Module - 2

Designing the SC Network

Designing the SC Network ( syllabus Titles)

• - Designing the Distribution Network –• - Role of distribution • - Factors influencing distribution • – Design options • – e-business and its impact • – Distribution networks in practice• - Network design in the SC • - Role of Network • – Factors affecting the network design decisions – modeling for SC

Role of Distribution in the SC• Refers to steps taken to move and store product from

supplier stage in the SC.• Distribution happens between 2Pts• RM, consumables, components are moved from suppliers

to consumers. • Key driver of overall profitability- because it affects direct

Customer experience and SC cost• Distribution cost 10.5% of US economy-• 20% of cost of manufacturing- • Distribution cost of cement-30%

Two Dimensions

High level performance of Distribution is based on:

1. Customers needs2. Cost of meeting

Factors affecting Distribution NW (SH)

• 1. Response time -Time to receive an order• 2.Product variety-Variety/configuration• 3. Product Availability –Ex- stock, order comes• 4. Customer experience –easy to order & get• 5. Time to market – time to launch new Prod• 6.Order Visibility –ability to track order position• 7. Return ability – ability to return defective

product & get replacement

Some of the well known Distribution SCs

• Wal-Mart US and Seven-Hill Japan are known for outstanding distribution design and operation.

• Provides high availability level of products and responsiveness @reasonable cost.

• Dell direct customers (PC)• HP re-seller customer (PC) • Gateway Stores Customer (PC)• Apple computers retail stores (PC)• P & G Distributors small vendors Super markets chains

Desired response time Vs Number of Facilities

•

Target customers, who can tolerate longer lead time, require few locations , that may be far from customers

Firms that target, who value shorter response time, needs to locate facility close to them

Desired Response time

Required No. of Facilities

2. Inventory Cost Vs No. of Facilities• Inventory Cost

•

No. of Facility•

• No. of facilities in SC increases, Inventory cost also goes up. This will affect :

• 1. Inventory. 2. Transportation . 3 Facility 4. Information

Total Logistics Cost

• Inbound transportation of ‘economies of scale ’ are maintained, increasing number of facilities decreases total transportation cost

• If ‘economies of scale’ is not maintained, more inbound small lots , will result in excessive transportation cost, along with facility increase.

• More facilities leads to more Facility cost. • Total Logistic Cost = Inventory cost +

Transportation cost +Facility Cost for a SC network

Net work Choices -Design Option (SH )

• Two choices:

–1. Product delivered @ Customers location Or pick-up from a pre ordained site?

–2. Will the Product flow thro’ an Intermediary?

6 Distribution Networks

1. Manufacturer’s Storage with direct shipping?2. Manufacturer’s Storage with direct shipping with in-transit merge?3.Distributor storage with package carrier delivery

4. Distributor Storage with last mile delivery 5.Mfr/ distributor storage with customer pick up 6.Retailer storage with customer pickup

Mfr

Retailer

Customer

Product FlowInformation Flow

Manufacturer Storage with Direct Shipping (Drop Shipping)

Sl No Cost Factors Performance

12

3

4

InventoryTransportation Facilities and handlingInformation

Low cost because of aggregationHigh cost, because of increased distance & disaggregate shipments

Low, because of aggregation. Investment in Information, to integrate mfr & retailer

Service Factors Performance

1234567

Response TimeProduct VarietyProduct availabilityCustomer ExperienceTime to marketOrder VisibilityReturn ability

Long response time , because of distance Easy to provide high level of variety High, because of aggregate mfr Good in terms of home deliveryFastMore difficult Expensive and difficult to implement

Characteristics of Manufacturer Storage with direct Shipping Network

Product FlowInformation Flow

Factories

In-transit mergeBy CarrierRetailer

In-transit merge Net work

Customers Customers

Sl No Cost Factor Performance

123

4

InventoryTransportationFacilities and Handling

Information

Similar to drop-shippingLower than transportationHandling Cost higher for carrier- low cost to customerHigh investment than drop-shopping

Service Factors Performance

1234567

Response TimeProduct VarietyProduct AvailabilityCustomer ExperienceTime to marketOrder VisibilityReturn ability

Similar to drop-shipping or+ -- do – -- do –Better than drop-shippingSimilar to drop-shipping or+ -- do – -- do –

Performance Characteristics of ‘In –Transit Merge’

Factories

Customers

Product FlowInformation Flow

Distributor Storage with Carrier Delivery

Distributor Storage

Sl No Cost Factor Performance

123

4

InventoryTransportationFacilities and Handling

Information

Higher than mfg storageLower than mfg storage+ than mfg storage

Simpler infrastructure compared to mfg storage

Service Factors Performance

1234567

Response TimeProduct VarietyProduct AvailabilityCustomer ExperienceTime to marketOrder VisibilityReturn ability

