Chapter 2 – Discussion Questions – Answers
1.
What is the difference between a “distributor” and “distribution?
Answer:
A “distributor” is a supply channel business that acts as a third party local representative and distribution point for a production firm. These firms may perform some light assembly or kitting of goods, but generally provides a buffer
for finished goods. Distributors typically purchase the goods in quantity from
the producer and ship to customers in smaller quantities. The essential role of
a distributor is to facilitate the flow of finished goods from channel manufacturers to end-use customers.
“Distribution” is the series of activities associated with the movement of material, usually finished goods or service parts, from the producer to the customer.
These activities encompass the functions of transportation, warehousing, inventory control, material handling, order administration, site and location analysis, industrial packaging, data processing, and the communications network
necessary for effective management. It includes all activities related to physical
distribution, as well as the return of goods to the manufacturer. In many cases,
this movement is made through one or more levels of field warehouses.
2.
Describe the differences between a centralized and decentralized distribution
system.
Answer:
In a centralized system, all decisions are made at a central location for the entire
supply chain. Centralized systems employ fewer channel warehouses, contain
minimal safety stocks, have reduced operating overheads, pursue economies of
scale, have decreased inbound transportation costs, and realize targeted service
levels while minimizing total system cost. Decentralized distribution possesses
the opposite attributes: decisions are made on the echelon level, businesses
must assume responsibility for increased costs to support channel warehouses,
warehouses must bear the cost of local safety stocks, inbound transportation
costs increase, and total system costs increase. Perhaps the critical deciding
factor between a centralized and decentralized system is maintaining targeted
customer service levels. In a centralized system, lead times will be longer as
products must traverse long distances from the storage site to the point of delivery. Often the outbound delivery cost will have to be absorbed by the shipper
or the customer. On the other hand, since decentralized systems are closer to
the customer, delivery lead times are short and outbound delivery costs are decreased.
3.
Identify the players that constitute the typical supply chain.
Answer:
The primary channel constituents are organized into six groups that reflect the
basic movement of goods through the supply chain. The first group, suppliers,
provides the supply chain with raw materials and components. In the second
group are integrators/producers that focus primarily on the development and
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production of products. The third entity in the supply chain consists of three
types of intermediary. The first is the wholesale distributor. The classical role
of wholesalers is serving as middlemen, providing other intermediaries with
products originating from manufacturers. The second group of intermediaries
found in the supply chain is brokers and jobbers. These intermediaries are distinct from wholesalers in that they do not take ownership of inventory and offer
a limited number of services. Their role, for the most part, is to facilitate the
buying and selling process between suppliers and customers. The third group
of intermediaries are retailers. The central purpose of retailers is to sell inventories received from manufacturers and wholesale distributors directly to company or individual customer end-users.
4.
Describe some manufacturer-based channel formats?
Answer:
This type of channel format performs the functions of sales and distribution
themselves without the assistance of an independent wholesale distributor. Organizations in this category operate as both wholly-owned and operated divisions of a manufacturing company or as independent businesses belonging to a
large, multicompany corporation. Manufacturer channel formats can be described as follows:
 Factory direct. In this format, product is shipped and serviced directly
from the factory’s finished goods warehouse. Product is sold through
company catalogues, an internal sales force, or independent agents. This
distribution strategy is often used by make-to-order manufacturers who
build customer products per customer request.
 Sales branches and offices. In this format can be found manufacturers
who distribute their own products through simple or complex matrices of
sales offices and channel warehouses.
 Manufacturer-owned full-service wholesale distributor. This format describes an acquired wholesale distribution company serving the parent's
markets. Typically, these enterprises form the connecting link between a
company's production and distribution operations. When synergies warrant, these distribution formats will also distribute the products of other
manufacturers.
 Manufacturer's outlets. This format consists of manufacturer-owned retail
outlets located in high-density markets. These stores are primarily used to
liquidate seconds and excess inventory, such as designer clothing and athletic wear.
 License. In this format, a manufacturer contracts with an independent distributor or retailer, granting product and marketing exclusivity for a specific period of time. This distribution method is often used for products in
the development stage of their life cycles.
 Consignment-locker inventories. In this format, the plant ships finished
goods to a point of consumption, but title does not pass until the goods are
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consumed. What are the three basic channel entities and what is their role
in the supply chain?
The basic structure of a supply chain consists of a producer with one supplier and one customer. The manufacturing entity is responsible for the
production of products (or services). The role of the supplier is to provide
production inventories to the manufacturer who, in turn, produces finished products that are then sold to the customer.
Describe the main players in the e-business channel format?
