Physical Distribution System
David Jankowski
Introduction to Physical Distribution Systems
Slide 01: Overview
Hello, my name is David Jankowski and I am the owner of DT Jankowski and Associates, a company committed to life-long professional education through supply chain management instruction and consulting. I have over 30 years of experience with a variety of business organizations, both as a practitioner and a consultant. I am Certified in Production and Inventory Management at the Fellow level CFPIM by APICS, The Educational Society for Resource Management., and I am an instructor for a number of local APICS chapters.
This course is entitled ‘Physical Distribution System,’ and it will explain how an organization plans and executes a coordinated system of product distribution that supports its primary goal of first-class customer service and satisfaction.
Slide 02: Three Phases of Material Flow
In a typical flow of a company’s supply chain structure, the movement of material occurs in three phases. First, from supplier to producer; second, through the steps of a producer’s manufacturing process; and third, from the producer to the final customer. This course will concentrate on the third flow of material, which makes up our topic of physical distribution.
Slide 03: Physical Distribution
Physical distribution is an activity whose primary goal is to get the product in the hands of the customer the best way possible. In some markets such as consumer goods, this simply targets the final product being made available for the appropriate customer pick-up. Examples of this include supermarket grocery stores or bulk warehouse stores where, in each case, the product is delivered to be appropriately stocked and displayed for convenient customer selection and purchase.
This system of delivery could occur straight from the producing plant or through a detailed multilevel network of supply that could either be completely self-owned, or that contains levels of distribution partners who contribute their expertise in the delivery of products to the ultimate customer.
Slide 04: Physical Distribution
For an industrial application, we can look at a company where our customer will send their own vehicle to pick up some barrels of machine lubricant. In either case, the approach taken must add value for the customer. This could be achieved strategically by a company depending upon a market’s demands and the organization’s core competency, which provides the order-winners for customer satisfaction.
The distribution capabilities can be defined to support situations where the producer must concentrate on delivery speed, customer location, material availability to support customer service targets, and on any special services that the customer may request. All of these circumstances influence how a company’s physical distribution system will take shape.
Slide 05: Physical Distribution System The components that make up the approach to distribution for an organization include the transportation methods employed, the makeup and planning for distribution inventory, the creation of a distribution system that is made up of a number of warehouses — also known as distribution centers, decisions on the type of materials handling and packaging to be used, and finally, an efficient approach to customer order processing and communication between all key departments within an organization.
Key Terminology
Slide 06: Terminology
Before we begin our presentation in detail, let’s define some key terminology that helps to describe physical distribution. In discussing the terms that relate to distribution, you may have come across more than one phrase that describes the same technique. In this course, we strive to be consistent in all explanations of supply chain terminology. From time to time, you may encounter some synonyms that are used based upon an author’s preference to that word. For that reason, we ask you to use the APICS Dictionary for which there are links in this course to help familiarize yourself with the primary vocabulary.
A company’s distribution system is typically made up of a series of activities that are defined by the necessary movement and storage of finished goods. To expand upon the APICS definition of a distribution system, the system must be an integrated network of facilities and interactions that provide the best combination of customer service and minimal cost to ship the company’s goods.
The partnerships that usually occur within a typical distribution system are there to contribute value to the entire process. This movement of goods can result in changes in inventory ownership depending upon the nature of the industry. Independent distributors and retailers can exist that will either partner in inventory ownership or will take complete possession of product inventory prior to providing delivery to the ultimate consumer of the item.
The system can be made up of what is called the distribution network structure, which consists of a series of distribution channels that service to map out a detailed flow of product to one or more partnering organizations that help to put the product in the customer’s hands. Networks like these exist in a number of industries. The number of levels and participants can vary, depending upon how widespread the market demand is.
Slide 07: Distribution Network To illustrate the concept of a distribution network and distribution channels, let’s look at a diagram of a supply chain for a hardware manufacturer that contains a significant distribution system. To get the product that the hardware producer makes to the ultimate consumer, three distribution channels exist in this example.
Slide 08: Distribution Network
The first distribution channel consists of a number of retailers who maintain their own supply system, which then moves goods to local retail stores who sell to the general public, the customers. These retailers can purchase the finished goods inventory from the hardware producer, and then, in the transaction, become their customer. The hardware producers can provide a product such as door knobs and packaging that is specific to that retailer. Depending upon how large a market area they serve, the national retail chain can operate a number of regional warehouses called distribution centers (or DCs) that in turn will supply a number of local stores. The local store owner can also arrange to partner or totally own inventory that it sells.
Slide 09: Distribution Network
In the second channel that exists in our example, the producer can sell to a hardware wholesaler who may add value to the original product by repacking, or bundling the hardware in various size packages, so as to provide pricing economies which are then passed along to either the industrial suppliers or local retailers who then sell to their particular markets. The hardware wholesaler can buy door knobs in bulk from the producer and pass along the same bulk package or repack according to the customer that it serves, who in turn sells it to their end customers accordingly.
Slide 10: Distribution Network
In the third channel, there are customers to the hardware producers who are called original equipment manufacturers (or OEMs), who use the purchased hardware in the manufacture of another product. Let’s say they purchased door knobs to use in the production of a family of wooden doors; these doors in turn are sold to wholesalers who then can sell to retailers for their particular markets. So we can see how an organization’s distribution network can include a large number of companies who make up a supply chain alliance that serves a particular consumer market.
Agenda Overview and Transportation Choices
The choices that a company must make in constructing a distribution system are covered in the four sections of this course.
