Supply Chain

Management,
11e
Chapter 4: Distribution and Omni-
Channel Network Design

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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

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 Drivers of Supply Chain Network Redesign

1. Changes in global trade patterns

2. Changes in customer service requirements – The emergence of omni-channel
supply chains
3. Shifts in customer and/or supply market locations
4. Changes in corporate ownership/merger and acquisition activity
5. Cost pressures
6. Competitive capabilities
7. Corporate organizational change
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Macro Perspective on Logistics
U.S. Business Logistics Costs

Source Figure 4.1: C. John Langley Jr., Ph.D., Penn State University. Used with permission.
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 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.

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 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

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 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.

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 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.

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 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.

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 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.

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 Major Locational
Determinants

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 Broad Geographic and Site-Specific
Locational Determinants
Global/National/ Regional Determinants Site-Specific Determinants

• Labor climate • Transportation access

• Transportation services and infrastructure − Truck
− Air
• Proximity to markets and customers
− Rail
• Quality of life
− Water
• Taxes and industrial development incentives
• Inside/outside metropolitan area
• Supplier networks
• Availability of workforce and needed skill sets
• Land costs and utilities
• Land costs and taxes
• IT infrastructure
• Utilities
• Company preference

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 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

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 Modeling Approaches for
Supply Chain Network Design

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 A Network Design Model
The Challenge of Supply Chain Complexity

Source Figure 4.4: SAILS: Strategic Analysis of Integrated Logistics Systems

(Manassas, VA: Insight, Inc.): Reproduced by permission.
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 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.

Classic Objective Today’s Objective

• Finished goods DCs • Procurement
• Expanded scope & • Various stages of manufacturing
complexity of network
• DCs
design model
• Transport flows

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 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.

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 Potential Supply Chain Modeling
Pitfalls to Avoid
• Inaccurate or incomplete data
• Level of detail
• Sensitivity analysis
• Linearity of transportation costs
• Geographic concerns
• Time horizon
• Use of appropriate analytical techniques
• “Fluctuating” model inputs

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 Omni-Channel
Network Design

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 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.”

Three Important Elements

• 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.

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 Omni-Channel Network Design
Marketing Channel vs. Logistics Channel

Source Figure 4.7: Robert A. Novack, Ph.D. Used with permission.

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 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.”

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 Omni-Channel Network Design (1 of 2)
Customer Order Fulfillment Models
• Integrated Fulfillment
• Store Fulfillment
• Flow-Through Fulfillment
• Direct Store Delivery (DSD)
• Pool Distribution
• Dedicated Fulfillment

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Omni-Channel Network Design (2 of 2)
Customer Order Fulfillment Models

Source Figure 4.9: Robert A. Novack, Ph.D. Used with permission.

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 Omni-Channel Customer Fulfillment Models
Integrated Fulfillment

Source Figure 4.10: Robert A. Novack, Ph.D. Used with

permission.
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)
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 Omni-Channel Customer Fulfillment Models
Dedicated Fulfillment

Source Figure 4.11: Robert A. Novack, Ph.D. Used with

permission.
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
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Omni-Channel Customer Fulfillment Models
Pool Distribution

Source Figure 4.12: Robert A. Novack, Ph.D. Used with

permission.
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
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 Omni-Channel Customer Fulfillment Models
Direct Store Delivery

Source Figure 4.13: Robert A. Novack, Ph.D. Used with

permission.
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
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 Omni-Channel Customer Fulfillment Models
Store Fulfillment

Source Figure 4.14: Robert A. Novack, Ph.D.

Used with permission.
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

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 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.
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