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Network Design in the Supply Chain
5

PowerPoint presentation to accompany
Chopra and Meindl Supply Chain Management, 5e
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Learning Objectives
Understand the role of network design in a supply chain.
Identify factors influencing supply chain network design decisions.
Develop a framework for making network design decisions.
Use optimization for facility location and capacity allocation decisions.

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Notes:

Network Design Decisions
Facility role
What role, what processes?
Facility location
Where should facilities be located?
Capacity allocation
How much capacity at each facility?
Market and supply allocation
What markets? Which supply sources?

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Facility- Closing of Netflex DC due to Video Streaming, Amazon increase in DC.
3

Factors Influencing
Network Design Decisions
Strategic factors
Technological factors
Macroeconomic factors
Tariffs and tax incentives
Exchange-rate and demand risk
Freight and fuel costs
Political

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Strategic Factors : What is the strategic Factor of Costco in regard to the facility . What is the strategic factors- Looking at Cost. – Look for labor cost is low in other countries.
Technological Factors: How much automation in system. Software
Macro- economic- government negotiations for local market. Currencies fluctuation. Oil prices

Political-

Infrastructure:

4

Factors Influencing
Network Design Decisions
Infrastructure factors
Competitive factors
Positive externalities between firms
Locating to split the market
Customer response time and local presence
Logistics and facility costs

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Positive externalities between firms- E.g. Everyone is in a mall where everyone benefits based on the location
E.g. Melbourne – Embrarer opened facilities which then allowed more aviation companies to locate in that location

Locating to split the market: E.g. Maximize market share if they are closer together. So like Walt Disney and Universal studios.

Customer response time and local presence: BJ’s Customer less time sensitive. Starbuks- Location not far from customers

Logistics and Facility Cost- E.g. Blue Nile and Zales

5

Competitive Factors
Positive externalities between firms
Collocation benefits all
Locating to split the market
Locate to capture largest market share

Figure 5-1

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Framework for Network Design Decisions
Figure 5-2

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PHASE 1- Macro – Supply chain strategy

PHASE 2- Regional Facility Configuration- Identify regions where the facilities can be located.

PHASE 3- Desirable Sites where facilities are to be located
Hard Infrastructure: Availability of Suppliers, Transportation services, communication network , utilities,
Soft Infrastructure: skilled workforce, workforce turnover, community receptivity to business and industry

PHASE 4: Location choices=select precise locations and give a more quantifiable measurement of the regions selected of facility cost while still looking an non – quantifiable measurements to determine the best locations.

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Framework for Network Design Decisions
Phase I: Define a Supply Chain Strategy/Design
Clear definition of the firm’s competitive strategy
Forecast the likely evolution of global competition
Identify constraints on available capital
Determine growth strategy

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Framework for Network Design Decisions
Phase II: Define the Regional Facility Configuration
Forecast of the demand by country or region
Economies of scale or scope
Identify demand risk, exchange-rate risk, political risk, tariffs, requirements for local production, tax incentives, and export or import restrictions
Identify competitors

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Framework for Network Design Decisions
Phase III: Select a Set of Desirable Potential Sites
Hard infrastructure requirements
Soft infrastructure requirements
Phase IV: Location Choices

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Models for Facility Location and Capacity Allocation
Maximize the overall profitability of the supply chain network while providing customers with the appropriate responsiveness
Many trade-offs during network design
Network design models used to decide on locations and capacities and to assign current demand to facilities

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Summary of Learning Objectives
Understand the role of network design in a supply chain
Identify factors influencing supply chain network design decisions
Develop a framework for making network design decisions
Use optimization for facility location and capacity allocation decisions

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Notes:

FORECAST DEMAND

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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher.
Printed in the United States of America.

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d1 = a+
1– b – a

2
and d2 =

1+b – a
2

d
1
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2
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2
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2

Designing Global Supply Chain Networks
6

PowerPoint presentation to accompany
Chopra and Meindl Supply Chain Management, 5e
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Learning Objectives
Identify factors that need to be included in total cost when making global sourcing decisions.
Define uncertainties that are particularly relevant when designing global supply chains.
Explain different strategies that may be used to mitigate risk in global supply chains.
Understand decision tree methodologies used to evaluate supply chain design decisions under uncertainty.

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Impact of Globalization on Supply Chain Networks
Opportunities to simultaneously grow revenues and decrease costs
Accompanied by significant additional risk
Difference between success and failure often ability to incorporate suitable risk mitigation into supply chain design
Uncertainty of demand and price drives the value of building flexible production capacity

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Impact of Globalization on Supply Chain Networks

Risk Factors Percentage of Supply Chains Impacted

Natural disasters 35

Shortage of skilled resources 24

Geopolitical uncertainty 20

Terrorist infiltration of cargo 13

Volatility of fuel prices 37

Currency fluctuation 29

Port operations/custom delays 23

Customer/consumer preference shifts 23

Performance of supply chain partners 38

Logistics capacity/complexity 33

Forecasting/planning accuracy 30

Supplier planning/communication issues 27

Inflexible supply chain technology 21

Table 6-1

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The Offshoring Decision: Total Cost
Comparative advantage in global supply chains
Quantify the benefits of offshore production along with the reasons
Two reasons offshoring fails
Focusing exclusively on unit cost rather than total cost
Ignoring critical risk factors

