“Education in Pursuit of
Supply Chain Leadership”
dp&c Chapter2
Chapter 2
Distribution Management
Environment
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Learning Objectives
• Define inventory management
• Define inventory management objectives
• Describe what inventory management does
• Describe the different classes of inventory
• Identify the different levels of inventory management
• Review the characteristics of inventory in the supply chain
• Detail the strategic inventory management process
• Balance demand and supply objectives
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Learning Objectives (cont.)
• Contrast the conflicting objectives of inventory
management among marketing/sales, finance, and
operations
• Understand inventory trade-off decisions
• Describe inventory and demand flows
• Define supply chain inventory and demand flows
• Describe inventory dynamics
• Understand how inventory provides value
• Determine whether inventory is an asset or a liability
• Assess the financial impact of inventory management
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Chapter 2
Distribution Management Environment
Inventory
Defining
the
Management
Basics
Distribution
Function
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Defining “Distributor”
“A business that does not manufacture its own products but
purchases and resells these products.”
APICS Dictionary, 14th edition
“A business and industry that acts as a third party local
representative and distribution point for a manufacturing
firm. These firms may perform some light assembly or
kitting of goods, but generally provides a buffer for finished
goods. Distributors typically purchase the goods in quantity
from the manufacturer and ship to customers in smaller
quantities.”
Council of Supply Chain Management Professionals
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Defining Distribution
The activities associated with the movement of material,
usually finished goods or service parts, from the
manufacturer to the customer. These activities encompass
the functions of transportation, warehousing, inventory
control, material handling, order administration, site and
location analysis, industrial packaging, data processing, and
the communications network necessary for effective
management. It includes all activities related to physical
distribution, as well as the return of goods to the
manufacturer. In many cases, this movement is made
through one or more levels of field warehouses.
APICS Dictionary, 14th edition
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Chapter 2
Distribution Management Environment
Inventory
Revisiting Basics
the
Management
Supply Chain
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Supply Chain Constituents
Demand / Information /
Payment Flow
Product / Invoicing Flow
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Basic Supply Chain Distribution Formats
Process based
Market based
Channel based
The manufacturer operates as a single
value-added delivery chain either
delivering factory direct or through
company-owned warehouses.
The manufacturer manages a limited set of
logistics functions across a multidivisional
or multiple-enterprise channel for joint
delivery
A manufacturer seeks to manage the
distribution process by forming alliance
with wholesalers and retailers
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Manufacturer-Based Channel Formats
Factory direct. Product is shipped and serviced directly from the factory’s
finished goods warehouse. Product is sold through company catalogues,
an internal sales force, or independent agents
Sales branches and offices. Manufacturers who distribute their own
products through simple or complex matrices of sales offices and
channel warehouses
Manufacturer-owned full-service wholesale distributor. An acquired
wholesale distribution company serving the parent's markets.
Manufacturer's outlets. Manufacturer-owned retail outlets located in highdensity markets. These stores are primarily used to liquidate seconds
and excess inventory
License. A manufacturer contracts with an independent distributor or
retailer, granting product and marketing exclusivity for a specific period
of time
Consignment-locker inventories. The plant ships finished goods to a
point of consumption, but title does not pass until the goods are
consumed
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Merchant Wholesaler Channel Formats
Full-service wholesalers. Independent enterprises that buy finished
products from producers and other wholesalers and sell to companies
for resale or manufacturing consumption
Industrial distributors. Wholesale merchants who sell products
exclusively to manufacturers
Limited-service wholesalers. Independent enterprises that offer a limited
range of products and services to their customers
Cash-and-carry wholesalers. Normally stocks a limited line of fastmoving products that are sold to small retailers
Truck wholesalers. Performs primarily a selling and delivery function only
Drop shippers. Operates in industries associated with commodities
handled in bulk, such as building materials, coal, lumber, and paperbased products
Rack Jobbers. Provides highly advertised, brand-name nonfood products
and accompanying services to grocery, convenience, and drug stores
Mail-order wholesaler. Depends on the sale of products from a catalog
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Distribution Service Channel Formats
Brokers. Serve as intermediaries, matching buyers with sellers and
assisting in price, product, and delivery negotiations
Manufacturer’s agents. Also termed manufacturers' representatives,
these independent agents usually represent two or more manufacturers
that produce complimentary product lines
Selling agents. Contracted by a manufacturer to sell the firm's entire
production output
Purchasing agents. A product expert who, besides obtaining for the
customer the best goods and prices available, provides consultative
services
Commission merchants. Takes possession of goods from the producer
and then sells them in the marketplace for the best price
Value-added reseller (VAR). A company that employs designers,