Slide 12: Course Agenda
We will discuss first how a transportation approach depends upon products being shipped and the markets being served. Choices on the modes of transportation that should be used can be limited by availability of open routes of shipping called ways. The company must then choose how to provide the necessary modes of shipment. The choice encompasses whether to own the vehicles or to partner with a company that has invested in that type of transportation; and finally, to determine how the cost of those transportation choices can be leveraged to provide the best shipment performance to the customer.
Slide 13: Course Agenda
In the second session, we will cover the choices that surround the building of the facilities that make up the distribution system. The types of warehousing, and the roles they must play to serve specific markets, provide many cost trade-offs that must be considered in determining the best way to satisfy the customer. An organization’s knowledge of the types and volumes of products that must be shipped will help to determine the best choices of material handling and packaging.
Slide 14: Course Agenda
In the third section, we will see how an organization’s business approach affects its choices in filling the distribution inventory pipeline. The purpose of the inventory to be carried helps to determine the characteristics necessary to ship economically. Company objectives here cover the same goals that govern manufacturing; maximum customer service with optimum system performance at minimum production support costs. The makeup of an organization can affect the distribution environment by determining inventory requirements and replenishment strategy at corporate or at individual district levels.
Slide 15: Course Agenda
And finally, we will see how a company’s distribution strategy must communicate to and interact with the other key organizational areas that encompass manufacturing, marketing, and finance. Important decisions that affect even basic customer support must be coordinated through an integrated system of operations and materials management.
Slide 16: Transportation: Modes Let’s begin by discussing the transportation choices that are available to a company. We will cover different modes of travel that products can take, providers of the transportation needed, and cost issues that must be considered in making transportation decisions. What are the products that a company provides? They can be anything from vegetable seeds to tractors, from soup to electricity.
Where must those products be shipped? To the next town? Cross-country? To another country? Throughout a global marketplace? The answers to these questions, along with the market demand, the availability of routes or ways in which to travel, and in some cases governmental regulations, help to determine the appropriate selection of the mode of transportation to take.
And after all this thought process, we still must address the best cost option to accomplish the execution of that choice of mode. And how do we make these choices? Let’s begin by looking at the characteristics of each choice of mode and how best they apply to various industries’ transportation requirements.
Modes of Transportation
Slide 17: Transportation: Modes - Rail The first choice of mode is by rail. The routes that trains or vehicles commonly called railcars must travel are called railways. The capital cost of these railways is high. They are provided by companies that provide and maintain the routes available for transport, and sometimes, are subject to governmental regulations. For these reasons, this choice of mode is best suited for large volumes of heavy bulk goods to be carried over long distances.
Although the speed of this choice of delivery is slower than other choices such as by road, the overall operating costs are low. If this mode of shipment is essential to a business, they may choose to construct rail connections on their plant site that merge with an existing railway. This option allows local control of loading or unloading depending upon the transportation advantage desired.
Shipping routes have to be planned carefully because of the limitations on flexibility. Specifically, shipments by rail are dependent upon the schedules by which trains are planned and deliveries may be restricted by the timing of such schedules to move products to a specific destination at a specific time. Also, rail deliveries can only go so far on the routes or ways that they travel. Once unloaded at freight stations, products may depend upon transport to other modes of transportation to get to their final destination.
There are many versions of railcars available that provide flexible and special handling capabilities. These vehicles are designed by railroad providers in response to the specific product characteristics and logistic needs of their customers. Over the years, providers have had to be very innovative in the types of transport offered, and on providing customer specific solutions. A customer’s decision to ship by train versus other modes of transport can depend upon how a provider can competitively design and furnish these services.
Slide 18: Alternative Rail Cars
A few examples on the choice of railcar that is available are boxcars, which provide a protected and economical choice based upon optimum use of a car’s capacity to handle boxes or drums; tank cars that allow for the transport of liquid or gaseous products and can also be temperature controlled; flat cars that handle various large and bulky loads like logs or bars of steel; in the response to a customer’s special handling needs, special versions of the flat car, which is adapted to carry things such as automobiles or large transformers.
Slide 19: Transportation: Mode - Road
Another choice of transportation mode is by road. The vehicles used for this choice of transport are usually trucks. Trucks can handle a large variety of goods in different volumes and containers. They travel on their own ways commonly called roads or highways. These roads are usually built by local government agencies that charge taxes and/or tolls for their use and for upkeep.
Delivery with these vehicles is very flexible, as delivery speed is moderately fast, and can be as close to the customer as door-to-door. Shipping schedules can be very specific as to the timing and destination. Of course, we need to be aware that the more specific service that is requested on this delivery, the more it could cost.
A truck’s capacity is chosen to match up with the type and volume of a product that must be shipped. It is more economic to fill the truck to capacity, which can be determined by cubic volume or weight. Product packaging is designed to make the best use of a truck’s cargo space.
Shipments made by road can be partnered with other modes of transportation to gain overall economies and delivery capabilities. We will discuss this concept further in our presentation of intermodal transportation.
Slide 20: Road Alternatives: Loading Profiles
Shipping by road via trucks provides many alternatives to product loading. Some choices include single high automatic loaders such as tank trucks. Liquids are pumped directly from the warehouse’s holding tanks through pipelines into a tank truck, which will shut off the flow automatically once the tank truck’s capacity has been reached. Another approach is to load the truck with stacked product containers on pallets, which are designed to make the best use of a vehicle’s cubic capacity. Products shipped this way include truckloads of the same products, such as boxes of bagged potato chips, or candy.