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The Offshoring Decision: Total Cost

Performance Dimension Activity Impacting Performance Impact of Offshoring

Order communication Order placement More difficult communication

Supply chain visibility Scheduling and expediting Poorer visibility

Raw material costs Sourcing of raw material Could go either way depending on raw material sourcing

Unit cost Production, quality (production and transportation) Labor/fixed costs decrease; quality may suffer

Freight costs Transportation modes and quantity Higher freight costs

Taxes and tariffs Border crossing Could go either way

Supply lead time Order communication, supplier production scheduling, production time, customs, transportation, receiving Lead time increase results in poorer forecasts and higher inventories

Table 6-2

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The Offshoring Decision: Total Cost

Performance Dimension Activity Impacting Performance Impact of Offshoring

On-time delivery/lead time uncertainty Production, quality, customs, transportation, receiving Poorer on-time delivery and increased uncertainty resulting in higher inventory and lower product availability

Minimum order quantity Production, transportation Larger minimum quantities increase inventory

Product returns Quality Increased returns likely

Inventories Lead times, inventory in transit and production Increase

Working capital Inventories and financial reconciliation Increase

Hidden costs Order communication, invoicing errors, managing exchange rate risk Higher hidden costs

Stock-outs Ordering, production, transportation with poorer visibility Increase

Table 6-2

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The Offshoring Decision: Total Cost
A global supply chain with offshoring increases the length and duration of information, product, and cash flows
The complexity and cost of managing the supply chain can be significantly higher than anticipated
Quantify factors and track them over time
Big challenges with offshoring is increased risk and its potential impact on cost

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The Offshoring Decision: Total Cost
Key elements of total cost
Supplier price
Terms
Delivery costs
Inventory and warehousing
Cost of quality
Customer duties, value added-taxes, local tax incentives
Cost of risk, procurement staff, broker fees, infrastructure, and tooling and mold costs
Exchange rate trends and their impact on cost

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Risk Management In
Global Supply Chains
Risks include supply disruption, supply delays, demand fluctuations, price fluctuations, and exchange-rate fluctuations
Critical for global supply chains to be aware of the relevant risk factors and build in suitable mitigation strategies

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Risk Management In
Global Supply Chains

Category Risk Drivers

Disruptions Natural disaster, war, terrorism
Labor disputes
Supplier bankruptcy

Delays High capacity utilization at supply source
Inflexibility of supply source
Poor quality or yield at supply source

Systems risk Information infrastructure breakdown
System integration or extent of systems being networked

Forecast risk Inaccurate forecasts due to long lead times, seasonality, product variety, short life cycles, small customer base
Information distortion

Table 6-3

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Risk Management In
Global Supply Chains

Category Risk Drivers

Intellectual property risk Vertical integration of supply chain
Global outsourcing and markets

Procurement risk Exchange-rate risk
Price of inputs
Fraction purchased from a single source
Industry-wide capacity utilization

Receivables risk Number of customers
Financial strength of customers

Inventory risk Rate of product obsolescence
Inventory holding cost
Product value
Demand and supply uncertainty

Capacity risk Cost of capacity
Capacity flexibility

Table 6-3

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Risk Management In
Global Supply Chains
Good network design can play a significant role in mitigating supply chain risk
Every mitigation strategy comes at a price and may increase other risks
Global supply chains should generally use a combination of rigorously evaluated mitigation strategies along with financial strategies to hedge uncovered risks

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Risk Management In
Global Supply Chains

Risk Mitigation Strategy Tailored Strategies

Increase capacity Focus on low-cost, decentralized capacity for predictable demand. Build centralized capacity for unpredictable demand. Increase decentralization as cost of capacity drops.

Get redundant suppliers More redundant supply for high-volume products, less redundancy for low-volume products. Centralize redundancy for low-volume products in a few flexible suppliers.

Increase responsiveness Favor cost over responsiveness for commodity products. Favor responsiveness over cost for short–life cycle products.

Table 6-4

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Risk Management In
Global Supply Chains

Risk Mitigation Strategy Tailored Strategies

Increase inventory Decentralize inventory of predictable, lower value products. Centralize inventory of less predictable, higher value products.

Increase flexibility Favor cost over flexibility for predictable, high-volume products. Favor flexibility for unpredictable, low-volume products. Centralize flexibility in a few locations if it is expensive.

Pool or aggregate demand Increase aggregation as unpredictability grows.

Increase source capability Prefer capability over cost for high-value, high-risk products. Favor cost over capability for low-value commodity products. Centralize high capability in flexible source if possible.

