7.

1 Introduction
Focus on the distribution function.
Various possible distribution strategies, and the
opportunities and challenges associated with these
strategies.
Chapter 7. Distribution Strategy 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).

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7.2 Direct Shipment Distribution 7.3. Intermediate Inventory Storage Point

Strategies Strategies
Advantages: Strategies:
The retailer avoids the expenses of operating a distribution center
Traditional warehousing strategy
Lead times are reduced.
Disadvantages: distribution centers and warehouses hold stock
Risk-pooling effects are negated
inventory
Manufacturer and distributor transportation costs increase provide their downstream customers with inventory as
Commonly used scenarios: needed.
Retail store requires fully loaded trucks Cross-docking strategy
Often mandated by powerful retailers warehouses and distribution centers serve as transfer
Manufacturer may be reluctant but may have no choice points for inventory
Lead time is critical.
Prevalent in the grocery industry (lead times are critical because no inventory is held at these transfer points.
of perishable goods). Centralized pooling and transshipment strategies
may be useful when there is a large variety of different
products
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 Traditional Warehousing Centralized vs Decentralized
Management
Inventory management and risk pooling Decentralized system
Each facility identifies its most effective strategy without considering the
Other factors also play a significant role impact on the other facilities in the supply chain.
Leads to local optimization.
Centralized vs Decentralized Management Centralized system
Central vs Local Facilities decisions are made at a central location for the entire supply network.
Typical objective: minimize the total cost of the system subject to
satisfying some service-level requirements.
Centralized control leads to global optimization.
At least as effective as the decentralized system.
Allow use of coordinated strategies
If system cannot be centralized
often helpful to form partnerships to approach the advantages of a
centralized system.

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Central vs. Local Facilities A Hybrid Decision

Centralized facilities
Employ both fewer warehouses and distribution centers Some products use centralized strategy while
Facilities are located further from customers.
others use local strategy
Other factors:
Safety stock. Lower safety stock levels with centralized facilities
Overhead. Lower total overhead cost with centralized facilities
Not an either or decision
Economies of scale. Greater economies of scale with centralized facilities
Lead time. Lead time to market reduced with local facilities
Varying degrees of centralization and
Service. localization due to the varying levels of
Utilization of risk pooling better with centralized
Shipping times better with local advantages and disadvantages
Transportation costs.
Costs between production facilities and warehouses higher with local
Costs from warehouses to retailers lesser with local

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 Cross-Docking The problems of cross-docking (1)

Popularized by Wal-Mart Require a significant start-up investment and

Warehouses function as inventory coordination are very difficult to manage:
points rather than as inventory storage points. DC, retailers and suppliers must be linked with
Goods arriving at warehouses from the advanced information systems to ensure that all
manufacturer: pickups (分拣) and deliveries are made within the
are transferred to vehicles serving the retailers
required time windows.
are delivered to the retailers as rapidly as possible. A fast and responsive transportation system is
necessary for a cross-docking system to work.
Goods spend very little time in storage at the
warehouse Forecasts are critical, necessitating the sharing of
Often less than 12 hours information.
Limits inventory costs and decreases lead times
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The problems of cross-docking (2) Example: Wal-Mart

Cross-docking strategies are effective only for large Wal-Mart是世界上最大且获利最多的零售商

distribution system, because 它利用直接转运技术运送85%的商品
A large number of vehicles are delivering and picking up 为了帮助直接转运的进行，Wal-Mart经营一个私人的卫
goods at the cross-dock facilities at any one time.
星通讯系统，可以传送POS资料給它所有的供应商，让
In such system, there is enough volume every day to allow 他们对所有店的销售情況有一个清楚的了解
shipments of fully loaded trucks from suppliers to the
warehouse. 此外，Wal-Mart拥有一个两千辆卡车的车队，而且它的
Since these systems typically include many retailers, demand 分店平均每星期补货两次
is sufficient so items that arrive at the cross-docking facilities 直接转运使Wal-Mart能够采购整车而达到经济规模
can be delivered immediately to the retailer outlets in full
truckload quantities. 它降低了安全存货的必要性，与该产业的平均数比较起來，
它也減少了3%的销货成本
这是Wal-Mart能够创造高边际收益的主要原因
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 Inventory Pooling – GM Example Centralized Pooled Systems Perform
Better
1,500 Cadillacs parked at a regional distribution For the same inventory level, a centralized system
center in Orlando provides:
Await delivery to dealers statewide within 24 hours higher service level
higher sales
10% to 11% sales loss because a car is not
available… Push-pull supply chain
Moving from a push supply chain
Test program expected to:
Dealers have to order before demand is realized
improve customer service
To a push-pull supply chain
boost sales of Cadillacs by 10% Dealers pull from regional distribution centers.
Implications:
End consumers will see better customer service
More cars are available to them.
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Other Factors Example of Inventory Pooling

Will GM sell more cars to GM dealers? Two retailers face random demand for a single product.
Total number of cars ordered by dealers will not No differences between the retailers
necessarily increase, even as customer service increases. Compare two systems
What about the dealers? centralized pooled system,
Dealers have access to more inventory retailers together operate a joint inventory facility
Potentially can sell more. take items out of the pooled inventory to meet demand.
decentralized system
Levels out the playing field between dealers.
each retailer individually orders from the manufacturer to
Small dealers would favor such a system Competitive meet demand
advantage of large dealers wiped out
In both systems, inventory is owned by the retailers