Answer:
e-Business formats are described as follows:
 Business-to-business (B2B) channel formats. These channel intermediaries are concerned with the sale of goods and services between businesses.
They can be grouped into three major types:
 Independent Trading Exchanges (ITX). These formats are described
as many-to-many marketplaces composed of buyers and sellers networked through an independent intermediary. ITXs can further be
divided into vertical exchanges focused on providing Internet trading
activities to a particular industry and horizontal exchanges that facilitate e-business functions for products and services common to multiple industries.
 Private Trading Exchanges (PTX). These formats are Web-based
trading communities hosted by a single company that recommends
or requires trading partners participate as a condition of doing business.
 Consortia Trading Exchange (CTX). These formats are described as
a some-to-many network consisting of a few powerful companies organized into a consortium along with their trading partners.
 Business-to-customer (B2C) channel formats. These channel intermediaries are any business that uses the Internet to sell products and services directly to the customer. Channel formats include:
 e-Stores or e-tailers. The goal of this format is to simulate an actual
shopping experience where consumers can browse through catalogs
or use search mechanisms to locate, price compare, and order goods
to be shipped directly to their homes. Pure play e-tailers, like Amazon.com, or bricks-and-clicks e-tailers, like Barnes & Noble, belong
to this format.
 Third-party catalog services. This channel format is composed of
multiple suppliers that provide a catalog for a group of customers
frequenting a certain place, such as airline in-flight magazines and
catalogs and in-room hotel publications.
 Consumer-to-consumer (C2C). This model applies to Internet sites that
allow customers to buy from each other. C2C’s are consumer-driven and
consist of online communities that interact via e-mail groups, Web-based
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discussion forums, or chat rooms. Currently this area is undergoing dramatic change as the concept of social network gain traction. An example
would be ebay.com. Issues associated with this area are financial settlement and timely shipment and delivery.
Consumer-to-business (C2B). This model applies to any consumer that
utilizes the Internet to sell products or services directly to a business.
This area is also expected to be dramatically impacted by the growth of
online tools like Facebook, twitter, and U-Tube that allow consumers to
directly communicate with businesses. An example would be priceline.com that sells products and services to individuals or to companies.
What are the three critical distribution problems solved by effectively designed distribution channels.
Answer:
Distribution channels are formed to solve three critical distribution problems:
functional performance, reduced complexity, and specialization. The problem
of increasing the efficiency of time, place, and delivery utilities is the central
focus of channel functional performance. As the number of suppliers and customers increase in a supply chain, the presence of channel intermediaries can
substantially reduce the number of transactions, information, and product flows
between producers and customers. Supply chain intermediaries can also increase functional performance by facilitating channel product and service
search. Distribution channels can decrease channel complexity by the routinization of business functions and product sorting. Routinization refers to the
establishment of policies and procedures that provide channel members with
common goals, channel arrangements, and expectations that enable supply network exchange mechanisms to facilitate transactional efficiencies. Sorting is
defined as a group of activities associated with transforming products and product quantities acquired from producers into the assortments and lot sizes demanded by the marketplace. The final reason why distribution channels are
formed is to solve the problem of specialization. As the supply chain grows
more complex, costs and inefficiencies tend to grow in the channel. To overcome this deficiency, many channels contain intermediaries that specialize in
one or more of the elements of distribution, such as cross-docking or transportation. The net effect of specialization is to increase the velocity of goods and
value-added services that flow through the distribution pipeline by reducing
costs associated with selling, sorting, transporting, carrying inventory, warehousing, order processing, and credit.
Describe the four channel service outputs?
Answer:
The four channel service outputs are:
 Bulk-breaking. The term refers to the fact that whereas manufacturers
normally produce large quantities of a limited number of products, channel intermediaries like retailers normally require only a small quantity of
a large number of diverse products. Distributors solve this problem by
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buying large lots sizes from producers and then breaking the lots down
into much smaller lots desired by customers. In addition, by stocking
many different products from multiple producers, distributors can offer a
wider assortment than can a single producer.
Spatial convenience. A fundamental service output of distribution is to
shrink time and geographical distance between producer and buyer. By
locating products and services close to the customer, channel intermediaries, such as retail stores, neighborhood supermarkets, and convenience
stores, satisfy customers' requirements for reduced search time and transportation cost.
Length of waiting and delivery time. This service output is concerned
with the length of time spanning the point when a customer enters an order and when it is received from the supplier. The longer the order replenishment time, the more it is inconvenient for the buyer who must
plan for replenishment and even acquire excess safety inventories in advance of actual need. Usually, the longer buyers wait, the lower the price
or shipping charge they receive.