Table 6-4

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Flexibility, Chaining, and Containment
Three broad categories of flexibility
New product flexibility
Ability to introduce new products into the market at a rapid rate
Mix flexibility
Ability to produce a variety of products within a short period of time
Volume flexibility
Ability to operate profitably at different levels of output

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Flexibility, Chaining, and Containment
Figure 6-1

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Flexibility, Chaining, and Containment
As flexibility is increased, the marginal benefit derived from the increased flexibility decreases
With demand uncertainty, longer chains pool available capacity
Long chains may have higher fixed cost than multiple smaller chains
Coordination more difficult across with a single long chain
Flexibility and chaining are effective when dealing with demand fluctuation but less effective when dealing with supply disruption

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Discounted Cash Flow Analysis
Supply chain decisions should be evaluated as a sequence of cash flows over time
Discounted cash flow (DCF) analysis evaluates the present value of any stream of future cash flows and allows managers to compare different cash flow streams in terms of their financial value
Based on the time value of money – a dollar today is worth more than a dollar tomorrow

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Discounted Cash Flow Analysis
Compare NPV of different supply chain design options
The option with the highest NPV will provide the greatest financial return

where
C0, C1,…,CT is stream of cash flows over T periods
NPV = net present value of this stream
k = rate of return

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Trips Logistics Example
Demand = 100,000 units
1,000 sq. ft. of space for every 1,000 units of demand
Revenue = $1.22 per unit of demand
Sign a three-year lease or obtain warehousing space on the spot market?
Three-year lease cost = $1 per sq. ft.
Spot market cost = $1.20 per sq. ft.
k = 0.1

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Trips Logistics Example

Expected annual profit if warehouse space is obtained from the spot market =

= 100,000 x $1.22
– 100,000 x $1.20
$2,000

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Trips Logistics Example

Expected annual profit with three year lease =

= 100,000 x $1.22
– 100,000 x $1.00
$22,000

NPV of signing lease is $60,182 – $5,471 = $54,711 higher than spot market

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Using Decision Trees
Many different decisions
Should the firm sign a long-term contract for warehousing space or get space from the spot market as needed?
What should the firm’s mix of long-term and spot market be in the portfolio of transportation capacity?
How much capacity should various facilities have? What fraction of this capacity should be flexible?

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Using Decision Trees
During network design, managers need a methodology that allows them to estimate the uncertainty in demand and price forecast and incorporate this in the decision-making process
Most important for network design decisions because they are hard to change in the short term

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Basics of Decision Tree Analysis
A decision tree is a graphic device used to evaluate decisions under uncertainty
Identify the number and duration of time periods that will be considered
Identify factors that will affect the value of the decision and are likely to fluctuate over the time periods
Evaluate decision using a decision tree

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Decision Tree Methodology
Identify the duration of each period (month, quarter, etc.) and the number of periods T over which the decision is to be evaluated
Identify factors whose fluctuation will be considered
Identify representations of uncertainty for each factor
Identify the periodic discount rate k for each period
Represent the decision tree with defined states in each period as well as the transition probabilities between states in successive periods
Starting at period T, work back to Period 0, identifying the optimal decision and the expected cash flows at each step

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Decision Tree – Trips Logistics
Three warehouse lease options
Get all warehousing space from the spot market as needed
Sign a three-year lease for a fixed amount of warehouse space and get additional requirements from the spot market
Sign a flexible lease with a minimum charge that allows variable usage of warehouse space up to a limit with additional requirement from the spot market

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Decision Tree – Trips Logistics
1000 sq. ft. of warehouse space needed for 1000 units of demand
Current demand = 100,000 units per year
Binomial uncertainty: Demand can go up by 20% with
p = 0.5 or down by 20% with 1 – p = 0.5
Lease price = $1.00 per sq. ft. per year
Spot market price = $1.20 per sq. ft. per year
Spot prices can go up by 10% with p = 0.5 or down by 10% with 1 – p = 0.5
Revenue = $1.22 per unit of demand
k = 0.1

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Decision Tree
Figure 6-2

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Decision Tree – Trips Logistics
Analyze the option of not signing a lease and using the spot market
Start with Period 2 and calculate the profit at each node
For D = 144, p = $1.45, in Period 2:
C(D = 144, p = 1.45,2) = 144,000 x 1.45
= $208,800
P(D = 144, p = 1.45,2) = 144,000 x 1.22
– C(D = 144, p = 1.45, 2)
= 175,680 – 208,800
= –$33,120

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Decision Tree – Trips Logistics

Revenue Cost
C(D =, p =, 2) Profit
P(D =, p =, 2)

D = 144, p = 1.45 144,000 × 1.22 144,000 × 1.45 –$33,120

D = 144, p = 1.19 144,000 × 1.22 144,000 × 1.19 $4,320

D = 144, p = 0.97 144,000 × 1.22 144,000 × 0.97 $36,000

D = 96, p = 1.45 96,000 × 1.22 96,000 × 1.45 –$22,080

D = 96, p = 1.19 96,000 × 1.22 96,000 × 1.19 $2,880

D = 96, p = 0.97 96,000 × 1.22 96,000 × 0.97 $24,000

D = 64, p = 1.45 64,000 × 1.22 64,000 × 1.45 –$14,720

D = 64, p = 1.19 64,000 × 1.22 64,000 × 1.19 $1,920

D = 64, p = 0.97 64,000 × 1.22 64,000 × 0.97 $16,000

Table 6-5

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Decision Tree – Trips Logistics
Expected profit at each node in Period 1 is the profit during Period 1 plus the present value of the expected profit in Period 2
Expected profit EP(D =, p =, 1) at a node is the expected profit over all four nodes in Period 2 that may result from this node
PVEP(D =, p =, 1) is the present value of this expected profit and P(D =, p =, 1), and the total expected profit, is the sum of the profit in Period 1 and the present value of the expected profit in Period 2

