Distribution Planning

Objectives

• Identify business strategies related with distribution planning.

(slide#4)
• List & describe the objective of distribution planning .
(slide#5)
• Describe the basic distribution system model. (slide#6)
• Discuss the relationship of transportation & safety stock to the
no. of distribution centers. (slide#11-12)
• Identify & describe quantitative & qualitative factors in
distribution center site selection. (slide#14-15)
• Explain the basic concept of transportation & freight
management. .(slide#39)
 Distribution Planning

Forecasting

Distribution
Planning

Order
Servicing
Consideration for Distribution

• No. of level in distribution channel

• No. of stocking locations at each level
• Ownership of stocking location
• Mode of transportation
• Ownership of carriers
• Cost reduction in transportation, storage &
handling
• Replenishment process
 Distribution System Objectives
• Customer Service
– Timely delivery lead time
– Buffering against demand uncertainties
– Providing the necessary variety of goods
– Item & qty accuracy
• Efficiency
– Minimize transportation cost
– Level production of replenishment orders
– Size & location of storage
– Accurate inventory data
• Minimize inventory investment
– Minimize necessary safety stock
– Optimize order qty to control safety stock
Distribution Supply Channel

Supplier

Manufacturer

Distribution Center

Retailer
Customer / Consumer
 Distribution Relationship
Primary flow of information

Retailer
Distributor
Supplier Manufacturer

Primary flow of products & services

 Distribution Relationships
• Lowest level: retailer
• Wholesaler, area distribution points
• Regional distribution points
• Producing locations (manufacturer)
Forecasting by Aggregation Example

• Estimation the demand at each final distribution

center or store based on historical demand.
• Forecasting by allocation: the total nationwide or
worldwide sales for the product in terms of the
no. of units.
• Forecasting total sales tends to yield a more
accurate prediction because larger volumes
spread over many customers will have a smaller
forecast error than will small volumes spread over
a few customers.
 Level of safety stock required

• SS for DC = SS for 1DC

√#of DCs
• SS=safety stock ; DC = distribution center
• If company were carrying 500 units of safety stock at one
DC & decided to add 3 additional DCs; the required safety
stock for each DC would be:
• Safety stock = 500 = 500/2 = 250
• Total safety stock √4
= 250 x 4(DCs) = 1000
Determining the no. of warehouses by Cost

Warehouse cost

Carrying cost

Cost

Transportation
Cost

No. of warehouses
 Transportation cost vs No. of
Distribution Centers
• Cost of truck load (TL) & rail carload (CL)
shipments to DC will increase because the
demand in the area of DC increases.
• Cost of LTL shipments to customers will decrease
because as the demand in the area of DC
increases, the need for small shipment will
correspondingly decrease.
• Because shipping TL qty is less costly than
shipping LTL, total cost of transportation will
decrease.
 Total Distribution System
Cost
Some distribution costs:
• Inventory
• Inventory carrying cost
• Warehouse lease & utility costs
• Packaging equipment & material
• Material handling equipments & personnel
 Quantitative Factors in Site
Selection

• Inbound transportation costs

• Outbound transportation costs
• Building & land costs
• Local tax structures
• Local labor costs
• Operating costs
 Qualitative Factors in Site Selection

• Customer base
• Supply of skilled labor
• Labor relations, & competition for same
• Government regulations
• Availability of transportation systems
• Climate
• Schools, medical & recreation facilities (quality of
life)
• Infrastructure
 Qualitative Factor Analysis
Illustrated

  Factor & weight

Governm Schools, Sum of

Labor ent
relati
medi wei
regula Transport cal & ght
Labor ons recre
supply tions ation Climate ation sco
  8 6 3 10 2 4 res
Site#
1 60 90 80 80 100 60 2500
Site#
2 75 75 80 75 80 80 2520
Site#
3 80 70 90 90 50 90 2690
Site#
4 80 50 100 80 60 70 2440
 Distribution Planning
Systems
• Reorder point
• Pull system using reorder point
• Push system
• Distribution requirement planning (DRP)
• Distribution resource planning (DRP II)
• Vendor-managed & vendor owned
inventory (VMI & VOI)
• Collaborative planning forecasting &
replenishment (CPFR)
 Reorder Point

• Demand constant & predictable

• ROP = DDLT + SS
• Safety stock covers demand variation in lead
time
• Basically reactive, looks at history
• No advance notice to the supplier
 Pull System Using Reorder Point

• Each DC manages its own inventory using

conventional inventory control methods.
• Products are pulled from the factory through the
distribution network structure, triggered by
replenishment orders from stocking locations that
directly supply customer needs.
• Major shortcoming is unpredictability of the timing
of orders at each intermediate stocking point & at
the central supply.
 Push System

DC#1
DC#1 DC#2
DC#2 DC#3
DC#3

Regional Warehouse
 Push System Concepts
• Time phased order point (TPOP): planning system
creates planned orders in lot size when the
projected available balance falls below the safety
stock level.
• Data processing & communication so that
forecast, sales, inventory status & stock
adjustment information can be provided on daily
basis.
• Feasibility of centralized push systems when all
DCs, plants are owned & closely controlled by
single company
• Sales replacement & base stock systems
 Time Phased Order Point
Example

