Unit

DESIGNING THE
SUPPLY CHAIN
NETWORK
 Conten
ts
 Role of Distribution in the Supply Chain
 Factors Influencing Distribution Design Options
 Design Options for a Distribution Network
 Online sales and distribution network
 FMCG and distribution channel network design in the supply
chain
 Role of Network
 Factors Affecting Network Design Decisions
 Designing and Planning Transportation Networks
 Role of Transportation
 Key Players in Transportation
 Transportation Modes and their Performance
 Infrastructure and Policies
 Design Options and their Trade-Offs
The Role of Distribution in the Supply
Chain
 Distribution:
 The steps taken to move and store raw materials, WIP and
finished products from supplier stage to the customer
stage in a supply chain

 Drives profitability by directly affecting supply chain cost

and the customer experience

 Choice of distribution network can achieve supply chain

objectives from Low Cost (WalMart) to High Responsiveness
(Zara)
 Factors Influencing Distribution Network
Design
 Distribution network performance is evaluated along 2
dimensions:
1. Customer requirements that are to be met
2. Cost of meeting these customer requirements

 The company must calculate the impact on Customer Service

and Costs for different distribution network options & select
the best possible option

 Profitability of the distribution network is calculated as:

Revenue from met customer requirements – Network
Supply Chain Costs affected by Network
Structure
 Inventory:
• All raw materials, work-in-process and finished goods within
a
supply chain.
 Sourcing:
• The business processes required to purchase raw materials
and
components.
 Transportation:
• Moving inventory from point-to-point in the supply chain.
 Facilities:
• The physical locations in the supply chain network where
components andproducts are manufactured or stored.
 Information:
• Analysis of Data regarding facilities, inventory, transportation,
Elements of Customer Service influenced by
Distribution Network Structure
 Response time:
 Amount of time it takes for a customer to receive an order
 Product variety:
 Number of different products that are offered by the company
 Product availability:
 How much of a product is available for purchase at any given time
 Customer experience:
 Ease with which customers can place & receive orders & the extent
of customization
 Order visibility:
 Ability of customers to track their orders from placement to
delivery
 Returnability:
 Ease with which customers can return unsatisfactory products and hte
ability of the network to handle such returns.
Correlation between Desired Response Time and
Number of Facilities

Increasing the number of facilities moves them closer to

the customer. This reduces the Response Time.
Correlation between Inventory Costs and
Number of Facilities

Inventory costs increase as we increase the number of

facilities since the quantity of products stored in the
facilities will increase.
 Correlation between Transportation Costs and
Number of Facilities

Transportation costs decreases as we increase the number of Facilities

since the distances travelled will reduce. But if the Economies of Scale is
not maintained, then the Transportation costs would increase.
Correlation between Facility Costs and Number
of Facilities

Facility costs increase as we increase the number

of facilities since the quantity of equipments & their
maintenance costs will increase.
Correlation between Total Logistics Cost, Response
Time and Number of Facilities
FMCG and Distribution channel network design
in the supply chain

 The Choice of Distribution Network from

Manufacturer to Customerand its Design is very
critical

 Two key decisions to be made:

1. Will product be directly delivered to the
customer location or picked up by the customer
from a pre-arranged place?
2. Will product flow through an intermediary
(or intermediate location)?
There are six Network Design options to
choose
from…

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
Manufacturer Storage with Direct
Shipping

e.g. Godrej Interio, Nordstrom

Manufacturer storage with Direct Shipping
and In-Transit Merge

e.g. Dell PC/Laptop components such as monitors,keyboards etc. produced

by various suppliers are merged & assembled at one location & then
distributed to customers.
Distributor Storage with Carrier
Delivery

e.g.
Distributor Storage with Last Mile
Delivery

e.g. Amazon,
 Manufacturer or Distributor Storage with Customer
Pickup

e.g. Walmart, Seven-Eleven retail

Cross-Docking: This involves unloading goods arriving from a manufacturer and immediately loading
these goods onto smaller outboundtrucks bound for various retailer locations. This eliminates
storage at the retailer’s inbound warehouse and cuts the lead time.
e.g. Foodworld,
Online sales and distribution network:
Netflix
 Impact of Online sales on Customer Service:
 Excellent selection and good recommendation site

 Video Streaming through a variety of devices

 Also, customers can receive their DVDs within 24 hours

of being shipped

 Impact of Online sales on Cost:

 Reduced Inventory costs

 Lower Facility costs

 Increase in Information costs

 Higher transportation costs, increased streaming will

reduce transportation costs

Role of
Network
 Facility role:
 What role, what processes required?