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Decision Tree – Trips Logistics
From node D = 120, p = $1.32 in Period 1, there are four possible states in Period 2
Evaluate the expected profit in Period 2 over all four states possible from node D = 120, p = $1.32 in Period 1 to be
EP(D = 120, p = 1.32,1) = 0.2 x [P(D = 144, p = 1.45,2) +
P(D = 144, p = 1.19,2) +
P(D = 96, p = 1.45,2) +
P(D = 96, p = 1.19,2)
= 0.25 x [–33,120 + 4,320 –
22,080 + 2,880
= –$12,000

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Decision Tree – Trips Logistics
The present value of this expected value in Period 1 is
PVEP(D = 120, p = 1.32,1) = EP(D = 120, p = 1.32,1) / (1 + k)
= –$12,000 / (1.1)
= –$10,909
The total expected profit P(D = 120, p = 1.32,1) at node D = 120, p = 1.32 in Period 1 is the sum of the profit in Period 1 at this node, plus the present value of future expected profits possible from this node
P(D = 120, p = 1.32,1) = 120,000 x 1.22 – 120,000 x 1.32 +
PVEP(D = 120, p = 1.32,1)
= –$12,000 – $10,909 = –$22,909

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Decision Tree – Trips Logistics
For Period 0, the total profit P(D = 100, p = 120,0) is the sum of the profit in Period 0 and the present value of the expected profit over the four nodes in Period 1
EP(D = 100, p = 1.20,0) = 0.25 x [P(D = 120, p = 1.32,1) +
P(D = 120, p = 1.08,1) +
P(D = 96, p = 1.32,1) +
P(D = 96, p = 1.08,1)]
= 0.25 x [–22,909 + 32,073 –
15,273) + 21,382]
= $3,818

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Decision Tree – Trips Logistics
PVEP(D = 100, p = 1.20,1) = EP(D = 100, p = 1.20,0) / (1 + k)
= $3,818 / (1.1) = $3,471

P(D = 100, p = 1.20,0) = 100,000 x 1.22 – 100,000 x 1.20 +
PVEP(D = 100, p = 1.20,0)
= $2,000 + $3,471 = $5,471

Therefore, the expected NPV of not signing the lease and obtaining all warehouse space from the spot market is given by NPV(Spot Market) = $5,471

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Decision Tree – Trips Logistics

Node EP(D =, p =, 1) P(D =, p =, 1)
= D x 1.22 – D x p +
EP(D =, p =, 1) / (1 + k)

D = 120, p = 1.32 100,000 sq. ft. –$22,909

D = 120, p = 1.08 100,000 sq. ft. $32,073

D = 80, p = 1.32 100,000 sq. ft. –$15,273

D = 80, p = 1.08 100,000 sq. ft. $21,382

Table 6-6
Fixed Lease Option

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Decision Tree – Trips Logistics

Node Leased Space Warehouse Space
at Spot Price (S) Profit P(D =, p =, 2)
= D x 1.22 – (100,000 x 1 + S x p)

D = 144, p = 1.45 100,000 sq. ft. 44,000 sq. ft. $11,880

D = 144, p = 1.19 100,000 sq. ft. 44,000 sq. ft. $23,320

D = 144, p = 0.97 100,000 sq. ft. 44,000 sq. ft. $33,000

D = 96, p = 1.45 100,000 sq. ft. 0 sq. ft. $17,120

D = 96, p = 1.19 100,000 sq. ft. 0 sq. ft. $17,120

D = 96, p = 0.97 100,000 sq. ft. 0 sq. ft. $17,120

D = 64, p = 1.45 100,000 sq. ft. 0 sq. ft. –$21,920

D = 64, p = 1.19 100,000 sq. ft. 0 sq. ft. –$21,920

D = 64, p = 0.97 100,000 sq. ft. 0 sq. ft. –$21,920

Table 6-7

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Decision Tree – Trips Logistics

Node EP(D =, p =, 1) Warehouse Space
at Spot Price (S) P(D =, p =, 1)
= D x 1.22 – (100,000 x 1 + S x p) + EP(D =, p = ,1)(1 + k)

D = 120, p = 1.32 0.25 x [P(D = 144, p = 1.45,2) + P(D = 144, p = 1.19,2) + P(D = 96, p = 1.45,2) + P(D = 96, p = 1.19,2)] = 0.25 x (11,880 + 23,320 + 17,120 + 17,120) = $17,360 20,000 $35,782

D = 120, p = 1.08 0.25 x (23,320 + 33,000 + 17,120 + 17,120) = $22,640 20,000 $45,382

