Manufacturer storage with direct shipping and in transit merge example

SCM 304 Principles of Supply Chain Management

Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved

Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.

1

Logistics

Chapter 8

1

You will learn

Describe why logistics is important and discuss the major decision areas that make up logistics.

List the strengths and weaknesses of the various modes of transportation and discuss the role of multimodal solutions.

Identify the major types of warehousing solutions and their benefits.

Discuss the purpose of a logistics strategy.

Identify design options for a distribution network

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Introduction (1 of 2)

Logistics management – That part of supply chain management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers’ requirements.

© CSCMP – Council of Supply Chain Management Professionals

Source: financemonks.com

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Introduction (2 of 2)

Logistics Management Activities:

Transportation

Warehousing

Material handling

Packaging

Inventory management

Logistics information systems

4

Why Logistics is Critical

Challenges and opportunities in managing logistics

Advances in information systems

Globalization of markets

Push toward sustainability

Significant impact on delivery speed and reliability

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Logistics Decision Areas (1 of 19)

Five Transportation Modes:

Highway

Water

Air

Rail

Pipeline

Source: cststudy.blogspot.com

Source: asia.nikkei.com

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Logistics Decision Areas (2 of 19)

Table 8.1 Modal Shares of U.S. Domestic Freight for 2012 (% Change, 2002 – 2012)

Transportation Mode Value (Billion $) Tons (Millions) Ton-Miles (Billions)
Highway (trucking) $10,132 (+63%) 8,060 (+3%) 1,248 (−1%)
Rail $473 (+52%) 1,629 (−13%) 1,211 (−4%)
Water $302 (+238%) 576 (−15%) 193 (−32%)
Air $451 (+70%) 5 (29%) 6 (0%)
Pipeline $543 (+264%) 636 (−7%) Not available
Multimodal $1,951 (+81%) 357 (+65%) 272 (+20%)
Source: U.S. Department of Transportation, National Transportation Statistics, April 2017, Washington, DC, Table 1-58, www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/publications/national_transportation_statistics/html/table_01_58.html.

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Logistics Decision Areas (3 of 19)

Highway

Dominates the U.S. logistics infrastructure due to:

Geographic extension of supply chains

Greater emphasis on delivery speed and flexibility

Continues to grow because it is one of the most flexible modes of transportation

Very few goods are moved without highway transportation at some point in transit

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Logistics Decision Areas (4 of 19)

Highway

Has become more cost effective over time due to:

Better scheduling and use of vehicle capacity

More efficient and reliable vehicles

Increased cost competition due to deregulation

Involves different types of shipments

Direct truck – Shipment made with no stops

Less than truckload (LTL) – Smaller shipment combined with other loads

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Logistics Decision Areas (5 of 19)

Water

Ideal for materials with high weight-to-value ratio, especially if delivery speed is not critical.

Examples of these materials include farm produce, timber, petroleum-based products.

Has one of the lowest ton-mile rates of any mode which helps to keep costs down.

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Logistics Decision Areas (6 of 19)

Air

Ideal for customers with a low weight-to-value ratio, especially if delivery speed or delivery reliability is critical.

Is the least-used mode in terms of tons and ton-miles

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Logistics Decision Areas (7 of 19)

Rail

Has characteristics similar to water transportation but is somewhat more flexible.

To accommodate growth, rail carriers have doubled the number of lines along busy corridors, changed the physical configuration of the trains, and utilized multimodal solutions.

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Logistics Decision Areas (8 of 19)

Table 8.2 Strengths and Weaknesses of the Major Transportation Modes

Transportation Mode Strengths Weaknesses
Highway Flexibility to deliver where and when needed. Often the best balance among cost, flexibility, and reliability/speed of delivery. Neither the fastest nor the cheapest option.
Water Highly cost-effective for bulky items. Most effective when linked to a multimodal system. Limited locations. Relatively poor delivery reliability/speed.
Rail Highly cost-effective for bulky items. Can be most effective when linked to a multimodal system. Limited locations, although less so than with water. Not as fast as highway, but improving over time.
Air Quickest mode of delivery. Flexible, especially when linked to the highway mode. Often the most expensive mode on a per-pound basis
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Logistics Decision Areas (9 of 19)

Multimodal solution – A transportation solution that seeks to exploit the strengths of multiple transportation modes through physical, information, and monetary flows that are as seamless as possible

Roadrailer – A specialized rail car the size of a standard truck trailer that can be quickly switched from rail to ground transportation without changing the wheels.

