Distribution Channel Strategies: Center For Transportation & Logistics

Distribution
Channel Strategies
MIT Center for

Transportation & Logistics ctl.mit.edu
We know what a supply chain is . . .
Two or more parties linked by a flow of resources – typically material,
information, and money – that ultimately fulfill a customer request.
Information (order)
Information (status)
Physical (delivery)
Financial (payment)
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Transportation & Logistics 2
. . . and that they involve multiple parties . . .
. . . with complex and non-linear relationships . . .
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. . . and that they can take many different forms.
Customer
Rubber
Mfg Tire Retailer
Supplier Hardware
Supplier
Supplier
Gear
Supplier
Wholesaler
Customer
Pedal
Supplier
Supplier Bicycle
Retailer
MFG.
Casting
Smelter
Plant
Wholesaler Customer
Frame
Supplier
Retailer
Pigment
Supplier
Paint
Supplier Retailer Customer
Chemical
Mfg
Now lets focus on the Distribution Channel Strategies

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Distribution Channel
The path by which all goods and services travel from the original
vendor to the end consumer and the pathway that payments make
from the end consumer to the original vendor.
Four Types of Players:

Manufacturer Makes products
Traditional middleman.
Purchases products in large
Wholesaler quantities, consolidates,
/Distributor assembles, and resells to
retailers & others.
Retailer Sells goods directly to consumer
Consumer Person who buys the product
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Transportation & Logistics
Three Classic Channel Types
Wholesaler Channel
Manufacturer Wholesaler Retailer Consumer
Direct to Retailer
Manufacturer Retailer Consumer
Direct to Consumer
Manufacturer Consumer
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Agenda for the Lesson
1. Distribution Channel Strategies
2. Omni-Channel Distribution
3. Reverse Supply Chain
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Distribution Design Options
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Distribution Designs - Traditional
Traditional Multi-Tiered Distribution
mfg 1 mfg 2 Product Flow
1. Retailer places orders to each manufacturer,
2. Product flows from manufacturer to retail DCs,
3. Retail DCs receive product from multiple vendors,
4. DCs send full TLs of mixed goods to stores, and
5. Consumers/Customers view, select, receive, and pay for
goods at store.
Pros/Cons
• Flow leverages retailer economies of scale but with lots of
DC DC handling
• On the inbound, DCs need to be able to justify full loads from
vendors
• On the outbound, DCs are able to mix product from multiple
sources
• High level of inventory stored at retail locations
• Lower transportation costs due to scale economies
• Good for fast moving items
Manufacturer • Shorter transit times from vendors to stores
Retail DC
Retail Store
Consumer
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Distribution Designs – Mixing Centers
Mixing Centers / Hubs
Product Flow
mfg 1 mfg 2 1. Retailer places orders to each manufacturer,
2. Product flows from manufacturer to Mixing Center,
3. No (or very little) inventory is held at the Mixing Centers –
In-transit Merge,
4. Retail DCs receive full TL of goods from multiple
Mix manufacturers from the Mixing Center,
Center 5. DCs send full TLs of mixed goods to stores, and
goods at store.
DC DC Pros/Cons
• Flow leverages retailer economies of scale with lots of
handling
• On both IB and OB, DCs are able to mix product from multiple
sources
• Good for slower moving items
Manufacturer • Longer transit times from vendors to stores
Retail DC
Retail Store
Consumer
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Distribution Designs – Distributors
Distributors
mfg 1 mfg 2 Product Flow
1. Retailer places orders to distributor,
2. Product flows from manufacturer to distributor,
3. Inventory is held by the distributor,
Distributor 4. Retail DCs receive full TL of goods from multiple
manufacturers from the distributor,
5. DCs send full TLs of mixed goods to stores, and
goods at store.
DC DC Pros/Cons
• Flow leverages the distributor’s economics with lots of
handling
• On both IB and OB, DCs are able to mix product from multiple
vendors
• Good for much slower moving items
Manufacturer
• Much longer transit times from vendors to stores
Retail DC • Higher cost due to 3rd party involvement
Retail Store
Consumer
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Distribution Designs – DSD
mfg 1 mfg 2 Direct to Store Delivery
Product Flow
1. Retailer places orders to each manufacturer,
2. Product flows from manufacturer directly to the retail stores
bypassing the DCs,
3. Vendor often merchandises, orders, and manages the
retailer’s shelf,
goods at store.
DC DC Pros/Cons
• Flow leverages the vendor’s economics
• Bypassing the retail DC reduces congestion
• Vendor can take over ordering, merchandising, etc.
• Can lead to congestion and added costs at the retail stores
• Loss of control of product flow and availability by the retailer
• Used for select items (beverages, newspapers, snack foods)
Manufacturer
Retail DC
Retail Store
Consumer
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Distribution Designs – Drop Shipping
mfg 1 mfg 2 Drop Ship to Customer
Product Flow
1. Consumer orders from Retailer,
2. Retailer passes order to Manufacturer,
3. Manufacturer sends product directly to consumer.
4. Manufacturer and Retailer could be same firm.
Pros/Cons
• Very slow response time to consumer
• Very strong product availability while keeping inventory levels
DC DC
low
• Bypassing retail DC and store reduces congestion
• Transportation cost can be high – small shipment size to
consumer
• Allows for high level of customization
• Consumer places order – triggers pull operation
Manufacturer
Retail DC
Retail Store
Consumer
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Summary of Distribution Design
Traditional Retail Mix/Consolidation Distributor / Direct to Store Drop Ship from

