1

Supply Chain Management

Dr. RAVI SHANKARAssociate Professor

SOM

SESSION 7: Distribution Strategy

Dr. RAVI SHANKARProfessor

Department of Management Studies

Indian Institute of Technology DelhiHauz Khas, New Delhi 110 016, India

Phone: +91-11-26596421 (O); 2659-1991(H); (0)-+91-9811033937 (m)Fax: (+91)-(11) 26862620

Email: r.s.research@gmail.comhttp://web.iitd.ac.in/~ravi1

SESSION#7: Distribution Strategy (CFVG: 2012)

SUPPLY CHAIN DISTRIBUTION STRATEGIES

3

DISTRIBUTION STRATEGY

4

Distribution Control

� Centralized

� Key decisions are made by a single entity for the entire supply network

� Cost/service goals

� Can lead to global optimization

� Must have access to common data for this to work

� Decentralized

� Each facility in the system makes its own decisions

� Only considers its individual goals

� Will lead to local optimization

� Increases the bullwhip effect

5

National/Central Distribution

� Advantages

� Lower safety stock levels

� Lower overhead costs

� Economies of scale

� Disadvantages

� Longer lead times

� Higher delivery costs

� May become too large to manage effectively

Supplier

Warehouse

Retailers

6

Regional/Local Distribution

� Advantages� Shorter lead times

� Better customer knowledge and service

� Lower delivery costs

� Disadvantages� No risk pooling opportunity

– higher safety stock

� Higher overhead costs –more staff required

� Limited economies of scale

7

Distribution Strategies – Traditional Retail

Direct Shipment

Warehousing

Cross-docking

8

Direct Shipping

� Eliminates need for intermediate facilities (e.g., warehouses and distribution centers).� Dell computer – orders for desktop computers will have

the monitors picked up directly from Sony, and delivered to the customer.

� Warehouse club stores, grocery stores, and mass merchandisers are adopting the DSD (direct store delivery) strategy where manufacturer delivers goods directly to the retail outlet or the customer.

� Perishable items, high volume goods, high bulk items, and specialty products are primary candidates for direct shipping.

9

Benefits of Directing Shipping

� Less inventory in the supply chain

� Less handling and opportunity for product damage

� Faster production to store shelf time

� DSD categories are among the most profitable in the store

� Higher productivity, sales, service, satisfaction

� Improved accuracy – invoices match receiving records, correct products enter the store

10

Direct Shipping Challenge

� Greater hassle for store personnel� More deliveries, paperwork, activity

� No risk pooling benefit� No safety stock in the event of a supplier problem� Transportation costs can be higher� Manufacturers may incur extra handling costs by

picking/shipping to individual stores� Not well suited to high variation events like holidays and

promotions

� Few companies have installed DSD (direct store delivery) receiving systems

11

Cross-docking“Cross-docking is a flow through concept and we don’t want product to stop anywhere, because space, brick and mortar is getting very expensive these days.”

12

The driving idea behind crossdocking

� Crossdocking seeks to eliminate the expensive functions of inventory holding and order picking from modern distribution centers by taking advantage of the information system infrastructure in modern supply chains.

� Hence, at a crossdock, incoming material is already assigned to a destination, and therefore, the only required functions are consolidation and shipping.

� In this way, material is staged at the facility for less than 24 hours (at most 48 hours in the warehouse)

� => Just-In-Time for distribution

13

Major requirements for justifying and effectively deploying a crossdock operation

� Move product directly from receiving to the shipping dock – no interim storage

� Cross-dock users

� Mass merchandisers, grocery companies, LTL trucking companies, air cargo carriers

� Cross-docking candidates

� Seasonal items, promotional goods, store specific pallets, high volume items

� Significant and steady product flow

� easy to handle material / unit-loads

� Good and reliable information flow across the entire supply chain

� pre-distribution crossdocking: the customer is assigned before the shipment leaves the vendor, so it arrives to the crossdock bagged and tagged for transfer.

� post-distribution crossdocking: the crossdock itself allocates material to its stores.

14

Examples

� Home Depot operates a pre-distribution crossdock in Philadelphia serving more than 100 stores in the Northeast area.

� Wal-Mart operates many cross-docking facilities to support Sam’s Club division

� traditional warehousing for staple stock - i.e., items that customers are expected to find in the same place in every Wal-Mart (e.g., toothpaste, shampoo, etc.)

� crossdocking for direct ship - i.e., items that Wal-Mart buyers have gotten a great deal on and are pushing out to the stores

� Wal-Mart delivers about 85% of its goods through its warehouse system, compared to about 50% for Kmart

� Costco uses pallet-based post-distribution crossdocking

� Mervyn’s cross-docks more than 30% of its product

� Computer firms like Dell consolidate the major computer components in “merge in transit” centers.

� JIT manufacturers consolidate inbound supplies in a nearby warehouse

� LTL and package carriers (UPS, FedEx) crossdock to consolidate freight

15

Cross Docking Options

� Basic / low-tech

� Full pallets assembled by the manufacturer are moved directly through the crossdock facility to shipping dock with no breakdown

� Flow-through / high-tech

� Break down pallet at receiving, reassemble them for delivery and ship them without ever putting product into storage

16

Basic crossdock

Sort/stage Load/deliverReceive/unload

17

Crossdock Operations

Strip doors: doors where full trailers are parked and unloaded.

