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CH7 Distribution Strategies

From Class Textbook Designing and Managing the Supply Chain: Concepts, Strategies, and Cases
<See professors PPT slides>

What is Distribution?
Distribution refers to the steps taken to move and store a product from the supplier stage to a customer stage
in the supply chain.

Effective supply chain requires the efficient integration of the front end (customer demand), with the back
end (production and manufacturing processes).

Two Possible distribution strategies:
1) Directly shipped
From Supplier/manufacturer to retail stores/end customers
2) Use intermediate inventory storage points (warehouses/distribution centers)
Warehouses used in different ways depending on:
1. Manufacturing strategy (make-to-stock vs make-to-order)
2. # of warehouses
3. Inventory policy
4. Inventory turnover ratio
5. Internal warehouses owned by firm or by outside distributors
6. Supply chain owned by one firm or multiple firms
7. Length of time that inventory is stored in warehouse*
*One of the most fundamental

1. Direct Shipment Distribution Strategies
- Operating distribution center expenses avoided by retailers
- Lower Lead Times

- Risk-pooling effects are neglected (CH2)
- Transportation cost increase smaller trucks to more locations

Consequently Direct Shipment is commonly used:
When retailers requires fully loaded trucks
When mandated by powerful retailers
When lead time is critical
Manufacturer may be reluctant but may have no choice
In grocery industry (perishable goods)*
*Where Lead Times are critical due to perishable goods

Example of company using the direct shipment strategy: JC Penney
2. Intermediate Inventory Storage Point Strategies
Different strategies are used according to the length of time used to store inventory at the DC/WH

1) Traditional Warehousing Strategy
DC/WH hold stock inventory and distribute them as needed to downstream customers

Issues and decisions:
Centralized Management OR Decentralized Management?
Central Facility OR Local Facilities?

2) Cross-Docking Strategy
DC/WH does not hold inventory. DC/WH serves as transfer points for inventory
(Wal-Mart made this strategy famous)
.Limits inventory Cost
.Decreased lead times by decreasing storage time (often less than 12 hours)

.Needs significant start-up investment
.Very difficult to manage
-Must be linked with advance info system
-Needs a fast and responsive transportation system
-Forecasts are critical, necessitating the sharing of info
-Effective ONLY for large distribution centers

3) Centralized Pooling and Transshipment Strategy
Useful when there is a large variety of different products, demand for specific product is small and
difficult to predict
Centralized Inventory Pooling System

Transshipment system

7.5 Selecting an Appropriate Strategy

From Other Textbook Supply Chain Management: Strategy, Planning, & Operations:

1) Manufacturer storage with Direct Shipping (Drop Shipping)
Product is directly shipped from manufacturer to end customer:

2) Manufacturer storage with Direct Shipping and In-Transit Merge
Shipping is still directly from Manufacturer to end customer, except that with in-transit merge you
can deliver to the customer in a single shot after combining pieces of the order coming from different

In-transit merge has been used by direct sellers such as Dell and can be used by companies
implementing drop-shipping.

1) Distributor Storage with Package Carrier Delivery
DC/Retailer holds inventory. Uses package carrier to deliver product to customer.

2) Distributor Storage with Last-Mile Delivery
DC/Retailer holds inventory. DC/Retailer delivers product to customer, no use of package carrier.

3) Manufacturer/Distributor storage with Customer Pickup
DC/WH or Manufacturer holds inventory. Customer order online or by phone and picks up the product
in designated pickup points.

4) Retail Storage with Customer Pickup
Traditional supply chain: where Retail holds inventory, and customers walk into the Retail store.

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

Elements of customer service influenced by network structure:
Response time
Product variety
Product availability
Customer experience
Order visibility
Supply chain costs affected by network structure:
Facilities and handling

See Professors PPT slides for relationship graphs

Practice Question from Midterm:
Which of the following delivery network performs (comparatively) the best in terms of response time and
order visibility?
A. Manufacturer Storage with Direct Shipping
B. Manufacturer Storage with Merge In-Transit
C. Retail Storage with Customer Pickup ANSWER?
D. Distributor Storage with Package Carrier Delivery
E. Distributor Storage with Last Mile Delivery

The distribution system of Dell PC is an example of
A. Manufacturer storage with In-Transit Merge ANSWER?
B. Retail Storage with Customer Pickup
C. Distributor Storage with Package Carrier Delivery
D. Distributor Storage with Last Mile Delivery
E. Manufacturer Storage with Customer Pickup

<From the Class notes>
Distribution Network/System Design (DESC361 textbook: Intro to Management Sciences pg 330-334)
Using Integer Linear Programming
1) Decisions to Make
a. Open/use a facility (plant, WH, DC) at a given location or not
b. Flow of product from Distribution Center (DC)/Warehouse(WH) to a customer
2) Data needed
a. Potential location specified/facility (i)
b. Whether a facility is used/opened (Xi): Xi=1 if open, otherwise Xi=0
c. Customer zone (j)
d. Flow of product from Facility (i) to customer zone(j): (Yij)
e. Annual facility Cost (Ci)
f. Transportation Cost from facility to customer zone (Bij)
g. Demand of customers at each zone (dj)
3) Formulation:
Objective Function:
Min TC= SUM of (facility cost Ci)*(open facility Xi) + SUM of (Transp cost Bij)*(Flow of product Yij)
SUM of Yij should be >= dj
SUM of Yij should be <= MXi