SCM

MODULE - 2
DESIGNING SUPPLY CHAIN NETWORK

Designing your supply chain network optimally will help you ensure that you are using the best modes of
transportation, the best routes, and the right mix of intermediate assets (example: storage, inventory etc.) to
get your products where they need to be to meet your business goals. It is relatively easy and cost effective
process.

1) Clearly define your objectives.

2) Gather supporting data.
3) Model your supply chain network.
4) Analyze your supply chain network.
5) Implement and refine.
THE ROLE OF DISTRIBUTION IN THE
SUPPLY CHAIN
Supply chain distribution is required to balance your supply and demand. Your
distribution strategy should be capable to handle market changes, including
supply disruptions and increase in demand. The distribution chain aims to reduce
the number of transactions needed to get a product from supplier to customer.

he "new" supply chain and distribution channel has several key components,
which fall under the supply chain management "umbrella." These components
include:
Distribution: The physical logistics of moving inventory along a chain of
distribution.
Inventory management: The entities that control how much is moved and
where it is stored.
Customers: identifying who the "real" customers are and keeping their loyalty
despite all of the changes to the supply chain and distribution channel
 Distribution refers to the steps to move and store a product from the
supplier stage to customer stage in the supply chain.

 Distribution occurs between every pair of stages in the supply chain.

 Raw materials and components are moved from suppliers to

manufacturers, whereas finished products are moved from the
manufacturer to end customer.

 Distribution is a key driver of the overall profitability of a firm because it

affects both the supply chain cost and the customer experience directly.

 Choice of distribution network can achieve supply chain objectives from

low cost to high responsiveness.
What are the four channels of distribution in Supply Chain?
There are four main channels of distribution in the supply chain. Each distribution channel may
work well for one type of business but falter for another.
 Direct sales: Direct sales involve direct distribution from manufacturer to customer. Direct
sales is best for products that have a mid-price point. The products should be affordable
enough to have broad appeal. Direct sales also require that products sold have an extended
shelf-life.
 Brokerage: Brokers work as a go-between for manufacturers and retailers. For instance, food
manufacturers may hire a broker to sell their products to grocery stores. Brokers don't ship
the products directly but handle the sale contracts.
 Wholesale: Wholesalers purchase products in bulk from the manufacturer to sell at a higher
price point through resales. As a reseller, wholesale companies take on more of the risk if
products don’t sell since buyers purchase directly from them.
 Dual distribution: For dual distribution, a company may use several strategies to get its
products to customers. For instance, the company may decide to offer both direct sales and
wholesale. Franchises are one business model that frequently uses more than one type of
distribution channel.
Industry example that highlight the variety of distribution network
choices and the issues that arise when selecting among these options.

Dell distributes its PCs directly to end consumers, whereas companies such
as HP distribute through resellers. Dell customers wait several days to get a
PC, whereas customers can walk away with an HP PC from a reseller.
Gateway opened Gateway Country stores, where customers could examine
the products and have salespeople help them configure a PC that suited their
needs. Gateway, however, chose to sell no products at the stores; all PCs were
shipped directly from the factory to the customer. In 2001, Gateway closed
several of these stores because of their poor financial performance. Apple
Computer, in contrast, has opened many retail stores where computers are
sold.
FACTORS INFLUENCING DISTRIBUTION NETWORK
DESIGN DECISION
STRATEGIC FACTOR

 A firm’s competitive strategy has a significant impact on network design

decisions within the supply chain.

 Firms that focus on cost leadership tend to find the lowest cost location for
their manufacturing facilities, even if that means locating very far from the
markets they serve.

 Firms that focus on responsiveness and efficiency tend to locate facilities

closer to the market and may select a high-cost location if this choice allows
the firm to react quickly to changing market needs.
Distribution network performance evaluated along two dimensions at the highest
level:

1. Customer needs that are met (Customer service)

 Response time ( Time it takes for a customer to receive an order)

 Product variety (Number of different products that are offered)
 Product availability (Probability of having a product in stock)
 Customer experience (Ease of placing and receiving orders)
 Order visibility (Ability of customers to track their orders)
 Returnability (Ease of returning unsatisfactory merchandise)
2. Cost of meeting customer needs (supply chain cost)

 Inventory (All raw materials, WIP, and finished goods)

 Transportation (Moving inventory from point to point)
 Facility & handling (Locations where product is stored, assembled or
fabricated)
 Information (Data and analysis of all drivers in a supply chain
DESIGN OPTIONS FOR A DISTRIBUTION
NETWORK
 Distribution network choices from the manufacturer to the end
customer.

