Distribution Planning

Considerations for Distribution

·         # of stocking locations

·         # of stocking location at each level

·         Geographical location

·         Functions at each location

·         Mode of transportation

·         Ownership of carriers

·         Ownership of stocking location(s)

·         Cost reductions

·         Replenishment processes


Distribution System Objectives

·         Overall goal:  provide products/services timely, efficiently, and cost – effectively to multiple customers

·         Customer Service

o   Delivery within lead times

o   Buffering in case of increased demand

o   Provide necessary variety of products (including samples and display products)

o   Item/Quantity accuracy

·         Distribution Efficiency

o   Minimize transportation/storage costs

o   Level production/replenishment orders

o   Location/size of storage

o   Timely/accurate inventory data

·         Minimize Inventory Investment

o   Minimize necessary safety stock

o   Optimize order quantities


Distribution Supply Channels

·         Distribution Function:

o   Distribution Center

o   Retailer


Distribution Relationships

·         Lowest Level Distribution Points

o   Retailers:  close to ultimate customers as possible, provide high level of customer service and reasonable transportation costs.

·         Area Distribution Points

o   Wholesalers:  supply directly to lower level distribution point, usually located central to the markets being served (normally large metropolitan areas)

·         Regional Distribution Points

o   Larger area to cover such as whole continents:  South America, Asia, Europe, etc…

·         Producing Locations



Forecasting by Aggregation

·         Estimate demand at each final distribution center

·         Based on historical demand

·         Sum of all distribution points (e.g. stores) served by an area DC is the forecast for that area stocking point

Forecasting by Allocation

·         Forecasting total world/nationwide sales

·         More accurate predictions (larger volumes spread over many customers have smaller forecast error)

·         Second forecast needed:  historical percentage of total sales by regional center


Safety Stock Levels in Distribution Center Network



Total Distribution Cost

·         More DCs =

o   Truckload (TL) costs will INCREASE

o   Less than Truckload (LTL) costs will DECREASE

o   Shipping TL is less costly than LTL… total cost of transportation will DECREASE

·         The first few DCs added will cause a major cost savings

·         As more DCs are added the rate of savings decreases

·         A point will come where transportations savings get reversed.

·         Other Distribution costs:  each increase with every DC

o   Inventory $

o   Inventory Carrying Costs

o   Packaging materials and equipment

o   Warehouse utility costs and lease

o   Material handling


Distribution Site Selection

·         Quantitative Factors:

o   Inbound shipping costs

o   Outbound shipping costs

o   Land and building costs

o   Taxes

o   Labor costs

o   Operating costs

·         Qualitative Factors:

o   Customer geographical base

o   Skilled labor supply

o   Government Regulations

o   Climate

o   Infrastructure (roads, industrial parks, energy stations)

o   “Quality of Life considerations (schools, recreation, medical facilities)

o   Labor relations

o   Transportation system availability

o   ***Qualitative Factor Analysis:  Assign percentage weights to each factor based on relative importance***

Distribution Planning Systems

·         Push system

o   Centralized:  what? How many? When? All these decisions made from one central command

o   Push system concepts:

§  Time-Phased Order Point (TPOP)

·         Planned order in calculated lot size quantities whenever projected balance falls below SS

§  Feasibility of Centralized Push Systems

·         All centers, productions facilities, and distribution must be owned by one company

§  Data Processing and Communications

§  Sales Replacement and Base Stock Systems

§  Push System Allocation (Fair Share Allocation)

·         Reorder point

o   Demand:  fairly predictable and constant

o   Anticipated demand during replenishment lead time (DDLT) + level of safety stock (SS)

o   SS set to cover variability in demand (forecast error) and variability in supply (lead time and quantity)

o   Reactive, only looks at previous usage and assumes this will continue

o   No advance notice to the supplier.  Surprise!

