internal benefits
• Sit back and wait mentality
• No way to justify the high cost of US0.30 to
  US0.40 per tag
• It will take time for the RFID initiatives to
  begin driving cost out of the supply chain

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RFIDs impact on market growth larger than
expected

• Inbound Logistics, May 2004
• The market size and compound annual growth rate
  was originally estimated to rise by 21 annually
  between 2003 and 2005
• The near-term annual growth rate for RFID
  software and systems is now expected to surpass
  37

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Prospective RFID users face supply chain
challenges

• Inbound Logistics, May 2004
• From a US1 billion market in 2004 to a US3
  billion in 2008
• If the cost of an RFID tag decreases
• US.50 today, but may drop to US.05 in one or
  two years

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Prospective RFID users face supply chain
challenges

• Supply chains with all items tagged, moving and
  visible will be very positive
• But, done wrong it could be a nightmare

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New FCC rule improves RFID systems used for
container security

• Inbound Logistics, May 2004
• FCC Federal Communications Commission
• 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

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Cultural problems slow RFID momentum overseas

• A widespread interest exists, but it appears to
  be shallow
• Two factors contribute to the reluctance
• Technical problems
• Read rates are too slow
• Difficulties in affixing tags to products

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Cultural problems slow RFID momentum overseas

• Cultural problems
• Stronger than the technical problems
• Internal distrust and animosity toward the IT
  departments
• Fear of change within the organization

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Cultural problems slow RFID momentum overseas

• However, there is a great interest at many levels
  in RFID adoption
• Belief that there will be some benefit in actual
  work and return on investment over the next five
  years

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Prediction

• If some standards commonality is achieved -
  whereby RFID equipment from different
  manufacturers can be used interchangeably - the
  market will very likely grow exponentially

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What factors influence distribution strategies?

• Customer demand
• Customer location
• Service level
• Transportation costs
• Inventory costs

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Interplay between inventory and transportation
costs

• Both depend on shipment size
• But in opposite ways
• Increasing lot sizes reduces the delivery
  frequency and enables the shipper to take
  advantage of price breaks in shipping volume
• Reduces transportation costs
• However, large lot sizes increase inventory cost
  per item
• Items remain in inventory longer

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Demand variability

• Also impacts distribution strategy
• Larger the variability, the more stock needed
• Stock held at the warehouse provides protection
  against demand variability
• Due to risk pooling, the more warehouses a
  distributor has, the more safety stock is needed

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However, if cross-docking or direct shipping is
used

• More safety stock is needed in the distribution
  system
• Because each store needs to keep enough safety
  stock
• Mitigated by distribution strategies that enable
  better demand strategies and smaller safety
  stocks and transshipment
• Must also consider lead time, volume
  requirements, and capital investment

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Distribution strategies
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Transshipment

• Shipment of items between different facilities at
  the same level in the supply chain to meet an
  immediate need
• Customers demand is met from another retailer
• Retailers must know what other retailers have in
  inventory
• Information system is needed

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Transshipment

• Since all inventories are available, this takes
  advantage of risk pooling
• If retailers are independently owned, this
  doesnt work as well
• Helps competitors

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Central versus local facilities

• First consideration Safety stock
• Consolidating warehouses allows the vendor to
  take advantage of risk pooling
• The more centralized an operation, the lower the
  safety stock

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Central versus local facilities

• Second consideration Overhead
• Operating a few large central warehouses leads to
  lower total overhead costs (compared to operating
  many smaller warehouses)

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Central versus local facilities

• Third consideration Economies of scale
• In manufacturing, it is often less expensive to
  have one central manufacturing facility than many
  smaller ones

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Central versus local facilities

• Fourth consideration Lead time
• Can often be reduced if a large number of
  warehouses exist (they might be closer to the
  market areas)

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Central versus local facilities

• Fifth consideration Service
• Centralized warehousing enables risk pooling so
  orders can be met (and with a lower total
  inventory level)
• But, shipping time from the warehouse to the
  retailer will be longer

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Central versus local facilities

• Sixth consideration Transportation costs
• As the number of warehouses increases,
  transportation costs go up because total distance
  traveled is greater
• And, quantity discounts are less likely to apply
• However, transportation costs from the warehouses
  to the retailers are likely to fall as the
  warehouses are closer to the retailers

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Push versus pull systems

• Push-based supply chain
• Based on long-term forecasts
• Pull-based supply chain
• Production is demand driven

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Push system
Orders
External Demand
Product
Manufacturer
Retailer
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Push system

• Based on long-term forecasts
• Takes time to react to a change in demand leading
  to
• Inability to meet changing demand patterns
• Obsolescence of supply chain inventory as demand
  for some products disappears

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Push system

• Bullwhip effect is more pronounced leading to
• Excessive inventories
• Larger safety stocks are needed
• Larger production lots
• And more variable
• Decreased service levels

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Push system

• Production capacity
• Should it be based on peak demand?
• Results in lots of idle capacity
• Transportation capacity
• Should it be based on peak demand?
• Results in lots of idle capacity
• Should it be based on average demand?
• Results in expensive spot costs

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Pull system
Orders
External Demand
Product
Manufacturer
Retailer
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Pull system

• Coordinated with actual customer demand
• For example, POS data
• This leads to
• Decrease in lead times
• Due to better anticipation of incoming orders
  from the retailers
• Decrease in inventories at the retailers
• Shorter lead times decrease inventories

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Pull system

• This leads to
• Decrease in variability in the system
• Specially, variability faced by manufacturers
• Due to lead time reduction
• Decreased inventory at the manufacturer
• Due to reduction in variability

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Hybrid systems

• Postponement or delayed differentiation
• Initial stages of the supply chain are push
• Final stages are pull
• Interface is called the push-pull boundary
• Discussed later

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End