Product variety (assortment). This function is extremely important to retailers. Unless they are a highly specialized business selling products
made by only one or a few manufacturers, most retailers prefer to deal
with suppliers that can provide a wide assortment of products that closely
fit their merchandizing strategy. The reason is simple: the more products
that can be sourced from a single supplier, the less the cost involved in
searching, purchasing, transportation, and merchandizing. Wholesalers
are particularly structured to serve this requirement. By purchasing related product families from multiple producers, they have the ability to
assemble the right combination of products and lot sizes to meet the requirements of the retailer and deliver it in a cost-effective manner.
What is the function of postponement and what are its main advantages?
Answer:
Postponement is the activity of transforming semi-finished goods derived from
the producer into their final form through the processes of sorting, labeling,
blending, kitting, packaging, and light final assembly. Stocking and transportation cost savings are attained by keeping semi-finished product at the highest
level possible in the pipeline and by moving products through the supply channel in large, generic quantities that can be customized into their final form as
close as possible to the actual sale. Postponement provides the following advantages:
 Reduced Channel Costs. As products move from the producer into the distribution pipeline, value is often added by channel partners who performed
sorting, packaging, or other activities. The problem is that at each valueadded node, the cost of processing was added to the product. In an effort to
reduce total price to the customer, many companies have decided to eliminate costly upstream channel partners and perform these value-added processes themselves in their own supply chains. Although they will have to
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bear additional costs for plant, equipment, and personnel, the expense is
more than offset by reductions in channel-wide finished goods inventories
and lower inbound transportation costs.
Lead-Time Reduction. As products no longer have to proceed through
costly and time consuming processes as they pass from one channel level to
the next, delivery time to the customer from the originating manufacturer
can be significantly reduced.
Inventory Reduction. Because products can be stored in the channel in a
semi-finished state until final differentiation by the customer order, there is
much less finished goods in the supply pipeline. Besides reducing channel
carrying costs, reduced inventories enable better control of product obsolescence and spoilage.
Customer Response and Flexibility. Because downstream channel network
nodes can now receive products in bulk or in an unassembled state, their
ability to respond to customer requests is increased. By moving semi-finished goods to downstream distribution facilities, customer response flexibility can be expanded without increasing inventory investment.
Material Handling. Postponement targeted at unitization can help reduce
labor and material handling costs while accelerating product movement.
Unitization can be defined as the consolidation of product into units of
measure that facilitate warehouse and transportation handling.
What are the channel transaction flows performed by supply chain entities?
Answer:
The following transaction functions must be performed by one or multiple supply channel entities.
 Product possession. This transaction flow refers to channel activities associated with product warehousing and transportation. The goal of product possession is to provide targeted levels of customer service at the
lowest carrying cost at all channel echelons.
 Selling and Promoting. Distribution channels provide an expanded opportunity for sales and promotion. By providing national and localized
marketing and sales forces, channel intermediaries can sell to a global
marketplace as well as target specific local market segments. In addition,
distributors can increase market share, educate customers about product
values and features, and expand brand awareness by deploying promotion
campaigns using special pricing, product assortments, and value-added
services such as short delivery cycles, financing, and transportation economies. Finally, supply chain sales and marketing efforts are augmented
by the broadcast to channel members of transactional data, sales plans,
and upcoming promotions.
 Ownership. Ownership of goods in the supply chain must be assumed by
one or multiple channel supply points. Change of ownership occurs when
the goods are sold to the customer.
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Risk. Companies in the supply chain taking ownership of goods incur
risk. As channel entities expand stocks of product, the possibility of financial loss caused by shifts in demand, customer tastes, carrying costs,
obsolescence, and spoilage grow proportionally.
Negotiations. The transfer of ownership of goods from one business in
the supply chain to another usually involves attaining agreement on price
and other sales terms. The costs involved are mostly composed of the
cost of personnel performing the negotiations. Sometimes the negotiations are performed by a channel member specializing in this transaction
function. Negotiation should always be supportive of the overall competitiveness of the channel system.
Ordering Flow. The placement of customer and channel replenishment
orders, as well as the gathering of information concerning marketplace
trends, occur at all echelons levels in the supply chain.
Payment Flow. The flow of cash payment proceeds through the distribution channel from the customer back to the manufacturer. While many
channel companies perform financial settlement functions, often banks
and other financial institutions are used to facilitate channel payment
flows. Many companies have also implemented financial management
software that allows direct electronic payment from buyer to seller,
thereby eliminating slower methods such as bank drafts and checks.
Financing. Supply chain members are often involved in financing the
distribution process by purchasing inventories, providing for transportation, managing accounts receivables, and extending credit to their channel customers.