Multi-Echelon Center Wholesaler Delivery (DSD) Manufacturer
• Distribution channel strategies are not mutually exclusive

• Most firms use multiple channels for products
• Selection based on:
n velocity (demand) of the product
n desired response time to consumers
n physical and other characteristics of products, suppliers, customers
n value of products
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Rise and Evolution of e-commerce
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Timeline for e-commerce
• Pure players (~1995-2000)
n Firms that allow customers to buy goods
and services over the internet using a
website – no physical presence
n Having traditional stores seen as
unnecessary in the future
• Multi-channel (~2000-2010)
n Firms use multiple online and traditional
distribution channels
n Traditional and online channel operations
are kept separate and distinct (why?)
n Referred to as Bricks & Clicks
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Material adapted from Ponce, E. (2017) 16
Timeline for e-commerce
• Introduction of Smartphones (2007)
n Apple released first iPhone on Jan 07, 2007
n As of 2016,
w ~50% of the world’s population have smartphones
w ~40% of the world’s population have Internet connectivity
n Introduction of mobile commerce (m-commerce)
• Omni-channel (~2010-?)
n Evolution of multi-channel retailing
n Firms provide a seamless retailing
experience through all available shopping
channels (online & offline)
n Operations are mixed between channels
n Consumers have multiple options for
researching, ordering, receiving, paying,
and/or returning products.
MIT Center for Material adapted from Ponce, E. (2017) By Andrew from London, UK (16GB iPhone) [CC BY-SA 2.0
(http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia 17
Consumer’s Perspective
Online Omni-Channel
Traditional (e-commerce) (m-commerce)
• Core Activities
n Research
w view options and select
n Order
w placing the order
n Receive
w receiving the goods
n Pay
w paying for the goods
n Return
w returning goods that are
not desired
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All images public domain from pixabay.com. 18
Retailer’s Perspective: Challenges!
• Where to prepare the orders?
n Distribution Center vs. Fulfillment Center vs. Store
n Trading off distance vs efficiency vs. effectiveness
n Changes in packaging requirements and usability
n Adapting workforce, facilities, and systems to new tasks
n Maintaining inventory visibility across the channels & facilities
• Where and how does the order meet the customer?
n Stores vs. Home vs. 3rd Party locations (work, lockers, gas station)
n Attended vs. Unattended Delivery
n Own fleet vs. Parcel vs. Crowdsourcing vs. Mobile lockers
• How to handle returns?
n Product returns ~30% for online vs. 8% for traditional
n At location of purchase vs. Drop points vs. Everywhere
n Allowable reasons: Damaged, Wrong size/color/style, etc.
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Omni-Channel Network Design
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Example: Araz – Fashion for the Budget Conscious!
• Situation
n Araz is a fast-fashion retailer selling mainly to fashion conscious women on
a budget. They currently distribute their products from their own plants to
their own branded stores or directly from fulfillment centers to home for
online sales.
n They have decided to offer different delivery options for their online (e-
commerce & m-commerce) consumers:
w Home delivery
w Pick up in their stores
w Pick up in a convenience store (e.g. an attended pick up point)
w Pick up in an Automated Package Station (e.g. “un-attended” pick up point)
• How should Araz design this omni-channel network?
n Formulate a MILP to design physical flow through multiple channels
n Determine flow quantity through different channels and intermediate
facilities to open in order to minimize cost
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Araz – Fashion for the Budget Conscious!
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Araz – Model Formulation 3
1 ID 1 Convenience Store
0 CDC Retail Store
2 ID2 APS
6
Home
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c03=6.00 v3=0.50
D3=4500
c01=2.40 c13=2.20 c06=8.15
c14=2.10
S1=20,000
f1=1,100
v1=1.35 D4=15000
c04=5.85
v5=0.75
c05=6.25
c02=2.45 c25=1.05 D5=1000 D6=3000

