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Title: Distribution

Distribution Logistics Strategies
  • Henry C. Co
  • Technology and Operations Management,
  • California Polytechnic and State University

  • strategy
  • NOUN
  • Inflected forms pl. strategies
  • The science and art of using all the forces of a
    nation to execute approved plans as effectively
    as possible during peace or war The science and
    art of military command as applied to the overall
    planning and conduct of large-scale combat
  • A plan of action resulting from strategy or
    intended to accomplish a specific goal. See
    synonyms at plan.
  • The art or skill of using stratagems in endeavors
    such as politics and business.

American Heritage Dictionary of the English
Language Fourth Edition. 2000
  • Logistic costs in the U.S. are rising, from 910
    billion in 2002 to 936 billion in 2003.
  • Inventory costs account for a third of logistic
    costs. The ability to respond faster to changing
    customer needs and the flexibility to adjust
    manufacturing and delivery cycles as keys to
    success in this competitive environment.
  • Even industries with stable demand patterns spend
    millions of dollars each year coping with
    uncertainty in customer demand and operating
  • Uncertainty can lead to major supply chain
    inefficiencies, causing lost revenue, poor
    service, high inventory levels and unrealized

15th Annual State of Logistics Report (Council of
Logistics Management, 2004)
Five Areas of Focus
  • Facility Sizing/Space Requirements
  • Warehouse Management Systems
  • Storage Systems
  • Order Fulfillment Methodologies
  • Material Handling Requirements

Facility Sizing/Space Requirements
  • How big?
  • Industry standard practices
  • Companys uniqueness space requirements
  • Inventory profiles
  • SKU velocity
  • cube data

Warehouse Management Systems
  • Evolution of WMS
  • Initially a system to control movement and
    storage of materials within a warehouse
  • Role of WMS has expanded to including light
    manufacturing, transportation management, order
    management, and complete accounting systems.
  • WMS is evolving into a warehouse-focused ERP

Side Note MRP started as a system for planning
raw materials requirements in a manufacturing
environment. Soon MRP evolved into MRP II, adding
scheduling and capacity planning logic into the
system. Eventually, MRP II evolved into ERP,
incorporating MRP II functionality with full
financials and customer-vendor management
  • Functionality of WMS overlaps with
  • Enterprise Resource Planning, Distribution
    Requirements Planning, Transportation
  • Management Systems, Supply Chain Planning,
    Advanced Planning and Scheduling, and
  • Manufacturing Execution Systems.

Core WMS Functionality
  • To control the movement and storage of materials
    within an operation.
  • Picking
  • Replenishment
  • Put-away
  • The detailed setup and processing
  • Vary from one software vendor to another.
  • However the basic logic will use a combination of
    item, location, quantity, unit of measure, and
    order information to determine where to stock,
    where to pick, and in what sequence to perform
    these operations.

Storage Systems
  • Basic selective rack system
  • Complex multi- level pick module
  • Automated Storage and Retrieval System (AS/RS)

Order Fulfillment Methodologies
  • Cost-effective solution that provides the highest
    performance, scalability, and future growth
  • Fulfillment methods depends on specific order
  • Order profiles
  • Product velocity
  • Cube, and
  • Replenishment cycles

  • Order Fulfillment Methods
  • Pick and pass
  • Pick to belt
  • Bar code/RFID
  • Voice-directed pick
  • Dynamic light directed zone pick
  • Carousel, pallet
  • Carton flow pick

Material Handling Requirements
  • Seasonality
  • Creates inefficiencies
  • Capacity issues and bottlenecks based on those
    SKUs, orders, or other issues that create steep
    spikes in the companys daily throughput
  • A robust system design can handle the variability
    in the companys everyday order volume while
    providing the reserve capacity to manage the
    seasonal spikes.
  • Material handling requirements depend on key
    business and customer metrics
  • Order profiles
  • Market trends
  • Order drop rates
  • Daily peaks and valleys of the order fulfillment
    and replenishment processes.
  • Other business factors.

