Chapter 4: Supply Chain and Omnichannel Network Design

Supply chains adapt to

external changes

Challenges arise from

globalization and tech

Traditional retail stores opt for

omni-channel delivery

Rapid deployment centers

reduce costs

The Strategic Importance of Supply Chain Network Design

• Adjust network to fit supply chain. • Today's decisions shape future results. • Understand dynamic business environments. • Adapt resources to changing conditions. • Existing supply chains may not keep pace with change. • Reassess aging networks for upgrades.

Changes to global trade patterns

• Global trade volumes worldwide fluctuation • Regions' capacity for global shipping • The effect of conflict and politics on product availability • Global infrastructure for item transportation • Balance or lack of balance in global trade

Changing Customer Service Requirements

• Business evolution alters logistical needs. • Contemporary interest drives supply chain redesign. • Customers seek efficient, cost-effective logistics. • Customer service needs and customer demographics change. • “Omni-channel” supply chains expand customer reach, demand innovation in capabilities.

Shifting Locations of Customer and/or Supply Markets

• Supply chain dynamics altered by network changes. • Globalization drives strategic network development. • Emphasizing strategic locations, operations must align globally. • Utilizing developing markets for supply chain is crucial globally.

Change in Corporate Ownership/Merger and Acquisition Activity

• Firms often assess supply chains before ownership shifts. • Ensures smooth logistics for mergers/independence transition. • Lack of planning leads to duplicate effort and expenses. • Supply chain redesign due to corporate restructuring such as downsizing. • Strengthen logistics during restructuring.

Cost Pressures

• Firms innovate for cost reduction. • Reevaluate logistics for savings. • Examine and adapt supply chains. • Globally, labor wages shape manufacturing and logistics sites. • Global business volatility drives changes. • Plant modernization requires cost analysis.

Competitive Capabilities

• Competitive pressures drive logistics evaluation. • Cost analysis, service enhancement crucial. • Facility location review fosters competitiveness. • Utilize transportation advancements strategically.

Define Process

• Form a transformation team. • Establish the parameters and objectives • Evaluate the potential involvement of third-party suppliers of logistics services.

Perform a supply chain audit

• Customer requirements and environmental factors. • Key logistics goals and objectives. • Profile of current supply chain and firm's positioning. • Understanding of key supply chain activities. • Benchmark values for costs and performance. • Identification of gaps in performance. • Key objectives for supply chain design.

Examine network alternatives

• Apply suitable quantitative models to the current logistics system and to the alternatives under consideration. • Identify preliminary supply chain network design solutions consistent with the key objectives identified during the audit phase. • Conduct “what-if” analyses to test the sensitivity of recommended network designs to changes in key variables.

Conduct a facility location analysis

• Form a location selection team. • Qualitatively and quantitatively analyze the attributes of specific regions and locales. • Identify recommended specific sites for logistics facilities

Make decisions regarding network and facility location

• Evaluate network and sites • Confirm consistency with criteria • Assess logistical changes • Consider third-party involvement

Develop an Implementation plan

Develop a “blueprint for change” as a road map • Commit the resources necessary to ensure • Smooth and timely implementation • Continuous improvement of the network decisions

Implementation and transformation

• Implement plan • Transform chain • Transition from “as-is” to “to-be” • Rely on change management • Logical, understandable process • Integrate new insights seamlessly

Labor climate

• Location decision makers weigh factors • Labor cost, availability concerns • Degree of unionization • Skill level and work ethic • Rate of unemployment

Transportation services and infrastructure

• high-quality, transportation services • Interstate highway access • Availability of intermodal or local rail facilities • Convenience of a major airport facility • Proximity to inland or ocean port facilities • Assess infrastructure capabilities

proximity to markets and customers

• Proximity weighs logistics, competition • Transportation, freight cost, market size, logistics • Complex supply chains increases costs • Advanced transport and tech widen reach

Quality of life

• Quantifying regional life quality challenging • Employee well-being influences work quality

Taxes and industrial development incentives

• Knowledge of state and local taxes • Significant impact • Availability of industrial development incentives • Free trade zones (FTZs): special economic zones

supplier networks

• Availability and cost of raw materials and component parts • Cost of transporting materials • Consider supplier's inbound cost, service

land costs and utilities

• Facility type determines variance • Land cost concerns • Utility availability crucial • Local codes, construction costs • Decision-making considerations

IT infrastructure

• Supply chain IT infrastructure availability and capability • Facility location relevance • Speed and quality of network • Network security

Company preferences

• Company and/or CEO’s regional preference • Competitor presence: facility location • Shared access benefit: agglomeration determinant

Supply chain impacts location

Strategic positioning of inventories: “market-facing” logistics facilities

“customer-direct” – eliminating intermediate distribution capabilities

factory outlet

Optimization models

Designed to find the “best,” or optimum solution, while recognizing relevant constraints.