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 The Two Systems Other Data

Wholesale price = $80 per unit

Selling price = $125 per unit
Salvage value = $20 per unit
FIGURE 7-10: Probabilistic
demand faced by each retailer Production cost = $35 per unit
FIGURE 7-9: The centralized and
decentralized systems

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Costs and Profits in the Two Systems Customer Search

Decentralized system If the customer arrives at a dealer and does
Each dealer orders 12,000 units not find the item
Expected profit per dealer = $470,000, Total = $940,000
Switches to another dealer
Expected sales = 11,340 units, Total = 22,680 units
Manufacturer profit = $1,080,000
Helps the manufacturer sell more products
Centralized system Which system is better under customer search?
Two dealers together will order 26,000 units No impact on the centralized system
Total expected profit = $1,009,392
Joint expected sales = 24,470 units
Manufacturer profit = $1,170,000

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 Impact on Decentralized System Nash Equilibrium (Game Theory)
If a dealer knows that its competitors do not keep enough If two competitors are making decisions, they
inventory
this dealer should raise the inventory level to satisfy:
have reached Nash equilibrium if they have
its own demand both made a decision
demand of customers who initially approach other dealers with Both have decided on an amount to order
limited inventory.
If a dealer knows that its competitors has significant neither can improve their expected profit by
inventory changing the order amount if the other dealer
this dealer will reduce the inventory level doesn’t change his order amount.
It is not likely to see customers who switch
Dealer’s strategy depends on its competitor’s strategy.
Dealers may/may not know their competitor strategy
not clear how they decide on their inventory level.
not clear about the impact of search on the manufacturer
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Best Response with α=90%

Example
α = percentage of customers that search the system
Each retailer can determine what their effective
demand will be if the other retailer orders a specific
amount.
Based on this information, they can calculate how
much they should order given any order by their
competitors.
Best response

FIGURE 7-11: Retailers’ best response

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 Decentralized and Centralized Systems for
Nash Equilibrium of the System Search Level of 90%
Retailer one orders about 20,000 units, retailer two will respond by
ordering about 12,000 units Strategy Retailers Manufacturer Total
If this is the case, then retailer one should modify its strategy and
reduce the order quantity Decentralized 978,920 1,251,000 2,229,920
No retailer has an incentive to modify its strategy
They order amounts associated with the intersection of the two Centralized 1,009,392 1,170,000 2,179,392
curves.
Optimal order quantity for each retailer = 13,900 units
Total expected profit for each retailer = $489,460 Centralized system does not dominate the decentralized
Total expected profit = $978,920 system.
Total expected sales = 25,208 Retailers prefer the centralized system
Total amount ordered from the manufacturer = 27,800 Manufacturer’s profit is higher in the decentralized system
Manufacturer’s profit = $1,251,000.
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As α Increases As α Increases

Each retailer’s order quantity and profit With larger α

increases retailers will order more in a decentralized system
Retailers’ total expected profit will be higher in manufacturer will prefer a decentralized system
the centralized pooling system than in the retailers will prefer a centralized system
decentralized system. With smaller α
manufacturer will order less in a decentralized
system
both the retailers and the manufacturer will prefer
a centralized pooling system.

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 Effect of α on Amounts Ordered Critical Search Level

Presence of a critical search level

manufacturer prefers the centralized system below
the level
otherwise, manufacturer prefers the decentralized
system.
Manufacturer always prefers a higher search
level

FIGURE 7-12: Amount ordered by dealers as a function of the search level

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How Can the Search Level Be Increased? Transshipment

Increase brand loyalty Shipment of items between different facilities
customers will more likely search for a particular brand at at the same level in the supply chain to meet
another retailer if their first choice does not have the
product in inventory. some immediate need
Information technology initiatives to increase Occurs mostly at the retail level
communication between retailers Can be achieved:
increases the ease with which customers can search in the
system with necessary information systems
higher likelihood that customers will search in the system Shipping costs are reasonable
Organization support

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 Retailers with Different Owners Which Strategy to Adopt?
May not want to do transshipments Different approaches for different products
Distributor Integration strategies may be Factors:
adopted Customer demand and location
Not clear regarding inventory levels Service level
A retailer’s strategy depends on competitors’ Costs => transportation & inventory costs
strategies Demand Variability

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Summary of Distribution Strategy Summary

Critical to implement effective distribution strategies
Strategy Direct Cross- Inventory at regardless of the total level of supply chain integration.
Attribute shipment Docking warehouse Strategies:
Take direct shipping
Risk pooling warehouses or distribution centers
advantage
Transportation Reduced Reduced Related decisions
cost inbound cost inbound cost Should there be many or only a few warehouses or DC’s?
No Should inventory be held at these locations, or transshipped?
No holding As a retailer, does it make sense to participate in a
Holding cost warehouse
cost centralized inventory pooling system?
cost
What about a transshipment system?
Allocation Delayed Delayed
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 Homework END

 Case preparation: “How Kimberly-Clark Keeps Client

Costco in Diapers” on Page 223.

Copyright © CJ Wang. All rights reserved 37 Copyright © CJ Wang. All rights reserved 38

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