Safety stock = 80

Order qty = 500

Lead time = 2 Period

  1 2 3 4 5 6 7 8

Forecast demand 130 160 120 260 130 120 185 115

Scheduled receipt                

Projected available 370 240 80 460 200 570 450 265 150

Net requirements     40   70      

Planned order receipts     500   500      

Planned order releases 500   500          

 Push System Allocation Example
  Requirements Week
On
h
a Daily
Warehouse Safety n Usa
location Stock d 1 2 3 4 5 ge
Manila 1 12 28 40 40 40 40 40 8
Warsaw 2 15 47 50 50 50 50 50 10
Kobe 3 10 42 35 35 35 35 35 7
New Delhi 4 18 64 60 60 60 60 60 12
Perth 5 5 14 15 15 15 15 15 3
20 20 20 20 20
Total 60 195 0 0 40
0 0 0
Current stock in factory = 225
Total unit in system = 225 + 195 = 420
Minus the safety stock requirements = 420-60=360
=( total supply net of safety stock) / total daily usage = 360/40 = 9 days
stock
Requirements = daily usage rate x days of supply + safety stock
Qty to send = requirements-current on hand
Requirements Qty to send
Warsaw = 10x9+15=105 =105-47=58
Kobe = 7x9+10=73 = 73-42=31
 Distribution Requirement
Planning
• Planning replenishment in a distribution network
• Uses TPOP/MRP logic
• Multilevel usage
• Implodes to master scheduling.
• Planning horizon should far enough to cover the
sum of all lead times from beginning to the end of
manufacturing .
• Re-planning frequency.
 Distribution Resource Planning (DRPII)

• The extension of distribution requirements

planning into planning of the key resources
contained in a distribution system: warehouse
space, workforce, money, trucks, freight cars,
etc.
» APICS dictionary.
Vendor Managed Inventory (VMI)

• Supplier has access to customer’s inventory data.

• The vendor is responsible for maintaining
customer’s inventory levels.
• Replenishment is triggered at a certain sales level.
• Contract specify ownership of material.
• Vendor owned inventory (VOI) is the placement
of materials from supplier at a customer site
without a transfer of ownership until a
prearranged time
• Contracts specify ownership of material.
 VMI by APICS
• Means of optimizing supply chain
performance in which the supplier has access
to the customer’s inventory data & is
responsible for maintaining the inventory
level required by customer.
 CPFR
• CPFR: Collaborative Planning Forecasting &
Replenishment.
• The collective sharing of information
between partners in global supply chains
• Objective is to eliminate the safety stocks
cause by uncertainty of demand at each
level in the supply chain.
 Extended Supply Chain
Interfaces

Manu Manufac
Raw Mate Customer Customer
facturing Turer
Rial supplier DC DC
DC

Reliable Operation
 Bill of Distribution & BOM

Warehouse#1 Warehouse#2 Warehouse#3

Bill of Supply
Distribution Warehouse

BOM
Product A

Component1 Component2 Component3

DRP/MRP Interface with MPS

DC#1 DC#2 DC#3 DC#4 DC#5 DC#6

RW1 RW2

END ITEM

Product Package

Bottle Cap Pills Box Label Insert

 Cont..
• Demand management
• Responding to change
• Safety stock with DRP

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 DRP & JIT
• Meet specific schedules
• Supply exact qty
• Supply quality products
• Adjust deliveries & qty to meet changing
needs
• Perform activities with a minimum paperwork
 DRP/JIT Interface to Materials Management

• Material planning: DRP manage customer & forecast

thru time, while JIT manage actual customer order.
• Capacity planning: DRP provide distributor with
effective mean to plan financial, labor, equipment,
warehousing & transportation capacity
• Distribution process control: DRP provide timely
reporting for effective performance measurement
• Cross functional support
 JIT Considerations
• Smooth flow from supplier to customer
• Repeatable delivery cycles: small qty can be shipped
in planned cycle
• Partnership relationships: bread man concept
• Reducing the no. of stocking points
• Emphasis on local supply
• Use of small, standard sized containers
 Transportation Choices
• Delivery vehicles
• Mixed loads
• Milk runs
• Freight consolidation: combining several load
on a vehicle for optimization
• Load switching points & cross docking
• Local warehouses when necessary
 Domestic Terms of Sale
• Free on Board (FOB)
• Freight collect origin
• Freight prepaid
• Freight prepaid & charged back
• Free on board
• Freight collect Destination
• Freight prepaid
• Freight collected & allowed
 International Terms of Sale
• At the seller’s dock
• Free carrier (at named
point)
• Free on rail
• FOB airport
• FOB a vessel
• FAS (free alongside ship)
• FRC (free carrier)
• C&F (cost & freight)
• CIF (cost, insurance &
freight)
• Freight & carriage paid to
specific point
• Freight or carriage &
insurance paid to a specific
point
• Ex ship
• Ex quay
• Delivered at frontier
• Delivered with duty paid
 Freight Management
• Transportation specialists
• Ownership vs. subcontracting
• Good planning & control systems
• Multiple handling
• Full vs. partial loads (TL vs. LTL)
• Shipment scheduling
• Shipment tracking
• Export & import