Contemporary Issues and Practices
Central vs. Distributed Control
Distribution Control
  • Centralized
  • Key decisions are made by a single entity for the
    entire supply network
  • Cost/service goals
  • Can lead to global optimization
  • Must have access to common data for this to work
  • Decentralized
  • Each facility in the system makes its own
  • Only considers its individual goals
  • Will lead to local optimization
  • Increases the bullwhip effect

National vs. Regional Distribution Facilities
Distribution Strategies, Brian J. Gibson,
Auburn Logistics Foundation
National/Central Distribution
  • Advantages
  • Lower safety stock levels
  • Lower overhead costs
  • Economies of scale
  • Disadvantages
  • Longer lead times
  • Higher delivery costs
  • May become too large to manage effectively

Regional/Local Distribution
  • Advantages
  • Shorter lead times
  • Better customer knowledge and service
  • Lower delivery costs
  • Disadvantages
  • No risk pooling opportunity higher safety stock
  • Higher overhead costs more staff required
  • Limited economies of scale

Warehouse Territory
  • This part taken from Ronald H. Ballou, Business
    Logistics Management, Prentice Hall, 1992

The Landed Cost Method
Warehouse And Transportation Rates
Between Warehouse Locations
Warehouse Territory Boundary
(No Transcript)
Push vs. Pull
  • APICS conducted a highly successful MRP campaign
    in the late 60s.
  • APICS American Production and Inventory Control
  • MRP Materials Requirements Planning
  • MRP plans for all component parts and raw
    materials that are required to produce all the
    products in the master production schedule (MPS).
  • Component parts and raw materials are push to
    the workstations, in time for assembly.

  • Push applicable where setup cost is high, or
    when demand seasonal/lumpy.
  • Problem
  • Whenever the MPS is revised (often!), component
    parts and raw materials ordered in anticipate of
    their needs will not be consumed as planned.
  • Bullwhip effect changes in MPS create changed
    requirements in feeder operations that are
    usually amplified because of lot size rules,
    set-ups, queues, and waiting time. A 10 changed
    in MPS could result in a 100 change in raw
    material usages!

  • JIT initiates production to replenish inventory
  • JIT Just-In-Time (Toyota, 1970s)
  • Production at one stage is linked immediately to
    consumption at next stage of the supply chain.
  • e.g., Today, ,the final assembly workstation just
    completed the assembly of 200 chairs.
  • A total of 200 x 4 800 legs have been withdrawn
    from inventory.
  • The workstation fabricating the legs will produce
    exactly 800 legs tomorrow.
  • Thus, a workstation pulls output from the
    preceding station as needed, and the station
    produces to replenish inventory.
  • Obviously, for the Pull system to work, the setup
    cost must be low, and demand stable.

  • In a Pull system, an order to replenish an item
    is placed as soon as it is used.
  • The obvious assumption is that future demand
    equals past demand.
  • Otherwise, the wrong quantity will be ordered at
    the wrong time.
  • Pull system works in Toyota because of the unique
    way Toyota structure its master production
  • Master production schedule in MRP seeks economies
    and efficiencies through economical lot sizes.
  • In JIT production, the MPS is prepared with the
    goal of scheduling every product every day.

Distribution Strategy Push
  • Traditional
  • Supply chain activity is based on long-term
  • When to use
  • Products have long lead time, short shelf life,
    or seasonal demand
  • Challenges
  • Being responsive, managing inventory, combating
    product obsolescence, reducing bullwhip effect

Distribution Strategy - Pull
  • Contemporary
  • Supply chain activity is based on customer demand
  • When to use
  • Products/materials with stable demand patterns,
    short lead times, consistent quality
  • Challenges
  • Supplier quality and consistency, information
    sharing, order cycle time, reducing costs and
    inventory rather than shifting them

Ship Direct, Cross-Docking, and Other Strategies
Distribution Strategies
Direct Shipment
Direct Shipping
  • Eliminates need for intermediate facilities
    (e.g., warehouses and distribution centers).
  • Dell computer orders for desktop computers will
    have the monitors picked up directly from Sony,
    and delivered to the customer.
  • Warehouse club stores, grocery stores, and mass
    merchandisers are adopting the DSD (direct store
    delivery) strategy where manufacturer delivers
    goods directly to the retail outlet or the
  • Perishable items, high volume goods, high bulk
    items, and specialty products are primary
    candidates for direct shipping.