A truck can be loaded with products in a loose pack, where various types of products or packaging are loaded from a distribution center to be delivered to a local store that has requested that combination of goods. Examples include fruits and vegetables being delivered from a central distribution point to fill the various needs of local grocery stores, or a mixed delivery of television sets, refrigerators, and stoves sent from an appliance distributor to a retail store.
Modes of Transportation Continued
Slide 21: Transportation: Modes - Air
A third mode of transportation is by air. The routes that airplanes fly are regulated by a governmental system that controls air traffic. This choice of transport is fast, but is usually very expensive. Therefore, the appropriate choices of goods for this mode are high-value products, usually of low weight. This type of cargo, if shipped by this mode, can be time-sensitive, possibly due to an emergency, and from that perspective, it can be a relatively inexpensive way to get products to the customer quickly.
Unusual cargo can be handled with proper planning, such as in transporting animals. The storage location on a plane is important because the container size can adapt to the shape of a plane’s cargo hold, or if it is a passenger flight, the product travels in holds located below the seating area. Aircraft schedules must be considered to plan deliveries correctly to ensure that the product arrives at the necessary location for timely customer delivery.
Some situations for the type of products shipped by this means of transport include a company that needs to ship automobile engines from Germany to an assembly plant located in North America; a business that may ship medical supplies such as artificial limbs or blood to a hospital to meet patient needs; and a company’s emergency shipment of high-value products that can best absorb the expense of flying them.
Slide 22: Transportation: Modes - Water
Another transportation mode that can be chosen is to have products shipped by water. Routes in which ships travel — commonly called waterways — are usually there by nature, although more and more routes are man-made, such as the St. Lawrence Seaway or the Panama Canal. Shipping by water is a good option to use for transporting products over long distances at very low cost per unit due to the large capacities that are available. Beware though that this mode of transportation is the slowest of all choices, and should be planned accordingly. The slowness of the delivery would mean that more inventories are in the overall transportation supply line and any flexibility is lost.
A product is often packaged into large seagoing containers, which are able to be stacked to be able to take the best advantage of the cubed volume of a ship’s cargo hold or stackable area above the decks.
Seagoing vessels are only one type of shipping option available. There are other sizes of water-going shipping. The largest, for example, are used to move large amounts of low-valuable cargo, such as salt or oil on local water routes.
Slide 23: Types of Water Freight
Coastal shipping terminals are built to which container-carrying ships can come and be loaded by crane to maximize ocean-bound freight capacity at good rates. These ships can make numerous stops at different coastal terminals until they are fully loaded for their overseas trip. A similar sequence of stops may also apply then when making deliveries at receiving ports of call.
Local waterways include rivers, canals, and bays. Vessels are designated that can specifically travel over those routes effectively. A choice of barge or steamship can be made based upon the best maneuverability required to get that product to the desired point of delivery. Products such as fresh fish, cattle feed, or sugarcane can be shipped this way right up to the processing plants that normally locate themselves adjacent to local waterways.
Slide 24: Transportation: Modes - Pipeline
A mode of product transport that is not widely used but has important implications in specific industries is called a pipeline. Construction of the type of pipeline delivery is made to best match the type of product to be moved. Products such as oil, natural gas, and drinking water are delivered to local customers from bulk storage facilities by pipeline grids that are specifically built for this purpose.
Very high volumes can be moved continuously over large distances. The cost of initial construction is high due to local government regulations that control obtaining rights of way in actual pipeline construction. But once in place, ongoing operating costs are very low. In pervious to weather conditions, pipelines can be located on either above or below ground.
Slide 25: Transportation: Modes - Intermodel
A combination of modes of transportation called intermodal is very prevalent today. Any two or more modes can be used to get product from the producing location to the ultimate customer. The choices made are selected to make the best use of a combination of benefits that the modes can supply. Shipping truckload containers from the producer to a coastal terminal, where it is then transferred to a ship, is an example of combining ways of freight transfer. Once the ship reaches port and is unloaded, the cargo can then go by road on a truck to a rail yard where the product is then shipped by rail to a customer’s distribution center. There are many uses of intermodal shipping that can exist that are not just economically motivated, but are the only choices possible due to local geography.
Modes of Transportation Summary
Slide 26: Transportation Modes - Summary
So we have seen that there are quite a few choices that can be made to move products from a producer to the final customer. Just what choice a company makes depends on the customer service and operations strategies that target a specific market’s requirements and logistics.
In summary, let’s look at a chart which will show the characteristics of each mode of transportation. The characteristics address the initial fixed cost investment that is involved with the decision of transportation mode, the operating cost that will be incurred as a result of choosing that particular mode, which is addressed here as cost per ton mile, the differences in the aspects of speed and flexibility regarding the choice of routes traveled and schedules available, and finally, the possibilities of product types that can be handled by that particular mode of transport. We will show how choices can be made by comparing these characteristics against the goals that exist for a company’s distribution system.
Slide 27: Transportation Modes - Summary
For rail, the initial fixed cost is high, but the cost per ton mile is low. Speed of delivery is slow, route flexibility is very low, and other complementary means of transport may have to be considered to arrive at a final destination. Schedule flexibility is low and must be taken into account for delivery promises. The good news is that there is a wide variety of goods that can be accommodated by rail shipment.