Any incoming trailer can be unloaded to any strip door.

Stack doors: doors where empty trailers are put to collect freight for

specific destinations. Each stack door is permanently assigned to a distinct

destination.

Typical material handling modes:

• manual carts for smaller items

• pallet jacks and forklifts for pallet loads

• cart draglines (reduce walking time but impede forklift travel)

Cross-dock Area

18

Flow-thru Example

Freight is received,checked for accuracy & prepared for release to stores (bar coded labels are applied to cartons).

Cartons travel thrufacility on conveyor system to reduce labor and speed transfer of goods.

Bar code readeridentifies productsand diverts cartonsdown appropriateloading line.

Cartons are loadedin trailer and shippedwhen trailer is full

19

Cross-Docking Opportunities

� Speed the flow of products from the supplier to the store

� Remove labor from the process� No storage and handling activities

� Eliminate the two most expensive distribution operations

� Reduces finished goods inventory in system� Increases inventory turns

� Avoids LTL deliveries to stores

� Reduces the need for distribution facilities

� Saves $$$

20

Cross-Docking Challenges

� Requires strong IT capabilities & real-time info sharing

�via EDI

�Bar codes on cartons� Requires buyer cooperation and timely decisions

� May necessitate new facility layout, bar code scanning equipment,

� Maintaining product visibility as it moves through the system

� Product availability, accuracy, & quality are critical

� Can’t force other supply chain members to incur costs or additional effort

21

Cross-Docking Challenges

“…one of the principal barricades has been that cross-docking requires a lot of supply chain synchronization, which, in turn, relies on better information and planning.

As more companies, even industries, move toward a "pull" form of replenishment rather than the "push" form we're used to, cross-docking will make more sense.”

22

Other Cross-Docking Uses

� Supports JIT manufacturing efforts

� Goods shipped from suppliers are captured at cross dock, sorted by plant location and schedule, and delivered in small batches

� Consolidate inbound production material

� Capture and redistribute reusable containers

� Terminal cross docking at transportation facilities (hub-and-spoke systems)

23

Comparing the Strategies

Issue

Direct Shipment

Cross-Docking

Traditional DC

Inventory levels

Lower Lower Higher

Safety stock Held at store Held at store Held in DC

Risk pooling No benefit No benefit Take advantage

Spike protection

Lower Lower Higher

24

Comparing the Strategies

Issue

Direct Shipment

Cross-Docking

Traditional DC

Handling costs

Very low Low High

Facility investment

None Low Very high

Labor cost Low Moderate High

Transport cost

Higher Lower Lower

25

Other Distribution Strategies: Transshipment

� Transshipment� Sharing inventory between facilities at

same level in the supply chain

� Opportunity� Better customer service, fewer stockouts

� Requires� Inventory visibility

� Cooperation

� Shipping and delivery processes

http://www.opem.northwestern.edu/r2.html

26

� Many clothing and footwear retailers, such as Macy's and Footlocker, request articles from other retail locations when a specific product (because of size or design) is unavailable.

� Consumer electronic stores have also employed such a practice with cameras, video recorders and televisions.

� Typically retailers will hold high levels of inventory in order to avoid stock-outs, with the flexibility that transshipments bring, retailers are able to meet uncertain demand with lower inventory levels.

Examples- Transshipment

27

� Pool distribution� Consolidating merchandise shipments at the origin

into loads destined for defined regions

� Transporting the load to a central point in the region

� Making local deliveries from the central point

� Benefits� Reduced transportation costs, better service

� Requires� Multiple delivery points within a region

� Significant, consistent volume entering the region

Other Distribution Strategies- Pool distribution

28

� Pool distribution� Consolidation warehousing is a form of

warehousing that pulls together small shipments from a number of sources (often plants) in the same geographical area and combines them into larger, more economical, shipping loads intended for the same area.

� Consolidation warehouses are typically constructed at a strategic location between manufacturers and customers. The goal is to maximize transportation utilization and minimize costs.

Other Distribution Strategies- Pool distribution

29

Hub & Spoke Model

Identify the best locations (distributors to be used as

hubs) while meeting each distributor’s demand and

minimizing total cost.

A hard problem for large supply chains.

Other Distribution Strategies

30

Hub & Spoke

31

� Milk-run systems� Pick up goods from suppliers along a route

and delivering the entire load to a single facility

� Benefits� Supports JIT systems, eliminates DCs

� Requires� Consistent schedule, high volume

� Dedicated carrier or private fleet

Other Distribution Strategies- Milk-run systems

32

Milk-Run Systems

� Drivers pick up goods from suppliers along a route and delivering the entire load to a single facility.

� Benefits: Supports JIT systems, eliminates distribution centers.� Requires

� Consistent schedule, high volume� Dedicated carrier or private fleet.

Source of Schematic: http://www.engr.uky.edu/me/iaes/group_press/chuah.pdf

33

Freight Distribution and Network Strategies

A

BPoint-to-Point

A

BCorridor

A

BHub-and-Spoke

A

BFixed Routing

A

BFlexible Routing

Transshipment node

Route node

Network node

Unserviced node

Route

Alternative

route