 Facility location:
 Where should facilities be located?

 Capacity allocation:
 How much capacity at each facility?

 Market and supply allocation:

 What markets? Which supply sources?
 Factors Affecting Network Design
Decisions
 Strategic:
 Focus on Cost or Responsiveness?
 Technological:
 High tech or Low tech facility required?
 Macroeconomic:
 Tariffs, Taxes (SEZ), Exchange rates (Hedging)
 Political:
 Stability of country/states
 Infrastructure:
 Roads, Telecom, Power, Water
 Competitive:
 Location of competitors?
 Logistics and Facility costs:
 Impact of number of facilities on Inventory, Facilities &
Transport costs
Framework for Network Design
Decisions
 Framework for Network Design
Decisions

continued…
Phase I: Define a Supply Chain Strategy/Design
 Clear definition of the firm’s competitive strategy
 Forecast the likely evolution of global competition
 Identify constraints on available capital
 Determine growth strategy

 Phase II: Define the Regional Facility Configuration

 Forecast of the demand by country or region
 Economies of scale
 Identify demand risk, exchange-rate risk, political risk, tariffs, tax incentives and export
/ import restrictions
 Identify competitors

 Phase III: Select Desirable Potential Sites

 Infrastructure requirements

 Phase IV: Location Choices

 Labour, Transport, Inventory
 Conventional Supply Chain Network

Material Finished Custome

Vendo r Custome
s DC Goods
r DC r Store
DC
DC
Custome
Component r
Manufacturin Store
Vendo g Plant Custome
r Warehous r DC Custom
DC e er
Components DC Store

Vendo Finished Customer

Custome
r Goods
r DC Store
DC Final DC
Assembl Custom
y er
Store
 Tailored / Customized Network:
Multi-Level Finished Goods
Network
Local DC
Regional Store
Cross-
Finished 1
Dock Customer
Goods
DC 1 DC Store
Local DC 1
National
Cross-
Finished Store
Dock Customer
Goods 2
DC 2 DC
Local DC Store
Regional
Cross- 2
Finished
Dock
Goods Store
DC 3

Store
3
 DESIGNING AND PLANNING
TRANSPORTATION
NETWORKS
Content
s
 Role of Transportation
 Key Players in Transportation
 Transportation Modes and their
Performance
 Transportation Infrastructure
 Design Options and their
Trade-Offs
 Tailored or Customized
 Transportation
concepts
 Transportation refers to the movement of inventory from one location to
another from the beginning of a supply chain till the customer.
 Transportation is essential because it enables trade between
people,
which in turn facilitates the development of society.
 Any Supply Chain’s success is closely linked to the appropriate use
of transportation. For example:
 Wal-Mart has effectively used Cross-Docking as part of an effective
transportation system.
 Cross-Docking is a process where products contained in trucks arriving from a
manufacturer are immediately shifted ontotrucks bound for various retailer
locations, so that each truck going to a retail store has products from different
suppliers.
 This eliminates storage at the retailer’s warehouse, reduces lead time &
Transportati
on
 Role in the Supply Chain:
 Moves the product between stages in the
supply chain
 Affects responsiveness and efficiency
 Faster transportation allows greater
responsiveness but lower
efficiency
 Also affects inventory and
facilities
 Allows a firm to adjust the location of its
facilities and inventory to find the right balance
Overall trade-off: Responsiveness versus
Efficiency

 Overall balance required

between Responsiveness versus
Efficiency:
The cost of transporting a given product
(efficiency) and the speed with which
that product is transported
(responsiveness)
Using fast modes of transport raises
responsiveness and transportation cost
Key Players in
Transportation
 There are 2 key players in any transportation
that takes place within a supply chain.
 They are called Shipper & Carrier.
 Shipper is the company that requires the movement of
the product between two points in the supply chain.
 Carrier is the company that moves or transports
the product.
◼ For example, Dell makes use of UPS to transport
components/computers from factory to the customer.
Here Dell is the Shipper & UPS is the Carrier.
Key Players in Transportation
continued…
 The Shipper uses transportation to minimize
Total Cost which consists of:
 Transportation, Inventory, Facility and Information
costs
 The Carrier makes investment decisions
regarding transportation modes and
maximizes return from:
 Vehicle related cost – type? quantity?