Source: trovestar.com

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Logistics Decision Areas (10 of 19)

Warehousing – Any operations that stores, repackages, stages, sorts, or centralizes goods or materials.

Warehousing can be used to:

Reduce transportation costs

Improve operational flexibility

Shorten customer lead times

Lower inventory-related costs.

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Logistics Decision Areas (11 of 19)

Reducing Transportation Costs

Consolidation warehousing – A form of warehousing that pulls together shipments from a number of sources in the same geographic area and combines them into larger and more economical loads.

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Logistics Decision Areas (12 of 19)

Reducing Transportation Costs

2. Cross-docking – A form of warehousing in which large incoming shipments are received and then broken down into smaller outgoing shipments to demand points in a geographic area.

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Logistics Decision Areas (13 of 19)

Reducing Transportation Costs

3. Hub-and-spoke system – A form of warehousing in which strategically placed hubs are used as sorting or transfer facilities.

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Logistics Decision Areas (14 of 19)

Improving Operational Flexibility

Postponement warehousing – A form of warehousing that combines classic warehouse operations with light manufacturing and packaging duties to allow firms to put off final assembly or packaging of goods until the last possible moment.

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Logistics Decision Areas (15 of 19)

Shortening Customer Lead Times

Assortment warehouses – A form of warehousing in which a wide array of goods is held close to the source of demand in order to ensure short customer lead times.

Spot stock warehouses – A form of warehousing that attempts to position seasonal goods close to the marketplace.

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Logistics Decision Areas (16 of 19)

Lowering Inventory-Related Costs

Using inventory pooling can enable firms to reduce inventory-related costs.

Consolidating safety stock for stores into one centralized location can provide same-day service to all the stores and would reduce the amount of inventory needed to protect the stores against demand surges.

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Logistics Decision Areas (17 of 19)

Logistics Information Systems

Decision support tools

Cost and travel time estimations

Simulation and optimization

Planning systems

Selecting carriers

Scheduling deliveries

Execution systems

Monitor logistics systems and identify problems before they get out of hand

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Logistics Decision Areas (18 of 19)

Material handling system – A system that includes the equipment and procedures needed to move goods within a facility, between a facility and a transportation mode, and between different transportation modes.

Packaging – The way goods and materials are packed in order to facilitate physical, informational, and monetary flows through the supply chain.

Source: cisco-eagle.com

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Logistics Decision Areas (19 of 19)

Inventory Management

Implications for transportation:

Using slower and cheaper transportation modes will cause inventory levels within the supply chain to rise.

Using faster and more expensive transportation modes will enable firms to lower inventory levels.

Implication for warehousing:

Warehousing and inventory managers must work closely to achieve the desired business outcome.

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Amazon’s Logistics System

https://www.youtube.com/watch?v=Yiafb0-gqF4

Questions:

Can other retailers such as Walmart and Target compete with Amazon for one-day shipping? How?

Amazon is not working with FedEx anymore. Does this mean Amazon will let go all shipping partners one day?

What are the advantages and disadvantages of building their own distribution network?

Logistics Strategy (1 of 7)

Logistics strategy – A functional strategy which ensures that an organization’s logistics choices are consistent with its overall business strategy and support the performance dimensions that targeted customers most value.

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Logistics Strategy (2 of 7)

Owning versus Outsourcing

Does the firm have the volume needed to justify a private logistics system?

Would owning the logistics system limit the firm’s ability to respond to changes in the marketplace or supply chain?

Is logistics a core competency for the firm?

Common carriers

Contract carriers

Third-party logistics providers

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Logistics Strategy (3 of 7)

Table 8.3 The Linkage between Key Performance Measures and Transportation and Warehousing Choices

Performance Dimension Transportation Mode Warehousing System
Delivery reliability—Deliver on time consistently Highway None (direct ship)
Blank Air Assortment
Blank blank Spot stock
Delivery speed—Minimal time from order to delivery Air None (direct ship)
Blank Highway Assortment
Blank blank Spot stock
Mix flexibility—Support a wide range of different products/delivery needs Highway Assortment
Blank Air Spot stock
Blank Rail blank
Design flexibility—Support design changes/unique customer needs Highway Postponement
Blank Air blank
Volume flexibility—Provide products/delivery services in whatever volume the customer needs Highway None (direct ship)
Blank Air Assortment
Blank blank Spot stock
Cost—Minimize the cost of transportation Rail Consolidation
Blank Water Cross-docking
Blank Pipeline Hub-and-spoke
Blank Highway blank
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Logistics Strategy (4 of 7)

Measuring Logistics Performance

The perfect order represents the timely, error-free provision of a product or service in good condition that is:

Delivered on time (according to buyer’s delivery dates)

Shipped complete

Invoiced correctly

Undamaged in transit

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Logistics Strategy (5 of 7)

Landed cost – The cost of a product plus all costs driven by logistics activities, such as transportation, warehousing, handling, customs fees, etc.

