WEEK 8 LECTURE DISTRIBUTION STRATEGIES AND STRATEGIC ALLIANCES

7.1 Introduction
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

- Inventory turn over ratio
- Internal warehouses vs outside distributor
- Owned by a single firm or by a variety of firms

7.2 Direct Shipment Distribution Strategies

Advantages
- The retailer avoids the expenses of operating a distribution centre
- 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 Inventory Storage Point

- traditional warehousing
- centralised vs decentralized management
- central vs local facilities
- cross docking
- intermediate points but holds no inventory
- goods are send to retail centres quickly after cross docked

Central vs. Local Facilities

Centralized facilities
- Employ both fewer warehouses and distribution centers
- Facilities are located further from customers.

Other factors:
- Safety stock. Lower safety stock levels with centralized facilities
- Overhead. Lower total overhead cost with centralized facilities
- Economies of scale. Greater economies of scale with centralized facilities
 - Lead time. Lead time to market reduced with local facilities
- Service.
- Utilization of risk pooling better with centralized
- Shipping times better with local

Transportation costs.
- Costs between production facilities and warehouses higher with local
- Costs from warehouses to retailers lesser with local

A Hybrid Decision
- some products use centralized strategy while others use local strategy
- varying degrees of centralization and localization due to the varying levels of
advantages and disadvantages

Example Of Inventory Pooling

Two retailers face random demand for a single product.

No differences between the retailers

Compare two systems

- centralized pooled system
i retailers together operate a joint inventory facility
ii take items out of the pooled inventory to meet demand
- decentralized system
i each retailer individually orders from the manufacturer to meet demand
(sometimes meet the demand from another if there is shortage)
in both systems, inventory is owned by the retailers

Customer Search
If the customer arrives at a dealer and does not find the item
- switches to another dealer
- helps the manufacturer sell more products

which system is better under customer search?

- No impact on the centralized system

Impact on Decentralized System

If a dealer knows that its competitors do not keep enough inventory
this dealer should raise the inventory level to satisfy:
- its own demand
- demand of customers who initially approach other dealers with limited
inventory.

If a dealer knows that its competitors has significant inventory

- this dealer will reduce the inventory level
- It is not likely to see customers who switch

Dealers strategy depends on its competitors 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

7.4 Transhipment

Shipment of items between different facilities at the same level in the supply chain
to meet some immediate need

Occurs mostly at the retail level

Can be achieved:
- with advanced information systems
- Shipping costs are reasonable
- Retailers have same owner

Retailers With Different Owners

May not want to do transhipments

Distributor Integration strategies may be adopted

Not clear regarding inventory levels
- A retailers strategy depends on competitors strategies

Summary of the Distribution Strategies

STRATEGY
Direct Cross-docking Inventory at warehouses
ATTRIBUTE
shipment
Risk pooling Take advantage

Transportation Reduced Reduced inbound costs

costs inbound costs
Holding costs No warehouse No holding
cost costs
Allocation Delayed Delayed

FRAMEWORK FOR STRATEGIC ALLIANCES: WHEN TO GO FOR A STRAGIC ALLIANCE?

- Adding value to products
- Improving market access
- Strengthening operations
- Adding technological strength
- Enhancing strategic growth
- Enhancing organizational skills
- Building financial strength
3 Types of Strategic Alliance
Third Party Logistics (3PL)
RetailerSupplier Partnerships (RSP)
Distributor Integration (DI)

3PL Advantages
Focus on Core Strengths
- Allows a company to focus on its core competencies
- Logistics expertise left to the logistics experts

Provides Technological Flexibility

- Technology advances adopted by better 3PL providers
- Adoption possible by 3PLs in a quicker, more cost-effective way
- 3PLs may have the capability to meet the needs of a firms potential
customers

Provides Other Flexibilities

- Flexibility in geographic locations.
- Flexibility in service offerings
- Flexibility in resource and workforce size

3PL Disadvantages
Loss of control inherent in outsourcing a particular function.

- Outbound logistics 3PLs interact with a firms customers.