Benefits of Directing Shipping
  • Less inventory in the supply chain
  • Less handling and opportunity for product damage
  • Faster production to store shelf time
  • DSD categories are among the most profitable in
    the store
  • Higher productivity, sales, service, satisfaction
  • Improved accuracy invoices match receiving
    records, correct products enter the store

Save Mart Supermarkets report saving 500,000 a
year in accounting and bookkeeping costs
after implementing DSD and a related software
package. Adding evening deliveries would cost
retailers in a typical 100-store chain 97,000
per year but would save suppliers 164,500 a year
by enabling suppliers to cut back on trucks and
reduce waiting time. (Gibson, 2003)
Direct Shipping Challenge
  • Greater hassle for store personnel
  • More deliveries, paperwork, activity
  • No risk pooling benefit
  • No safety stock in the event of a supplier
  • Transportation costs can be higher
  • Manufacturers may incur extra handling costs by
    picking/shipping to individual stores
  • Not well suited to high variation events like
    holidays and promotions
  • Few companies have installed DSD receiving systems

Direct Shipping Challenge
Five to seven years ago, the apparel and
soft-goods industry tried POS-driven
replenishment. But companies found it difficult
to maintain inventory at the accuracy level
required. If youre off by one or two cases at
the warehouse, it doesnt affect you much. In a
store, if you are off by one or two cases, youre
out of stock. Does the store manager in every
store spend a minimum of five minutes each day
observing the back room receiving operations? I
bet he doesnt, and that means youre
not achieving an acceptable level of control at
the back door.
  • Cross-docking means to take a finished good from
    the manufacturing plant and deliver it directly
    to the customer with little or no handling in
  • Cross-docking reduces handling and storage of
    inventory, the step of filling a warehouse with
    inventory before shipping it out is virtually
    eliminated. Simply, it means receiving goods at
    one door and shipping out through the other door
    almost immediately without putting them in

  • Imagine taking a finished good from the
    manufacturing plant, deliver it to the front door
    of a distributor, and almost immediately, take
    the item out the back door and load it to a truck
    headed for the customer.
  • Cross docking shift the focus from "supply chain"
    to "demand chain" by receiving goods at one door
    and shipping out through the other door almost
    immediately without putting them in storage.
  • For example stock coming into cross docking
    center has already been pre-allocated against a
    replenishment order generated by a retailer in
    the supply chain.

Cross-Docking Example
Freight is received, checked for accuracy
prepared for release to stores (bar coded
labels are applied to cartons).
Cartons travel thru facility on conveyor system
to reduce labor and speed transfer of goods.
Bar code reader identifies products and diverts
cartons down appropriate loading line.
Cartons are loaded in trailer and shipped when
trailer is full
  • Cross docking reduces cost
  • Increases inventory turns by speeding the flow of
    products from the supplier to the store.
  • Cross docking, coupled with consolidating
    warehousing, avoids LTL deliveries.
  • Most notably, it eliminates the two most
    expensive distribution operations cost of
    handling and storing inventory.

Cross Docking Cost Advantage
Conventional process
Cross-dock process
0.85 0.58 0.97 0.91 0.89
0.85 0.97 0.65 0.89
3.36 per ton
4.20 per ton
  • Supports JIT manufacturing.
  • Goods shipped from suppliers are captured at
    cross dock, sorted by plant location and
    schedule, and delivered in small batches directly
    to the shop floor.
  • Today, cross docking is the bailiwick of the mass
  • Depending on the company, mass merchandisers
    cross-dock anywhere from 40 percent to 90 percent
    of the goods between the distribution center
    receiving doors and the retail store floor.
  • Mervyns, for example, cross-docks more than 30
    of its product, and Wal-Mart operates 19
    cross-docking facilities to support Sams Club
  • Other than mass merchandisers, grocery companies,
    LTL trucking companies and air cargo carriers are
    the leading cross-dock users.

Cross-Docking Challenges
  • Cross-docking requires supply chain
  • Supply chain synchronization relies on strong IT
    capabilities (ASN via EDI, Bar codes on cartons,
    etc.) and real-time information sharing.
  • Works best if trading partners engage in
    collaborative planning, forecasting, and
  • Cross-docking may necessitate
  • New facility layout,
  • bar code scanning equipment, and
  • WMS (500,000 investment) to maintaining product
    visibility as it moves through the system.
  • To support JIT, product availability, accuracy,
    and quality are critical since goods are shipped
    directly from supplier to the shop floor.

