Chapter 7: DistributionStrategies7-1
7-1 Chapter 7: Distribution Strategies
7.1 IntroductionFocus on the distribution functionVariouspossible distribution strategies,andtheopportunities and challenges associated withthesestrategiesTwofundamental distribution strategiesItemscanbedirectlyshippedfromthesupplierormanufacturertotheretailstoresorendcustomerUseintermediateinventorystoragepoints(typicallywarehousesand/ordistributioncenters)IssueswithwarehousesManufacturingstrategy(make-to-stockvs.make-to-order)NumberofwarehousesInventorypolicyInventoryturn overratioInternalwarehousesvs.outsidedistributorOwnedbyasinglefirmorbyavarietyoffirms7-2
7-2 7.1 Introduction ⚫ Focus on the distribution function. ⚫ Various possible distribution strategies, and the opportunities and challenges associated with these strategies. ⚫ Two fundamental distribution strategies: ⚫ Items can be directly shipped from the supplier or manufacturer to the retail stores or end customer ⚫ Use intermediate inventory storage points (typically warehouses and/or distribution centers). ⚫ Issues with warehouses ⚫ Manufacturing strategy (make-to-stock vs. make-to-order) ⚫ Number of warehouses ⚫ Inventory policy ⚫ Inventory turn over ratio ⚫ Internal warehouses vs. outside distributor ⚫ Owned by a single firm or by a variety of firms
7.2 Direct Shipment DistributionStrategiesAdvantages:The retailer avoids the expenses of operating a distributioncenterLead times are reducedDisadvantages:Risk-pooling effects arenegatedManufacturer and distributor transportationcostsincreaseCommonly used scenarios:Retail store requiresfullyloaded trucksOftenmandatedbypowerful retailersLead time is criticalManufacturer may be reluctant but mayhave no choicePrevalent inthegroceryindustryleadtimesarecriticalbecauseofperishablegoods7-3
7-3 7.2 Direct Shipment Distribution Strategies ⚫ Advantages: ⚫ The retailer avoids the expenses of operating a distribution center ⚫ Lead times are reduced. ⚫ Disadvantages: ⚫ Risk-pooling effects are negated ⚫ Manufacturer and distributor transportation costs increase ⚫ Commonly used scenarios: ⚫ Retail store requires fully loaded trucks ⚫ Often mandated by powerful retailers ⚫ Lead time is critical. ⚫ Manufacturer may be reluctant but may have no choice ⚫ Prevalent in the grocery industry ⚫ lead times are critical because of perishable goods
7.3. Intermediate InventoryStoragePoint StrategiesVariety of characteristics distinguishdifferentstrategiesLengthoftimeinventoryisstored atwarehousesanddistribution centersStrategies:Traditional warehousing strategydistributioncenters and warehouseshold stock inventoryprovidetheirdownstreamcustomerswith inventoryasneededCross-docking strategywarehousesand distributioncentersserveas transferpointsforinventorynoinventoryisheldatthesetransferpointsCentralized pooling andtransshipmentstrategiesmaybeuseful whenthere is a large varietyofdifferentproducts7-4
7-4 7.3. Intermediate Inventory Storage Point Strategies ⚫ Variety of characteristics distinguish different strategies. ⚫ Length of time inventory is stored at warehouses and distribution centers. ⚫ Strategies: ⚫ Traditional warehousing strategy ⚫ distribution centers and warehouses hold stock inventory ⚫ provide their downstream customers with inventory as needed. ⚫ Cross-docking strategy ⚫ warehouses and distribution centers serve as transfer points for inventory ⚫ no inventory is held at these transfer points. ⚫ Centralized pooling and transshipment strategies ⚫ may be useful when there is a large variety of different products
Traditional WarehousingInventory managementand risk poolingkeyfactorsOtherfactorsalsoplayasignificantroleCentralizedvsDecentralized ManagementCentralvsLocalFacilities7-5
7-5 Traditional Warehousing ⚫ Inventory management and risk pooling key factors ⚫ Other factors also play a significant role ⚫ Centralized vs Decentralized Management ⚫ Central vs Local Facilities