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7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Supply Chain Management: Strategy,Planning, Operations (3/e)
Sunil Chopra & Peter Meindl
Chapter 4 & 5
Lecture 4Designing the Distribution Network in a
Supply Chain
1Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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The Role of Distribution
in the Supply Chain
Distr ibut ion : the steps taken to move and store aproduct 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
2Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Factors Influencing
Distribution Network Design
Distribution network performance evaluated alongtwo 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
3Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Factors Influencing
Distribution Network Design
Elements of customer service influenced by networkstructure:
Response time
Product variety
Product availability Customer experience
Time to Market
Order visibility
Returnability
Supply chain costs affected by network structure: Inventories
Transportation
Facilities and handling
Information4Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Service and Number of Facilities
(Fig. 4.1)
Number of
Facilities
Response
Time5Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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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
6Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Inventory Costs and Number
of Facilities (Fig. 4.2)
Inventory
Costs
Number of facilities
7Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Transportation Costs and
Number of Facilities (Fig. 4.3)
Transportation
Costs
Number of facilities
8Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Facility Costs and Number
of Facilities (Fig. 4.4)
Facility
Costs
Number of facilities
9Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Transportatio
n
Total Costs Related to
Number of Facilities
T o t a l C o s t s
Number of Facilities
Inventory
Facilities
Total Costs
10Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Response Time
Variation in Logistics Costs and Response
Time with Number of Facilities (Fig. 4.5)
Number of Facilities
Total Logistics Costs
11Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Design Options for a
Distribution Network
1. Manufacturer Storage with Direct Shipping
2. Manufacturer Storage with Direct Shipping and
In-Transit Merge
3. Distributor Storage with Carrier Delivery
4. Distributor Storage with Last Mile Delivery
5. Manufacturer or Distributor Storage with
Consumer Pickup
6. Retail Storage with Consumer Pickup7. Selecting a Distribution Network Design
12
Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Manufacturer Storage with
Direct Shipping (Fig. 4.6)
Manufactur
er
Retailer
Customers
Product
FlowInformation
Flow13
Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Manufacturer Storage with Direct
Shipping
Product is shipped directly from the manufacturer to the end customer bypassing the retailer.
Advantage:
Ability to centralize inventories at the manufacturer
Opportunity to postpone customization until after a
customer has placed an order
14
Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Manufacturer Storage with Direct
Shipping
Inventory cost low but transportation cost high
Supply chain saves fixed costs
A good information infrastructure is necessary
between manufacturer and retailer
Response time tends to be long
Manufacturer storage allows a high level of
product variety
Home delivery Expensive – suitable for large variety low
demand items
15
Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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In-Transit Merge Network (Fig.
4.7)
Factories
Retaile r
Product
FlowInformation
Flow
In-Transit Merge by Carrier
Customer
s
16
Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Manufacturers storage with direct
shipping and in-transit merge
Transportation cost lower
Facilities and handling cost higher
Investment in informationinfrastructure is higher
17
Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Distributor Storage with
Carrier Delivery (Fig. 4.8)
Factories
Customers
Product
FlowInformation
Flow
Warehous e Storage
by
Distr ibutor/Retai ler
18
Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Distributor Storage with
Carrier Delivery
Lower transportation cost
Higher inventory cost
Higher handling cost
Simple information
infrastructure
19
Global Supply Chain Management: Lecture 4
EMBA IB
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Distributor Storage with
Last Mile Delivery (Fig. 4.9)
Factories
Customers
Product
Flow
InformationFlow
Distr ibutor/Retai ler
Warehouse
20
Global Supply Chain Management: Lecture 4
EMBA IB
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Distributor Storage with
Last Mile Delivery
Higher level of inventory
High transportation and inventory cost
Facilities costs higher
Response time quick Less variety of products
More expensive to make product available
21
Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Manufacturer or Distributor Storage with
Customer Pickup (Fig. 4.10)
Factories
Retaile r
Pickup
Sites
ProductFlowInformation
Cross Dock DC
Customer Flow
Customer
s
22
Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Comparative Performance of Delivery
Network Designs (Table 4.7)
Information
Facility & Handling
Transportation
Inventory
Returnability
Order Visibility
Customer Experience
Product Availability
Product Variety
Response Time
Manufacturer
storage with
pickup
Distributor
storage with
last mile
delivery
Distributor
Storage with
Package Carrier
Delivery
Manufacturer
Storage with In-
Transit Merge
Manufacturer
Storage with Direct
Shipping
Retail Storage
with Customer
Pickup
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
2
2
2
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2
2
2
2
2
3
3
3
3
3
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3
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3
3
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4
4
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4
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5
5
55
5
6
6
5
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Linking Product Characteristics and Customer
Preferences to Network Design
Low customer effort
High product variety
Quick desired response
High product value
Many product sources
Very low demand product
Low demand product
Medium demand
product
High demand
product
Manufacturer
storage with
pickup
Distributor storage
with last mile
delivery
Distributor Storage
with Package Carrier
Delivery
Manufacturer
Storage with In-
Transit Merge
Manufacturer
Storage with
Direct Shipping
Retail
Storage with
Customer
Pickup
+2
+2
+2
+2
+2
+2
+2 +2 +2
+2
+1
+1
+1
+1
+1
+1
+1
+1
+1
+1
+1
+1
+1
+1
+1
0
0
0
0
0
0
0
0 0
0
-1
-1
-1
-1
-1 -1
-1
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-1
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E-Business and the Distribution
Network
Impact of E-Business on Customer Service
Impact of E-Business on Cost
25
Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Impact of E-Business on Customer
Service
Response time Product variety
Product availability
Customer experience
Time to Market Order visibility
Returnability
Direct sales to customer
Flexible pricing, product portfolio and promotions Efficient fund transfer
26
Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Impact of E-Business on Cost
InventoriesTransportation
Facilities and handling
Costs related to the number andlocations of facilities in a network
Costs associated with the operations
that take place in these facilities Information
27
Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Distribution Networks in Practice
The ownership structure of the distributionnetwork 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 criticalityhave an impact on the type of distribution system
preferred by customers
28
Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Network Design Decisions
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 should be allocated to each
facility?
