G5

Distribution Network Design and Facility Decisions

[Chopra & Meindl] CH. 4-6

Prof. Anthony Han

Prepared for GMBA Program, School of Management National Chiao Tung University

Distribution Network Design (Ch 4)

Design Criterion: Customer Needs vs. Cost
Cost Factors:
Inventories Transportation Facilities Information

Customer Service Factors:

Response time Product Availability Product Variety Order Visibility Returnability Customer Experience
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Design Options for a Distribution Network

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 or Distributor Storage with Consumer Pickup 6. Retail Storage with Consumer Pickup
Design Factor Storage Location & Customer Pickup or not

Manufacturer Storage with Direct Shipping (Fig. 4.6) p.97

Also called Drop Shipping STOCK
Manufacturer

Retailer

Customers

Product Flow Information Flow

4

Manufacturer Storage with Direct ShippingDrop Shipping

Examples: Dell, eBags, Nordstorm, etc. Advantages:
Centralized inventory at manufacturers High level of product availability

Disadvantages:
High (Less-than-Truck, LTL) transportation costs Long shipping time

Good for products of:

High variation High value Slow moving
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In-Transit Merge Network (Fig. 4.7)

Stock

p.100

Factories

Retailer

In-Transit Merge by Carrier

Customers

Product Flow Information Flow

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In-Transit Merge Network

Examples: Dell, Gateway, Sony etc. Similar to drop-shipping:
High level of product availability Transportation costs are lower Facility/Processing costs are higher Better customization opportunities

Good for:
Medium demand High value items Medium-demand products
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Distributor Storage with Carrier Delivery (Fig. 4.8) p.102

Factories

FG Stock

Warehouse Storage by Distributor/Retailer (Package Carrier Delivery) Customers Product Flow Information Flow
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Distributor Storage with Carrier Delivery

Examples: W.W. Gringer, McMaster Carr, etc. Two levels inventory:
Distributors carry inventory at warehouses or DCs Retailers carry inventory at retail stores

Performance characteristics see Table 4.3 (p.103) Observations:

Slow moving items => Inventory storage upstream More faster moving => Storage moves more downstream

Distributor Storage with Last Mile Delivery (Home Delivery)

(Fig. 4.9), p.104 Factories

FG Stock

Distributor/Retailer Warehouse Milk-Run Delivery by Distributor/Retailer Customers Product Flow Information Flow
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Manufacturer or Distributor Storage with Customer Pickup (Fig. 4.10) p.106

Factories

FG Stock
Retailer

FG Stock
Cross Dock DC

Pickup Sites

Customers Mostly for B2B, company customers Customer Flow Product Flow Information Flow

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Retail Storage with Customer Pickup (Individual Customers)

Factories

Retailer

Cross Dock DC

FG Stock
Retail Stores Retail Stores Retail Stores Pickup Sites

Customers Customer Flow Product Flow Information Flow

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Factors Influencing Distribution Network Design

Elements of customer service influenced by network structure: Response time Product variety Product availability Customer experience Order visibility Returnability
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Facility Decisions (Ch

5)

Distribution Network Facility Decisions

Type (Warehouse, DC, Factory, X-Dock) Number, Location, Capacity Allocation

Trade-offs
The more DCs Higher facility/equipment costs Higher personnel costs Lower transportation costs higher safety inventory costs Better customer service

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Costs and Number of Facilities

Inventory Costs Facility costs

Transportation

Number of facilities
5-15

Cost Build-up as a function of facilities

Total Costs

Cost of Operations

Percent Service Level Within Promised Time

Facilities Inventory Transportation Labor

Number of Facilities
5-16

Where inventory needs to be for a one week order response time - typical results --> 1 DC

Customer DC

2004 Prentice-Hall, Inc.

5-17

1-17

Where inventory needs to be for a 5 day order response time - typical results --> 2 DCs

Customer DC

5-18 2004 Prentice-Hall, Inc. 1-18

Where inventory needs to be for a 3 day order response time - typical results --> 5 DCs

Customer DC

2004 Prentice-Hall, Inc.

5-19

1-19

Where inventory needs to be for a next day order response time - typical results --> 13 DCs

Customer DC

2004 Prentice-Hall, Inc.

5-20

1-20

Facility Decisions in Practice (I)

Life Span of Different Facilities
Production Plants last for decades; Warehouses and Offices may change in a year
(An insurance company moved to reduce costs but then found hard to sell the facility in suburban area)

Cultural Implications
Ford Lincoln Mark VIII though shared platform with Mercury Cougar still locate in Wixom plant with other luxury cars to show consistent quality

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Facility Decisions in Practice (II)

Dont Ignore Quality of Life Issues
QOL has great impact on performance of workforce; Cost-saving is not all

Tax/Tariff Incentives
Has Big Influence in Global Setting Ireland attracted hi-tech firms to build European facilities there Local governments good offer made Toyota, BMW, Mercedes locate plants in some states of USA
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A Framework for Global Site Location

Competitive STRATEGY GLOBAL COMPETITION INTERNAL CONSTRAINTS Capital, growth strategy, existing network PRODUCTION TECHNOLOGIES Cost, Scale/Scope impact, support required, flexibility COMPETITIVE ENVIRONMENT

PHASE I Supply Chain Strategy

TARIFFS AND TAX INCENTIVES

PHASE II Regional Facility Configuration

REGIONAL DEMAND Size, growth, homogeneity, local specifications POLITICAL, EXCHANGE RATE AND DEMAND RISK

PHASE III Desirable Sites

PRODUCTION METHODS Skill needs, response time FACTOR COSTS Labor, materials, site specific

AVAILABLE INFRASTRUCTURE

PHASE IV Location Choices

LOGISTICS COSTS Transport, inventory, coordination

[Chopra & Meindl, 2007] CH 5.2, p.138

5-23

Location/Allocation Model
yi = 1 if plant is located at site i, 0 otherwise xij = Quantity shipped from plant site i to customer j fi: Fixed cost of facility i cij: Per unit transportation cost from i to j Ki: Capacity of facility i
Mixed Integer Programing Model (MIP) [Chopra & Meidl, 2007]
CH 5.4, pp.141-145 Excel Example
n n i i m ij ij

Min
i =1

f y + c x
i =1 j =1

s.t.
n

x = D
ij i =1 n ij j =1

, for every j

x K y , for every i
i i

y {0,1}
i
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Distribution Operations Decisions

Fleet Planning/Management
Fleet Size and Fleet Mix Own Fleet or Outsourcing

Vehicle Routing/Scheduling
TSP, VRP, VRPTW, PVRP, .

Crew Scheduling / Dispatching Hard problems need Decision Support

(See a DSS prototype system developed in 1995 )

See research results of our Network Research Lab on my website

reduce cost and improve service reliability

Make-or-Buy:
You dont have to do it all by yourself!
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Network Design under Uncertainty

(CH 6) Use Decision Tree Analysis
Techniques usually taught in OR Courses

In practice:
Keep alert of change of business/economic environment Build up good customer relationship Build strategic alliances with LSP partners

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