Faster than mfg storage Lower than mfg cost Higher cost Better than mfg Higher than mfg Easier than mfg Easier than mfg

Characteristics of Distributor storage with Carrier Delivery

Other 3 design Options

• 5. Distributor storage with last mile delivery (Diagram + Table)• 6. Mfr / distributor Storage with customer

pick- up (Diagram + Table)

• 7. Retailer storage with Customer Pick-up

Seven Eleven’s distribution System• Objective: To track the total Sales of Items To offer short replenishment cycles• Forecasting Sales accurately• March 1987, Offered 3 times a day- delivery of all

rice dishes ( fast food items)• Bread & fresh food – twice a day• Ice cream- daily in summer - 3 times a week,

other days• Replenishment Cycle – less than 12 hours

Seven Eleven’s distribution System• Combined delivery System- At DCs, like products from different

suppliers were grouped and moved in ‘single temp controlled trucks’. (milks and sand witches)

• 4 categories trucks • 1. frozen 2. chilled 3. room temp 4. processed & warm foods• No. of items/truck depends sales volume.• Deliveries during off-peak hours, using scanner terminals.- worked on

trust, no delivery person-• This has reduced delivery time @ each stores• In 1974 -No. of vehicles 70 / day - but 1994, only 11/day -reduced

cost. rapid delivery – fresh foods- No Inventory• Transporter – Trans fleet ltd, (Company set by Mitsui & Co) exclusive for 711)

E- Business and the distribution Network

• Late 1990s, E-Business started impacting on various Networks.

• Goal is to understand, where e-business became successful in some Net works, not all.

• SC’s ability to meet customers needs and the cost of meeting those needs.

• Impact on Customer service: • Response to customers- Those who wants short response

time, may not use the Internet, to order. • Going ‘on-line’ , gives ‘time advantage.’

Impact of e- Business….On customer service

• 1.Product variety:• E- Business finds it easier to offer large

selection of Products. Eg : Amazon .com – Large selection of books.

• 2.Product availability:• Information On customer demand is

disseminated thro’ out SC. • 3.Customer Experience:• In-terms of Access, Customization, &

Convenience (any time access, distance customer)

Impact of e- Business….. ( On customer service)

• Other Impacts:• 4. Faster time to market• 5. Order Visibility• 6. Return ability• 7. Direct Sales to customers• 8. Flexible Pricing, Product portfolio & Promotions• 9. Efficient fund transfer

Impact of e- Business ( on Cost)

• 1. Inventory– Low, by Sc coordination– Better match, demand=supply– Aggregation of Inventory

• 2. Facilities ( Number, location, & operation costs)

• 3. Transportation(storable & down load, no tr. Cost- music)

•4. Information( sharing , visibility, planning, Forecast thro SC)The impact of e- Business can be quantified by a Score Card

Area Impact

1. Response time –2. Product variety3. Product Availability 4 . Customer experience –5. Time to market – 6. Order Visibility 7. Direct sales8. Flexible pricing, portfolio & promotion9. Efficient fund transfer Transportation10. Inventory11. Facility12. Transportation 13. InformationKey: +2 = very positive -1= negative +1 = positive - 2 = very negative

0 = Neutral -

The e – Business Score Card

Customer

Dell

Customer

Supplier Supplier

PC Manufacturer

Retailer

PULL PULL

PUSH

Dell Supply Chain Traditional PC SC

SC of Dell and Traditional Companies

Sl . No Area Dell Amazon.com

Peapod

ww. Grainger

1 Response time – -1 -1 -1 0

2 Product variety +2 +2 0 +2

3 Product Availability +1 +1 0 0

4 Customer experience +2 +1 +1 +1

5 Time to market – +2 +1 0 +1

6 Order Visibility +1 0 -1 +1

7 Direct sales +2 0 0 0

8 Flexible pricing, portfolio , promotion +2 +1 +1 +1

9 Efficient fund transfer +2 0 0 0

10 Inventory +2 +1 0 0

11 Facility +2 +1 -1 +1

12 Transportation -1 -2 -2 0

13 Information 0 -1 -1 -1

+14 +4 -4 +6

Dell’s Score card compared with Others

Distribution Network in practice

• 1. Ownership structure can have impact on Distribution network ( Mfr ? Distributor ?)

