Chap. 4 - Industrial Distribution Networks Flashcards
What is the role of distribution in the supply chain?
The roles of distribution in the supply chain are:
- Drives profitability by directly affecting supply chain cost and the customer experience
- The choice of distribution network can achieve supply chain objectives from low cost to high responsiveness
- Nowadays, the distribution as an important service part of industrial and consumer products
What are the important objectives in balancing the cost-service trade-off in a distribution channel?
Important objectives in balancing the cost-service trade-off by the design of a distribution channel are:
- Increasing product availability in the right buying environment for customers
- To enhance the prospects of sales being made: product should be visible and attractively displayed
- To achieve cooperation with regard to any relevant distribution factors (minimum order sizes, delivery access etc.)
- To achieve a given level of service → monitoring of SLA between the involved parties
- To minimize logistics and total costs
- To achieve fast and accurate feedback about cost and service development
What is the difference between a “long” vs. a “short” distribution channel?
A “long” distribution channel is characterized by a high number of involved intermediaries resp. links in the distribution channel in fulfilling the distribution tasks. This could be warehouses, transshipment points or other facilities.
As “short” distribution channel is characterized by the opposite profile → low number of intermediaries resp. links in the distribution channel.
What are important characteristics in the design of a successful distribution channel?
Important channel characteristics are:
Market Characteristics:
- Size, spread and density of customer base
- Geographically wide-spread markets need longer channels with more intermediate links
- Market with few buyers can be served by short channels
Product Characteristics:
- Value to Weight ratio: high-value items should be sold directly via short channels (costs, security)
- Complexity of products requires direct selling
- ”Age” of product: New products are better distributed by intermediaries
- Time-sensitivity: accepted channel lead times
Competitive Characteristics:
- Which service levels are provided by competitors?
- Which distribution channel guarantees a USP?
Which factors have an important influence on the customer service expectations which are offered by a distribution channel design?
Factors which are important that the customer meets are met = customer service are:
- 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)
- The customer experience (Ease of placing and receiving orders)
- Order visibility (Ability of customers to track their orders)
- Returnability (Ease of returning unsatisfactory merchandise)
What are the important cost factors in meeting the customer needs (= supply chain costs?
Important cost factors in meeting the needs of the customer are:
- Inventory (All raw materials, WIP, and finished goods)
- Transportation (Moving inventory from point to point)
- Facility & handling (Locations where the product is stored, assembled, or fabricated)
- Information (Data and analysis of all drivers in a supply chain)
Why are transportation costs first decreasing with the number of facilities in a distribution channel and increasing again, when the number reached a channel-specific number?
With an increasing number of facilities in a distribution channel the chance increases, that the capacity utilization of transport vehicles between storing nodes can be maximized (centralization effect of inventory → possibility of FTL).
From a specific number of facilities on, the transportation costs are increasing again, because the transport demand for a specific location is lower than the capacity optimum of the transport vehicle for one transport (LTL or lower).
What are the cost-related characteristics of a distribution channel type: “Manufacturing storage with direct shipping” (Drop Shipping)?
Give product examples!
In dropshipping products are shipped directly to the consumer from the manufacturer; the retailer acts an information collector:
- Passes orders to the manufacturers
- The retailer does not hold product inventory
- *Qualified for dropshipping** are products with
- large shipment volumes per customer (FTL) - like in the construction industry
- the need for additional service activities at the customer (e.g. installation or maintenance)
Cost-characteristics:
- Inventory costs: low costs because of possible aggregation/centralization → risk pooling!
- Trsp. costs: Higher, because of increased distance and disaggregated shipping
- Facility costs: lower costs because of aggregation; some savings on handling cost at the manufacturer
How would you characterize the distribution channel, which is called the “Dell Business Model”?
What is the biggest cost-advantage of such a distribution channel structure in comparison to dropshipping?
The Dell Business Model is a production process that is based on a “Built-to-Order” philosophy. The trigger of the assembly and distribution process is a customer-specific online-order with the storage of components at the manufacturer (tied-up capital!).
The different parts of the customer order are then “merged” in so-called “merge-centers” through the distribution process into one shipment. The “merge-centers” are transshipment points with only small amounts of the required products for buffering.
The biggest advantage in comparison to dropshipping is the possibility to consolidate the inbound-transports to the merge centers. This consolidation reduces the transportation costs for the entire distribution channel and offers the possibility to ship a multi-component order in one shipment to the customer.
A reference for the distribution channel type “Distributor storage with carrier delivery” is Amazon.
What is the general cost-service trade-off for Amazon? What are the logistics challenges regarding the cost-drivers in such a distribution channel?