Slide 28: Transportation Modes - Summary
For road transport, initial fixed costs are moderate and may have some flexibility depending upon whether equipment is owned, leased, or handled by a third party logistics provider. The cost per ton mile is moderate. Speed of shipment is moderate with high flexibility of both routes and schedules. Wide assortment of products can be handled.
Slide 29: Transportation Modes - Summary
Shipping by air incurs high fixed costs and costs per ton mile. Speed is very fast and the urgency for this delivery speed may in fact prove to be a large factor to weigh into the real cost of the product and serving a customer. Route flexibility is moderate to high depending upon the use of private or public air transportation. Because of the schedule limitations that may exist depending upon choice of air service provider, schedule flexibility is moderate. The variety of products that may be shipped by air is also moderate.
Slide 30: Transportation Modes - Summary
Transporting product by water has moderate to high fixed costs. Due to the bulk nature of cargo shipped, the cost per ton mile is moderate to very low. The choice of an ocean shipment versus the use of local waterways for cargo greatly influences these operating cost levels. Careful planning and review of delivery options is important due to the slow speed and low flexibility of routes and schedules. There are a wide variety of goods that can be shipped by water.
Slide 31: Transportation Modes - Summary
Finally, a company that chooses to transport products by pipeline will incur initial high capital costs but will have very low costs of operation or costs per ton mile. Moving a product within the pipeline is moderate. There is little or no flexibility in the routing or scheduling of the pipeline flow. The types of products that can be shipped this way are very limited.
Slide 32: Transportation Modes - Summary
In looking at all the characteristics involved with the varied choices and the movement of products, we may see that many choices can be made within the logistics operations of an organization. There are many priority factors, both internal and external, which may affect which selection a company will ultimately choose. How well these choices are made will help to determine both customer service and satisfaction.
Transportation Providers & Costs
Slide 33: Transportation: Providers There are many types of companies that offer transportation choices. These companies are called providers. The vehicles used can be solely owned by a producer, or there can be partnerships which assist in getting products from a producer to a customer. These providers are commonly known as third party logistics or 3PL providers. The possible choices of providers can be defined as a common carrier, which is available on call to the general business public, a contract carrier, which works by negotiated arrangements, and a private carrier, where the manufacturing company may own or lease their vehicles for private use. 3PL businesses exist that can control shipping arrangements and movement even though they may not actually own the shipping equipment itself.
Slide 34: Transportation: Cost Elements
Choices of shipment are cost oriented, and a system of billing depends largely upon the type of service contracted for. Some different types of cost elements to be aware of include;: first, line haul cost, which is charged depending upon the distance traveled regardless of weight. In this situation, a company should look to make maximum use of the cargo space available. Some examples of this include shipping such things as unassembled tables or products that can be nested into tight packages such as baskets or lampshades.
Line haul costs are based on covering the transportation expenses of the driver’s wages, fuel, and vehicle maintenance. An example of this cost calculation would occur when a provider charges a line haul rate based upon mileage, such as $5 a mile. A company should look to maximize the tonnage shipped in this way. If two tons are transported 300 miles at a rate of $5 a mile, the cost is $1,500 and the cost per ton shipped is $750. If the producer, through product nesting, increased the tonnage to three tons, the cost per ton would lower to $500.
Another transportation charge that can be incurred is called pickup and delivery costs. This occurs when a carrier would charge based upon the total weight shipped and the total number of pickups necessary to obtain that weight. This situation can happen if a company contracts with a carrier to make stops at all warehouses within a certain geographical area before shipping to a final destination.
A third type of transportation charge that can be issued is called terminal handling costs. This occurs when a company needs to be aware of the cost of shipping less than a full truckload or LTL. Unless contracted to ship direct non-stop to a destination, the carrier will, after pickup, return to a local terminal to consolidate other loads that are destined to travel to that same geographical area.
Mixed loads of television sets and drums of solvent have been known to travel on the same vehicle. Then, once arrived at another terminal, the load is broken down and reloaded onto other vehicles for the final local delivery. Each time a shipment is handled, loaded, and unloaded, the cost tally is increased. So a company should go for full truckload whenever possible to save on transportation costs.
Transportation billing and collection is now a thriving 3PL business. Unless a company is set up to do their own billing, audit and payment operations, they usually contract with an outside service provider. The charges to accomplish these tasks add on to an organization’s transportation cost totals.
Slide 35: Transportation Providers & Cost Summary
Mr. Jankowski has presented the modes of transportation and the types of charges that are associated with each. There is a natural hierarchy to the transportation decision which considers groups of products and groups of customers. Let’s look at examples where the transportation choices are limited by the product or the environment or chosen by the customer.
The hierarchy of choices is typically:
- What are the shipping and receiving locations and who is paying for the transportation? What are the characteristics, including regulatory limitations or requirements, of the product?
- What mode of transportation will be used?
- What are the delivery, security, and handling requirements?
- Will the company transport the goods or employ a contract carrier?
- If a contract carrier is used, what is the freight classification and rating? When will the goods be available and when must they be delivered.
The answers to those seven questions should point to a specific transportation arrangement.
Warehouse Strategies
Slide 36: Warehousing: Types
Let’s move on to discuss the strategy of establishing warehousing for our manufactured products, and then determining the best network of distribution that can result. Knowledge of the market and the product characteristics will help in deciding on things like how many warehouses are needed, where they should be located, and on what roles they will need to play in servicing customers., the nature of the products required in customer orders, which dictate how those items must be identified, packaged, and handled throughout the distribution network. Let’s look at some of the details that make up a company’s distribution system.