Information services. The explosion in information technologies has required some channel companies to contract with channel specialists who
possess the necessary equipment and technical skills to manage multiple
facets of channel information management. Many channel sellers supply
these networking tools to channel partners who do not have the funding
or technical expertise and equipment.
Management Services and Consulting. In some instances, companies can
assist their channel partners rationalize transaction processes by providing expert advice to enhance their operations or provide important services.
10. Describe the nature of supply chain inventories and demand flows.
Answer:
The supply channel can be divided into three segments based on the type of
inventory and demand flow. The key to understanding the management of
supply chain inventories is recognizing that inventory demand assumes very
different characteristics depending on where in the channel it occurs. All
channel demand has one point of origin and that is independent demand for
finished goods coming from the end-use customer positioned at the end of the
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supply chain. While classically a retailer, the purchase point could be a distributor, catalog sales, Internet sales, or a manufacturer. In all cases the enduse customer determines the true demand for the inventory. The channel entity that serves the end-use customer directly experiences this independent demand. Channel businesses located in the end-use customer segment of the
supply chain normally view inventory as a short-term risk. In this environment, the goal is managing the velocity of buying and selling of inventories.
Supply chain entities usually manage independent demand from end-use
customers by developing some form of forecast of future sales. This forecast,
which is passed upstream to channel intermediaries, is termed derived demand. Unlike independent demand, which is random, derived demand consists of a window of fairly stable demand that is placed on the second major
area of the supply chain: channel intermediaries. The role of channel intermediaries is to acquire finished goods from producers and then pass the inventory to downstream distributors and retailers concluding with the end-use customer. While it is true that the demand a channel intermediary receives can be
said to originate from its “customer,” such demand is not considered as independent but rather as derived from the inventory replenishment plans stemming from the channel entities directly servicing the end-use customer. Channel intermediaries view inventories as a medium-term risk. They will buy
products (usually in large lot sizes and varieties) from many sources to create
a broad assortment which they in turn sell to other distributors or retailers,
usually in smaller lot sizes.
In the third segment of the supply chain is found the producers of finished
goods and the materials suppliers. The demand the producer experiences can
be either derived (when it is received from channel intermediaries) or independent (when it involves direct sales to the end-use customer). The total demand is calculated by combining the derived and independent demand placed
on the producer’s finished goods. This total demand, in turn, is used in the producer’s material requirements planning (MRP) system to determine the production inventories required for production. The next step is to communicate
the requirements to materials suppliers for replenishment. The requirements for
manufacturing inventories constitute the third and final form of demand: dependent demand. The demand is dependent because the producer knows exactly the production items and quantities that must be ordered based on the bill
of materials explosion occurring in the MRP system. Companies in this segment of the supply chain view inventories as a long-term risk. Even though they
offer a limited variety of finished goods, manufacturers must stock a wide variety of raw materials and components that often spend a long time in inventory
before they pass through the production process.
11. According to Little’s law, if it takes 30 days for inventory to cycle through a
company’s supply chain and daily sales average 50 units, what would be the
size of the inventory in the supply channel?
Answer:
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Little’s law uses the following formula: Inventory (I) = Throughput rate (D)
× Flow time (T). The amount of inventory in the supply chain is therefore
calculated as 30 days × 50 units = 1,500 units.
12. Describe the options in the environmental sustainability reverse logistics hierarchy.
Answer:
The reverse logistics hierarchy is expressed in the form of a pyramid with the
most desirable actions for managing returned and damaged products at the top
and the least desirable at the base of the pyramid.
 Reduce. Reducing the use of resources is considered the most responsible
option in the reverse logistics hierarchy. Reducing resources can be accomplished through such actions as redesigning products and packaging
that use physical resources more efficiently; reducing the amount of energy needed to run productive processes; and increasing the efficiency of
resources and energy needed to run channel warehouses and transportation.
 Reuse. This strategy looks to the design of products so materials and
components can be more easily separated for reuse. In addition, intelligently designed product upgrades can extend the life of durable products
if they are easy to install.
 Recycle. Similar to reuse, recycling seeks to capture wastes in the form of
packaging materials, containers (bottles, barrels, drums, etc.), scrap materials, and so on, and to reprocess them into other products. Recycling reduces disposal costs.
 Recover energy. “Trash to energy” refers to the harvesting of forms of
energy contained in products that are no longer usable in their physical
form.
 Responsible landfill. Some products and wastes must go to the incinerator or landfill, but this is the least desirable option. A responsible landfill
that prevents degrading items from leaching into a water source or polluting the air is preferable.