- Many third-party logistics firms work very hard to address these concerns.
i) Painting company logos on the sides of trucks, dressing 3PL employees in
the uniforms of the hiring company, and providing extensive reporting on
each customer interaction.

Logistics is one of the core competencies of a firm

- Makes no sense to outsource these activities to a supplier who may not be as
capable as the firms in-house expertise
i) Wal-Mart, pharmaceutical companies

3PL Issues Asset-Owning vs Non-Asset-Owning 3PL

Asset-owning companies
- Significant size, human resources, customer base, economies of scope and
scale, and systems
- May be bureaucratic with a long decision-making cycle.

Non-asset-owning companies
- May have limited resources and bargaining power
- May be more flexible
- Able to tailor services and have the freedom to mix and match providers.
- May have low overhead costs and specialized industry expertise at the same
time
Retailer-Supplier Relationships
Cooperative relationship between suppliers and retailers to use one anothers
knowledge
Suppliers have better knowledge of lead times and production capacities
Retailers have better knowledge of demands

Types of RSP Quick Response Strategy

- Suppliers receive POS data from retailers
- Suppliers use this information to synchronize their production and inventory
activities with actual sales at the retailer.
- Retailers still prepare individual orders
- POS data are used by suppliers to improve forecasting and scheduling and to
reduce lead time
- Also called rapid replenishment
- Suppliers receive POS data
- Suppliers use these data to prepare shipments at previously agreed-upon
intervals to maintain specific levels of inventory.
- Advanced form of continuous replenishment
i) Suppliers may gradually decrease inventory levels at the retail store or
distribution center as long as service levels are met.

Types of RSP Vendor Managed System (VMI)

Also called vendor-managed replenishment (VMR) system
Supplier decides on the appropriate inventory levels and the appropriate inventory
policies to maintain these levels.
Supplier suggestions initially approved by retailer
Goal of many VMI programs is to eliminate retailer oversight on specific orders.
Wal-Mart and Procter & Gamble VMI
- Partnership, begun in 1985
- Has improved P&Gs on-time deliveries to Wal-Mart while increasing inventory
turns
 Main Characteristics of RSP

T CRITERIA
Decision maker Inventory Ownership New skills employed by
Y
vendors
P Quick response Retailer Retailer Forecasting skills

E Continuous Contractually Either party Forecasting and inventory

replenishment agreed-to levels control
Advanced Contractually Either party Forecasting and inventory
continuous agreed-to and control
replenishment continuously
improved levels
VMI Vendor Either party Retail management

RSP REQUIREMENTS
Presence of advanced information systems
Top management commitment
- Especially because information will be shared across companies
A level of trust among partners
- Supplier manages retailers inventory
- Retailer provides sales information to supplier
- Reduced inventory leads to space savings
Should not be given to competitors

RSP Implementation
Performance measurement criteria must also be agreed to.
- Non-financial measures as well as the traditional financial measures.

Initial problems can be worked out through communication and cooperation.

Manufacturing technology or capacity at supplier may need to be

modified/enhanced to respond to specifics in the contract:

- Fast response to emergencies

- Situational changes at the retailer

Distribution Integration (DI)

Distributors an important partner in the supply chain
Distributors have a wealth of information about customer needs and wants
- Successful manufacturers use this information when developing new products
and product lines.
Distributors typically rely on manufacturers to supply the necessary parts and
expertise
Types of DI
Addresses both inventory-related and service-related issues
- Inventory pooling across the entire distributor network
- Each distributor checks inventories of other distributors to locate a needed
product or part.
- Dealers are contractually bound to exchange the part under certain conditions
and for agreed-upon remuneration.
i) lowers total inventory costs
ii) increases service levels.

Can meet a customers specialized technical service requests

- Steer special requests to the distributors best suited to address them

DI Relationship Requirements
- a large commitment of resources and effort for the manufacturer
- a long-term alliance.
- trust among the participants.
- pledges and guarantees from the manufacturer to ensure distributor
commitment.