There are two types of warehousing approaches. Both are based upon the immediacy and frequency of product movement. Storage can be for a long term or for a very short stay. A general warehouse is set up to store and protect goods for long periods of time until needed. There would be minimal materials handling as packages would be mostly bulked by the use of pallets and shrink-wrap for example, and then hopefully only moved once for put-away and once again for any shipment requirements.
Packages in this warehouse environment will seldom have to be moved and broken down into smaller packages prior to shipment. An example of this type of warehouse is for a company whose products are seasonal. Their items are usually made months in advance of the selling season based upon market forecasts. They are then shipped to be stored in a general warehouse until that season arrives. Retail stores that handle seasonal merchandise may choose to pack up the product once the particular season is over and return it back to the general warehouse until the next seasonal requirement occurs.
The opposite of a general warehouse is a very active distribution warehouse or distribution center (or DC). The purpose of this type of warehouse is to move, mix, or consolidate various types of products with the purpose of filling customer orders such as individual retail stores, supermarkets, wholesale stores, or other manufacturers. Service activities such as special packaging or special labeling may be required prior to shipment. The DC becomes the focal point for achieving customer service goals, and as such, may be organized for optimal movement and added value for the customer.
Slide 37: Warehousing: Roles
We have already talked in some general terms of the roles that warehouses may have to play in filling customer orders. Now let’s look at some of those roles in more detail. The customer service goals of an organization become the main drivers of particular warehouse roles, as they are activities that are necessary to be successful.
Slide 38: Warehousing: Roles
One such role is transportation consolidation. This task entails the bringing together of many small shipments and staging them to eventually be shipped together to obtain the cost benefits of full loads. A central warehouse located at the manufacturing plant looks to do this when pushing goods through a specific geographic network of distribution centers. We will discuss the characteristics of a push system in our upcoming section on distribution inventory characteristics. Examples of this type of activity occur within a dyestuff manufacturer, whose product can be shipped to numerous garment producers within a specific area, or with a carpet manufacturer who stocks a central warehouse, which then will look to fill orders for different types of carpets for a regional wholesaler.
Slide 39: Warehousing: Roles
Another role is product mixing. This commonly occurs in a distribution center where many different products, all from different manufacturing locations, are stored. This DC always replenishes orders from the field, such as those received in a supermarket chain’s DC on a time-sensitive basis. The every Thursday truck, for example, that goes to a grocery store will contain various types of products made up of many different sizes and packaging. The main purpose of this approach is to minimize order processing costs.
Slide 40: Warehousing: Roles
And last, a warehouse can provide specific customer requested services. For example, generic products can be stored at a warehouse location, and pending customer order instructions, can have the product completed to order specifications by the application of customer-specific packaging and or labels prior to shipment. A dye warehouse that stores colors in various tanks can draw from those tanks and mix primary colors together to deliver customer-ordered dyes for specific applications, such as for garments or carpet.
Cost Elements that Affect the Distribution System
Slide 41: Warehousing: Costs Distribution Cost Elements
For an organization, the controlling of distribution costs presents a constant challenge. There are five major cost elements that affect the distribution system. The first cost element is the cost of transportation itself. We have discussed so far the choices that a company must make to plan shipments by taking advantage of full truckload quantities and strategic carrier alliances whenever possible. The structure of a distribution network must take this cost into account in determining the number and location of warehouses in the system. This activity makes up the major portion of total distribution costs.
The second cost element concerns the cost of carrying inventory. Although inventory planning is based upon the concept of an average inventory calculation, a warehouse must be flexible enough to handle periodic maximums as well as averages. The cost of carrying this product mix is made up of the cost of money tied up in inventory at any given time and the cost of storing the inventory, which is made up of such things as insurance, financing, labor costs, etc.
The third cost factor is the cost of the warehouse itself. Fixed costs like space and equipment plus ongoing operating costs make up this number. The more warehouses in the distribution system, the more these costs increase.
The fourth cost factor concerns materials handling. How much and how often does a product need to be moved,? The number of distribution centers in the network and the capability of full load shipments affect the number of times the product must be handled. This definitely can increase the cost in this category.
Finally, the cost of packaging is included. The types of packages, along with any special conditions and/or labeling, make up this cost, which definitely grows along with the size of the inventory.
Slide 42: Warehousing: Costs Effect of Distribution Centers
All of these cost factors, except those of transportation, will tend to increase as more warehouses are added to the network; and even total transportation costs, which at first will significantly decrease when adding warehouses, will tend to level out at some point. This is due to the diminishing capability to ship full loads as more warehouses are brought on board with the purpose of getting closer to the customer.
All of these costs must be measured up against the company’s stance on customer service measurements. For example, adding a warehouse close to a cluster of customers reduces the delivery time to those customers, lowers the transportation cost from the warehouse to the customer, but also results in increasing costs of facilities, materials handling, labor, and inventory investment. The trade-offs must be weighed in the analysis of the company’s customer service strategy.
Materials Handling
Slide 43: Warehousing: Materials Handling
Let’s now turn our attention to the decisions of materials handling. The basic makeup of a warehouse depends upon the products that it must carry, plus the service needs of the customer. The goal is to make the most efficient use of overall space to store items safely and effectively. In a warehouse environment, we are mainly looking at short-distance movement of products. We need to be aware of something called cube utilization, which means knowing how wide, how high, and how deep a product and its packaging dimensions are. Do we store it on shelves, in tanks, or on pallets? Do we store only unopened, full cartons, or do loose items and open packages exist?