engineers, or consultants that joint venture or have arrangements with
manufacturers to sell and service equipment or products
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Distribution Retail Formats
Franchise. Product, brand recognition, and marketing expertise are sold
to small entrepreneurs who in turn execute the functions of sales and
delivery
Buying clubs. Provides manufacturers with the opportunity to penetrate
certain niche markets or experiment with product variations
Mail-order/catalog. Non-store selling is performed through catalog
literature
Food retailer. Sells a wide range of foodstuffs, health and beauty aids,
and general merchandise bought from manufacturers and wholesalers
Department stores. National retailers that stock a broad mix of soft
goods (clothing, food, and linens) and hard goods (appliance and
hardware)
Mass merchandisers. Similar to department stores, except product
selection is broader and prices are usually low
Specialty store. Offers a deep selection of merchandise in one line, such
as women's apparel or electronics
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Export/Import Channel Formats
International trading company. performs functions such as the
purchasing and selling of goods, arrangement of logistics services
between exporters and importers, managing currency conversion and
rate fluctuations, assisting with consulting advice, and other marketing
and logistics issues
Export merchants. Similar to domestic merchant wholesalers, they
purchase goods from manufacturers and wholesalers and then ship
them to distribution points in foreign markets
Resident buyers. Employees of a company resident directly in an
exporting country
Export commission house. Performs the same functions as a resident
buyer but is not a company employee
Allied manufacturer. Manufacturing firm that exports and imports
products by using a foreign business partner
Export management company. acts as a product line or foreign market
specialist who represents that export for one or a group of noncompeting
manufacturers and/or distributors
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Buyer-Initiated Formats
Producer’s cooperatives. Distribution organization formed by companies,
usually in the same industry, that create an organization in which each
member is a shareholder. The organization uses the combined strength
of the members to leverage economies of scale so that smaller
companies can compete with larger businesses
Buying groups. Similar to a producer's co-op, with the exception that it is
less structured. Members can belong to multiple buying groups. A group
can buy direct through manufacturers or through wholesale distribution
channels. Buying groups use this format to purchase low volume items
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e-Business Formats
Business-to-business (B2B) channel formats
Independent trading exchanges (ITX). many-to-many
marketplaces composed of buyers and sellers networked through
an independent intermediary
Private trading exchange (PTX). Web-based trading communities
hosted by a single company that recommends or requires trading
partners participate as a condition of doing business
Consortia trading exchange (CTX). some-to-many network
consisting of a few powerful companies organized into a
consortium along with their trading partners
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e-Business Formats (cont.)
Business-to-customer (B2C) channel formats
e-Stores and e-tailers. This format seeks to simulate an actual
shopping experience where consumers can browse through
catalogs or use search mechanisms to locate, price compare,
and order goods to be shipped directly to their homes
Third-party catalog services. Composed of multiple suppliers that
provide a catalog for a group of customers frequenting a certain
place, such as airline in-flight magazines and catalogs and inroom hotel publications
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Delivery Network Facilitators
Financial institutions. Provides a wide-range of banking functions
ranging from cash management and lending to taxes, currency
exchange, and payment. Other specialists in this area will handle other
services like insurance and stock buying and selling
Marketing and advertizing agencies. Provides major marketing,
advertising, and promotional campaigns
Technology services. Provides sophisticated technology tools that
support ease of information transmission through the availability of wideband data, voice, video, and text information transfer
Logistics service providers. Provides logistics (global trade services,
inbound/outbound delivery, supplier management, inventory
management, and payment); transportation (package delivery, intermodal
transport, track and trace, fleet management, and equipment leasing);
Warehousing (storage, pick/pack, cross-docking, delivery); special
services (direct delivery, import/export/customs functions, financial
services); and technology EDI, satellite/wireless communications, web
enablement, and software solutions hosting)
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Chapter 2
Distribution Management Environment
Inventory
Role
of Distribution
Management
Basics
Channels
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Three Essential Distribution Problems
Functional
performance
Increasing the efficiency of time, place, and
delivery utilities
Reduced
complexity
Reducing the amount of transactions by
routinization of business functions around
common goals, channel arrangements, and
expectations
Specialization
Use of channel specialists to increase the
velocity of goods and value-added services by
reducing costs associated with selling, sorting,
transporting, carrying inventory, order
processing, and financial settlement
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Reducing Channel Transaction Complexity
P
P
P
P
Producer
C Customer
C
C
C
C
P
P
P
C
# transactions
=PxC
= 3 X 5 = 15
I
I
C
C
C
Intermediary
# transactions
=P+C
=3+5=8
C
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Sorting process
Sorting out
Separating a heterogeneous group of products,
often acquired from multiple suppliers, into
homogeneous subgroups.