Market and supply allocation
What market should each facility serve?
Which supply sources should feed each facility?
5-2929
Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Factors Influencing
Network Design Decisions
Strategic
Technological
Macroeconomic
Political
Infrastructure
Competitive
Customer response time and local preference Logistics and facility costs
5-3030
Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Strategic
1. Offshore facility: low cost facility for exportproduction
2. Source facility: low cost facility for global
production
3. Server facility: regional production facility
4. Contributor facility: regional production facility
with development skill
5. Outpost facility: regional production facility builtto gain local skills
6. Lead facility: facility that leads in development
and process technologies
31
Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Technological
Economies of scale
Lower fixed cost
Flexibility
32
Global Supply Chain Management: Lecture 4
EMBA IB
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Macroeconomic Factors
Tariffs and Tax Incentives
Exchange Risk
Demand Risk
33
Global Supply Chain Management: Lecture 4
EMBA IB
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Competitive Factors
Positive externalities between firms Locating to split the market
Firm 1 locate at a and firm 2 at 1 – b; demand for
both firm d1
and d2
d1 = a +(1-b-a)/2 and d2 = (1+b-a)/s {Hotelling}
34
Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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A Framework for
Global Site Location
PHASE I
Supply Chain
Strategy
PHASE IIRegional 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, supportrequired, 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
5-3535
Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Conventional Network
Customer
Store
Materials
DC
ComponentManufacturin
g
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
5-3636
Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Tailored Network: Multi-Echelon
Finished Goods Network
Regional
Finished
Goods DC
RegionalFinished
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
5-3737
Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Gravity Methods for Location
Ton Mile-Center
Solution
x,y: Warehouse Coordinates
xn, yn : Coordinates of deliverylocation n
dn : Distance to delivery
location n
Fn : Annual tonnage to delivery
location n
k
n n
n
k
n n
nn
k
n n
n
k
n n
nn
n
d F D
d F y
D
d F D
d F x D
y y x xd
n
n y
n
n
x
nn
1
1
1
1
22
)()(
Min F Dd nn n
5-381-38
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Network Optimization Models
Allocating demand to production facilities
Locating facilities and allocating capacity
Which p lants to establ ish? How to con f igure the network
Key Costs:
• Fixed facility cost
• Transportation cost
• Production cost
• Inventory cost
• Coordination cost
5-3939
Global Supply Chain Management: Lecture 4
EMBA IB
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Demand Allocation Model
Which market is served
by which plant?
Which supply sources
are used by a plant? x ij = Quantity shipped from
plant site i to customer j
0
,...,1,
,...,1,
..
1
1
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x
K x
D x
xc
ij
i
m
jij
j
n
iij
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m
jijij
ni
m j
t s
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5-4040
Global Supply Chain Management: Lecture 4
EMBA IB
Plant Location with Multiple
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Plant Location with Multiple
Sourcing
yi = 1 if plant is located
at site i, 0 otherwise
xij = Quantity shipped
from plant site i tocustomer j
}1,0{;
,...,1,
,...,1,
..
1
1
1
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5-411-41
7/30/2019 Global Supply Chain Management Lecture 4.pptx
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Plant Location with Single Sourcing
yi = 1 if plant is located
at site i, 0 otherwise
xij = 1 if market j is
supplied by factory i, 0otherwise
}1,0{
,...,1,
,...,1,1
..
,
1
1
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y K x D
x
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ni j
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