The same way that we strive to maximize utilization of shipping containers, we also look to maximize the capacity or cube utilization of warehouse space. Utilization must also be balanced with the need for accessibility. The highest utilization could be achieved by stacking pallets, for example, floor-to-ceiling and wall-to-wall, but movement of stock may be necessary to get a particular pallet, which is against the back wall.
The strategic location of inventory to address the needs for working stock, fast-moving products, or reserve stock may be necessary to help achieve this balance. There are numerous devices available that are capable of quick and efficient materials handling. Some of these are very capital intensive and others are simply labor intensive. Let’s look at some examples of each type.
Slide 44: Materials Handling Devices
Here, we see some of the more commonly-used types of materials handling devices. Devices such as manual dollies allow warehouse personnel to move more goods than one single person can, but are subject to a weight or size range limitation. By using tools, such as mechanized folk lifts or conveyors, more products can be moved quickly and with more flexibility. Special-purpose mechanisms, such as hoists, provide greater space utilization along with greater range of movement. We strive to move the right product with the right material handling device. The only limitation a company may have with the choice of device is usually related to the capital funding that is available. That is why a lot of equipment is leased rather than purchased outright.
Slide 45: Warehousing: Packing and Marking
The final warehousing issue to address covers packing and marking. Manufacturer’s products need to be packaged in such a way so as to not damage the item, yet provide some measure of safety to the materials handler. Usage of such packing aids as shrink-wrap and specialty designed tapes help to provide assurance of the safe shipment of goods. Since cube utilization is always a major concern in storage and shipment, the packaging options available must address unitization, or as the APICS Dictionary states, “the consolidation of several units into larger units for fewer handlings.”
For example, there normally are a dozen eggs in a carton of eggs. The carton of eggs can be shipped to a warehouse in corrugated boxes that contain 24 of the cartons, and in turn, the corrugated boxes can be shipped on-truck by shrink-wrapping pallets in certain combinations. We can also offer special pricing options to customers, pending the size of container that they choose to buy. The saving is based on not having to break down packages.
And finally, all packages shipped must be appropriately labeled. Types of labels may contain information on destination addresses, item identification, special handling instructions, warnings, and content descriptions. The labels may be typed out or printed with bar codes. Labeling requirements, such as UPC identifiers or RFID tags, may be defined by specific customers. Other necessary safety labeling denotes products as flammable, hazardous or biohazard, and may be defined by various regulatory agencies. All of these labeling operations and options must add value to the customer in ensuring safe delivery of the product.
Automated Material Handling & Inventory Distribution
Slide 46: Warehousing Trends in Automation
As technology expands we are finding better, more economical ways to store our warehouse items. Computer controlled lifts can both put away and retrieve inventory with minimum human intervention. The concept of an automated storage and retrieval system can be used in warehouse situations for industries such as high-tech, where reels of integrated circuit components are kept in an automated tower that is dust free and temperature controlled. Automatic carousels allow for a maximum product variety and a minimum of inventory to be available to the warehouse’s order picker, providing for delivery speed on shipments. One company’s president has been overheard to say that if the carousel is not turning, we are not making money today.
Increased automation has also allowed us to move more products without the need for either a large operating labor force or significant energy costs. A recently developed storage approach known as lights-out operations extends automation capabilities using computer-controlled warehouses to save on overall operating costs. A recent development in this area is the automated garage.
This is a service facility where a customer can safely park their car by the procedure of swiping an ID card through a computer terminal, then driving their car into a large compartment which will then automatically be moved to an open grid oriented bin location, such as on a rack for storage. It will then remain there safely until retrieved by its owner. This kind of operation definitely requires a high integration of computers, data, and control. The capital cost for startup is high, and has to be compared against the benefits being sought by the use of this warehousing approach.
Slide 47: Distribution Inventory: Characteristics
Our next section of the course takes us through the makeup and planning of distribution inventory. We will discuss the characteristics of different types of inventory warehouses that support various operating environments. We will point out how a company’s business objectives affect decisions on how a product not only will be produced but also distributed to customers. We will then look at the decisions an organization can make to determine both the replenishment and the shipping of the product throughout its distribution system.
Let’s start this section with a look at the characteristics of a typical distribution inventory as it relates to some specific operating environments. The two production environments that we will concentrate on are make-to-stock and assemble-to-order. In make-to-stock production, the distribution inventory is made up of finished goods and maybe some spare parts inventory if applicable to the market served. It should be noted here that spare parts inventory can relate to any company approach to satisfying customer demand and could also include engineer-to-order and make-to-order environments.
A product can be in various stages of transit or storage within the system of warehouses and distribution centers. This total transportation inventory is a major part of a company’s aggregated inventory investment. Issues of either a seasonal or steady demand will dictate the type of storage and activity that is necessary. Customer service goals drive the organization of a logistics strategy that looks for maximum efficiency while minimizing costs.
In an assemble-to-order production environment, the distribution inventory will have some semi-finished product and materials that are needed to complete products with special options and features as demanded by customers. In this case, warehouses must be equipped with the correct configuration possibilities to meet customer order specifications. This strategy may also allow the warehouse to be located close to customer markets to provide a quick response. In both approaches, strategy concentrates on the efficient management of distribution costs.
Slide 48: Distribution Inventory: Objectives
The ultimate objective of any distribution system is to meet or exceed corporate customer service goals in a matter that requires excellent cost control and efficient operations.