Accumulation
Combining homogeneous stocks of products into
larger groups of supply
Allocation
Breaking down large lots of products into smaller
lots for sale
Assorting
Mixing similar or functionally related items into
assortments to meet customer demand
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Channel Service Outputs
Bulk-breaking
Breaking-down large lot quantities into a small
quantity of a large number of diverse products
Spatial
convenience
Locating products and services close to the
customer satisfy customers' requirements to
reduce search time and transportation cost
Wait and
delivery time
Reducing the length of time spanning the point
when a customer enters an order and when it is
received from the supplier
Product variety/
assortments
Purchasing related product families from multiple
producers and then assembling the right
combination of products and lot sizes to meet the
requirements of the retailer and deliver it in a costeffective manner
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Other Distribution Channel Functions
Selling and
Promoting
Using of internal and third-party partners to market, direct
sell, inventory, and deliver products and services
Postponement
Transforming semi-finished goods into their final form
through the processes of sorting, labeling, blending,
kitting, packaging, and light final assembly
Transportation
Moving goods from one node in the supply channel to
another to achieve time and place utilities
Warehousing
Ensure that the supply channel possesses sufficient stock
to satisfy customer requirements and to act as a buffer
guarding against uncertainties in supply and demand
Sequencing
Sorting goods into unique configurations necessary to fit
the requirements of specific customers
Merchandizing
Placing products into special packaging or assembling in
a display unit determined by marketing and sales
campaigns
Marketing
Information
Receiving information regarding product, marketplace
issues, and competitors’ activities from the channel
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Postponement Advantages
Reduced
channel costs
Cutting costs to have intermediaries perform valueadded tasks by performing them internally
Lead-time
reduction
Removal of time products must spend in the supply
channel being processed by intermediaries
Inventory
reduction
Storage in the channel in a semi-finished state until
final differentiation by the customer order, means
much less finished goods in the supply pipeline
Customer
response and
flexibility
By moving semi-finished goods to downstream
distribution facilities, customer response flexibility can
be expanded without increasing inventory investment
Material
handling
Postponement targeted at unitization can help reduce
labor and material handling costs while accelerating
product movement
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Chapter 2
Distribution Management Environment
Inventory
Distribution
Channel
Management
Basics
Transaction Flows
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Channel Transaction Functions
Product
possession
Channel activities associated with product
warehousing and transportation
Selling and
promoting
Selling to a global and local markets, creating brand
awareness and market share, and broadcasting
transaction data, sales plans, and promotions
Ownership
Assuming ownership of goods and use of
consignment selling
Risk
Negotiations
Taking ownership of goods incurs risk of financial loss.
Also assuming responsibility for product failures,
warranties, and price fluctuations
Attaining agreement of price and other sales terms.
Should always be supportive of the overall
competitiveness of the channel system
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Channel Transaction Functions (cont.)
