SUPPLY CHAIN

MANAGEMENT
NETWORK DESIGN
 Distribution
in the Supply Chain
• Distribution: Move and store a product from
the supplier stage to the customer stage
• Distribution directly affects cost and the
customer experience and therefore drives
profitability
• Choice of distribution network can achieve
supply chain objectives from low cost to high
responsiveness
•
 FACTORS
• Distribution

• Meet customer needs (Customer

experience)

• Cost of it (Cost of supply chain)

 SERVICE FACTOR
• Product availability
• Response time
• Product variety
• Customer experience
• Order visibility
• Returnability
 COST FACTOR
• Facilities

• Inventory

• Transportation

• Information
 NETWORK DESIGN
• No of warehouses
• Location
• Size
• Storage
• Allocating customers
FACILITIES

OVERHEADS

INVENTORY COST

TRANSPORTATION COST

RESPONSE TIME

NO OF FACILITIES
 ROLE OF DISTRIBUTORS
• Reduction in inbound transportation cost
(TL consignment from factory to
distributor)
• Distributors combines products from
various factories to retail – reduces
outbound freight
• Distributor aggregates safety stock
• Better response time since product is
closer to customer
 TYPES OF NETWORK
Manufacturer Storage & direct
shipping

RETAIL

FACTORY CUSTOMER
 Manufacturer Storage & direct
shipping

• No distributor/retailer
• Retailer to pass on information
• Inventory centralized
• High level of product availability
• High value, low & unpredictable demand items
• Store components & customize
• Out bound transportation cost increases
 TYPES OF NETWORK
Manufacturer Storage & direct
shipping
• Low inventory cost
• Higher transportation cost
• Because of aggregation low cost of facility
• High investment in information system
• Response time is high
• Large no of varieties can be handled
• Cost of product return high
 MERGE IN-TRANSIT

FACTORY CUSTOMER
MERGE

FACTORY CUSTOMER

RETAIL
FACTORY CUSTOMER
 MERGE IN-TRANSIT
• Extra cost of merge centre facility
• Transport cost is slightly less
• Better customer experience since all items
are received together
• Higher investment in information
technology
STORAGE AT DISTRIBUTOR

FACTORY CUSTOMER

FACTORY DISTRIBUTOR
CUSTOMER

FACTORY
CUSTOMER
 STORAGE AT DISTRIBUTOR
• High inventory
• Suitable for products having high demand
• Less transportation cost due economy of scale
• Higher facilities cost
• Less investment in information
• Better response time
• Better customer experience
• Better visibility of orders
• Easier returnability
 RETAIL STORAGE
• High inventory cost
• Low transportation cost
• Higher cost of facilities
• Fast response time
• Low product variety
• Good customer experience
• Easier returnability
• Order visibility is not an issue
 HYBRID NETWORK
• Tailored to match product characteristic &
customer preference
• Fast moving & emergency items – Retail
(local storage)
• Slower moving items stored at central
docking centers
• Very slow moving items are stored at the
manufacturer
 Conventional Network
Materials Customer
Vendor Finished Customer
DC Store
DC Goods DC DC

Customer
Component Store
Vendor Manufacturing
DC Plant Customer Customer
Warehouse DC Store
Components
DC Customer
Vendor Store
DC Finished
Customer
Goods DC
Final DC Customer
Assembly Store
 Multi-Echelon Finished Goods
Network
Local DC
Cross-Dock Store 1
Regional Customer 1
Finished DC
Goods DC Store 1
Local DC
Cross-Dock
National Store 2
Customer 2
Finished
DC
Goods DC
Local DC Store 2
Cross-Dock
Regional
Finished Store 3
Goods DC

Store 3
 ROLE OF DISTRIBUTORS
• Consumer goods :
- Low cost of transportation is desired
- Retail has low storage capacity
-Distributor receives a full truck load &
distributes small lot to the retail
 DESIGN DECISIONS
• No of Facilities

• Location

• Capacity

• Allocation of customers
 DATA
• Location of customers
• Demand for each product by customer location
• Future demand
• Special transportation needs
• Transportation rates
• Cost of warehousing
• Shipment size & frequency of delivery
• Order processing cost
• Customer service requirements
• Location of manufacturing centers
 DATA AGGREGATION
• Customer : Clustering
• Products :
- Product type
- Distribution pattern :
: Same source & customers
: Weight & volume
 SOLUTION TECHNIQUES
• Mathematical modeling
- For optimal solution
- Heuristic
• Simulation
• Data validation
Network Design: Objective function
The objective is to balance service level against
• Production/ purchasing costs
• Inventory carrying costs
• Facility costs (variable and fixed costs)
• Transportation costs
Minimize total annual cost of the distribution network that
satisfies product demands at specified customer service
levels.
 Network Design Tools

• Mapping
– Mapping enables visualization
– Mapping the solutions allows to better understand different
scenarios
– Color coding, sizing, and utilization indicators allow for further
analysis
• Data
– Data specifies the costs of your supply chain
– The baseline cost data should match your accounting data
– The output data allows you to quantify changes to the supply
chain
• Engine
– Optimization Techniques
 Data for Network Design

1. A listing of all products

2. Location of customers, stocking points and sources
3. Demand for each product by customer location
4. Transportation rates
5. Warehousing costs
6. Shipment sizes by product
7. Order patterns by frequency, size, season, content
8. Order processing costs
9. Customer service goals
 Aggregating Customers
• Customers located in close proximity are
aggregated using a grid network or
clustering techniques. All customers within
a single cell or a single cluster are
replaced by a single customer located at
the centroid of the cell or cluster.

We refer to a cell or a cluster as a

customer zone.
 Product Grouping
• Companies may have hundreds to
thousands of individual items in their
production line
– Variations in product models and style
– Same products are packaged in many sizes
• Collecting all data and analyzing it is
impractical for so many product groups
Mapping
 OBJECTIVE FUNCTION
Minimize total cost = Xij * Cij + Yjk * Cjk

Ij jk

Subject to Xij => 0

Yjk => 0

Xij <= BOL for existing factories and unlimited for new factories

Yjk <= Demand in Customer k

Xij = Yjk

i k

Unit cost of distribution

from factory i to depot j = Cij
Unit cost of distribution
from depot j to
customer k Cjk

Quantity from factory i to

depot j = Xij

Quantity from depot j to

customer k = Yjk
 OBJECTIVE FUNCTION
Optimize total cost = Xij * MCij

Unit cost of
manufacturing in
Factory i = MCi = MCAi + MCRMi + MCVi
 OUT PUT
• Total cost
• Optimum sourcing
• Capacities required in each factory
• Start up of any new factory/Depot