Demand Planning and Replenishment
Slide 49: Distribution Inventory System Control
The decision-making that is entailed in determining when and how to stock and re-supply a distribution network lies mainly within a company’s approach to management style and the demands of the market the company serves. The decisions on demand and supply issues can be made either in a centralized approach, where all choices of re-supply are made from the central supply point, or in a decentralized strategy, where decisions on demand and replenishment are made at district-oriented distribution centers which are closer to their customers. There are significant implications on the activities within a distribution network that result from each approach.
Let’s use a chart to list and compare choices made in both centralized and decentralized distribution strategies.
Slide 50: Distribution Inventory System Control
The first issue that we see highlighted on our chart is the one that deals with determining product demand. In a decentralized approach, that demand is captured directly from the distribution centers who are closest to customer activity within their geographic areas. In some situations, these warehouses can have their own individual order entry and customer service departments who can track actual orders, and determine their own supply levels that they feel are needed to support the local market.
In a centralized approach, all product demands are tracked then forecasted in aggregate at the central supply point, which is usually located at the factory. Customer order entry is usually also centralized in order to control the flow of materials through the distribution system.
Slide 51: Distribution Inventory System Control
Replenishment ordering is done at the local distribution centers in a decentralized environment, and a product is requested regardless of what is happening elsewhere in the distribution network. The danger, here, is if a distribution center oversells a normal forecast, or does not forecast well, they can still draw more inventories than projected at the expense of other DC requests. This also causes large spikes in demand on the supplying plant’s schedules. It is like, ‘first-come, first-served’ in this approach of inventory replenishment. This situation can also result in an expensive and sometimes painful re-balancing effort to get inventory where it needs to be. There have been many products that have experienced trips back and forth among warehouses in this kind of situation.
Slide 52: Distribution Inventory System Control
Product allocations would only be done in a centralized environment. This happens because in the process of aggregate forecasting, overall history is used to project sales at the distribution center levels. They are then combined to determine the overall demand on the plant. Once the product has been delivered, distribution decisions are made district by district to determine the so-called fair share allocation of inventory. Economies of scale can be used in this approach because forecasted products can be used to fill truckload shipments even though inventory may not be needed right away.
Slide 53: Distribution Inventory System Control
As we can see on the chart cooperation with other warehouses in the network, in a decentralized environment is low or even non-existent. By the centralizing of distribution decisions, the entire distribution structure can be taken into account.
Slide 54: Distribution Inventory System Control
The build on inventory in a decentralized environment is mainly due to the setting of each distribution center’s safety stock levels independently, rather than in a system-wide aggregated approach as is done in centralized control. The rule is that forecast error is normally less in an aggregated calculation than it is in an individual DC by DC calculation. The size of the error, along with any existing distribution center service level targets, which tend to be high in a decentralized environment, causes the calculation of safety stock to end up being high.
Slide 55: Distribution Inventory System Control
Total inventory investment in a decentralized approach tends to be higher than a centralized one due to the fact that each distribution center is acting independently in netting their customer service targets, and in turn, inventory levels.
Replenishment Continued: Push Vs. Pull
Slide 56: Distribution Inventory: Push Vs. Pull Replenishment
So, in our comparison of a centralized versus a decentralized approach in inventory replenishment, we see a push versus a pull strategy taking place against demand on the central supply warehouse.
Slide 57: Distribution Inventory: Push Vs. Pull Replenishment
A push replenishment approach does just what it implies. It pushes inventory out of the distribution network based upon forecasts and allocations. Equal weight is given to each DC’s supply situation.
Slide 58: Distribution Inventory: Push Vs. Pull Replenishment
When a pull replenishment approach is used, as is done in a decentralized strategy, the DC pulls its inventory through the network independently of other stock points that exist. Both replenishment strategies can best be served by looking at our next type of distribution planning approach, which is being implemented at more and more companies’ distribution requirement planning.
Slide 59: Distribution Inventory: Planning
Distribution requirements planning (or DRP) provides a time-phased approach to managing inventory within a company’s distribution system. Each warehouse in the network is able to send their demands to the integrated company planning system and have the time-period comparison done as far out as necessary to plan replenishment. Special situations can be planned and communicated in enough time so as not to upset any previously made replenishment plans. The projections also give the supplying plant warehouse an early warning as to significant changes in the network and to re-supply plans.
This approach to planning uses similar logic as a plant does in using to plan material requirements for production demands. Shipments can be based upon calculated replenishment order quantities that match up with the modes of transportation that are used. In this planning approach, a hierarchy of acceptable replenishment warehouses can be defined for any warehouse in the system. This is especially useful if stock is not readily available from central supply. This overall replenishment approach works to provide stability to both the supplying plant and to the distribution network.
An extension of DRP known as distribution resource planning (or DRP II) takes one more step in the DRP replenishment approach by using the demand and supply information projected to plan needed resources to support future needs of the system. These resources can include additional warehouse space, labor, finances, or logistic partnerships.
Slide 60: DRP Approach to Inventory Replenishment
This diagram illustrates how DRP would work. A western distribution center places a replenishment order for product A144 as shown as a planned order release on the chart for weeks one and three. In turn, these demands are communicated to the central supply warehouse.
Slide 61: DRP Approach to Inventory Replenishment
The eastern distribution center has demand in week two also for product A144, and also sends it along to central supply for replenishment planning.
