How design of the distribution affects the cost of supply chain drivers
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How design of the distribution affects the cost of supply chain drivers
Distribution revolves around the systematic steps in transporting and storage of products between the suppliers and customers. The two decisions for designing a distribution network regards if the products are supplied directly to the customer or the customer collects them from an agreed point and whether the product would be delivered through intermediate sites. Depending on the choice, distribution network may involve storage by the manufacturer from where goods are shipped directly to customers. The network is expensive because of the long distance to be covered. It also requires package carriers that are more expensive than trucks. However, it has the advantage of centralizing inventories around the area of manufacturing. The network may also involve the manufacturer storing the products and delivering them directly to the consumer but with in-transit merge. Several orders from various locations are merged and delivered as one (Meindl &Sunil, 2001). Delivery costs are less because of the merger prior to transportation of orders. Distribution network may also involve storage at the distributor’s location where transportation is through package carriers. The costs of transport for the network are much less compared to manufacturer storage because the mode of delivery uses truckloads that are more economical. However, the costs of facilities are more because there is less aggregation. Another network involves storage at the distributor’s location and transporting the products to the customer’s residence without using package carriers. More inventories are needed for the network due to reduced aggregation. The costs of delivery for the network are the highest. Another network design regards storage with either the manufacturer or distributor but the customer collects the products. Delivery costs are reduced because no package carriers are used and orders can be aggregated prior to transportation to the delivery site. Finally, the network design may involve storage at the retailer’s location and customer collecting the orders. Delivery costs are lowest in this design because it uses less expensive modes of delivery. Costs of facilities are high due to the need for local facilities (Meindl &Sunil, 2004).
Warehouse A
Cost of lease per month $1000
1st year cost of lease $1000×12=$12000
2nd Year cost of lease $1000×12=$12000
3rd Year cost of lease $1000×12=$12000
Total lease in 3 years=$12000+$12000+$12000=$36000
Upfront cost for 3 years lease=$2000
Total cost for lease and upfront cost=$36000+$2000=$38000
Estimated revenue per month=$1500
Estimated revenue for 3yrs (36 months) =$1500×36=$54000
Profit margin=$54000-$38000=$16000
Warehouse B
Cost of lease per month $1200
1st year cost of lease $1200×12=$14400
2nd Year cost of lease $1200×12=$14400
3rd Year cost of lease $1200×12=$14400
Total lease in 3 years=$14400+$14400+$14400=$43200
Upfront cost for 3 years lease=$0
Total cost for lease and upfront cost=$43200+$0=$43200
Estimated revenue per month=$1500
Estimated revenue for 3yrs (36 months) =$1500×36=$54000
Profit margin=$54000-$43200=$10800
Since the estimated rate of return for both locations stands at 10% per year, location A would be a better choice because it will provide a higher profit margin.
Approaches used to manage inventory to meet predictable variability of demand
Inventory management deals with managing tangible assets that are to be sold later. It increases consumer satisfaction by ensuring the sales are available all the time. Firms hold inventories for the purpose of globalization and economies of scale. Inventories also assist a firm to strike a balance between demand and supply and offer securities from uncertainties that revolve around demand and supply. Lastly, inventories are efficient buffers through the interfaces of supply chain (Meindl &Sunil, 2004). Inventories therefore ensure high level of customer satisfaction and profit margins. When inventories are in excess, the cost is high and profit margins are low. The various types of inventories used include cycle inventory, which is the average inventory available to match the demand between transportation, safety inventory, which is used when demands are more than projected and seasonal inventory that is used whenever demand varies within predicted limits. Inventories can also be in-transit between the manufacturers and consumers or speculative, which is maintained for the purpose of speculation. Finally, inventory can be referred to as dead if it is static. These inventories affect decision making at the three levels of supply chain management namely strategic, analytic, and operational. It is therefore paramount to establish what cost should be part of carrying cost (Croucher, Oxley & Rushton, 2000).
Decision phases for a successful supply chain
The three decision categories regard the delivery of information cash and products. The first phase is the supply chain strategy and involves the firm deciding on the configuration of the supply chain, distribution of resources and the roles for each stage. A firm decides on the location and production capacities as well as the facilities used in the warehouse. The decisions also include the goods to be manufactured and where they would be stored after transportation through various routes. This category also deals with the information system to be used. It is therefore important to ensure that the strategic objectives of the phase are in harmony with the supply chain configuration. The second decision phase is the supply chain planning, which involves making decisions for every three months in a year. It is characterized by fixed configurations in the supply chain that are established in the strategic category. A firm plans by forecasting demands in various markets for the following year. Decisions are made on the markets to be supplied and the location from where the delivery would be made as well as the policies to be used. The last decision category is the supply chain operation. In this phase, decisions are made within a period of a week or a day on individual orders from the clients. The phase has a fixed supply chain configuration predefined policies. The main objective of the operation is to satisfy the needs of incoming client’s orders in the best way possible (Butcher, Lalwani & Mangan, 2008).