Freight forwarder – An agent that serves as an intermediary between an organization shipping a product and the actual carrier, typically on international shipments.

Customs broker – An agent who handles customs requirements on behalf of another firm.

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Logistics Strategy (6 of 7)

Reverse logistics system – A complete supply chain dedicated to the reverse flow of products and materials for the purpose of returns, repair, remanufacture, and/or recycling.

© 2016 APICS Dictionary

Source: systemsplusgroup.blogspot.com

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Logistics Strategy (7 of 7)

Challenges:

Firms have less control over the timing, transportation modes used, and packaging for goods flowing back up the supply chain. Reverse logistics systems often need to be designed to be more flexible and less cost efficient than forward-based systems.

Goods can flow back up the supply chain for a variety of reasons and a reverse logistics system needs to be able to sort and handle these different flows.

Forward logistics systems typically aren’t set up to handle reverse logistics flows.

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Distribution Network Design 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 value

Image source: A supply chain distribution network design model: An interactive fuzzy goal programming-based solution approach

Hasan Selim, Irem Ozkarahan

Published 2008

DOI:10.1007/s00170-006-0842-6

Source: ttnews.com

Design Options for a Distribution Network (1 of 2)

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)?

Design Options for a Distribution Network (2 of 2)

One of five 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

Retail storage with customer pickup

1. Manufacturer Storage with Direct Shipping

Source: shop.nordstrom.com

2. In-Transit Merge Network

Source: hsn.com

3. Distributor Storage with Carrier Delivery

Source:pymnts.com

4. Distributor Storage with Last Mile Delivery

Source: wikimarketing.vn

5. Retail Storage with Customer Pickup

Source: corporate.homedepot.com

The customer service and cost components listed earlier are the primary measures used to evaluate different delivery network designs. In general, no distribution network will outperform others along all dimensions. Thus, it is important to ensure that the strengths of the distribution network fit with the strategic position of the firm.

In the next section, we discuss various distribution networks and their relative strengths and weaknesses.

4.3 DESIGN OPTIONS FOR A DISTRIBUTION NETWORK

In this section, we discuss distribution network choices from the manufacturer to the end consumer. When considering distribution between any other pair of stages, such as supplier to manufacturer or even a service company serving its customers through a distribution network, many of the same options still apply. Managers must make two key decisions when designing a distribution network:

1. Will product be delivered to the customer location or picked up from a prearranged site? 2. Will product flow through an intermediary (or intermediate location)?

Based on the firm’s industry and the answers to these two questions, one of six distinct distribution network designs may be used to move products from factory to customer. These designs are classified as follows:

1. Manufacturer storage with direct shipping 2. Manufacturer storage with direct shipping and in-transit merge 3. Distributor storage with carrier delivery 4. Distributor storage with last-mile delivery 5. Manufacturer/distributor storage with customer pickup 6. Retail storage with customer pickup

Manufacturer Storage with Direct Shipping

In this option, product is shipped directly from the manufacturer to the end customer, bypassing the retailer (who takes the order and initiates the delivery request). This option is also referred to as drop-shipping. The retailer carries no inventory. Information flows from the customer, via the retailer, to the manufacturer, and product is shipped directly from the manufacturer to customers as shown in Figure 4-6. Online retailers such as eBags and Nordstrom.com use drop-shipping to deliver goods to the end consumer. eBags holds few bags in inventory. Nordstrom carries some products in inventory and uses the drop-ship model for slow-moving footwear. W.W. Grainger also uses drop-shipping to deliver slow-moving items to customers.

The biggest advantage of drop-shipping is the ability to centralize inventories at the manufac- turer who can aggregate demand across all retailers that it supplies. As a result, the supply chain is

Chapter 4 • Designing Distribution Networks and Applications to Online Sales 73

Manufacturers

Customers

Retailer

Product Flow Information Flow

FIGURE 4-6 Manufacturer Storage with Direct Shipping

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http://Nordstrom.com
Given its performance characteristics, manufacturer storage with direct shipping is best suited for a large variety of low-demand, high-value items for which customers are willing to wait for delivery and accept several partial shipments. Manufacturer storage is also suitable if it allows the manufacturer to postpone customization, thus reducing inventories. It is thus ideal for direct sellers that are able to build-to-order. For drop-shipping to be effective, there should be few sourcing locations per order.