D = 80, p = 1.32 0.25 x (17,120 + 17,120 – 21,920 – 21,920) = –$2,400 0 –$4,582

D = 80, p = 1.08 0.25 x (17,120 + 17,120 – 21,920 – 21,920) = –$2,400 0 –$4,582

Table 6-8

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Decision Tree – Trips Logistics
Using the same approach for the lease option, NPV(Lease) = $38,364
Recall that when uncertainty was ignored, the NPV for the lease option was $60,182
However, the manager would probably still prefer to sign the three-year lease for 100,000 sq. ft. because this option has the higher expected profit

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Decision Tree – Trips Logistics

Node Warehouse Space at $1 (W) Warehouse Space
at Spot Price (S) Profit P(D =, p =, 2)
= D x 1.22 – (W x 1 + S x p)

D = 144, p = 1.45 100,000 sq. ft. 44,000 sq. ft. $11,880

D = 144, p = 1.19 100,000 sq. ft. 44,000 sq. ft. $23,320

D = 144, p = 0.97 100,000 sq. ft. 44,000 sq. ft. $33,000

D = 96, p = 1.45 96,000 sq. ft. 0 sq. ft. $21,120

D = 96, p = 1.19 96,000 sq. ft. 0 sq. ft. $21,120

D = 96, p = 0.97 96,000 sq. ft. 0 sq. ft. $21,120

D = 64, p = 1.45 64,000 sq. ft. 0 sq. ft. $14,080

D = 64, p = 1.19 64,000 sq. ft. 0 sq. ft. $14,080

D = 64, p = 0.97 64,000 sq. ft. 0 sq. ft. $14,080

Table 6-9
Flexible Lease Option

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Decision Tree – Trips Logistics

Node EP(D =, p =, 1) Warehouse Space at $1 (W) Warehouse Space
at Spot Price (S) P(D =, p =, 1)
= D x 1.22 – (W x 1 + S x p) + EP(D =, p = ,1)(1 + k)

D = 120,
p = 1.32 0.25 x (11,880 + 23,320 + 21,120 + 21,120) = $19,360 100,000 20,000 $37,600

D = 120,
p = 1.08 0.25 x (23,320 + 33,000 + 21,120 + 21,120) = $24,640 100,000 20,000 $47,200

D = 80,
p = 1.32 0.25 x (21,120 + 21,120 + 14,080 + 14,080) = $17,600 80,000 0 $33,600

D = 80,
p = 1.08 0.25 x (21,920 + 21,920 + 14,080 + 14,080) = $17,600 80,000 0 $33,600

Table 6-10

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Decision Tree – Trips Logistics

Option Value

All warehouse space from the spot market $5,471

Lease 100,000 sq. ft. for three years $38,364

Flexible lease to use between 60,000 and 100,000 sq. ft. $46,545

Table 6-11

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Onshore or Offshore
D-Solar demand in Europe = 100,000 panels per year
Each panel sells for €70
Annual demand may increase by 20 percent with probability 0.8 or decrease by 20 percent with probability 0.2
Build a plant in Europe or China with a rated capacity of 120,000 panels

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D-Solar Decision

European Plant Chinese Plant

Fixed Cost
(euro) Variable Cost
(euro) Fixed Cost
(yuan) Variable Cost
(yuan)

1 million/year 40/panel 8 million/year 340/panel

Table 6-12

Period 1 Period 2

Demand Exchange Rate Demand Exchange Rate

112,000 8.64 yuan/euro 125,440 8.2944 yuan/euro

Table 6-13

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D-Solar Decision
European plant has greater volume flexibility
Increase or decrease production between 60,000 to 150,000 panels
Chinese plant has limited volume flexibility
Can produce between 100,000 and 130,000 panels
Chinese plant will have a variable cost for 100,000 panels and will lose sales if demand increases above 130,000 panels
Yuan, currently 9 yuan/euro, expected to rise 10%, probability of 0.7 or drop 10%, probability of 0.3
Sourcing decision over the next three years
Discount rate k = 0.1

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D-Solar Decision
Period 0 profits = 100,000 x 70 – 1,000,000 – 100,000 x 40 = €2,000,000
Period 1 profits = 112,000 x 70 – 1,000,000 – 112,000 x 40 = €2,360,000
Period 2 profits = 125,440 x 70 – 1,000,000 – 125,440 x 40 = €2,763,200
Expected profit from onshoring = 2,000,000 + 2,360,000/1.1 +
2,763,200/1.21
= €6,429,091
Period 0 profits = 100,000 x 70 – 8,000,000/9 – 100,000 x 340/9

4
Designing Distribution Networks and Applications to Online Sales

PowerPoint presentation to accompany
Chopra and Meindl Supply Chain Management, 5e
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https://www.youtube.com/watch?v=GHNuOLrAwlo- Unilever

network design short videos

https://www.youtube.com/watch?v=gg_i7jFmINw&list=PLI3QncrPtQTXFE5TOV09ytyLCi8XSMBtU&index=1

https://www.youtube.com/watch?v=tkt9ncUzEHg&list=PLI3QncrPtQTXFE5TOV09ytyLCi8XSMBtU&index=2

https://www.youtube.com/watch?v=-xR4wcDUY9U&list=PLI3QncrPtQTXFE5TOV09ytyLCi8XSMBtU&index=3

https://www.youtube.com/watch?v=qPzw_w8W0OI&list=PLI3QncrPtQTXFE5TOV09ytyLCi8XSMBtU&index=4

https://www.youtube.com/watch?v=PSH1vQV_9SU&list=PLI3QncrPtQTXFE5TOV09ytyLCi8XSMBtU&index=5

https://www.youtube.com/watch?v=ooe_8E8jO8c&list=PLI3QncrPtQTXFE5TOV09ytyLCi8XSMBtU&index=6