Ordering flow
The placement of customer and channel
replenishment orders occur at all echelons levels in
the supply chain
Payment flow
The flow of cash payment proceeds through the
distribution channel from the customer back to the
manufacturer
Financing
Purchasing inventories, providing for transportation,
managing accounts receivables, and extending credit
to their channel customers
Information
services
Contract with channel specialists who possess the
necessary equipment and technical skills to manage
multiple facets of channel financial management
Management
services/
consulting
Assisting channel partners rationalize transaction
processes by providing expert advice
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Transaction Flow Types
Forward
Movement of goods and services from the supplier
to the customer
Backward
Movement of information and payment from the
customer to the supplier
Exchange
Functions that facilitate the buying and selling of
goods and services
Logistics
Functions that facilitate the transportation and
storage of goods
Facilitating
Functions necessary to complete financial
exchange and logistics transfer
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Levels of Channel Structures
Zeroechelon
channel
Manufacturer
Distributor
One-echelon
channel
Retailer
Distributor
Twoechelon
channel
Retailer
Distributor
Regional
Warehouse
Fourechelon
channel
Regional
Three-Warehouse
echelon
Retailer channel
Retailer
Customer
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Chapter 2
Distribution Management Environment
Inventory
Distribution
Channel
Management
Basics
Transaction Flows
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Channel Inventory Flows
Demand Flow
Manufacturing
Order
Channel
Resupply Order
Customer
Order
Shipping
Documents
Processes
Stores
Production
Components/
Raw Materials/
MRO
WIP
Inventories
Finished
Goods
In-transit/
Delivery
Finished
Goods
Service Parts
Distribution
Inventories
Inventory Flow
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Return Order/
Scrap/Rework
Obsolete/
Damaged/
Rework
Finished Goods
Components
Raw Materials
MRO
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Supply Chain Inventory and Demand Flows
Demand Flow
Dependent
Demand
Materials
Supplier
Producer
Derived
Demand
Channel
Intermediaries
Independent
Demand
Retailer
End
Customer
Inventory Flow
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Supply Chain Demand Types
Independent
Demand for finished goods coming from the
end-use customer positioned at the end of the
supply chain. While classically a retailer, the
purchase point could be a distributor, catalog
sales, Internet sales, or a manufacturer
Derived
Demand for finished goods originating with the
customer-facing channel entity (i.e. retail) and
placed on channel intermediaries and
producers
Dependent
Demand for materials and components
calculated by a producer’s MRP system.
Derived from finished goods bills of material
exploded through the MRP system
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Little’s Law
Little’s Law:
Critical principle for measuring inventory
throughput. Throughput is the rate at which
product is received into and is sold out of stock.
Expressed as:
I (inventory) = D (throughput rate) * T (flow time)
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Substituting Information for Inventory
Supply Chain
Integration
Increased
Flexibility
Achieving the strategic and tactical integration
of all channel intermediaries and producers
Increasing channel inventory flow by designing
flexible and agile processes
Lower Costs
Removing unnecessary buffers that add
carrying costs and risk obsolescence
Time-Based
Competition
Increasing supply channel delivery speed to
increase competiveness and reduce risk
Telescoping the
Supply Pipeline
Shrinking channel pipelines to reduce transit
times and buffer inventories
Channel
Performance
Designing metrics that measure the
performance of the entire supply chain
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Reverse Logistics Flows
Information Flows
Component Return
Product Return
Waste Return
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Factors Driving Reverse Logistics
Aftermarket
savings
Recovery of precious metals, repaired for continued
use, refurbished for resale, disassembled usable
components, as well as conscientiously recycled
Competitive
edge
Ease of return, repair, and recycling adds to a
product’s value. Growing “green” consciousness
among customers adds to product branding
Pressure
Consumers, shareholders, governmental legislation,
and foreign trade pressuring to make products,
processes, and distribution more sustainable
Environmental
safe products
Increasing demand for products that are simple,
clean, and less threatening to the environment
Environmental
awareness
Strategies that capture a growing sense of
environmental awareness, love of nature, and desire
to preserve the health of the nonhuman world
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Reverse Logistics Hierarchy
Reducing resource use is considered to be
Reduce the most responsible “green” strategy
Reduce
Reuse
Reuse
Design products for reuse of materials and
components and with easy upgrades to
extend life
Recycle
Recycle
Recover energy
Dispose in
responsible landfill
Similar to reuse; product materials
reprocessed into new products or
components
Dispose of product but recover
Recover
energy in the process; e.g.,
energy
“trash to energy” plants
Responsible Last resort: Send unusable, unrecyclable
materials and components to a responsible landfill
landfill
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Defining Sustainability
The management of environmental, social, and
economic impacts, and the encouragement of
good governance practice through the lifecycles of
goods and services. The objective of supply chain
sustainability is to create, protect, and grow longterm environmental, social, and economic value
for all stakeholders involved in bringing products
and services to market
United Nations Global Compact
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Impact of Sustainability on Business
Good environmental management and sustainability concerns
Focus on organizational efforts to conserve energy, reduce waste
and carbon footprints, and pursue the recycling of useable
products and wastes
Public opinion and the power of choice
Heightened consumer awareness about protecting the
environment, preserving the earth's finite natural resources, and
increasing demand for green products
Public opinion and the power of choice
Use of sustainability practices to increase resource efficiency and
reduce costs that can improve the financial bottom line across
multiple supply channel partners, build a reputation for ecofriendliness, attract talented employees, and inspire customer
loyalty
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“Education in Pursuit of
Supply Chain Leadership”
dp&c Chapter2
Chapter 2
End of Session
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