Slides 6
Distribution Strategies
Global Supply Chain
Management
Distribution Strategies
1
Introduction
 Various distribution strategies, and the opportunities
and challenges associated with these strategies.
 Two fundamental distribution strategies:
– Items can be directly shipped from the supplier or
manufacturer to the retail stores or end customer
– Use intermediate inventory storage points (typically
warehouses and/or distribution centers).
 Issues with warehouses and distribution centers
– The inventory policy and associated inventory turn ratio
– The number of warehouses or distribution centers
– Ownership: a single firm or a variety of firms
– Internally managed vs. outside
Distribution Strategies
Slide 2
Direct Shipment Strategies
 Advantages:
– Retailer avoids expenses of operating a distribution center
– Lead times are reduced
 Disadvantages:
– Risk-pooling (location, time) effects are negated
– Transportation costs increase, less EoS advantages
 Common example:
– Direct shipments to retailers are prevalent in perishable
goods (grocery industry), where lead time and little
handling is critical
Distribution Strategies
Slide 3
Intermediate Inventory Storage
Point Strategies
 Three generic strategies with IISPs:
– Traditional warehousing strategy
• distribution centers and warehouses hold stock/inventory
• provide their downstream customers with inventory as
needed.
– Cross-docking strategy
• warehouses and distribution centers serve as transfer points
for inventory
• no inventory is held at these transfer points.
– Centralized pooling and transshipment strategies
• retailers hold stock and transship when being asked to do so
• useful when there is a large variety of different products
Distribution Strategies
Slide 4
Traditional Warehousing
 Inventory management is critical (Q, R)
 Risk pooling option (location, time) is a
key advantage
 Associated decisions
– Centralized vs Decentralized Management
– Centralized vs Decentralized Facilities
(often called Central versus Local)
Distribution Strategies
Slide 5
Centralized vs Decentralized
Management
 Decentralized system
– Each facility identifies its most effective strategy without
considering the impact on the other facilities in the supply chain.
– Leads to local optimization.
 Centralized system
– Decisions are made at a central location for the entire supply
network.
– Typical objective: minimize the total cost of the system subject
to satisfying some service-level requirements.
– Centralized control leads to global optimization.
– At least as effective as the decentralized system.
 If system cannot be centralized ?
– It is often helpful to form partnerships in order to approach the
advantages of a centralized system.
Distribution Strategies
Slide 6
Central vs. Local Facilities
 Centralized facilities as opposed to Local
– Requires fewer warehouses and distribution centers
– Facilities are located further from customers.
 Other fact
– Safety stock: lower with centralization
– Service level: higher service level for the same
inventory investment with centralization
– Overhead costs: higher in decentralized system
– Customer lead time: response times lower in the
decentralized system
– Transportation costs: not clear. Consider outbound
and inbound costs.
Distribution Strategies
Slide 7
A Hybrid Decision
 For some products we can use a centralized
strategy, for others a de-centralized one
 Varying degrees of centralization and
localization due to the varying levels of
advantages and disadvantages
 So: not an either or decision
Distribution Strategies
Slide 8
Cross-Docking
 Popularized by Wal-Mart
 Warehouses function as inventory coordination
points (DCs) rather than inventory storage points:
 Goods arriving from the manufacturer:
– are transferred to vehicles serving the retailers
– are delivered to the retailers as rapidly as possible.
– See: http://www.youtube.com/watch?v=OS5CrureJoE
 Goods spend little time in storage at warehouse
– Usually less than half a day
– Limits inventory costs
 They are pure DCs, hardly without a warehouse.
Distribution Strategies
Slide 9
Issues with Cross-Docking
 Requires a significant start-up investment
 Is difficult to manage
 Supply chain partners must be linked with
advanced information systems for coordination
 Requires fast and responsive transport systems
 Good demand forecasts are critical
 And so is the sharing of that information
 Effective only for large distribution systems
– Sufficient volume every day to allow shipments of fully
loaded trucks from the suppliers to the warehouses.
– Sufficient demand at retail outlets to receive full
truckload quantities
Distribution Strategies
Slide 10
Inventory Pooling at GM
 GM experienced 10% loss of sales because
cars were not available (Cadillacs)
 A program was introduced
– To improve customer service
– To boost sales
 About 1,500 Cadillacs parked at a regional
distribution center in Orlando were waiting
delivery to Florida dealers within 24 hours
 This is an example of Inventory Pooling
 Dealers have inventories of second hand cars
and typically pool them
Distribution Strategies
Slide 11
Other Inventory Pooling Issues
 Will GM sell more cars to GM dealers?
– Total number of cars ordered by dealers will not
necessarily increase, even as customer service
increases.
 What about the dealers?
– Dealers have access to more inventory
• Potentially can sell more.
– It levels out the playing field between dealers.
• Small dealers would favor such a system, the
competitive advantage of large dealers is wiped out
Distribution Strategies
Slide 12
Centralized Pooled Systems
Perform Better
 For the same overall inventory level, a centralized
pooled system provides:
– higher service level
– higher prices, higher sales volume -> higher income
 Push-pull supply chain
– Moving from a push supply chain
• Dealers have to order before the demand is realized
– To a push-pull supply chain
• Dealers pull from regional distribution centers upon need.
 Implications:
– End consumers will see better customer service
– And more cars are in fact available to them.
Distribution Strategies
Slide 13
Risk Pooling
Aggregating demand across locations
through centralized management
Total number of cars when
inventory is centrally pooled
Expected
demand
80
Realized
demand
76
Distribution Strategies
Unsold
cars
4
Number of cars when inventory is
not centrally pooled
Expected
demand
Realized
demand
Unsold
cars
10
8
2
10
12
-2
10
5
5
10
13
-3
10
12
-2
10
14
-4
10
6
4
10
6
4
Slide 14
Transshipment
 Shipment of items between different
facilities at the same level in the supply
chain to meet some immediate need
 Occurs mostly at the retail level
 Can be achieved:
– with advanced information systems
– Shipping costs are reasonable
– Retailers have same owner
 Example:http://www.toyota.nl/occasions/index.tmex#
Distribution Strategies
Slide 15
Retailers with different owners
 May not want to do transshipments
 Integration strategies may have to be
adopted by the distributor
 Not clear policy regarding inventory levels
– A retailer’s strategy will depend on its
competitors’ strategies, competitors can
benefit from you holding stock
Distribution Strategies
Slide 16
Which Strategy to Adopt?
 Different approaches for different products
 Factors:
– Customer demand, its variability
– Service level vs. costs (for example
transportation and inventory costs)
– Lead time, is associated with both above
– Product being highly differentiated or not
– Economies of scale in transportation/storage
Distribution Strategies
Slide 17
Summary of Distribution Strategies
Strategy →
Attribute ↓
Direct
shipment
Cross-docking
Risk pooling
Take advantage
Transportation
costs
Holding costs
Inventory at
warehouses
Reduced inbound
costs
No
warehouse
cost
Allocation
Distribution Strategies
Reduced
inbound costs
No holding costs
Delayed
Delayed
Slide 18
Summary
 Critical to implement effective distribution
strategies regardless of the total level of supply
chain integration.
 Strategies:
– direct shipping
– warehouses or distribution centers
• Traditional warehousing strategy
• Cross-docking strategy
• Centralized pooling and transshipment strategies
 Related decisions
– Should there be many or only a few warehouses or DC’s?
– Should inventory be held at these locations, or
transshipped?
– As a retailer, does it make sense to participate in a
centralized inventory pooling system, in transshipments?
Distribution Strategies
Slide 19