BLOCK CHAIN

1

Learning Objectives
Identify the key factors to be considered when designing a distribution network
Discuss the strengths and weaknesses of various distribution options
Understand how online sales have affected the design of distribution networks in different industries

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The Role of Distribution
in 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
Drives profitability by directly affecting supply chain cost and the customer experience
Choice of distribution network can achieve supply chain objectives from low cost to high responsiveness

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Factors Influencing
Distribution Network Design
Distribution network performance evaluated along two dimensions
Customer needs that are met
Cost of meeting customer needs
Evaluate the impact on customer service and cost for different distribution network options
Profitability of the delivery network determined by revenue from met customer needs and network costs

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Factors Influencing
Distribution Network Design
Elements of customer service influenced by network structure:
Response time
Product variety
Product availability
Customer experience
Order visibility
Returnability

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Class I want each of you to Take 5 minutes to give me an example
5

Factors Influencing
Distribution Network Design
Supply chain costs affected by network structure:
Inventories
Transportation
Facilities and handling
Information

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6

Desired Response Time and Number of Facilities
Figure 4-1

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Notes: Increasing the number of facilities moves them closer to the end consumer. This reduces the response time. As Amazon has built warehouses, the average time from the warehouse to the end consumer has decreased. McMaster-Carr provides 1-2 day coverage of most of the U.S from 6 facilities. W.W. Grainger is able to increase coverage to same day delivery using about 370 facilities.

Inventory Costs and Number
of Facilities

Figure 4-2

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Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities.

Transportation Costs and
Number of Facilities
Figure 4-3

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Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities.

Facility Costs and Number
of Facilities
Figure 4-4

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Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities.

Logistics Cost, Response Time, and Number of Facilities
Figure 4-5

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Design Options for a
Distribution Network
Distribution network choices from the manufacturer to the end consumer
Two key decisions
Will product be delivered to the customer location or picked up from a prearranged site?
Will product flow through an intermediary (or intermediate location)?

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Design Options for a
Distribution Network
One of six designs may be used
Manufacturer storage with direct shipping
Manufacturer storage with direct shipping and in-transit merge
Distributor storage with carrier delivery
Distributor storage with last-mile delivery
Manufacturer/distributor storage with customer pickup
Retail storage with customer pickup

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Manufacturer Storage with
Direct Shipping
Figure 4-6

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Information goes to Retailer and manufacturer ships product directly to costomer.

Transportation cost – Up
Information – Up
Inventory- Low
Facility cost – low

Response time- Longer
Product Variety- large product variety
Produc
14

Manufacturer Storage with Direct Shipping Network

Cost Factor Performance

Inventory Lower costs because of aggregation. Benefits of aggregation are highest for low-demand, high-value items. Benefits are large if product customization can be postponed at the manufacturer.

Transportation Higher transportation costs because of increased distance and disaggregate shipping.

Facilities and handling Lower facility costs because of aggregation. Some saving on handling costs if manufacturer can manage small shipments or ship from production line.

Information Significant investment in information infrastructure to integrate manufacturer and retailer.

Table 4-1

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Manufacturer Storage with Direct Shipping Network

Service Factor Performance

Response time Long response time of one to two weeks because of increased distance and two stages for order processing. Response time may vary by product, thus complicating receiving.

Product variety Easy to provide a high level of variety.

Product availability Easy to provide a high level of product availability because of aggregation at manufacturer.

Customer experience Good in terms of home delivery but can suffer if order from several manufacturers is sent as partial shipments.

Time to market Fast, with the product available as soon as the first unit is produced.

Order visibility More difficult but also more important from a customer service perspective.

Returnability Expensive and difficult to implement.

Table 4-1

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In-Transit Merge Network
Figure 4-7

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In-Transit Merge

Cost Factor Performance

Inventory Similar to drop-shipping.

Transportation Somewhat lower transportation costs than drop-shipping.

Facilities and handling Handling costs higher than drop-shipping at carrier; receiving costs lower at customer.

Information Investment is somewhat higher than for drop-shipping.

Table 4-2

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In-Transit Merge

Service Factor Performance

Response time Similar to drop-shipping; may be marginally higher.

Product variety Similar to drop-shipping.

Product availability Similar to drop-shipping.

Customer experience Better than drop-shipping because only a single delivery has to be received.

Time to market Similar to drop-shipping.

Order visibility Similar to drop-shipping.

Returnability Similar to drop-shipping.

Table 4-2

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Distributor Storage with
Carrier Delivery
Figure 4-8

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Distributor Storage with
Carrier Delivery

Cost Factor Performance

Inventory Higher than manufacturer storage. Difference is not large for faster moving items but can be large for very slow-moving items.

Transportation Lower than manufacturer storage. Reduction is highest for faster moving items.