c26=3.40
S2=5,000
f2=900
v2=1.60
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Araz - Model in Spreadsheet
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Araz - Solving Model in Spreadsheet
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Araz - Solution
Total Cost: $146,100 x03=4500
x04=15000
x02=4000 x25=1000 x26=3000
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Reverse Supply Chains
Content primarily adapted from work by Dr. Eva Ponce
MIT Center for

Transportation & Logistics ctl.mit.edu
Supply-Chain Operations Reference (SCOR) Model
Plan
Customers
Suppliers
Source Make Deliver
Return Source Return Deliver

Enable
• Commercial (wrong size, color, etc.) • Defective Products

• Warranty / Recalls • End-of-use (e.g., cell phones)
• Overstocks / Poor Promotions • End-of-life (e.g., washing machines)
• Leases • Reusable Articles
MIT Center for Source: Supply Chain Council
Reusable Articles – Closed Loop Supply Chain
Durable products intended to be used multiple times by different users in
different locations of a supply chain network
Conveyances – things the products move in
Highly Customized
Widely Standardized (closer to product)
Products – the item itself
Source: Carrasco-Gallego, Ponce-Cueto and Dekker, R (2009).

MIT Center for Adapted from: Carrasco, Ponce and Dekker, 2012. 31
Transportation & Logistics Image sources at end.
Product Recovery Options
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Reverse Supply Chains and Recovery Options
Sorting / Disposition
Remanu- Refurbish
Dispose Recycle Cannibalize Reuse
facture / Repair
Collection &
Transportation
Resources
Extract Transform Source Make Deliver Use
Landfill
MIT Center for Adapted from Ponce, E. and Blanco E.

Reverse Flow Recovery Options
Raw Parts Modules Product Distribution
Users
Materials Fabrication Assembly Assembly
Cannibalization Refurbishing Repair

Recycling Direct Reuse
Remanufacturing or Resale
Disposal
Incinerate /
Landfill
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Adapted from Thierry et al. 1995 34
Recovery Options – Reuse and Resale
Users

Disposal
Direct Reuse or Resale
This includes both Reusable Articles (containers, totes, pallets,
books, etc.) and normal (non-reusable) products.
Incinerate /
Reusable Articles are inspected and, if needed,
Landfill
sterilized/cleaned/prepared for redeployment within firm or
across network.
Non-reusable Products are inspected and deemed ready for re-use
or resale to other customers without any repair or refurbishing.
e.g., Wrong size/color/style apparel
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Recovery Options – Repair/Refurbish/Remanufacture
Users

Repair
Disposal Used products returned to working order. Typically involves fixing and/or
replacing broken parts. e.g., computers, phones, electronic devices.
Refurbish
Incinerate / Used products brought up to specified quality level. Critical modules are
Landfill inspected and fixed or replaced. Sometimes includes technology
upgrading. e.g., aircraft
Remanufacture
Used products brought up to quality standards as rigorous as new products. Complete
disassembly, inspection, and part/module replacement as needed. e.g., automotive engines
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Recovery Options – Cannibalization & Recycling
Users

