426 W2 Discussion

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CHAPTER 4

Distribution and

Omni-Channel Network Design

Supply Chain Management: A Logistics Perspective (10e)

Coyle, Langley, Novack, and Gibson

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Discussion Outline

Drivers of supply chain network redesign

Process of comprehensive supply chain network design

Major locational determinants

Modeling approaches for supply chain network design

Omni-channel network design

Drivers of Supply Chain Network Redesign

Supply Chain Network Redesign

Changes in global trade patterns

Changes in customer service requirements – The emergence of omni-channel supply chains

Shifts in customer and/or supply market locations

Changes in corporate ownership/merger and acquisition activity

Competitive capabilities

Cost pressures

Corporate organizational change

Supply Chain Network Design Process

1. Define Process Steps

2. Perform Supply Chain Audit

3. Examine Network Alternatives

4. Facility Location Analysis

5. Network Decision-Making

6. Develop Implementation Plan

Location Selection Team

Continuous Improvement

Network Transformation Team Involved in All Steps

Source: Figure 4-1

Supply Chain Network Design Process Step 1: Define the Supply Chain Network Design Process

Form a supply chain network transformation team.

Establish the parameters and objectives of the network design or redesign process.

Evaluate the potential involvement of third-party suppliers of logistics services.

Image courtesy of DynamicCIO

Supply Chain Network Design Process Step 2: Perform a Supply Chain Audit

1. Fundamental Business Information

2. Logistics/Supply Chain System

3. Key Logistics/Supply Chain Activities

4. Measurement and Evaluation

5. Strategic Logistics/Supply Chain Issues

6. Logistics/Supply Chain Strategic Plan

Source: Figure 4-2

Supply Chain Network Design Process Step 3: Examine the Supply Chain Network Alternatives

Apply suitable quantitative models to the current logistics system and to the alternatives under consideration.

Identify preliminary supply chain network design solutions consistent with the key objectives identified during the audit phase.

Conduct “what-if” analysis to test the sensitivity of recommended network designs to changes in key variables.

Image courtesy of line-of-sight

Supply Chain Network Design Process Step 4: Conduct a Facility Location Analysis

Form a location selection team.

Qualitatively and quantitatively analyze the attributes of specific regions and locales.

Identify recommended specific sites for logistics facilities.

Supply Chain Network Design Process Step 5: Make Decisions Regarding Network and Facility Location

Evaluate the recommended network and specific sites for logistics facilities (Steps 3 and 4) for consistency with the design criteria identified in Step 1.

Image courtesy of decisionnel.info

Supply Chain Network Design Process Step 6: Develop an Implementation Plan

Develop a “blueprint for change” as a road map for moving from the current supply chain network to the desired new one.

Commit the resources necessary to assure a smooth, timely implementation, and the continuous improvement of the network decisions.

Major Locational Determinants

Broad Geographic and Site-Specific Locational Determinants

Transportation access

Truck

Air

Rail

Water

Inside/outside metropolitan area

Availability of workforce and needed skill sets

Land costs and taxes

Utilities

Global/National/ Regional Determinants

Site-Specific

Determinants

Labor climate

Transportation services and infrastructure

Proximity to markets and customers

Quality of life

Taxes and industrial development incentives

Supplier networks

Land costs and utilities

IT infrastructure

Company preference

Current Trends Governing Site Selection

Site Selection

Strategic positioning of inventories

(fast-moving, profitable items vs. slower-moving, less-profitable items)

Greater use of “Customer-direct” delivery from manufacturing

Growing use of and need for strategically located cross-docking facilities

Greater emphasis on access to major airports and/or ocean ports for import and export shipments

Greater use of providers of third-party-logistics services

Modeling Approaches for Supply Chain Network Design

A Network Design Model The Challenge of Supply Chain Complexity

A Network Design Model Objective and Need for Decision Support Tools

Answering network design questions today is virtually impossible without the help of very powerful decision support tools.

Today’s Objective

Expanded Scope & Complexity of Network Design Model

Procurement

Various Stages of Manufacturing

DCs

Transport Flows

Classic Objective

Finished Goods DCs

Types of Modeling Approaches

Modeling Approaches

Optimization Models

Designed to find the “best,” or optimum solution, while recognizing relevant constraints.

Simulation Models

Designed to develop a computer representation of supply chain network & observe changes as cost structures, constraints, and other factors are varied.

Heuristic Models

(e.g. grid technique)

Designed to reduce a problem to a manageable size and search automatically through various alternatives in an attempt to find a better solution.

Potential Supply Chain Modeling Pitfalls to Avoid

Short-term horizon

Too little or too much detail

Thinking in two dimensions

Using published costs

Inaccurate or incomplete costs

Fluctuating model inputs

Use of erroneous analytical techniques

Lack of appropriate robustness analysis

Omni-Channel Network Design

Omni-Channel Retailing Defined

“A direct to consumer (D2C) business model where all sales channels ranging from online, mobile, telephonic, mail order, self-service, and physical retail establishments are aligned and fulfillment processes integrated to provide consumers with a seamless shopping experience in alignment with the company’s brand proposition.”

Omni-channel strategy must align with the firm’s “go to market” strategy.

The fulfillment processes must be integrated regardless of order entry point.

“Ease of shopping” for the consumer is a priority regardless of where or how the order is placed.

Three Important Elements

Omni-Channel Network Design Marketing Channel vs. Logistics Channel

Source: Figure 4.7

Typical Retail Logistics and Marketing Channels

Logistics Channel

Marketing Channel

Supplier

Transport

Manufacturer

Transport

DCs/Fulfillment center

Transport

Retail store

Consumer

E-Procurement

National account sales

Wholesale/Distributor

Internet site

Retail customer

Omni-Channel Network Design Cost Consideration

Fixed Cost and Variable Cost Consideration:

A Rule of Thumb in Channel Design

“Assuming that the origin and destination remain the same, the more intermediaries used to deliver the product the higher the fixed cost and the lower the variable cost, and vice versa.”

