In this homework, we will follow the network design framework discussed in class

Question

In this homework, we will follow the network design framework discussed in class with the goal of improving a supply chain network. Problems are otherwise independent from each other. EdgeTex, a manufacturer of high-end computer servers, would like to review their supply chain network. Managers at EdgeTex find that they are spending substantially in transportation and believe that they can reduce costs by adding distribution centers (DCs). 1. (15pt) In Phase 1, EdgeTex would like to review their supply chain design at a broad level. One possible consideration is how they structure their distribution network. EdgeTex’s competitive strategy focuses on staying ahead of the curve in terms of technology, and thus they tend to have a high level of demand uncertainty. They also require a high level of product availability. Therefore, their supply chain prioritizes responsiveness over efficiency. In addition, because they are focused on new technology, it is important for them to be able to make a new product available on the market as quickly as possible. Currently, EdgeTex receives orders online and ships their products from their manufacturing plants directly to the end customer using a third-party transportation carrier. (a) From the six distribution networks discussed in class, which one fits EdgeTex’s current distribution network? Given EdgeTex’s requirements, discuss advantages and disadvantages of this network for EdgeTex. (b) Given EdgeTex’s requirements, propose a different distribution network that might be more suitable. Explain why this distribution network may be a better fit for EdgeTex’s strategy. Discuss one possible disadvantage that this network may have compared to EdgeTex’s current distribution network. (c) EdgeTex also produces a certain type of server that needs to be customized for each customer at the manufacturing plant. In addition, it has very low demand since it is targeted at a niche market. Would you recommend them to use the same distribution network for this product as in item (b)? If not, which one would you recommend? Explain how the two characteristics of the product make such a network more suitable. (d) Given their strategy and product type, which mode(s) of transportation would you expect to be prevalent in their distribution network? Why? Contrast this with the prevalent mode(s) for transporting coal. (e) Discuss one other factor that may be considered in Phase 1 besides the broad structure of EdgeTex’s network. Come up with an example of a situation where EdgeTex may be negatively affected (or may be losing an opportunity) if it neglects to consider this factor. Phase 1: Supply chain strategy Objective: Define broad supply chain design 1. Define the supply chain strategy 2. Analyzecompetitionineachmarket and estimate how it will evolve in the future 3. Identifyotherconstraintsaffectingthesupply chain at a broad level 4. Determinewhethereachsupplychainfunction will be performed in-house or outsourced 5. Determine stages in the supply chain

Explanation / Answer

EdgeTex, a manufacturer of high-end computer servers, would like to review their supply chain network. Managers at EdgeTex find that they are spending substantially in transportation and believe that they can reduce costs by adding distribution centres (DCs). 1. (15pt) In Phase 1, EdgeTex would like to review their supply chain design at a broad level. One possible consideration is how they structure their distribution network. EdgeTex’s competitive strategy focuses on staying ahead of the curve in terms of technology, and thus they tend to have a high level of demand uncertainty. They also require a high level of product availability. Therefore, their supply chain prioritizes responsiveness over efficiency. In addition, because they are focused on new technology, it is important for them to be able to make a new product available on the market as quickly as possible. Currently, EdgeTex receives orders online and ships their products from their manufacturing plants directly to the end customer using a third-party transportation carrier.

(a) From the six distribution networks discussed in class, which one fits EdgeTex’s current distribution network? Given EdgeTex’s requirements, discuss advantages and disadvantages of this network for EdgeTex.

There are 6 classifications for the distribution networks designs, namely;

In the case of EdgeTex, the current distribution network they are using is storage at manufacturing location with direct shipping to the end customer, as EdgeTex receives orders online and ships their products from their manufacturing plants directly to the end customer using a third-party transportation carrier. In this distribution network design the product is transported directly to the end customer from the storage of the manufacturing plant. This Distribution network design is also called ‘Drop Shipping’. Many online retailers opt for drop shipping.

EdgeTex has a high level of demand uncertainty and require a high level of product availability; also, it is crucial for EdgeTex to make a new [product available in the market as soon as possible due to the nature of their product, I.e. high end computer servers. Drop shipping gives the company advantage of centralized inventory storage at the manufacturer’s location, where the manufacturer can see cumulative demand and hence provide a high level of product availability that EdgeTex needs. It helps EdgeTex avoid high levels of inventory (unlike retail storage) and hence maintain a competitive cost. Also, due to centralization of demand is beneficial in case of high value items, with overall low volumes, having unpredictable demands. In case of EdgeTex, their product is high end computer servers, which is a high value and low volume per sku product and EdgeTex also face unpredictable demand, hence centralization of demand at the manufacturer’s location is beneficial for them. Drop shipping also gives the advantage of delaying their customization, to offer it based on the customer’s individual order requirements, hence EdgeTex can get further advantages of lower inventories and hence lower costs due to delayed customization. Due to the absence of the retailer in the supply chain, EdgeTex is also saving on it inventory handling costs to a great extent.