Disposal
Cannibalization
The returned product is used to recover a limited set of reusable parts
and components for use in other products. Only a small proportion of
Incinerate / the used product is typically reused. The remaining parts are recycled or
Landfill disposed of. e.g., integrated circuits from computers.
Recycling
Materials from used products and components are processed and
can be reused in production of original or other parts. e.g., metals,
paper and cardboards, plastics, etc.
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Differences Between Forward & Reverse Logistics
Forward Logistics Reverse Logistics
Forecasting Hard, but relatively More difficult due to
straightforward uncertainty of end of life
Transportation One to many Many to one
Product Quality Uniform Not uniform
Product Packaging Uniform Not uniform
Destination/Routing Clear Unclear
Pricing Relatively uniform Dependent on many factors
Delivery speed Importance recognized Often not considering a priority
Distribution costs Accounting systems Less directly visible
Inventory Consistent Not consistent
Management
Real-time information Available Less transparent
MIT Center for Adapted from Tibben-Lembke & Rogers, 2002
Why should we care?
• Increasing amount of waste generated . . .
n Over 300,000 cell phones disposed daily in United States
n Each EU citizen produces 17-20 kg of technological waste per year
• . . . of products containing hazardous materials
n Electronic devices contain lead, cadmium, mercury…
• . . . that have shrinking product life cycles.
n Lifecycle of cell phones is 18 months; laptops 24 months, etc.
• . . . and there are regulations!
n In some regions, producers are responsible for the environmentally
safe disposal of products. Extended Producer Responsibility (EPR)
n End of life waste framework directives in the EU for batteries,
vehicles, tires, etc.
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Example: Battery Collection and
Recycling Network Design
Image Source: “Battery recycling” by Santeri Viinamäki. Licensed under CC BY-SA 4.0 via Wikimedia
Commonshttps://commons.wikimedia.org/
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Reverse Logistics for Batteries
• The Situation
n Over 40 billion batteries are sold per year worldwide. Used batteries
contain toxic and hazardous compounds that can cause environmental
and health issues. There have been increasing regulatory requirements,
particularly in the EU, e.g., Directive on Batteries and accumulators
(2006).
n The collection rate of all batteries has improved from ~25% in 2011 to
~45% in 2015. Recycling rate for consumer waste batteries is near 50%.
• The Challenge
n Design a network of collection points, consolidation centers, and
recycling plants to receive and process used batteries.
n Formulate a MILP to design the reverse logistics network and used
product flow from collection points to recycling plants.
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Battery Recycling Network Design
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Ponce, E. et al. 2012. ESD-WP-2012-18. Citable URI: http://hdl.handle.net/1721.1/102933 42
Simplified Battery Recycling Network Design
Collection Regional Recycling
Points Storage/Sorting Depot Facilities
CP: Collection Points

RSSD: Regional Storage/Sorting Depot
RF: Recycling Facilities Recycled material flow from CP to RF through RSSD
Recycled material flow from CP to RF
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MILP Model 4
3 5
2
6
1
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c14=28.4 c46=19.2
c24=26.1
c45=17.6 K5=3,500
K4=6,000 f5=1,500
c34=23.8 f4=700 v5=74.8
c35=73.9 v4=5.4
S3=2,500
c25=62.4 K6=3,000
f6=1,300
v6=83.6
c36=53.6
S2=1,500 c15=66.4
c26=46.2
c16=56.2
S1=2,000 CP: Collection Points
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Model in Spreadsheet
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Solving Model in Spreadsheet
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c14=28.4 c46=19.2
c24=26.1
c45=17.6 K5=3,500
K4=6,000 f5=1,500
c34=23.8 f4=700 v5=74.8
c35=73.9 v4=5.4
S3=2,500
c25=62.4 K6=3,000
f6=1,300
v6=83.6
c36=53.6
S2=1,500 c15=66.4
c26=46.2
c16=56.2
S1=2,000 CP: Collection Points
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Battery Recycling Network Design - Solution
x14=2,000
x46=1,000
x45=3,500
x34=2,500
Total Cost: $765,000
x26=1,500
CP: Collection Points