Slide 62: DRP Approach to Inventory Replenishment
The execution of the DRP process takes all of these orders called gross requirements, as seen in the first line of the central supply worksheet, and is able to compare available inventory and any projected production receipts to plan replenishment orders. The visibility of this plan, throughout the distribution network, allows all interested parties up-to-date information on the demand and supply issues of the moment. We can see from this presentation, how DRP combines the best aspects of both the push and pull replenishment strategies.
Interfaces with Other Functions & Course Conclusion
Slide 63: Interfaces with Other Functions
In our final section of this course, we will cover the important responsibility of the distribution network of a company to communicate with the other managing departments of an organization, namely marketing, production, and finance. We will use another chart to look at the different components that we have seen make up the important characteristics of a company’s distribution system. We will review each characteristic individually to show the information that needs to be communicated to these important branches within any organization.
Slide 64: Interfaces with Other Functions
Starting with decisions made in the area of transportation, manufacturing would be interested in the mode of transportation selected for shipments. They would need to plan the appropriate production quantities and product packaging in order to best match up with the mode chosen. This allows for sound economics and logistical shipments to be made to support customer orders.
Marketing is interested in the reliability of promised delivery dates to the customer. Transportation choices can directly affect delivery performance if not planned carefully; and marketing would like to know ahead of time if any issues in transportation capability could affect promises made to customers. Our friends over in finance would be interested in all of the cost of freight that can be incurred that could make the promised customer delivery a reality.
Slide 65: Interfaces with Other Functions
For the makeup of the distribution network, the number and types of roles played by warehouses, and/or distribution centers, determine the capability of finished goods storage available in a make-to-stock environment, or within the assemble-to-order approach of any subassembly inventory storage. Marketing needs to know the availability of products to support their customer service goals. Having enough inventory in the right place is very important. To finance the size and number of warehouses in the network project any needs [??] for capital cost planning and investment.
Slide 66: Interfaces with Other Functions
Distribution inventory characteristics show manufacturing how to plan its production to best provide for the customer requirements for finished goods inventory. Marketing needs to know the best way to respond to any special customer request for special options or features. Finance needs to keep score on the total cost of finished goods inventory investments to support the business.
Slide 67: Interfaces with Other Functions
In material handling decisions, manufacturing has to plan to match its operations accordingly to link up with the material handling capability in the distribution centers. Issues of weight and volume are among the important dimension issues to match up with the capabilities of the distribution network. Marketing has a need for speed, delivery speed that is. The choice of manufacturing handling capability is important to the response rate necessary to make things happen in time to support customer demands. Finance again needs to be kept updated of the impact in the cost of operations.
Slide 68: Interfaces with Other Functions
With the last system characteristic of packaging, manufacturing is concerned with requirements of how to prepare our customer shipments in regards to package size, and on any nesting and palletizing needs. Marketing wants to be sure to supply adequate protection for the goods to be delivered undamaged. The product needs to be shipped with the correct identification and destination information to be sure that the right product gets to the right customer location as ordered, and just as important, as promised. Finance needs to know the effect on the capital cost of facilities and operations required to support any special packaging to support the business.
Slide 69: Interfaces with Other Functions
So in summary, we can see how decisions made in the set-up and operation of a distribution system need to be communicated throughout the company, especially to the key players in the operations management group. The timely and integrated flows of information and the resultant support activities are very important parts of a successful distribution and logistics operation for any company.
Slide 70: Physical Distribution System: Summary
So remember all we’ve talked about. The next time you drive to work or go on a vacation or business trip, just by looking around you, you will see many systems of transportation hard at work. It will give you an appreciation for the vision of your customer and the delivery performance of the network that delivered your car, your clothing, your home, and that serves your local community.
Thank you for your attention, and I wish you safe and happy travels.
Additional Distribution Approaches
There are three important topics regarding distribution systems that have evolved since this expert on demand course was originally produced. Several of them are based on approaches that were first, or primarily used production operations. Three of those topics are:
- Push-Pull supply chain
- Buffers in the supply chain
- Reverse logistics
Each of those topics will be addressed briefly.
Push-Pull Supply Chain
The presentation addressed both push and pull distribution systems, but as supply chain management has evolved, the concept of a supply chain that manages the distribution of goods partially in a push mode and partially in a pull mode has evolved. This is referred to as a push-pull supply chain. The point at which pull systems are replaced by pull systems is referred to as the push-pull boundary. Typically the supply chain push systems are used for processing steps closest to the raw materials and the supply chain pull systems are used for processing steps closest to the end customer. A trading partner in either the push or pull zones can choose to use either push or pull systems for its internal planning and control.
Buffers in the Supply Chain
As stated in an earlier course, inventory and time can be used to buffer operations and elements of the supply chain that operate at different paces or to keep the constraint on the system operating when there is an upstream disruption. Determining where and how much inventory will be maintained in the supply chain is a very important element of the design of a synchronized supply chain. Risk pooling is one approach to manage the supply chain inventory buffers when demand is highly variable.
Reverse Logistics
Reverse logistics deals with the flow of goods and material from the point of use up the supply chain and ultimately the disposition of those goods and materials. Reverse logistics applies not only to upstream flow of the product, but also to containers, packaging and other materials used in the production, storage, and transportation of the raw materials, intermediate products, and the finished goods. The reverse logic for product includes packaging and support materials as well as the product itself. Reverse logistics systems support the reduction of waste, the drive towards sustainability, and product life cycle management. Industry segments in which products are overhauled, rebuilt or remanufactured typically have fairly extensive reverse logistics systems, but they are not the only industries for which reverse logistics processes are important. The following table provides examples of other situations for which reverse logistics solutions are important.