 Fixed operating cost – terminal facilities cost?

 Trip related cost – labour? fuel?

Transportation
Modes
 Trucks
 Full Truck Load (FTL)
 Less Than Truck Load
(LTL)
 Rail
 Air
 Package Carriers
(FedEx)
 Water
 Pipeline
 Full Truckload
(FTL)
 Full Truckload refers to maximum capacity of the
truck
 Advantages:
 Lower operating costs
 Door-to-door shipment and less transit time
 Economies of Scale
 No transfer required between picking and delivery to customer
 Major concerns:
 Utilization (Idle time)
 Inconsistent service
 Return haul - Return journey of vehicle from its destination to
 Less Than Truckload (LTL)

 Used for smaller lot sizes

 Major concerns:
 Higher operating costs

 More lead time as other consignments are to be picked

and dropped off
 Location of consolidation facilities
 Vehicle routing

 Goal is to minimize costs through consolidation

without impacting delivery time and
reliability
 Ra
il
 Advantages:
 Ideal for very large, heavy, lesser value products
(such as Coal) over long distances
 Key issues:
 Higher operating costs

 More lead time

 Scheduling to minimize delays / improve service

 Delays (at pickup and delivery end)

 Yard operations
 Ai
r
 Advantages:
 Fast, reliable and safe

 Key concerns:
 High operating costs because of aircrafts, supporting
infrastructure, fuel, pilots
 Location / number of hubs
 Schedule optimization
 Fleet assignment
 Crew scheduling
 Capacity management by maximizing daily flying time
and revenue generated per trip
 Package
Carriers
 Package Carriers are companies like FedEx, USPS, UPS, DHL etc. that carry
small packages ranging from letters to shipments of about 70 kg
 Advantages:
 Rapid and reliable service – use combination of air, truck and rail
 Preferred mode for E-commerce business (e.g. Amazon, Flipkart)
 Key concerns:
 Expensive
 Smalland time-sensitive shipments
 Consolidation of shipments (especially important for package carriers that
use Air as a primary method of transport)
 Compare the transportation
networks of FedEx & USPS
Wate
r
 Transport through Ocean, Inland waterway system,
Coastal waters
 Dominant in global trade (used for heavy
machinery, automobiles, commodities,
apparel etc.)
 Advantages:
 Can carry heavy cargo at very low costs

 Concerns:
 Slowest – in movement, delays at ports, customs,
security
Pipelin
e
 Primarily used for transporting Water & Crude
Petroleum products
 Advantages:
 Best for large and predictable demand

 Concerns:
 High Setup & Maintenance costs

 Pipelines are generally used for transporting

crude petroleum to a port or refinery but not for
transporting refined petrol/diesel to a petrol-bunk
(why?)
 Intermodal or Multimodal
transport
 Intermodal or Multimodal transport refers to use of more
than onemode of transportation to move a shipment to its
destination
 Common examples are:
 Rail & Truck ; Water & Truck ; Water, Rail & Truck
 Advantages:
 More convenient for shippers (one entity provides the
complete transport to final destination)
 Key concern:
 Delay in transfers between modes increasing
shipment time to customer
Components of Transportation Decisions

 Components of Transportation
Decisions impacting Design
of transportation network:
◼ Modes, locations, and
routes
◼ Direct or with intermediate
consolidation points
◼ O n e or multiple supply or
demand points in a single run
 Design Options for a
Transportation Network

 3 aspects to be considered when designing

a Transportation Network:
1. Should transportation be direct-to-customer
or throughan intermediary?
2. Should the intermediary store products or
only serve as a cross-docking location?
3. Should each route supply a single
destination or multiple destinations (return
trip)?
Design Option 1: Direct Shipment Network
to Single Destination

e.g. Materials /
Components
for
Automobiles
manufacturing
 Design Option 2: Direct Shipping with
Return Trip
 Shipment from single supplier to several buyers e.g. Amway,
OR from several suppliers to single buyer Tupperware
 Design Option 3: All Shipments via intermediate
Distribution Center (DC) with Storage