RF: Recycling Facilities Recycled material flow from CP to RC through RSSD
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Key Take-Aways
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Key Take-Aways
• Distribution Channels
n Players: Manufacturer, Distributor, Retailer, Consumer
n Firms will use multiple flow paths for products
n Design is a function of supplier, customer, and product
• Omni-Channel
n Mobile commerce changed how consumers research, order, receive,
pay, and return products
n Retailers need to adjust to ship from/to a variety of different locations
and types of facilities
• Reverse Logistics
n Combined with “forward” logistics forms the Closed Loop Supply Chain
n Variety of recovery options: Reuse, Repair, Refurbish, Remanufacture,
Cannibalize, Recycle, or Dispose.
n Growing in importance: online returns as well as increasing regulations
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Questions, Comments, Suggestions?
Use the Discussion Forum!
“Bo is curious as to the best distribution channel for his food”

(Photo courtesy of Matt Harding)
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MIT Center for Transportation & Logistics ctl.mit.edu
Additional Image Sources
Slide 34
“Nestbare Behälter gestapelt” by Walther Faltsysteme GmbH. Licensed under CC BY-SA 3.0 via Wikimedia Commons.
https://commons.wikimedia.org/wiki/File:Nestbarer_Behaelter04.jpg
“Side view of a used Samsung CLT-K506L black laser toner cartridge” by W.carter. Licensed under CC BY-SA 4.0 via Wikimedia Commons.
https://commons.wikimedia.org/wiki/File:Samsung_laser_toner_cartridge_side_view.jpg
“Surgical instruments” by ‫ آرﻣﯿﻦ‬. Licensed under CC0 via Wikimedia Commons.
https://commons.wikimedia.org/wiki/File:Surgical_instruments_15.jpg
“San Diego City College Learing Recource City” by ‫آ‬Joe Crawford from Moorpark, California. Licensed under CC BY 2.0 via Wikimedia
Commons. https://commons.wikimedia.org/wiki/Library#/media/File:SanDiegoCityCollegeLearningResource_-_bookshelf.jpg
“Bicing bike share, La Rambla, Barcelona, Spain” by Maarten Sepp. Licensed under CC0 3.0 via Wikimedia Commons.
https://commons.wikimedia.org/wiki/File:Bicing_bike_share,_La_Rambla,_Barcelona,_Spain_-_panoramio.jpg
“Empty green beer bottles isolated on a white background” by Petr Kratochvil. Licensed under CC0 via Free Stock Photos.
http://www.freestockphotos.biz/stockphoto/10562
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Distribution

MIT Center for

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. . . with complex and non-linear relationships . . .

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Now lets focus on the Distribution Channel Strategies

Four Types of Players:

Retailer Sells goods directly to consumer

Consumer Person who buys the product

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Manufacturer Wholesaler Retailer Consumer

Manufacturer Retailer Consumer

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1. Distribution Channel Strategies

3. Reverse Supply Chain

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Traditional Retail Mix/Consolidation Distributor / Direct to Store Drop Ship from

• Distribution channel strategies are not mutually exclusive

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MIT Center for

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0 CDC Retail Store

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c02=2.45 c25=1.05 D5=1000 D6=3000

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x02=4000 x25=1000 x26=3000

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Content primarily adapted from work by Dr. Eva Ponce

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Source Make Deliver

Return Source Return Deliver

• Commercial (wrong size, color, etc.) • Defective Products

Products – the item itself

Source: Carrasco-Gallego, Ponce-Cueto and Dekker, R (2009).

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Extract Transform Source Make Deliver Use

MIT Center for Adapted from Ponce, E. and Blanco E.

Cannibalization Refurbishing Repair

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Cannibalization Refurbishing Repair

Cannibalization Refurbishing Repair

Cannibalization Refurbishing Repair

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CP: Collection Points

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Total Cost: $765,000

CP: Collection Points

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“Bo is curious as to the best distribution channel for his food”

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