• 2. The choice of DNW, had very long term consequence• 3. Consider whether an exclusive of distribution stage is

advantageous• 4. Product Price, Commoditization, and Criticality affect

the type of Dist. System ( PC from mfr , stationary from dealer)

• 5. Integrate the Internet with existing physical network

Network Designing in SC (NWD)

• NWD includes assignment of facility role, location, manufacturing, storage , transportation – related facilities. – 1. Facility role: what role should each facility play? what process are performed in each Facility?– 2.Facility Location: where should?– 3. Capacity allocation: How much capacity to ‘F’? – 4. Market and supply allocation

Factors influencing NWD decisions:

• 1. Strategic Factors:– 1. Off shore facility: Low cost facility to Export

Production– 2. Source Facility : Low cost production for global

production– 3. Server facility: Regional production facility– 4. Contributor facility: Regional production facility for

with development skills– 5. Out post facility: Regional production facility , built

to gain local skills– 6. Lead Facility: Facility that leads in developments and

process technologies

Factors influencing NWD decisions: (Continued…)

• 2. Technological Factors• 3. Macro economic factors

– A. Tariff and Tax Incentives– B. Exchange and demand risks

• 4. Political factors• 5. Infrastructure factors• 6. Competitive factors

– Positive externalities between firms– Locating to spilt the market

7.Socio Economic Factors• 8. Customer response time and local presence• 9. Logistics and facility Costs

Role of Network( Frame work for NW Design decisions)

• Role of Network is creating a frame work for NW design decisions

• Global NW design decisions are made in 4 stages:• 1. Define SC Strategy Decisions• 2. Define Regional facility configuration• 3. Select a set of desirable potential sites• 4. Location choices

1. Define SC Strategy Decisions (1st Phase)

• Objective:– To define firm’s broad SC design– This includes –determining stages,– In-house / Outsource, in each stage

• Firm’s competitive strategy– Customer needs– SC strategies ( capabilities to support competitive

strategy)– Identify global competitor

Define Regional facility configuration(2nd Phase)

• Objectives: To identify regions, where facility will be located, potential roles and their approximate capacity

• 1.Forecast of demand: Demand size– Requirement- homogenous or variables– If homogenous, consolidation facility– If variable, small and localized facility2.Manager to identify:” Economy of Scale”

- To have few plants for one market - To have one plant for each marketIf ‘economy of scale’ is not significant, better - each market to

have each facility

2. Define Regional facility configuration(2nd Phase… continued)

• 3.Manager to identify Risks: – Demand Risk– Exchange rate risk– Tax Incentives– Import Export RestrictionsBest way to obtain major share of Profit, at the location, with the lowest tax

rate• 4. Manager to identify competitors:Facility either nearer to the competitor or far away from competitorDesired response time , highest cost aggregate level, in each reason must be

identifiedRegional configuration defines no. of facilities, regions where to setup,

whether Facility will produce all products to given market, few products to all markets.

3. Select a set of desirable potential sites

• Objective: To select a set of desirable potential sites, with in each region, where facilities are located

• Hard Infrastructure requires:– Availability of suppliers– Transportation services– Communication facilities– Utilities and warehousing Infra structure

• Soft Infra structure requires:• Availability of skilled work force• Workforce turn over• Community receptivity to industry

4. Location choices

• Objectives: To select a precise location and capacity allocation for each facility– Desirable potential site selection in Phase -3– NW is designed to maximize total profit, taking

into account the ‘expected margin and demand in each market’

– Various logistics and facility costs– Taxes and Tariff at each location

Phase 1SC

Strategy

Phase 2Reg

FacilityConifig

Phase 3Desirable

sites

Phase 4Location Choices

Competitive Environment

Aggregate Factors and Logistic s costs

Production Technologies

Production Methods

Internal Constraints

Competitive Strategy

Factor costs

Global Competition

Tariffs & Tax Incentives

Regional Demand

Political, Exchange Rat and Demand Risk

Available Infra structure

Logistics Cost

Frame work for Network design Decisions

Modeling for Supply Chain

• 1. Network Optimization Models• 2. Capacitated Plant Location Models• 3. Gravity Location Models• .1. Network Optimization Models– Manager considers Regional demand, Tariff,

Economy of scale, Aggregate factor Cost to decide– The Regions in which the facilities are to be

located.

Cost and demand data.• Sun Oil Co.,( mfr of petrochemical products) has to consider

several different options to meet demand. • One possibility is to set up facility in each region. • Advantage : Lower transport – Duty payment defer, because no

import. • Disadvantage: Plants are sized to meet local demand, and may not

fully exploit’ Economies of Scale’.• An alternate approach is to consolidate plants in few regions. This

improves the economies of scale, but increases ‘Transportation’ cost and duties.

• Manager has to consider Quantifiable Trade –Offs, along with Non Quantifiable factors.( Competitive environment & Political Risk)

2. Capacitated Plant Location Models

• Following inputs are required for this model:• n= number of plants• m= number of markets• Dj=annual demand• K=potential capacity of plant• fj=annualized fixed cost of keeping factory• cij=cost of producing( Prodn + Inv +Trans+ tariff)Solution= 1. plants that are to be kept open 2. their capacity 3. Allocation of regional demand to these plants

3. Gravity location model

• Gravity models are used to find locations that Minimizes the cost of transporting the Raw

material from suppliers and finished goods to the market served.

Module - 2The End