Supply Chain Management

Module - 6

6. Designing the Supply Chain Network

 6.1. Designing the Distribution Network

• The Role of Distribution in the Supply Chain

• Factors Influencing Distribution Network Design
• Design Options for a Distribution Network
• The Value of Distributors in the Supply Chain
• Distribution Networks in Practice
 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 – Raw materials & Components / Finished Products

• Distribution directly affects cost and the customer

experience and therefore drives profitability – In India
outbound distribution cost is 30% of the cost of producing
and selling Cement
– WalMart – good availability of items
– 7-Eleven – high responsiveness
 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 – Inbound & Outbound – per unit costs
– Facilities and handling
– Information
 Service and Number of Facilities

Number of
Facilities

Response Time
 The Cost-Response Time Frontier

Hi Local FG
Mix
Regional FG

Local WIP
Cost Central FG

Central WIP

Central Raw Material and Custom production

Custom production with raw material at suppliers

Low
Low Response Time Hi
 Inventory Costs and Number of Facilities

Inventory
Costs

Number of facilities
 Transportation Costs and Number of Facilities

Transportation
Costs

Number of facilities
 Facility Costs and Number of Facilities

Facility
Costs

Number of facilities
 Total Costs Related to Number of Facilities
Total Costs
Total Costs

Facilities
Inventory
Transportation

Number of Facilities
 Variation in Total Logistics Costs and
Response Time with Number of Facilities

Response Time

Total Logistics Costs

Number of Facilities
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
 The Value of Distributors in the Supply Chain

• Distributing Consumer Goods in India

– Tens of millions of small retail outlets
– Commodity products / soap & detergents
– Transportation cost is to be low
– Full TLs of product close to the market / customer
– Distributors – full TL shipment – break bulk – smaller deliveries
to retailers
– Most distributors of consumer goods are One-stop shops
– Distributors provide shorter response times
Thus distributors improve performance of consumer goods
supply chain in India by lowering the transportation cost
and improving replenishment response time.
 The Value of Distributors in the Supply Chain

• Distributing MRO (Maintenance, Repair and Operations)

Products
– Needed in an emergency in small quantities – smaller value
– Large Variety of items – products from many manufacturers are
required
– Response time should be very small – day or two
– Including various items in one single outbound shipment lowers
the transportation cost to the customer
– In the US, MRO items are entirely sold through distributors
– In India also, MRO products are sold by distributors
 The Value of Distributors in the Supply Chain

• Distributing Electronic Components

– A few major component-manufacturers supply to a large number of
Original Equipment Manufacturers (OEMs)
– Distributors receive large shipments from manufacturers – supply in
small quantities to OEMs
– Distributors hold centralized safety stocks

Improvements in SC performance occurs for the following reasons

• Reduction in inbound and outbound transportation costs
• Reduction in Inventory costs
• A more stable order stream from distributor and hence lower cost
• By carrying inventory closer to Point Of sale (POS), better respons time
• One-stop shopping with products from various manufacturers
 Distribution Networks in Practice
• The ownership structure of the distribution network can have as big as an impact
as the type of distribution network
– Manufacturer or Distributor – performance varies
– When designing, impact of physical flow & ownership structure to be
considered
• The choice of a distribution network has very long-term consequences
– Lasting impact for decades
– In USA, automobile manufacturers have to depend on distributors
– Multi Brand Outlets (MBO)
– Dealers keep manufacturers as captives
• Consider whether an exclusive distribution strategy is advantageous
– Can increase sales because of higher profit margins
• Product, price, commoditization, and criticality have an impact on the type of
distribution system preferred by customers
– Buyers make relationship with a single enterprise that can deliver a full line of
products
6.2. Network Design in the Supply Chain
• Facility role
– Toyota has plants world wide near to markets
capable of serving the local markets
– Asian plants had idle time during the recession of
1990s – could not be used
– Built flexibility in manufacturing to be able to serve
markets other than local one
• Facility location
– Expensive to shutdown or move to other location
– Toyota’s Lexington plant proved to be profitable
when Yen strengthened
– Amazone.com added warehouses to be cost-
effective