Cost-Service Trade-off: Amazon has to handle and manage a growing number of heterogeneous products with increasing service needs while at the same time keeping the costs low.
The cost drivers are:
- increasing inventory-costs for larger and larger assortments
- increasing transportation-costs because of eCommerce speed with dependency on available CEP-providers
- increasing facility-costs because of expansive distribution centers (heterogenous product assortment)
Which kind of distribution channel type is the business model of “XXL-Lutz” - a wholesaler for low- to mid-priced furniture? Why are transportation costs higher than for a distributor like Amazon?
The distribution channel type of XXL-Lutz is “Distributor storage with last-mile delivery”.
In comparison to Amazon which uses CEP providers for the last mile, XXL-Lutz uses its own truck fleet working in daily tours. This is more expansive because XXL-Lutz cannot optimize the vehicle capacity resp. gain Economies of Scale and Distance than a CEP provider with its own transport network and internal consolidation effects.
Why are the transportation costs in a distribution channel with “Retail storage with customer pick-up” lower than in all other distribution channel types?
The “Retail storage with customer pick-up” distribution channel type tries to maximize the product availability at POS. This is realized by a two-echelon distribution channel with distribution warehouses (DC) and retail stores. The retail stores (like supermarkets, discounts) are in close proximity to the final consumer.
If the network configuration (number, location, and function of DCs and stores) is done well, the transport chain from the manufacturer via DC and retail store is able to realize high degrees of transport consolidation between all nodes of the network (FTL for products with a low value/weight-ratio!).
Why would you prefer the “Manufacturer storage with direct shipping” as a distribution channel type for products with a high product variety and a high product-value?
High product value is driving the tied-up capital costs; while high product variety is driving the inventory costs (assortment which can be offered).
To reduce the tied-up capital costs a consolidated demand (pattern) in a few storage-locations should be preferred. The best solution is to keep the entire inventory stock very close to the production and eliminate all intermediaries because in such a case the “risk-pooling” effect for the entire SC is the highest.
The dropshipping channel type allows such a combination of a large assortment and high-value products.
What are the important components of distribution network design? What are the key managerial questions you have to answer for each of the components?
-
Number of echelons
→ How many echelons are necessary to keep the service promise? -
Number/function of network nodes
→ How many nodes are necessary? What are the functions of the different notes? Where is the OPP? -
Space allocation of nodes (area selection)
→ Where is the optimal regional location of the network nodes regarding the minimal transport costs? -
Definition of service areas & tour planning
→ Which regional service area is responsible for which customer?; What is the right vehicle and delivery sequence for a dedicated tour? -
Choice of transport mode
→ What is the appropriate transportation mode for the transport task? -
Choice of the best supply channel
→ What ist the best supply channel for the specific customer order? -
Depth of added value (Make-or-Buy-Decision)
→ What is the optimal depth of added value in fulfilling the related transport for the customer order?
How would you characterize the distribution of an industrial machine vs. an FMCG regarding the market demand, the variety of products, the value of product per kg and the response time?
- Market demand: low for the (specific customized) industrial machine; high for the FMCG products
- Variety of products: low to middle for an industrial machine; high for the large assortments of FMCGs
- Value of product/kg: high for an expansive, specific customized industrial machine; low for FMCGs produced in mass production
- Response time: low for an order-specific transportation fo an industrial machine; low for cheap - mid-prized FMCGs
How would you compare a decentralized vs. a centralized distribution system regarding (reason your answers briefly!):
- Forecast accuracy?
- Fill rate?
- Delivery time?
- Cut-off-time?
- Turnover-rate
- Transportation costs?
- Handling costs?
- Planning and steering?
- Pooling effects?
- Forecast accuracy? → a centralized NW has risk pooling effects which make forecasting easier because of the consolidated demand in one spot
- Fill rate? → in a centralized NW the chance is higher that products are available in the reduced number of inventory locations
- Delivery time? → centralized NWs have longer distances to the final consumer because of a fewer number of intermediaries than decentralized NW
- Cut-off-time? → because of the longer transport distances, the cut-off time must be earlier in centralized NW than in decentralized NW structures
- Turnover-rate? → risk pooling effects in centralized NW
- Transportation costs? → higher in centralized NW because of lower consolidation effects in transport
- Handling costs? → minimal in centralized NW because of “one-touch”-handling in centralized NW (loading and unloading; point-to-point)
- Planning and steering? → Very simple in centralized NW because of a high concentration of inventory stock in a few storage locations
- Pooling effects? → supported in a centralized NW, because of a reduced number of storage points (risk pooling!)