Manufacturer Storage with Direct Shipping and In-Transit Merge

Unlike pure drop-shipping, under which each product in the order is sent directly from its manufacturer to the end customer, in-transit merge combines pieces of the order coming from different locations so that the customer gets a single delivery. Information and product flows for the in-transit merge network are shown in Figure 4-7. In-transit merge has been used by Dell and can be used by companies implementing drop-shipping. When a customer orders a PC from Dell along with a Sony monitor, the package carrier picks up the PC from the Dell factory and the monitor from the Sony factory; it then merges the two at a hub before making a single delivery to the customer.

As with drop-shipping, the ability to aggregate inventories and postpone product customization is a significant advantage of in-transit merge. In-transit merge allows Dell and Sony to hold all their inventories at the factory. This approach has the greatest benefits for products with high value whose demand is difficult to forecast, particularly if product customization can be postponed.

Although an increase in coordination is required, merge in transit decreases transportation costs relative to drop-shipping by aggregating the final delivery.

Facility and processing costs for the manufacturer and the retailer are similar to those for drop-shipping. The party performing the in-transit merge has higher facility costs because of the merge capability required. Receiving costs at the customer are lower because a single delivery is received. Overall supply chain facility and handling costs are somewhat higher than with drop-shipping.

A sophisticated information infrastructure is needed to allow in-transit merge. In addition to information, operations at the retailer, manufacturers, and the carrier must be coordinated. The investment in information infrastructure is higher than that for drop-shipping.

Response times, product variety, availability, and time to market are similar to drop- shipping. Response times may be marginally higher because of the need to perform the merge. Customer experience is likely to be better than with drop-shipping, because the customer receives only one delivery for an order instead of many partial shipments. Order visibility is an important requirement. Although the initial setup is difficult because it requires integration of manufacturer, carrier, and retailer, tracking itself becomes easier given the merge that occurs at the carrier hub.

76 Chapter 4 • Designing Distribution Networks and Applications to Online Sales

Factories

Customers

In-Transit Merge by CarrierRetailer

Product Flow Information Flow

FIGURE 4-7 In-Transit Merge Network

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inventory than a retail network. Amazon achieves about 10 turns of inventory annually using warehouse storage, whereas Barnes & Noble achieves about 3 turns using retail stores.

Transportation costs are somewhat lower for distributor storage compared to manufacturer storage because an economic mode of transportation (e.g., truckloads) can be employed for inbound shipments to the warehouse, which is closer to the customer. Unlike manufacturer storage, under which multiple shipments may need to go out for a single customer order with multiple items, distributor storage allows outbound orders to the customer to be bundled into a single shipment, further reducing transportation cost. Distributor storage provides savings on the transportation of faster moving items relative to manufacturer storage.

Compared to manufacturer storage, facility costs (of warehousing) are somewhat higher with distributor storage because of a loss of aggregation. Processing and handling costs are comparable to manufacturer storage unless the factory is able to ship to the end customer directly from the production line. In that case, distributor storage has higher processing costs. From a facility cost perspective, distributor storage is not appropriate for extremely slow-moving items.

The information infrastructure needed with distributor storage is significantly less complex than that needed with manufacturer storage. The distributor warehouse serves as a buffer between the customer and the manufacturer, decreasing the need to coordinate the two completely. Real-time visibility between customers and the warehouse is needed, whereas real-time visibility between the customer and the manufacturer is not. Visibility between the distributor warehouse and manufacturer can be achieved at a much lower cost than real-time visibility between the customer and manufacturer.

Response time under distributor storage is better than under manufacturer storage because distributor warehouses are, on average, closer to customers, and the entire order is aggregated at the warehouse before being shipped. Amazon, for example, processes most warehouse-stored items within a day and then it takes three to five business days using ground transportation for the order to reach the customer. W.W. Grainger processes customer orders on the same day and has enough warehouses to deliver most orders the next day using ground transport. Warehouse storage limits to some extent the variety of products that can be offered. W.W. Grainger does not store very low-demand items at its warehouse, relying on manufacturers to drop-ship those products to the customer. Customer convenience is high with distributor storage because a single shipment reaches the customer in response to an order. Time to market under distributor storage is somewhat higher than under manufacturer storage because of the need to stock another stage in the supply chain. Order visibility becomes easier than with manufacturer storage because there is a single shipment from the warehouse to the customer and only one stage of the supply chain is involved directly in filling the customer order. Returnability is better than with manufacturer storage because all returns can be processed at the warehouse itself. The customer also has to return only one package, even if the items are from several manufacturers.