Mixed-integer linear programming goals

• Enhance analysis, optimize end-to-end supply chains. • Analyze model inputs' impact on operations. • Consider fixed, variable costs, capacity, economies, limitations. • Analyze strategic, tactical, operational supply chains.

Simulation models

Designed to develop a computer representation of supply chain network and observe changes as cost structures, constraints, and other factors are varied

Simulation

Creates model —> Experiments —> Analyzes

Optimization

Plans —> Executes —> Assesses

Heuristic Models

Designed to reduce a problem to a manageable size and search automatically through various alternatives to find a better solution.

Grid technique

• A simplistic heuristic approach. • Helps companies with multiple markets and multiple supply points determine a leastcost facility location. • Attempts to determine a fixed facility. • Determines the low-cost “center of gravity” for moving raw materials and finished goods.

Grid Technique Advantages

• Simplicity, easy computation. • Allows precise location coding and rate-distance modification. • Facilitates early-stage location decisions. • Example: Netherlands distribution center for efficient shipments to Western Europe.

Grid Technique Limitations

• Doesn't adapt to changing conditions. • Assumes linear transportation rates. • Ignores topographic conditions. • Neglects practical movement directions

Sensitivity Analysis

Enables the decision-maker to ask what-if questions and measure the resulting impact on the least-cost location

Important SC Modeling Issue and Concerns

• Inaccurate or incomplete data. • Level of detail. • Sensitivity analysis. • Linearity of transportation costs – Tapering Rate • Geographic concerns – Blanket Rate • Time horizon. • Use of appropriate analytical techniques.

Omni-channel

all channel; focuses on considering the needs of customers and reaching them through all available channels.

More prevalent options for omni-channel fulfillment.

• Store: Click and Collect • Store: Fill and Deliver • Retailer DC • Vendor or 3PL DC

4 timeless principles guide progress

1. Align omni-channel with go-to-market strategy
2. Integrate fulfillment processes from all channels
3. Prioritize maximizing customer value and ease.
4. Adapt to changing consumer preferences and models

logistics channel

Means by which products flow physically from place of availability to place of demand. • Four basic functions: sorting out, accumulating, allocating, and assorting

marketing channel

Means by which necessary transactional elements are managed. • orders, billing, accounts receivable

Integrated fulfillment

Retailer operates one distribution network to service both “bricks-and-mortar” and “clicks-and-mortar” channels.

Integrated fulfillment pros

Low start-up costs for retailers, workforce efficiency.

Integrated fulfillment cons

Order profile changes, unavailability of products in consumer units (eaches), “Fast pick”, or broken case operation requirements for unit pick.

Dedicated fulfillment

Retailer operates two separate distribution networks to service “bricks-and mortar” and “clicks-and-mortar”

Dedicated fulfillment pros

Elimination of most of the disadvantages of integrated fulfillment.

Dedicated fulfillment cons

Duplicate facilities and duplicate inventories.

Pool distribution

small retailers use third party logistics companies, or pool distributors, for store delivery, allowing them to achieve efficiency of a truckload shipment for the line haul and the effectiveness of allowing stores to receive LTL orders on a regular schedule.

direct store delivery

Manufacturer makes direct deliveries to retailer’s stores, bypassing its distribution network.

direct store delivery pro

Reduction of inventory in distribution network.

direct store delivery con

Possible reduction of inventory visibility to the retailers, requires close collaboration and agreement between the manufacturer and retailer.

store fulfillment model

Order, placed through website, is sent to nearest retail store for customer to pick up or store to deliver.

store fulfillment model pros

Short lead time to the customer, low start-up costs for the retailer, returns handled through the retail store, product available in consumer units.

store fulfillment model

Reduced control and consistency over order fill, conflicts between store and Internet order inventories, requirements of realtime visibility to in-store inventories, requirements of stores’ space to store and stage products for pickups

flow-through fulfillment

Similar to store fulfillment. Products picked and packed at retailer’s distribution center. Sent to the store for customer pickup or delivery

flow-through fulfillment pros

Eliminates inventory conflict between store and Internet sales. Avoids "last-mile" transportation cost for consumer pickup. No need for store-level inventory status. Returns handled through the existing store network.

flow-through fulfillment cons

Longer processing time. Picking done at the distribution center. Order travels with other store replenishment merchandise. Storage space for pickup items at the store.

last-mile challenge

Managing final product delivery from distribution hub to destination.

last yard

Extends last mile to specific value-realizing locations.

Integrated with last mile

Some organizations (e.g., Frito-Lay) include last yard in last mile, optimizing shelf presence and removing expired items in grocery stores.