Facilities and handling Somewhat higher than manufacturer storage. The difference can be large for very slow-moving items.

Information Simpler infrastructure compared to manufacturer storage.

Table 4-3

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Distributor Storage with
Carrier Delivery

Service Factor Performance

Response time Faster than manufacturer storage.

Product variety Lower than manufacturer storage.

Product availability Higher cost to provide the same level of availability as manufacturer storage.

Customer experience Better than manufacturer storage with drop-shipping.

Time to market Higher than manufacturer storage.

Order visibility Easier than manufacturer storage.

Returnability Easier than manufacturer storage.

Table 4-3

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Distributor Storage with
Last Mile Delivery
Figure 4-9

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Distributor Storage with
Last Mile Delivery

Cost Factor Performance

Inventory Higher than distributor storage with package carrier delivery.

Transportation Very high cost given minimal scale economies. Higher than any other distribution option.

Facilities and handling Facility costs higher than manufacturer storage or distributor storage with package carrier delivery, but lower than a chain of retail stores.

Information Similar to distributor storage with package carrier delivery.

Table 4-4

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Distributor Storage with
Last Mile Delivery

Service Factor Performance

Response time Very quick. Same day to next-day delivery.

Product variety Somewhat less than distributor storage with package carrier delivery but larger than retail stores.

Product availability More expensive to provide availability than any other option except retail stores.

Customer experience Very good, particularly for bulky items. Slightly higher than distributor storage with package carrier delivery.

Time to market Less of an issue and easier to implement than manufacturer storage or distributor storage with package carrier delivery.

Order visibility Easier to implement than other previous options.

Returnability Harder and more expensive than a retail network.

Table 4-4

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Manufacturer or Distributor Storage with Customer Pickup
Figure 4-10

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Manufacturer or Distributor Storage with Customer Pickup

Cost Factor Performance

Inventory Can match any other option, depending on the location of inventory.

Transportation Lower than the use of package carriers, especially if using an existing delivery network.

Facilities and handling Facility costs can be high if new facilities have to be built. Costs are lower if existing facilities are used. The increase in handling cost at the pickup site can be significant.

Information Significant investment in infrastructure required.

Table 4-5

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Manufacturer or Distributor Storage with Customer Pickup

Service Factor Performance

Response time Similar to package carrier delivery with manufacturer or distributor storage. Same-day delivery possible for items stored locally at pickup site.

Product variety Similar to other manufacturer or distributor storage options.

Product availability Similar to other manufacturer or distributor storage options.

Customer experience Lower than other options because of the lack of home delivery. Experience is sensitive to capability of pickup location.

Time to market Similar to manufacturer storage options.

Order visibility Difficult but essential.

Returnability Somewhat easier given that pickup location can handle returns.

Table 4-5

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Retail Storage with Customer Pickup

Cost Factor Performance

Inventory Higher than all other options.

Transportation Lower than all other options.

Facilities and handling Higher than other options. The increase in handling cost at the pickup site can be significant for online and phone orders.

Information Some investment in infrastructure required for online and phone orders.

Table 4-6

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Retail Storage with Customer Pickup

Service Factor Performance

Response time Same-day (immediate) pickup possible for items stored locally at pickup site.

Product variety Lower than all other options.

Product availability More expensive to provide than all other options.

Customer experience Related to whether shopping is viewed as a positive or negative experience by customer.

Time to market Highest among distribution options.

Order visibility Trivial for in-store orders. Difficult, but essential, for online and phone orders.

Returnability Easier than other options because retail store can provide a substitute.

Table 4-6

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Comparative Performance of Delivery Network Designs
Table 4-7

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Identify the best and worst network along various dimensions.

Response time: (B) retail stores (W) Manufacturer storage with direct ship
Product variety: (W) retail stores (B) Manufacturer storage with direct ship
Product availability: (W) retail store (B) Manufacturer storage
Inventory: (W) retail store (B) manufacturer storage
Transportation: (B) retail store (W) last mile delivery
Facility: (W) retail store (B) manufacturer storage
Handling: (W) Distributor storage with last mile delivery (B)
Information: Retail stores may be less complex; manufacturer storage with pickup may be very complex

Delivery Networks for Different Product/ Customer Characteristics
Table 4-8

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When designing the delivery network we should account for product and market characteristics.
High demand products will have transportation cost play a significant role. Use network with good transportation cost (retail stores)
Very low demand products will have inventory play a significant role. Use network with low inventory costs (direct shipping)
Many product sources: transportation + information plays a role. Distributor storage with package carrier
Few product sources but high customization: manufacturer storage with merge in transit
High product variety: inventory cost will be significant. Use distributor storage
Low customer effort: Distributor storage with package carrier delivery or last mile delivery depending upon desired response time

Impact of Online Sales on Customer Service
Response time to customers
Physical products take longer to fulfill than retail store
No delay for information goods
Product variety
Easier to offer larger selection
Product availability
Aggregating inventory and better information on customer preferences improves product availability

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Impact of Online Sales on Customer Service
Customer experience
Improved access, customization, and convenience
Faster time to market
Order Visibility
Returnability
Harder with online orders
Proportion of returns likely to be much higher