The performance of distributor storage with carrier delivery is summarized in Table 4-3. Distributor storage with carrier delivery is well suited for slow- to fast-moving items.

Warehouse Storage by Distributor/ Retailer

Factories

Customers

Product Flow Information Flow

FIGURE 4-8 Distributor Storage with Carrier Delivery

78 Chapter 4 • Designing Distribution Networks and Applications to Online Sales

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(including transportation and processing) can be more than $20 per home delivery in the grocery industry. Last-mile delivery may be somewhat less expensive in large, dense cities. Transportation costs may also be justifiable for bulky products for which the customer is willing to pay for home delivery. Home delivery of water and large bags of rice has proved quite successful in China, where the high population density has helped decrease delivery costs. Transportation costs of last-mile delivery are best justified in settings where the customer is purchasing in large quantities. This is rare for individual customers, but businesses such as auto dealerships purchase large quantities of spare parts on a daily basis and can thus justify daily delivery. Home delivery to individual customers can be justified for bulky items such as five-gallon jugs of water in the United States and large bags of rice in China. In each instance, last-mile delivery is cheaper and more convenient than customers picking up their own bottles or bags.

Using this option, facility costs are somewhat lower than for a network with retail stores but much higher than for either manufacturer storage or distributor storage with package carrier delivery. Processing costs, however, are much higher than for a network of retail stores because all customer participation is eliminated. A grocery store using last-mile delivery performs all the processing until the product is delivered to the customer’s home, unlike a supermarket, where the customer does a lot more work.

The information infrastructure with last-mile delivery is similar to that for distributor storage with package carrier delivery. However, it requires the additional capability of scheduling deliveries.

Response times are faster than using package carriers. Kozmo and Urbanfetch tried to provide same-day delivery, whereas online grocers typically provide next-day delivery. Product variety is generally lower than for distributor storage with carrier delivery. The cost of providing product availability is higher than for every option other than retail stores. The customer experience can be good using this option, particularly for bulky, hard-to-carry items. Time to market is even higher than for distributor storage with package carrier delivery because the new product has to penetrate deeper before it is available to the customer. Order visibility is less of an issue given that deliveries are made within 24 hours. The order-tracking feature does become important to handle exceptions in case of incomplete or undelivered orders. Of all the options discussed, returnability is best with last-mile delivery, because trucks making deliveries can also pick up returns from customers. Returns are still more expensive to handle than at a retail store, where a customer can bring the product back.

The performance characteristics of distributor storage with last-mile delivery are summarized in Table 4-4. In areas with high labor costs, it is hard to justify last-mile delivery to individual consumers on the basis of efficiency or improved margin. It can be justified only if there is a large enough customer segment willing to pay for this convenience. In that case, an effort should be made to couple last-mile delivery with an existing distribution network to exploit economies of scale and improve utilization. An example is Albertsons’ use of existing grocery

Distributor/Retailer Warehouse

Factories

Customers

Product Flow Information Flow

FIGURE 4-9 Distributor Storage with Last-Mile Delivery

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Chapter 4 ◆ Designing Distribution Networks and Applications to Omni-Channel Retailing 85

Examples of companies that offer multiple options of order placement include Home Depot and Tesco. In either case, customers can walk into the store or order online. A B2B example is W.W. Grainger: Customers can order online, by phone, or in person and pick up their order at one of W.W. Grainger’s retail outlets.

Local storage increases inventory costs because of the lack of aggregation. For fast- to very-fast-moving items, however, there is little increase in inventory, even with local storage. Home Depot uses local storage for its fast-moving products while delivering a wider variety of products from a regional location for pickup at the store. Similarly, W.W. Grainger keeps its inventory of fast-moving items at pickup locations, whereas slow-moving items are stocked at a central warehouse.

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 is required.

Service Factor Performance

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

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 other manufacturer or distributor storage options.

Order visibility Difficult but essential.

Returnability Somewhat easier, given that pickup location can handle returns.

TABLE 4-5 Performance Characteristics of Network with Customer Pickup Sites

DC

Factories

Retail Stores

Customers

Product Flow Information Flow

Customer Flow

Figure 4-11 Retail Storage with Customer Pickup

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