·         Pull system w/ reorder point

o   Decentralized:  each stocking point determines its own replenishment order actions

o   Triggered from replenishment order from stocking locations directly supplying the customers

o   Orders move up the supply chain to the beginning factory or first step

o   Double order point:

§  “may order point” – Up to the planner if he/she will place an order

§  “must order point” – The planner must place and order if stock drops below this

·         Distribution requirements planning (DRP)

o   Provides framework for centralized push systems of distribution inventory management

o   TPOP/MRP Logic

o   Multilevel usage

o   Imploding to Master Scheduling

o   The Planning Horizon

o   Replanning Fregquency

·         Distribution resource planning (DRP II)

·         Vendor-managed and vendor-owned inventory (VMI and VOI)

o   Supplier has access to inventory data

o   Supplier responsible for maintaining customer’s inventory levels

o   Replenishment is triggered at specific sales level

o   Contracts specify ownership of inventory

·         Collaborative planning, forecasting , and replenishment (CPFR)

o   Sharing of info between partners in global supply chains

o   Objective:  eliminate safety stocks caused by demand variability at each level in supply chain


Bill of Distribution

·         Purpose:  systematically set the sourcing requirements generated at the demanding warehouses


DRP/MRP interface with MPS

·         Master production schedule can check capacity as part of the rough-cut capacity planning feasibility check

·         Demand Management

o   Represents the connection between manufacturing and the marketplace

·         Safety Stock with DRP


DRP and Just in Time (JIT)

·         To make JIT work distributors must:

o   Supply exact quantities

o   Meet specific schedules

o   Supply Quality products

o   Adjust deliveries and quantities when needed

o   Perform with minimum paperwork


DRP/JIT Interface to Materials Management

·         Capacity Planning

·         Material Planning

o   JIT manages actual orders in near term

o   DRP manages the forecast

·         Distribution Process Control

·         Cross Functional Support


Just-in-time (JIT) Considerations

·         Repeatable delivery cycles

·         Partnerships

·         Smooth Flow from Supplier to Customer

·         Reducing Number of stocking points

·         Use of small, standard-size containers

·         Emphasis on local Supply


Transportation Choices

·         Mixed Loads:  combining dissimilar items into same shipment to utilize vehicle space

·         Milk Runs:  Regular routes to pick up from several suppliers

·         Load Switching Points and Cross Docking:  staging/transferring shipments from vehicle to vehicle (semis pull in, the product is unloaded from them and loaded directly onto local delivery trucks)

·         Delivery Vehicles:  Suitable for their purpose

·         Freight Consolidation:  combining several loads on a vehicle to optimize use of the vehicle (FEDEX, UPS, and DHL all do this)

·         Local Warehouses when necessary:  have defined region (local coverage only)


U.S. Domestic Terms of Sale

·         Title passes to buyer at seller’s facility

o   F.O.B. origin, freight collect:  Buyer owns goods while in transit, pays freight charges, files claims

o   F.O.B. origin, freight prepaid:  Buyer owns goods while in transit and files claims.  Seller pays freight charges.

o   F.O.B. origin, freight prepaid and charged back:  Buyer owns goods while in transit and files claims.  Seller collects freight charges from buyer by adding amount to invoice              

·         Title passes to buyer upon delivery to buyer’s facility

o   F.O.B. destination, freight collect:  Seller owns goods while in transit and files claims.  Buyer pays freight charge

o   F.O.B. destination, freight prepaid:  Seller owns goods while in transit, pays freight charges and files claims

o   F.O.B. destination freight collected and allowed:  Seller owns goods while in transit and files claims.  Buyer pays freight charges but bills them back to seller by deducting amount from invoice


Freight Management

·         Transportation Specialists

·         Good Planning and Control Systems

·         Multiple Handling

·         Ownership vs. Subcontracting

·         Full vs. Partial Loads

·         Shipment Tracking

·         Shipment Scheduling

·         Export and Import

One Comment (+add yours?)

  1. Simona
    Apr 14, 2013 @ 15:10:52

    What are the disadvantages of the cross-docking?


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