 Suppliers ship only to DC and DC ships directly to

buyers

e.g. Apparel
companies
- Levi’s,
Nike
Design Option 4: Shipping via
Distribution Center (DC) using Return
trip
 Combination Network of previous 2 options
e.g.
E-commerce
Retailers such
as Flipkart,
Amazon and
also LPG
cylinders
 Design Option 5: All Shipments via Intermediate
Transit Point with Cross-Docking
 Suppliers send their shipments to an temporary terminal (truck bay) where they are
cross-dockedand sent to buyer locations without storing them. (Walmart, 7-Eleven)
Cross-Docking
concept
Cross-Docking is a process where products contained in larger trucks arriving
from a manufacturer are immediately loaded onto smaller trucks at a temporary
terminal meant for various retailer locations, so that each smaller truck going to a
retail store has products from different suppliers.
This eliminates storage at the retailer’s warehouse, reduces lead time & lowers
the overall costs. This has been used very successfully by Walmart.
Tailored / Customized Transportation

In Tailored Transportation, customized

combination of cross-docking, return trips and
various transportation modes are used based on
customer requirements and product
characteristics
 Factors affecting tailored transport:

 Customer distance and density

 Number of customers
 Product demand and value
Trade-offs in Transportation
Design
 There are 2 trade-offs to be considered
while designing a Transportation Network:
1. Transportation and Inventory Cost
trade- off:
 Choice of transportation mode
 Inventory Aggregation

2. Transportation Cost and

Responsiveness trade-off:
 Temporal Aggregation
Transportation and Inventory Cost trade-
off

 Choice of Transportation Mode:

 Inventory costs must be considered when selecting a
mode of transportation
 A mode with higher transportation costs can be justified
if it results in significantly lower inventories
 Cheaper modes of transport generally have longer lead
times and larger minimum shipment quantities thereby
resulting in higher inventory levels
 E.g. Use of Air transport for less volume & use
of Rail/Water transport for large volume
commodities
Transportation and Inventory Cost trade-
off
continued…
 Inventory Aggregation means combining inventories in
fewer
facilities (factories & warehouses)
 E.g. Toyota
 As a result of Inventory Aggregation:
 Inventory costs decrease
 Inbound transportation cost (into the warehouse) decreases
because of aggregation
 Outbound transportation cost increases (due to disaggregation)
therefore number of locations, quantity and distance to customer
is critical
Transportation cost and Responsiveness trade-
off
 Temporal Aggregation is the process of combining
orders over a longer time horizon before shipping
to customers
 Temporal Aggregation reduces transportation cost
because it results in larger shipments and
reduces variation in shipment volumes
e.g. GE Power, GE Aviation
 However, Temporal Aggregation reduces customer
responsiveness due to shipping delays
 Risk Management in
Transportation
 Three main risks to be considered in transportation are:
1. Risk of disruptions

2. Risk that the shipment is delayed

3. Risk of hazardous material

 Risk reduction strategies:
 Decrease the probability of disruptions by excellent planning

 Alternative routings to minimize delays

 In case of hazardous materials, the use of customized
containers & low-risk transportation models to reduce
modification of physical and chemical properties can prove
to be effective
Making Transportation Decisions in
Practice

1. Align transportation strategy

with competitive strategy
2. Consider both In-house and
Outsourced transportation
3. Use technology to improve
transportation performance
4. Design flexibility into the transportation
network
Manufacturer Storage with Direct
Shipping
continued…
Cost Performa
Factor
Inventor Lower costs becausence
of aggregation. Benefits of
y aggregation are highest for low-demand, high-value
products. Benefits are large if product
customization can be postponed at the
manufacturer.
Transportatio
n Higher transportation costs because of
increased distance and disaggregate shipping.
Facilities and Lower facility costs because of aggregation. Some
handling saving on handling costs if manufacturer can
manage small shipments or ship from production
line.
Informatio Significant investment in information infrastructure
n to integrate manufacturer and retailer.
Manufacturer Storage with Direct
Shipping
continued…
Service Factor Performance
Response time High response time of one to two weeks because of
increased distance and two stages for order processing.
Response time may vary by product, thus complicating
receiving.
Product variety Easy to provide a high level of variety.
Product availability Easy to provide a high level of product availability because
of aggregation at manufacturer.
Customer experience Good in terms of home delivery but can suffer if order
from several manufacturers is sent as partial shipments.
Time to Market Fast, with the product available as soon as the first unit
is produced.
Order visibility More difficult but also more important from a customer
service perspective.
Returnability Expensiveand difficult to implement.
Manufacturer storage with Direct Shipping and
In-
Transit Merge continued…
Service Factor Performance
Response time Similar to direct-shipping; may be marginally higher.
Product variety Similar to direct-shipping.
Product Similar to direct-shipping.
availabil
ity
Customer Better than direct-shipping because only a single
experien delivery has to be received.
ce
Time to market Similar to direct-shipping.
Order visibility Similar to direct-shipping.
Returnability Similar to direct-shipping.
Manufacturer storage with Direct Shipping
and In-Transit Merge continued…

Cost Factor Performance

Inventory Similar to direct-shipping ; Lower costs
because of aggregation.