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6.2. Network Design in the Supply Chain
• Capacity allocation
– Can be altered more easily than location
– Allocating too much capacity to a location, results in poor
utilization and higher costs
– Allocating too little capacity to a location, results in poor
responsiveness, if demand is not satisfied or in higher cost,
if demand is met from a distant facility
• Market and supply allocation
– Allocation should flexible so as to change according to
market conditions or plant capacities change
– Facilities should be flexible enough to serve different
markets and receive supply from different sources
– Dell has facilities in Texas, Ireland, Malaysia, Brazil, India
etc.
– Merging of two companies – reduce cost & improve
responsiveness
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 Factors Influencing Network Design
Decisions

• Strategic
• Technological
• Macroeconomic
• Political
• Infrastructure
• Competitive
• Logistics and facility costs

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Factors Influencing Network Design Decisions
Strategic Factors
• Focus on cost leadership – lowest cost location
• Focus on responsiveness – closer to the market
• Convenience stores
• Discount stores
• Global supply chain – strategic objectives – different facilities
playing different roles – Nike – facilities in China and Indonesia
provide mass-market low cost shoes – Korea and Taiwan
produce higher priced shoes – Cost / responsiveness trade-off
• Offshore Facility: Low-cost facility for export production
• Source Facility: Low-cost facility for global production
• Server Facility: Regional production facility
• Contributor Facility: Regional production facility with
development skills
• Outpost Facility: regional production facility built to gain local
skills
• Lead Facility: Facility that leads in development and process
technologies
Factors Influencing Network Design Decisions
Technological Factors
• Characteristics of available technologies – few production
facilities or more number of production facilities
- Computer microchips - few
- Beverage bottling plants - many
• Degree of Flexibility of the production technology

Macroeconomic Factors
• Tariffs and Tax Incentives
- More facilities
- Free trade zones
- Waiver of tariffs for high-tech products
- Limits on import contents from various countries
• Exchange Rates and Demand Risk
- Over capacity for flexibility
Factors Influencing Network Design Decisions

Political Factors

Infrastructure Factors

Competitive Factors
- Positive externalities between firms
- Locating to Split the market

Logistics and Facility costs

- Inventory
- Transportation
- Facility and its location
 The Cost-Response Time
Frontier

Hi Local FG
Mix
Regional FG

Local WIP
Cost Central FG

Central WIP

Central Raw Material and Custom production

Custom production with raw material at suppliers

Low
Low Response Time Hi

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 Service and Number of Facilities
Response
Time

Number of Facilities

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Costs and Number of Facilities
Inventory

Costs Facility costs

Transportation

Number of facilities

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 Cost Buildup as a Function of Facilities
Total Costs
Cost of Operations

Percent Service
Level Within
Promised Time
Facilities
Inventory
Transportation
Labor

Number of Facilities
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 Gravity Methods for Location
• Ton Mile-Center 2
d n = ( x − x n) + ( y − y n)
2

Solution n
– x,y: Warehouse Coordinates ∑ xi F i
i =1 Fi
– xn, yn : Coordinates of
x= di
delivery location n n
– dn : Distance to delivery ∑ Fi
i =1 di
location n
n yi F i
– Fn : Annual tonnage to ∑
delivery location n i =1 Fi
y= di
∑ 2 ( − y )2
Min F i ( xi − x) + y i n
∑ Fi
i =1 di
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Network Optimization Models
• Allocating demand to production
facilities
• Locating facilities and allocating
capacity
Key Costs:

• Fixed facility cost

• Transportation cost
• Production cost
• Inventory cost
• Coordination cost
Which plants to establish? How to configure the network?
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 Demand Allocation Model
• Which market is
served by which
plant?
• Which supply sources
are used by a plant?

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Capacity Investment Strategies
• Speculative Strategy
– Single sourcing
• Hedging Strategy
– Match revenue and cost exposure
• Flexible Strategy
– Excess total capacity in multiple plants
– Flexible technologies

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