Unit 2 L2 Network Design

Designing the Supply Chain Network
The Role of Distributionin the Supply Chain

• Distribution: the steps taken to move and store a product from the
supplier stage to the customer stage in a supply chain
• Distribution directly affects cost and the customer experience and
therefore drives profitability
• Choice of distribution network can achieve supply chain objectives
from low cost to high responsiveness
• Examples: Wal-Mart, Dell, Proctor & Gamble, Grainger
Factors Influencing Distribution Network
Design
• Distribution network performance evaluated along two dimensions at
the highest level:
• Customer needs that are met
• Cost of meeting customer needs
• Distribution network design options must therefore be compared
according to their impact on customer service and the cost to provide
this level of service
Factors InfluencingDistribution Network
Design
• Elements of customer service influenced by network structure:
• Response time
• Product variety
• Product availability
• Customer experience
• Order visibility • Returnability
• Supply chain costs affected by network structure:
• Inventories • Transportation
• Facilities and handling • Information
Designing and Planning Transportation Networks
Role of Transportation in a supply Chain:

▪ Movement of product from one location to another or path of a supply
chain to the customer.
▪ Products are rarely produced and consumed in the same location
▪ Transportation is a significant component of the costs incurred by most
supply chains.
▪ Any supply chain’s success is closely linked to the appropriate use of
transportation.
▪ The shipper is the party that requires the movement of the product
between two points
Modes of Transportation and Their Performance Characteristics:
▪ Air: Air carriers offer a fast and fairly expensive mode of transportation
▪ Water: ocean carriers, ideally suited for carrying large loads at low cost
▪ Rail: an ideal mode for carrying large, heavy, or high-density products over long distances
▪ Truck: offers the advantage of door-to-door shipment and a shorter delivery time
▪ Package carriers: transportation companies e.g. FedEx
▪ Pipeline: limited to transport of crude petroleum, refined petroleum products, and natural gas
▪ Intermodal: use of more than one mode of transport to move a shipment to its destination.
The effectiveness of any mode of transport is influenced by equipment investments and operating
decisions by the carrier and the available infrastructure and transportation policies.
Carrier’s primary objective is to ensure good utilization of its assets while providing customers
with an acceptable level of service.
Design Options for A Transportation Network
1. Direct Shipment Network to Single Destination
all shipments come directly from each supplier to each buyer Suppliers Buyer Locations
location
the routing of each shipment is specified, the supply chain manager
needs to decide only the quantity to ship and the mode of
transportation to use.
Advantage of this transportation network is the elimination of
intermediate warehouses and its simplicity of operation and
coordination, independent shipment decision, short transportation
time
Useful only if demand at buyer locations is large enough that replenishment lot sizes are close to a truckload
2. Direct Shipping with Milk Runs
Suppliers Buyer Locations Suppliers Buyer Locations

A milk run is a route on which a truck either delivers
product from a single supplier to multiple retailers or
goes from multiple suppliers to a single buyer location
A supply chain manager has to decide on the routing of
each milk run.
Direct shipping provides the benefit of eliminating
intermediate warehouses, whereas milk runs lower
transportation cost.
3. All Shipments via Intermediate Distribution Center with Storage
product is shipped from suppliers to a central distribution Suppliers Buyer Locations
center, where it is stored until needed by buyers

Storing product at an intermediate location is justified if Distribution
Center (DC)
transportation economies require large shipments on the

inbound side or shipments on the outbound side cannot be
coordinated.
The presence of a DC allows a supply chain to achieve
economies of scale for inbound transportation to a point close to
the final destination, because each supplier sends a large
shipment to the DC that contains product for all locations the
DC serves.
Because DCs serve locations nearby, the outbound
transportation cost is not very large.
4. All Shipments via Intermediate Transit Point with Cross-Docking
Under this option, suppliers send their shipments to an intermediate transit point
(which could be a DC), where they are cross-docked and sent to buyer locations
without storing them.
When a DC cross-docks product, each inbound truck contains product from
suppliers for several buyer locations, whereas each outbound truck contains
product for one buyer location from several suppliers.
Major benefits of cross-docking are that little inventory needs to be held and
product flows faster
Cross-docking is appropriate when economies of scale in transportation can be
achieved on both the inbound and outbound sides and both inbound and
outbound shipments can be coordinated.
4. All Shipments via Intermediate Transit Point with Cross-Docking
4. Shipping via DC Using Milk Runs

Milk runs can be used from a DC if lot sizes to be delivered to each buyer location are
small.
Milk runs reduce outbound transportation costs by consolidating small shipments.
Tailored Network
The tailored network option is a suitable combination of previous options that reduces the
cost and improves the responsiveness of the supply chain
The goal is to use the appropriate option in each situation
Selecting a Transportation Network
Ex- A retail chain has eight stores in a region supplied from four supply
sources. Trucks have a capacity of 40,000 units and cost $1,000 per load plus
$100 per delivery. Thus, if a truck making two deliveries charges $1,200. The
cost of holding one unit in inventory at retail for a year is $0.20.
The vice president of supply chain is considering whether to use direct
shipping from suppliers to retail stores or setting up milk runs from suppliers
to retail stores.
a) What network do you recommend if annual sales for each product at each
retail store are 960,000 units?
b) What network do you recommend if sales for each product at each retail
store are 120,000 units?
Solution

Unit 2 L2 Network Design

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Designing the Supply Chain Network

The Role of Distributionin the Supply Chain

Role of Transportation in a supply Chain:

Suppliers Buyer Locations Suppliers Buyer Locations

center, where it is stored until needed by buyers

transportation economies require large shipments on the

4. Shipping via DC Using Milk Runs

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