CHAPTER 4

Distribution And Omni-Channel Design

 Drivers of Supply Chain Network Design

1. Changes in global trade patterns.

2. Changes in customer service requirements.
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

 Supply Chain Network Design Process

Step 1: Define the Supply Chain Network Design Process

(design criteria)

- Form a dedicated team.

- Define the parameters and objectives of network design or
redesign process.

- Address issues pertaining the availability of resources

(***Another important consideration at this stage is the
 potential involvement of third-party logistics service
providers to achieve the firm's logistics objectives.)

Step 2: Perform a Supply Chain Audit

The supply chain audit gives the transformation team a big picture view of how the
company's logistics works. It also collects important information that will be helpful for
the next steps in improving the logistics process.

- Fundamental Business Information

- Supply Chain System
- Key Supply Chain Activities
- Measurement and Evaluation
- Strategic Supply chain issues
- Supply Chain Strategic Plan

Step 3: Examine Supply Chain Network alternatives.

1) We use special models to compare how well the current setup works
compared to other options. These models help us understand how well
different setups would work and how much they would cost.
Three types of models:
Optimization (finding the best solution)
Simulation (imitating how a supply chain works)
Heuristic (Finding good solutions but not necessarily the best)

2) Once a suitable modelling method is chosen, it should be used to find a

supply chain setup that meets the main goals identified during the audit
phase. However, teams often find that the model provides more insights
than direct answers. It can also raise new questions that need to be
addressed.

3) After figuring out some basic design ideas, it's important to test (using a
What if analysis) how those ideas would work if things changed. For
example, we might look at how different transport costs or distances to
customers could affect our plans. This helps us make recommendations on
how many facilities we need and where they should be to meet our goals.
Step 4: Conduct a Facility Location Analysis

- Form a location selection team.

- Qualitatively and Quantitively analyse the attributes of specific

regions and locales.

- Identify recommended specific sites for logistics facilities.

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.

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.
 Major Locational Determinants

 Broad Geographic and Site-Specific Locational

Determinants

Global/National/Regional Determinants
- Labour Climate
- Transportation services and infrastructure
- Proximity to markets and customers
- Quality of life
- Taxes and industrial development incentives
- Supplier networks
- Land costs and utilities
- IT infrastructure
- Company preference

Site-Specific Determinants
- Transportation access (Truck, Air, Rail, Water)
- Inside/outside metropolitan area
- Availability of workforce and needed skill sets
- Land costs and taxes
- Utilities
 Current Trends Governing Site Selection
number of determinants that are focused more directly
on specific sites that may be under consideration.

- Strategic positioning of inventories (fast-moving,

profitable items vs. slower-moving, less-profitable items)
- Greater use of customer-direct delivery from
manufacturing
- Growing use or 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 3rd party-logistics services

 Modelling Approaches for Supply Chain Network

Design

- This section discusses different ways to plan how goods

move through a supply chain, including where to put
factories, warehouses, and how to deliver products to
customers. These planning methods can be used for local
or global supply chains.

The main methods discussed are:

- Optimization: Finding the best solution mathematically,
considering factors like cost and speed.
- Simulation: Creating a model to simulate how the supply
chain would work in different scenarios.
 − Heuristic models: Designed to reduce a problem to a
manageable size and search automatically through various
alternatives in an attempt to find a better solution.
 Optimization Models
Optimization models use mathematical methods to find the best solution to a problem,
based on the data and assumptions provided. These models can be used to make decisions
about things like where to place factories and warehouses or how to organize transportation
to save costs and improve customer service.

For example, a simple optimization model might help decide how much of a product to
order at a time to minimize costs.

These models can handle complex supply chain structures, from getting raw materials to
delivering products to customers. They use techniques like linear programming, which helps
find the best distribution of facilities while considering things like supply and demand
limits.

More advanced models, like mixed-integer linear programming, can consider additional
factors like fixed costs, capacity constraints, and unique sourcing requirements. These
models help companies make strategic decisions about their supply chains, such as how to
maximize profits or improve efficiency.

While optimization models provide the best possible solution based on the information
given, they rely on specific assumptions and may not account for all real-world complexities.
However, they are valuable tools for understanding and improving supply chain operations.

 Simulation Model
Simulation models are used in supply chain network design to create a virtual
representation of a real system. These models help understand how changes in
factors like supply, demand, and network constraints affect the supply chain.

Unlike optimization models that find the best solution, simulation models are
used to experiment and see how different scenarios play out. They are especially
useful for testing the effects of different locations on costs and service levels.

Simulation models require detailed data and analysis to accurately represent the
supply chain. They don't provide the best solution but help understand the outcomes
based on the input data.

