Distribution Strategies

Chap 05

Copyright 2001

Centralized vs. Decentralized Control

Decentralized system: local optimization Centralized system: global optimization
using advanced IT, all facilities in a centralized system can have access to the same data to form partnerships to approach the advantages of a centralized system

Distribution Strategies
Direct Shipping
No DC needed Lead times reduced smaller trucks no risk pooling effects

Warehousing Cross-docking: warehouses rarely keep items for more than 10 to 15 hours

Cross Docking
In 1979, Kmart was the king of the retail industry with 1891 stores and average revenues per store of $7.25 million At that time Wal-Mart was a small niche retailer in the South with only 229 stores and average revenues about half of those Kmart stores. Ten years later, Wal-Mart transformed itself; it has the highest sales per square foot, inventory turnover and operating profit of any discount retailer. Today Wal-Mart is the largest and highest profit retailer in the world.

What accounts for Wal-Marts remarkable success

The starting point was a relentless focus on satisfying customer needs; Wal-Marts goal was simply to provide customers access to goods when and where they want them and to develop cost structures that enable competitive pricing The key to achieving this goal was to make the way the company replenished inventory the centerpiece of its strategy.

What accounts for Wal-Marts remarkable success?

This was obtained by using a logistics technique known as cross-docking. Here goods are continuously delivered to Wal-Marts warehouses where they are dispatched to stores without ever sitting in inventory. This strategy reduced Wal-Marts cost of sales significantly and made it possible to offer everyday low prices to their customers.

Characteristics of Cross-Docking:
Goods spend at most 48 hours in the warehouse, Avoids inventory and handling costs, Wal-Mart delivers about 85% of its goods through its warehouse system, compared to about 50% for Kmart, Stores trigger orders for products.

System Characteristics: (1/2)

Very difficult to manage Requires linking Wal-Marts distribution centers, suppliers and stores to guarantee that any order is processed and executed in a matter of hours. Wal-Mart operates a private satellitecommunications system that sends point-ofsale data to all its vendors allowing them to have a clear vision of sales at the stores

System Characteristics: (2/2)

Need a fast and responsive transportation system:

This allows them to ship goods from warehouses to stores in less than 48 hours replenish stores twice a week on average.

Wal-Mart has a dedicated fleet of 2000 truck that serve their 19 warehouses

Distribution Strategies
Strategy Attribute Risk Pooling Transportation Costs Holding Costs Demand Variability No Warehouse Costs Reduced Inbound Costs No Holding Costs Delayed Allocation Delayed Allocation Direct Shipment Cross Docking Inventory at Warehouses Take Advantage Reduced Inbound Costs

Transshipment
Definition: Shipment of items between different facilities at the same level in the supply chain to meet some immediate need. Most at the retail level What is the value of this? Risk pooling What tools are needed?
Communication transportation

What if the system is decentralized?

Central vs. Local Facilities

Safety Stock: risk pooling Overhead Economies of Scale Lead Time Service Transportation Costs

Pull Vs. Push Strategies

Push Strategies
Production decisions based on forecasts Manual purchase orders and invoices are employed Ordering decisions based on inventory & forecasts.

Push Strategies
Single retailer, single manufacturer.
Retailer observes customer demand, Retailer orders qt from manufacturer.
Orders

Manufacturer product

Retailer

External demand

Problems with Push Strategies:

Excess finished goods inventory Larger and more variable production batches Unacceptable service level Product obsolescence Inefficiency
- Excess capacity

- Low utilization of resources - High transportation cost

Pull Strategies
Single retailer, single manufacturer.
Retailer observes customer demand Retailer orders from manufacturer.
POS data

Manufacturer product

Retailer

External demand

Pull Strategies
Production is demand driven Faster information flow mechanisms are used Decrease in:
lead time inventory at the retailers and manufacturers variability in the system

Distribution facilities are transformed from storage points to coordinators of flow. But:
Harder to leverage economies of scale Doesnt work in all cases

Push and Pull Systems

To take advantage of both How can this be accomplished? Chap 8

Memo