Supply Chain Management (SCM) 101: Warehouse and Distribution - Distribution Network Design, Number and Location of DCs Centralised vs. Decentralised

What This Is

Distribution Network Design (DND) is the process of determining the optimal number and location of distribution centers (DCs) to serve customers efficiently. This matters in supply chain management because it directly affects costs, service levels, and inventory levels. For example, Amazon's DND strategy involves a network of fulfillment centers, sortation centers, and delivery stations to ensure fast and reliable delivery of products to customers.

Key Frameworks & Formulas

• Distribution Network Design (DND) Framework: A structured approach to designing a distribution network, considering factors such as demand, supply, transportation costs, and inventory costs.
• Economies of Scale (EOS): The cost savings achieved by increasing production or distribution volume, often used to justify larger DCs or more centralized distribution.
• Service Level (SL): The percentage of demand that is satisfied from stock on hand, often set at 95% or higher.
• Safety Stock (SS): The additional inventory held to mitigate stockouts and meet unexpected demand, calculated as SS = Z ×-× ?L, where Z is the Z-score,-is the standard deviation, and L is the lead time.
• Lead Time (LT): The time it takes to receive inventory from a supplier or to deliver products to customers, often set at 5-10 days.
• Transportation Cost (TC): The cost of moving products from suppliers to DCs and from DCs to customers, often a significant portion of total logistics costs.
• Inventory Holding Cost (IHC): The cost of holding inventory in DCs, warehouses, and on shelves, often a significant portion of total inventory costs.
• Fisher's Model: A framework for designing distribution networks, considering factors such as demand, supply, transportation costs, and inventory costs.
• SCOR (Supply Chain Operations Reference) Model: A framework for designing and improving supply chain operations, including distribution network design.
• EOQ (Economic Order Quantity) Formula: EOQ = ?(2DS/H), where D is demand, S is ordering cost, and H is holding cost.

Step-by-Step Application

1. Analyze Demand: Determine the demand patterns and volumes for each product and region to inform DC location and size decisions.
2. Assess Supply: Evaluate the supply chain's ability to meet demand, including supplier lead times, capacity, and reliability.
3. Evaluate Transportation Costs: Consider the costs of moving products from suppliers to DCs and from DCs to customers, including modes of transportation and fuel costs.
4. Calculate Inventory Holding Costs: Determine the costs of holding inventory in DCs, warehouses, and on shelves, including storage costs, insurance, and obsolescence.
5. Design the Distribution Network: Use the DND framework to design the optimal distribution network, considering factors such as demand, supply, transportation costs, and inventory costs.
6. Implement and Monitor: Implement the designed distribution network and continuously monitor its performance, making adjustments as needed.

Common Mistakes

• Mistake: Failing to consider transportation costs and lead times when designing the distribution network.
• Correction: Transportation costs and lead times can significantly impact the distribution network's efficiency and effectiveness, so they must be carefully considered.
• Mistake: Not accounting for inventory holding costs when determining DC size and location.
• Correction: Inventory holding costs can be significant, so they must be factored into the distribution network design to ensure optimal inventory levels.
• Mistake: Assuming a single distribution network design will meet all customer needs.
• Correction: Different customer segments may require different distribution network designs, so a tailored approach is often necessary.

Exam / Certification Tips

• Tricky Distinctions: Be able to distinguish between push and pull strategies, efficient and responsive distribution networks, and centralized and decentralized distribution.
• Common Question Patterns: Expect questions that require you to analyze demand and supply patterns, evaluate transportation costs and lead times, and design an optimal distribution network.
• Key Concepts: Make sure you understand the DND framework, Fisher's Model, SCOR Model, and EOQ formula.

Quick Practice Problem

A retailer wants to determine the reorder point for a product with a demand of 100 units per week, a lead time of 5 days, and a service level of 95%. What is the reorder point?

Answer: 45 units (95% service level = 1.645 standard deviations, standard deviation = 10 units, lead time = 5 days)

Last-Minute Cram Sheet

• Distribution Network Design (DND): The process of determining the optimal number and location of distribution centers (DCs) to serve customers efficiently.
• Economies of Scale (EOS): The cost savings achieved by increasing production or distribution volume.
• Service Level (SL): The percentage of demand that is satisfied from stock on hand (95% or higher).
• Safety Stock (SS): Additional inventory held to mitigate stockouts and meet unexpected demand (SS = Z ×-× ?L).
• Lead Time (LT): The time it takes to receive inventory from a supplier or to deliver products to customers (5-10 days).
• Transportation Cost (TC): The cost of moving products from suppliers to DCs and from DCs to customers.
• Inventory Holding Cost (IHC): The cost of holding inventory in DCs, warehouses, and on shelves.
• Fisher's Model: A framework for designing distribution networks, considering demand, supply, transportation costs, and inventory costs.
• SCOR (Supply Chain Operations Reference) Model: A framework for designing and improving supply chain operations, including distribution network design.
• EOQ (Economic Order Quantity) Formula: EOQ = ?(2DS/H).
• Push vs Pull: Push strategies focus on producing and distributing products based on forecasts, while pull strategies focus on producing and distributing products based on actual customer demand.
• Efficient vs Responsive: Efficient distribution networks prioritize cost savings and efficiency, while responsive distribution networks prioritize speed and flexibility.
• Centralized vs Decentralized: Centralized distribution networks are controlled from a single location, while decentralized distribution networks are controlled from multiple locations.