Transportation Lower transportation costs than direct-

shipping.

Facilities and Handling costs higher than direct-shipping at

handling carrier ; receiving costs lower at customer.

Information Investment is higher than for direct-shipping.

Distributor Storage with Carrier
Delivery
continued…
Cost Factor Performance
Inventory Higher than manufacturer storage. Difference
is not large for faster moving products but can
be large for very slow-moving products.

Transportation Lower than manufacturer storage. Reduction

in cost is highest for faster moving products.

Facilities Somewhat higher than manufacturer

and storage. The difference can be large for
handling very slow- moving products.

Information Simpler infrastructure compared

to manufacturer storage.
Distributor Storage with Carrier
Delivery
continued…
Service Factor Performance
Response time Faster than manufacturer storage.
Product variety Lower than manufacturer storage.
Product Higher cost to provide the same level of
availabil availability as manufacturer storage.
ity
Customer Better than manufacturer storage with direct-
experience shipping.
Time to market Higher than manufacturer storage.
Order visibility Easier than manufacturer storage.
Returnability Easier than manufacturer storage.
Distributor Storage with Last Mile
Delivery
continued…
Cost Factor Performance
Inventory Higher than distributor storage with package
carrier delivery.
Transportation Very high cost given minimal economies of
scale. Higher than any other distribution
option.

Facilities and Facility costs higher than manufacturer

handling storage or distributor storage with package
carrier delivery, but lower than a chain of
retail stores.

Information Similar to distributor storage with package

carrier delivery.
Distributor Storage with Last Mile
Delivery
continued…
Service Factor Performance
Response time Very quick. One-day or Two-days delivery to customer.
Product variety Somewhat less than distributor storage with package
carrier delivery but larger than retail stores.
Product More expensive to provide availability than any
availability other option except retail stores.
Customer Very good, particularly for bulky items. Slightly higher
experien than distributor storage with package carrier delivery.
ce
Time to market Less of an issue and easier to implement than manufacturer
storage or distributor storage with package carrier
delivery.

Order visibility Easier to implement than other previous options.

Returnability Easier to implement than other previous options.
Manufacturer or Distributor Storage
with
Customer Pickup continued…
Cost Factor Performance
Inventory Can match any other option, depending on the
location of inventory.

Transportation Lower than the use of package carriers,

especially if using an existing delivery
network.

Facilities and Facility costs can be high if new facilities have

handling to be built. Costs are lower if existing
facilities are used. The increase in handling
cost at the pickup site can be significant.

Information Significant investment in infrastructure

required.
Manufacturer or Distributor Storage with
Customer
Pickup continued…
Service Factor Performance
Response time Similar to package carrier delivery with manufacturer or
distributor storage. Same-day delivery possible for items stored
locally at pickup site.

Product variety Similar to other manufacturer or distributor storage options.

Product availability Similar to other manufacturer or distributor storage options.
Customer experience Lower than other options because of the lack of home
delivery. Experience is sensitive to capability of pickup
location.

Time to market Similar to manufacturer storage options.

Order visibility Difficult but essential.
Returnability Somewhat easier given that pickup location can handle returns.
Retail Storage with Customer
Pickup
Cost Factor Performance
Inventory Higher than all other options.

Transportation Lower than all other options.

Facilities and Higher than other options. The increase in

handling handling cost at the pickup site can be
significant for online and phone orders.

Information Some investment in infrastructure required

for online and phone orders.

e.g. Foodworld,
More
Retail Storage with Customer Pickup
continued…
Service Factor Performance
Response time Same-day (immediate) pickup possible for items
stored locally at pickup site.
Product variety Lower than all other options.
Product More expensive to provide than all other options.
availabili
ty
Customer Related to whether shopping is viewed as a positive
experien or negative experience by customer.
ce
Time to market Highest among distribution options.
Order visibility Trivial for in-store orders. Difficult, but essential,
for online and phone orders.
Returnability Easier than other options because retail store
can provide a substitute.