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Impact of Online Sales on Customer Service
Direct Sales to Customers
Social networking channels allow firms to directly pitch products and promotion
Flexible Pricing, Product Portfolio, and Promotions
Manage revenues from product portfolio more effectively than traditional channels
Promotion information can be conveyed to customers quickly and inexpensively
Efficient Funds Transfer

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Impact of Online Sales on Cost
Inventory
Lower inventory levels if customers will wait
Postpone variety until after the customer order is received
Facilities
Costs related to the number and location of facilities in a network
Costs associated with the operations in these facilities

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Impact of Online Sales on Cost
Transportation
Lower cost of “transporting” information goods in digital form
For nondigital, aggregating inventories increases outbound transportation
Information
Share demand, planning, and forecasting information throughout its supply chain
Additional costs to build and maintain the information infrastructure

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Online Sales Scorecard

Area Impact

Response time

Product variety

Product availability

Customer experience

Time to market

Order visibility

Direct sales

Flexible pricing, portfolio, promotions

Efficient funds transfer

Inventory

Facilities

Transportation

Information

Key: +2 = very positive; +1 = positive; 0 = neutral; −1 = negative; −2 = very negative.

Table 4-9

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Using Online Sales to Sell Computer Hardware: Dell

Figure 4-11

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Using Online Sales to Sell Computer Hardware: Dell
Impact of online sales on customer service
Delay in fulfilling customer request
Impact of online sales on cost
Reduced inventory costs
Lower facility costs
Higher total transportation costs
Incremental increase in information costs

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Impact of Online Sales on Performance

Area Impact for Customized Hardware Impact for Standard Low-Cost Hardware

Response time –1 –2

Product variety +2 0

Product availability +1 +1

Customer experience +2 +1

Time to market +2 +1

Order visibility +1 0

Direct sales +2 +1

Flexible pricing, portfolio, promotions +2 +1

Efficient funds transfer +2 +2

Inventory +2 +1

Facilities +2 +1

Transportation –1 –2

Information 0 0

Table 4-10

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

Using Online Sales to Sell Computer Hardware: Dell
A tailored supply chain network
A hybrid model can be very effective
More significant as hardware becomes more of a commodity
Take advantage of the strengths of both online sales and traditional retail and distribution channels

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

Using Online Sales to Sell Books: Amazon
Impact of online sales on customer service
Internet has not shortened supply chains
Increased selection, convenience
Impact of online sales on cost
Reduced inventory costs
Lower facility costs
Higher total transportation costs
Increase in information costs

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

Impact of Online Sales on Performance

Area Physical books e-books

Response time –1 +1

Product variety +2 +2

Product availability +1 +2

Customer experience +1 +1

Time to market +1 +2

Order visibility 0 0

Direct sales 0 +1

Flexible pricing, portfolio, promotions +1 +1

Efficient funds transfer 0 0

Inventory +1 +2

Facilities +1 +1

Transportation –2 +1

Information –1 –1

Table 4-11

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

Using Online Sales to Sell Books: Amazon
A supply chain network for books
Traditional bookstores pressured from both ends
Amazon more efficient

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

Using the Internet to Sell Groceries: Peapod
Impact of online sales on customer service
Sell convenience and the time savings
Offers less variety
Creating a personalized shopping experience and customized advertising and promotions

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

Using the Internet to Sell Groceries: Peapod
Impact of online sales on cost
Reduced inventory costs
Higher facility costs due to picking operation
Significantly higher total transportation costs
Increase in information costs

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

Impact of Online Sales on Performance

Area Impact

Response time –1

Product variety 0

Product availability 0

Customer experience +1

Time to market 0

Order visibility –1

Direct sales 0

Flexible pricing, portfolio, promotions +1

Efficient funds transfer 0

Inventory 0

Facilities –1

Transportation –2

Information –1

Table 4-12

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

Using Internet to Sell Groceries: Peapod
Value of online sales to a traditional grocery chain
Complement the strengths of their existing network
Offer an entire array of services at differing prices based on the amount of work the customer does

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

Using the Internet to Rent Movies: Netflix
Impact of online sales on customer service
Staggering selection and an excellent recommendation engine
Video streaming through a variety of devices
Customers received their DVDs within 24 hours of being shipped

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

Using the Internet to Rent Movies: Netflix
Impact of online sales on cost
Reduced inventory costs
Lower facility costs
Considerably higher total transportation costs, increased streaming will reduce transportation costs
Increase in information costs

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

Impact of Online Sales on Performance

Area Impact for DVDs Impact for Digital Content

Response time –1 +2

Product variety +2 +2

Product availability +1 +2

Customer experience +1 +1

Time to market –1 –1

Order visibility 0 0

Direct sales 0 0

Flexible pricing, portfolio, promotions +1 +1

Efficient funds transfer 0 0

Inventory +2 +2

Facilities +1 +1

Transportation –2 0

Information –1 –1

Table 4-12

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

4-‹#›
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

Distribution Networks in Practice
The ownership structure of the distribution network can have as big as an impact as the type of distribution network
It is important to have adaptable distribution networks
Product price, commoditization, and criticality affect the type of …

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