• Two key decisions to be taken are:-

1. Will product be delivered to the customer location or picked up from
a prearranged site?
2. Will product flow through an intermediary (or intermediate location) ?
One of 6 Designs may be used as an Option

1. Manufacturer storage with direct shipping

2. Manufacturer storage with direct shipping and in- transit merge
3. Distributor storage with carrier delivery
4. Distributor storage with last-mile delivery
5. Manufacturer/ Distributor storage with customer pickup
6. Retail storage with customer pickup
DIRECT SHIPPING

• Centralization is beneficial if there is high variety, high value items with low and
unpredictable demand.
• Centralized inventories leading to high product availability, low inventory levels
(higher inventory turnovers), better forecasts.
• Manufacturer can postpone customization until order arrival.
• Partial shipments introduce complexity, hard to implement if there are more
than 20-30 sourcing locations
• Ex: Furniture orders from both Kelebek Mobilya and Sauders.
IN-TRANSIT MERGE NETWORK

In-transit merge combines pieces of order coming from different locations, so

the customer receives the order by single delivery.

Ex : Order a Dell pc with a Sony Monitor.

Beneficial for high value items with low to medium demand and limited
number of manufactures.
Main advantage over drop shipping : lower transportation cost and improved
customer experience.
DISTRIBUTION STORAGE WITH CARRIER DELIVERY

 Inventory is not held by the manufacturers, but is held by distributer or retailor

in intermediate warehouses.
 Package carriers are used to transport items from the retailer to the
customers. Example:Amazon
 Higher inventory capacity is needed than the manufacturer, since demand
uncertainty is aggerated at a lower level.
 Better for medium to fast moving items. Better response time, lower
transportation costs when compared to manufacturer storage.
 Distributor storage can handle somewhat lower variety than manufacturer
storage but it is better than a chain of retailers.
DISTRIBUTOR STORAGE WITH LAST MILE DELIVERY

 Distributor or Retailer delivers the product to the customers home instead of

using a package carrier.
 Requires distributor warehouse to be very close to the customer, so more
warehouses are needed when compared to package delivery.
 Suitable for fast moving items where disaggregation does not lead to
significant increase of inventory.
 Hard to justify this option when labor cost is high.
 Can only be justified when there is large customer demand at this higher
price.Very short response time, better customer experience and returnability.
 Last mile delivery should be integrated with the existing distribution network.
MANUFACTURER OR DISTRIBUTOR STORAGE WITH
CUSTOMER PICKUP

 Inventory is sorted at the manufacturer or distributor warehouse (cross

dock), customer place orders on line or via call center and come to
designated pickup points to collect their orders

Ex: 7 –Eleven Japan

 Inventory and transportation costs are low due to appropriate aggregation.

DISTRIBUTION DECISIONS IN INDIAN FMCG
SECTOR
 FMCG companies today are staring at a major disruption in their distribution
model. Other than some basic technology interventions to track primary (sales
from the FMCG company to their distributors), and in some cases, secondary
sales (sales from the distributors to the retailers), very little changed over the
decades.

 Products go from brand manufacturing facilities to their distribution center

(DC), on to C&F agents in each state, on to the hundreds of distributors (DB) in
that state, and finally on to the retailers, where consumers/ shoppers purchase
them.

 The primary reason for the lack of change is the more or less static retail
environment we have seen- closed to 90% of retail even today is dominated by
mom & pop outlets, or what we call general trade(GT) in India, this was a high
as 98% till a decade or so ago.
Distribution 4.0 - Reimagining FMCG Distribution for 2030:

So, what could FMCG companies do as they plan for the next decade? If we fast
forward to 2030, the overall retail in India is expected to double to $1.5 trillion
from today’s $700bn, and while it is difficult to predict how large each retail
channel will be, we can expect GT’s share in overall retail, though still dominant, to
come down to 50% (from today’s 85-90%). In addition, many of GT/Kiranas in
Metros and Tier 1 & 2 cities are expected to upgrade to look and feel more like
MT, a trend that is already prevalent. MT will continue to grow and could have a
share of 25-30% by 2030, driven by its expansion into Tier 1, 2 and 3 cities with
different formats and sizes. E-comm could easily account for 15-20% of total retail
by 2030 (our research shows that it accounts for almost 50% of retail in China
today) driven by higher smartphone and internet penetration, growth of digital &
mobile payments, and expanding logistics infrastructure.
So, given these changes in retail, how should FMCG companies plan their distribution
for 2030.