Cross-Docking Challenges
one of the principal barricades has been that
cross-docking requires a lot of supply chain
synchronization, which, in turn, relies on better
information and planning. As more companies, even
industries, move toward a "pull" form of
replenishment rather than the "push" form we're
used to, cross-docking will make more sense.
Other Distribution Strategies
  • Pool Distribution
  • Transshipment
  • Milk-Run Systems

Pool Distribution
  • Consolidating merchandise shipments at the origin
    into loads destined for defined regions
  • Transporting the load to a central point in the
    region and making local deliveries from the
    central point.

Consolidation Warehouse
  • Consolidation warehousing is a form of
    warehousing that pulls together small shipments
    from a number of sources (often plants) in the
    same geographical area and combines them into
    larger, more economical, shipping loads intended
    for the same area.
  • Consolidation warehouses are typically
    constructed at a strategic location between
    manufacturers and customers. The goal is to
    maximize transportation utilization and minimize
  • Benefits
  • Reduced transportation costs, better service
  • Requires
  • Multiple delivery points within a region
  • Significant, consistent volume entering the region

A motor vehicle assembly plant in San Diego uses
pull system to replenish inventory from three
suppliers in the mid-west.
From Ronald H. Ballou, Business Logistics
Management, Prentice Hall, 1992
  • San Diego receives daily shipments of
  • 30,000 lbs of axle from Detroit,
  • 35,000 lbs of transmissions from Cleveland, and
  • 38,000 lbs of engines from Pittsburgh.
  • Two alternative approaches
  • Suppliers to ship directly to San Diego, or
  • Use consolidation warehouse in Cleveland

Direct Shipping Cost
  • Ship direct long-haul at less-than truckload
    (LTL) quantities
  • 4.80/CWT from Detroit,
  • 5.00/CWT from Cleveland, and
  • 5.30/CWT, from Pittsburgh.

Consolidation Warehouse
  • Lease warehouse in Cleveland to consolidate
    shipments from suppliers
  • LTL shipping costs from suppliers to the
    Cleveland warehouse
  • 0.50/CWT, from Detroit supplier,
  • 0.20/CWT, from Cleveland supplier, and
  • 0.40/CWT, from Pittsburgh supplier.
  • Cleveland warehouse charges are estimated to be
    110, 120, and 125 per day for shipments from
    Detroit, Cleveland, and Pittsburgh, respectively.
  • The shipments are combined, and shipped by rail
    to San Diego at 2.50/CWT.

  • The spreadsheet below shows a total cost of
    3,302 for using the Cleveland warehouse.

  • Consolidating warehouses, couple with cross
    docking (next section) supports just-in-time
    (JIT) manufacturing.
  • For example,
  • The NUMMI plant in California uses cross-docks in
    Chicago and Memphis to collect, consolidate, and
    sort freight from multiple vendors into
    containers that are shipped via rail to the
  • Suppliers send parts in bulk to GM cross-dock in
    Memphis. Parts are sorted for delivery to 15
    different production facilities in the Midwest.

  • Transshipment Sharing of inventory between
    facilities at same level in the supply chain.

  • Opportunity
  • Better customer service, fewer stockouts
  • Requires
  • Inventory visibility
  • Cooperation
  • Shipping and delivery processes

  • Many clothing and footwear retailers, such as
    Macy's and Footlocker, request articles from
    other retail locations when a specific product
    (because of size or design) is unavailable.
  • Consumer electronic stores have also employed
    such a practice with cameras, video recorders and
  • Typically retailers will hold high levels of
    inventory in order to avoid stock-outs, with the
    flexibility that transshipments bring, retailers
    are able to meet uncertain demand with lower
    inventory levels.

Milk-Run Systems
Source of Schematic http//www.engr.uky.edu/me/ia
  • Drivers pick up goods from suppliers along a
    route and delivering the entire load to a single
  • Benefits Supports JIT systems, eliminates
    distribution centers.
  • Requires
  • Consistent schedule, high volume
  • Dedicated carrier or private fleet.

Source http//www.engr.uky.edu/me/iaes/group_pres
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