Omni-Channel Network Design Customer Order Fulfillment Models

Integrated Fulfillment

Dedicated Fulfillment

Flow-Through Fulfillment

Pool Distribution

Store Fulfillment

Direct Store Delivery (DSD)

Omni-Channel Network Design Customer Fulfillment Models (continued)

Source: Figure 4-9

Integrated Fulfillment

Dedicated Fulfillment

Pool Distribution

Direct Store Delivery (DSD)

Store Fulfillment

Flow-Through Fulfillment

Retail DC

Fulfill-ment Center

Supplier DC

Retail Store

Retail DC

TL, LTL

TL, LTL, Parcel

Store

TL, LTL

Parcel

TL, LTL

Third Party

LTL

Delivery or Pick up

Store

Con-sumer

Store

Consumer

Omni-Channel Customer Fulfillment Models Integrated Fulfillment

Source: Figure 4-10

Integrated fulfillment means the retailer operates one distribution network to service both “bricks-and-mortar” (retail stores) and “clicks-and-mortar” (Internet sites) channels.

Advantages: Low start-up costs for retailers, Workforce efficiency

Disadvantages: Order profile changes, Unavailability of products in eaches, “Fast pick” or broken case operation requirements for unit pick (each pick)

Supplier Distribution Center

Picking

Ship truckload, LTL

Retailer Distribution Center

Picking

Pallet, Case, Each

Consumer

Ship Case

Retail Store

Ship truckload, LTL

Delivery

Pick-up

Consumer

Omni-Channel Customer Fulfillment Models Dedicated Fulfillment

Source: Figure 4-11

Dedicated fulfillment means the retailer operates two separate distribution networks to service “bricks-and-mortar” (retail stores) and “clicks-and-mortar” (Internet sites).

Advantages: Elimination of most of the disadvantages of integrated fulfillment

Disadvantages: Duplicate facilities and duplicate inventories

Supplier Distribution Center

Picking

Ship truckload, LTL

Retail Store DC

Picking

Pallet, Case, Each

Retail Internet DC

Picking

Each

Consumer

Ship truckload, LTL

Retail Store

Pick-up

Ship case

Delivery

Omni-Channel Customer Fulfillment Models Pool Distribution

Source: Figure 4-12

In pool distribution, small retailers use third party logistics companies, or pool distributors, for store delivery, allowing them to achieve efficiency of a truckload shipment for the line haul and the effectiveness of allowing stores to receive LTL orders on a regular schedule

Supplier Distribution Center

Picking

Ship TL, LTL

Retail Distribution Center

Picking

Pallet, Case, Each

Ship TL

Multiple LTL

Third Party DC

Mixing

Ship LTL

Consumer

Delivery

Pick-up

Delivery

Pick-up

Delivery

Pick-up

Delivery

Stores

Omni-Channel Customer Fulfillment Models Direct Store Delivery

Source: Figure 4-13

Direct store delivery involves a manufacturer delivering its product directly to a retailer’s stores, bypassing the retailer’s distribution network.

Advantages: Reduction of inventory in the distribution network

Disadvantages: Possible reduction of inventory visibility of the products to the retailers, Requirements of close collaboration and agreement between the manufacturer and retailer

Supplier Distribution Center

Picking

Ship TL

Supplier Required DC

Mixing

Multiple LTL

LTL

Stores

Consumer

Delivery

Pick-up

Delivery

Pick-up

Delivery

Pick-up

Omni-Channel Customer Fulfillment Models Store Fulfillment

Source: Figure 4-14

In store fulfillment model, the order is placed through the Internet site. The order is sent to the nearest retail store where it is picked and put aside for the customer to pick up or the store can arrange for delivery.

Advantages: Short lead time to the customer, Low start-up costs for the retailer, Returns handled through the retail store, Product available in consumer units

Disadvantages: Reduced control and consistency over order fill, Conflicts between store and Internet order inventories, Requirements of real-time visibility to in-store inventories, Requirements of stores’ space to store and stage products for pickups

Supplier Distribution Center

Picking

Ship TL

Retail DC

Picking

Pallet, Case, Each

Ship TL, LTL

Retail Store

Picking

Each

Consumer

Delivery

Pick-up

Omni-Channel Customer Fulfillment Models Flow-through Fulfillment

Source: Figure 4-15

In flow-through fulfillment, the product is picked and packed at the retailer’s distribution center and then sent to the store for customer pickup or delivery.

Advantages: Eliminates the inventory conflicts between store sales and Internet sales, No cost of the “last mile” transportation, Store-level inventory status not required, Returns handled through the retail store,

Disadvantages: Storage space at the store for pickup items, Longer fulfillment lead time

Supplier Distribution Center

Retail DC

Ship TL, LTL

Retail Store

Consumer

Delivery

Pick-up

Picking

Pallet, Case, Each

Picking

Each

Ship TL, LTL

Summary

The strategic importance of supply chain network design decision is growing with the increasing globalization of manufacturing, marketing, sourcing, and procurement.

A formal, structured process for network design or redesign is preferable to an informal, unstructured one.

Numerous factors may affect the design of a logistics network and the location of specific facilities within the context of the network.

Principal modeling approaches to gain insight into the topic of supply chain network design include optimization, simulation, and heuristic models.

In an omni-channel environment, many network models exist that can be used to service retail stores and Internet consumers, each of which has its advantages and disadvantages. Trade-offs must be taken into consideration when deciding which network model to use.