Two scenarios are likely to emerge:

Scenario one - with the distributor community shrinking, and the need for scale, technology, higher
margins, speed, along with a need for better trained sales force, many brands are likely to move to
larger distributors who have a multi-state or even national footprint. This is similar to what has
happened in other developing countries, as well as in categories like aerated beverages market in
India, where there are one or two distributors covering the entire market. This will shift the balance
of power between brands and distributors, and is likely to call for a strategic partnership between
them, with more negotiated Terms of Trade, Joint Business Planning, etc, to drive scale.

The second scenario, which is more likely, will be the game changer. It will require FMCG companies
to give up the ownership of the distribution model, and partner with multiple players for the best
market coverage between urban and rural markets, focusing their own efforts on marketing,
branding and in-store merchandising to create best-in-class shopper experience ( “retailtainment”).
In this scenario, they are likely to partner with aggregators, e-comm delivery companies, rural
distribution companies, and distribution arms of modern trade to drive coverage.
NETWORK DESIGN
The network design in supply chain concentrates mainly on the development of multi-stage stochastic
optimization methods required for decision support under demand, freight rate and exchange rate
uncertainty. Here, we will discuss the various strategies to study the uncertainty and scenario
modeling.

 Warehouse location − When companies expand their branches into various new locations, they
need new storage places as well. Here the company faces a warehouse location problem. Within the
set of probable choices in locations, the one that has minimal fixed costs and operational costs by
fulfilling the required demand is chosen.

 Traffic network design − With the growing population, the traffic in cities is increasing. Because of
the higher transportation demand, the traffic networks have also to be widened. Since the budget
allotted is usually limited, the major issue is to determine which projects should be constructed to
develop the flow inside a traffic network.

 Reshoring − This phenomenon has emerged recently because of the rising cost and other
circumstances. It is the exercise of bringing outsourced products and services back to the source
point from which they were originally shipped. It outlines the process of moving some or all
producing back to its original source.
COMPONENTS OF NETWORK DESIGN
1. Supply Chain Network in Simple and basic Terms Involves determining following
process design:
Procurement
 Where are your suppliers
 How will you procure raw materials and components
Manufacturing
 Where will you locate the factories for manufacturing/assembly
 Manufacturing Methodology
Finished Good
 Where will you hold inventories, Number of Warehouses, Location of warehouses etc.
 How will you distribute to markets - Transportation and Distribution logistics
All above decisions are influenced and driven by Key Driver which is the Customer
fulfillment.
2. Designing Supply Chain Network involves determining and defining following
Elements:
 Market Structure
 Demand Plotting or Estimation
 Market Segment
 Procurement Cost
 Product /Conversion Costs
 Logistics Costs including Inventory holding costs
 Over heads
 Cost of Sales
3. Network Design aims to define:
 Best fit Procurement model - Buying decision and processes- VMI, JIT, Kanban,
procurement cost models etc.
 Production processes - One or more number of plants, plant capacity design, Building
to order, build to stock etc, in-house manufacturing or outsource manufacturing and
related decisions including technology for production.
 Manufacturing Facility design - Location, Number of factories, size of unit, time frames
for the plant setup project etc.
 Finished Goods Supply Chain network - Number of warehouses, location & size of
warehouses, inventory flow and volume decisions, transportation.
 Sales and Marketing Decisions - Sales Channel and network strategy, Sales pricing and
promotions, order management and fulfillment process, service delivery process
definitions.
4. Network Design:

 Derives cost estimates for every network element

 Examines ways to optimize costs and reduce costs
 Extrapolates cost impact over various product lines and all possible
permutations and combinations to project profitability
FACTORS AFFECTING NETWORK DESIGN
DECISIONS
1. Strategic Factors
A firm’s competitive strategy has a significant impact on network design decisions within the supply
chain. Firms that focus on cost leadership tend to find the lowest cost location for their manufacturing
facilities, even if that means locating far from the markets they serve. In contrast, firms that focus on
responsiveness tend to locate facilities closer to the market and may select a high-cost location if this
choice allows the firm to react quickly to changing market needs.
2.Technological Factors
Characteristics of available production technologies have a significant impact on network design
decisions. If production technology displays significant economies of scale, a few high-capacity locations
are most effective. In contrast, if facilities have lower fixed costs, many local facilities are preferred
because this helps lower transportation costs. For example, bottling plants for Coca-Cola do not have a
high fixed cost. To reduce transportation costs, Coca-Cola sets up many bottling plants all over the
world, each serving its local market.
3. Macroeconomic Factors
Macroeconomic factors include taxes, tariffs, exchange rates, and shipping costs that are not
internal to an individual firm. As global trade has increased, macroeconomic factors have had a
significant influence on the success or failure of supply chain networks. Thus, it is imperative
that firms take these factors into account when making network design decisions.

4. Political Factors
The political stability of the country under consideration plays a significant role in location
choice. Companies prefer to locate facilities in politically stable countries where the rules of
commerce and ownership are well defined. While political risk is hard to quantify, there are
some indices, such as the Global Political Risk Index (GPRI), that companies can use when
investing in emerging markets.
5. Infrastructure Factors
The availability of good infrastructure is an important prerequisite to locating a facility in a
given area. Poor infrastructure adds to the cost of doing business from a given location. Key
infrastructure elements to be considered during network design include availability of sites
and labor, proximity to transportation terminals, rail service, proximity to airports and
seaports, highway access, congestion, and local utilities.

6. Competitive Factors
Companies must consider competitors’ strategy, size, and location when designing their
supply chain networks. A fundamental decision firms make is whether to locate their
facilities close to or far from competitors. The form of competition and factors such as raw
material or labor availability influence this decision.
7. Logistics and Facility Costs

Logistics and facility costs incurred within a supply chain change as the number of
facilities, their location, and capacity allocation change. Companies must consider
inventory, transportation, and facility costs when designing their supply chain networks.
Inventory and facility costs increase as the number of facilities in a supply chain increases.
Transportation costs decrease as the number of facilities increases. If the number of
facilities increases to the point at which inbound economies of scale are lost, then
transportation costs increase. For example, with few facilities, Amazon has lower
inventory and facility costs than Barnes & Noble, which has hundreds of stores. Barnes &
Noble, however, has lower transportation costs.
The supply chain network design is also influenced by the transformation occurring at
each facility. When there is a significant reduction in material weight or volume as a result
of processing, it may be better to locate facilities closer to the supply source rather than
the customer
IMPACT OF UNCERTAINTY ON NETWORK
DESIGN
Uncertainty of demand and prices will affect the balance between short- term portfolio and
long- term. Therefore, uncertainties in term of demand, supply, pricing, finance, must be
considered to make decision in the network design.

To evaluate the network design (network design) under certainty, there are several methods,
among design

1. Discount cash flow analysis

2. Binomial representation
3. Decision tree

The impact of uncertainty on network design decision

Supply chain design decision includes the number and size of investment in factories, the number
of trucks, the number of warehouses. This decision cannot be quickly changed in a short time, so
it requires flexibility in the determination of the decision.
GLOBAL SUPPLY CHAIN
Global supply chains are networks that can span across multiple continents and
countries for the purpose of sourcing and supplying goods and services. Global supply
chains involve the flow of information, processes and resources across the globe.
As India’s growth trajectory moves it closer to becoming a leading logistics
hub –connecting Asia to the Middle East, Europe, Africa, and beyond – our
members stress the importance of customs modernization and trade
facilitation reforms that will attract new supply chains to India. These
reforms are vital to India’s growth in manufacturing under the Make in India
agenda, and can support increased exports, boost India’s attractiveness as
an investment target for major multinational companies and raise India’s
ranking on indices like the World Bank’s Ease of Doing Business ranking.
Following are the measures that can improve India’s supply chain efficiency
and making India a more attractive destination:-
1. WTO Trade facilitation Agreement
2. Supply chain ecosystem standardization
3. Eliminate export value limit in courier mode
4. Bulk clearance and returns
5. Courier mode and OGA Integration
6. Commodities
7. Risk Management
8. Suspension or Revocation of courier registration provisions
9. Common single window clearance system
10.Platform Integration etc.