In some cases, companies use optimization models first to narrow down options and
then use simulation models for a more detailed analysis of the chosen network design.
 Heuristic Model
Heuristic models are used in supply chain network design to simplify complex
problems and find practical solutions, even if they're not the best possible
solutions.

These models use rules of thumb or simplified decision-making processes to

narrow down options and find a good solution quickly. For example, a heuristic
model might prioritize warehouse locations based on their proximity to major
markets, highways, and airports.

While heuristic models may not provide the most optimal solution, they are valuable
for quickly evaluating a large number of options and finding a practical solution that
meets most requirements. They are often used alongside more complex optimization
models to simplify the problem and find a workable solution.

 Potential Supply Chain Modelling 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
 Omni-Channel Network Design
 Introduction:
E-commerce is growing rapidly, with global sales reaching $2.3 trillion in 2017
and expected to nearly double by 2021. In the U.S., online shopping makes up
10% of retail sales and is growing at 15% per year. Amazon is the biggest player,
accounting for 44% of U.S. e-commerce sales in 2017.

Traditional retailers are also getting into e-commerce, so they need to be able to
sell both online and in stores. This means they need to have good online shopping
options and flexible ways to get products to customers.

Ways to Get Products to Customers:

1. Store Pickup: Customers order online and pick up at the store.
2. Store Delivery: Stores deliver products to customers' homes.
3. Warehouse Delivery: Products are delivered to customers from a warehouse.
4. Vendor or Third-Party Delivery: Products are delivered to customers directly
from the vendor or a third-party warehouse.

Key Principles of Selling Online and in Stores:

1. Alignment with Retailer’s Go-to-Market Strategy: Your online and in-store
selling should match your overall business plan.
2. Integrated Fulfilment Processes: No matter where people buy things, the way
you get products to them should work smoothly.
3. Maximizing Customer Value: Shopping should be easy, whether online or in-
store.
4. Adaptability to changing preferences: Customers' preferences change, so you
need to be ready to change how you sell and deliver products.

Conclusion:
Selling online and in stores is not just a short-term project; it's a long-term
strategy. Retailers need to make sure their online and in-store selling work well
together, make shopping easy for customers, and be ready to change as customers'
needs change.

 Channels of Distribution:
A channel of distribution is a pathway through which products, services, information,
and money flow from where they are produced to where they are consumed. It
involves various organizations or individuals, such as distributors, wholesalers,
retailers, transportation providers, and brokers, that facilitate this flow. Some
intermediaries physically handle the goods, some take ownership of them, and some
 do both. Therefore, when designing a distribution channel, both the logistics (physical
flow) and marketing (transactional elements) aspects need to be considered.

Logistics Channel vs. Marketing Channel:

The logistics channel focuses on the physical movement of products from their source
to the consumer. On the other hand, the marketing channel deals with managing
transactional elements like customer orders and billing. For example, a retail channel
involves both logistics (getting products to the store) and marketing (managing
customer transactions).

Functions of a Logistics Channel:

1. Sorting Out: Organizing products according to their destination.
2. Accumulating: Collecting products from various sources.
3. Allocating: Distributing products to different locations.
4. Assorting: Assembling different products into assortments for sale.

Types of Channels:
Channels can be direct or indirect, traditional or vertical marketing systems (VMS).
VMS involves organizations in the channel having a coordinated relationship,
allowing them to work together efficiently.

Channel Structure and Costs:

Different channels have varying fixed and variable costs. For example, a traditional
channel involving a manufacturer, distributor, retailer, and consumer has high fixed
costs (e.g., distribution centers, stores) but low variable costs (e.g., transportation in
bulk). In contrast, a direct-to-consumer channel via the internet reduces fixed costs
(no need for retailer's distribution center or stores) but increases variable costs (higher
transportation costs due to smaller shipments). The more intermediaries in a channel,
the higher the fixed costs and the lower the variable costs, and vice versa.

 Customer Fulfilment
Customer Fulfillment Models:
In retail, there are different ways to get products to customers, whether they buy in
stores or online. Here are some common methods:

1. Integrated Fulfillment: Stores and online orders are handled from one place. This
saves resources but can be tricky if orders are different.

2. Dedicated Fulfillment: Stores and online orders have separate systems. This avoids
some problems but can be more expensive.

3. Pool Distribution: Goods are sent in big batches to a central location, then divided
up and sent to stores. This is efficient for big retailers.
4. Direct Store Delivery (DSD): Manufacturers deliver straight to stores. This reduces
extra stock in warehouses.

5. Store Fulfillment: Online orders are filled by nearby stores for pickup or delivery.
This is fast but can lead to stock issues.

6. Flow-Through Fulfillment: Like store fulfillment, but products are packed at a

warehouse and sent to stores. This helps manage stock better.

Each method has its pros and cons, and the best one depends on the costs and needs of
the retailer.