There are certain disadvantages attached to this distribution network design, the biggest being the high transportation costs that EdgeTex is incurring, due to the use of package carriers to meet the requirement of shipping to each customer individually. The shipping cost of package carriers is way higher than that incurred when using truckload or less-than-truckload carriers. Also, as the order has to be shipped to the end customer, where the shipping distances are generally overall large from the manufacturing plant’s site, hence the response time for the order might be higher than the other distribution networks. This also arises the need for a state of the art information infrastructure in EdgeTex that requires hefty investment to manage the demands. Finally, in case of returns, the cost of shipping returns is much higher than the cost of shipping the order; hence, the cost associated to returns can be burden for EdgeTex due to drop shipping.

(b) Given EdgeTex’s requirements, propose a different distribution network that might be more suitable. Explain why this distribution network may be a better fit for EdgeTex’s strategy. Discuss one possible disadvantage that this network may have compared to EdgeTex’s current distribution network.

Based on EdgeTex’s requirements, Distributor Storage with Carrier delivery, is a suitable distribution network, as EdgeTex is facing the problem of high transportation costs, which the managers at EdgeTex are trying to reduce chain (as the case states: “Managers at EdgeTex find that they are spending substantially in transportation and believe that they can reduce costs by adding distribution centres (DCs)”).

In Distributor Storage with Carrier delivery network design, the inventory is not kept at the manufacturing plant sites, rather inventory is kept at the distributor’s storage locations, and package carriers are used to transport the product from the distributor to the end customer. This network design offers EdgeTex the benefit of lower overall transportation costs, as for transporting the goods from the manufacturing plant to the distributor’s location is done using cost effective transportation modes like truckload carriers. The distribution centres selected in this design are hence kept closer to the customer, so that the higher shipping cost using the package carriers from the distributor to the customer can be minimized. This network design also allows EdgeTex to maintain the advantage of delaying the customization, by allowing the customization as per the final customer orders at the distributor’s site, rather than the manufacturing location. Also, the information infrastructure and management needed in the case of this network design is much less complex than was needed in the drop shipping, because the real time visibility of the orders is now needed to the level of the distributor only; hence the investment in information management is also substantially lower. This network design also gives the advantage of much lower response time for customer orders, as the orders are aggregated and shipped from the distributor’s site which is much closer to the customer than the actual manufacturing location. This network design also gives EdgeTex the advantage of lower return cost of their products hence higher customer satisfaction. The cost of returning the product to the distributor’s site is much lower than to the manufacturing plant (as was in the case of drop shipping).

One possible disadvantage that Distributor Storage with Carrier delivery network has when compared to Manufacturer storage with direct shipping, is the higher cost of facility management. EdgeTex has to invest in infrastructure for their distribution centres; hence it is an additional cost for EdgeTex, which was not there in case of drop shipping.

(c) EdgeTex also produces a certain type of server that needs to be customized for each customer at the manufacturing plant. In addition, it has very low demand since it is targeted at a niche market. Would you recommend them to use the same distribution network for this product as in item (b)? If not, which one would you recommend? Explain how the two characteristics of the product make such a network more suitable.

Since this product needs customization specifically at the manufacturing plant, the Distributor Storage with Carrier delivery network as suggested in part (b) will not be suitable for this product, as the demand for this product is also very low, as it is targeted only for the niche, holding its inventory at the distribution centres is not very cost effective. For this product the original network design at EdgeTex, i.e. Storage at manufacturing location with direct shipping, is the most suitable. Since the demand is low, catering few niche customers directly using package carriers is a better option, as the transportation costs for a few sku’s won’t be that high, this will help EdgeTex save the inventory holding costs by unnecessary holding inventory of this product at the distribution centres. Hence, the low demand makes the drop shipping network design more suitable. The second characteristic of the product, i.e. customization required at the manufacturing plant, makes drop shipping suitable for this product, since customization will be based on individual customer orders, hence it will more appropriate if the order information is communicated directly to the manufacturer, to reduce the response time for this product, which otherwise would have gone to the distributor first, then to the manufacturer, then the product would have been shipped to the distributor selectively, and then to the customer.

(d) Given their strategy and product type, which mode(s) of transportation would you expect to be prevalent in their distribution network? Why? Contrast this with the prevalent mode(s) for transporting coal.

Given the strategy and product type the modes of transportation expected to be prevalent in EdgeTex’s distribution network will be road transport mainly by trucks. Unlike the modes of transportation used for transporting coal, i.e. railroads. Shipping through road transportation modes, EdgeTex can ship their products, where road connectivity is there, directly to the customer’s home. Hence drop shipping can be done with the help of road transport, where as railroad doesn’t offer shipment benefit to the final customer’s home. Also, in case of road transportation like trucks, the response time is lower, as this mode is faster than other modes. But road transportation by trucks, is an expensive option, when the product is bulky in huge in volume like coal. Transporting coal hence by trucks will be particularly costly, but in case if EdgeTex, the product being transported in Computer servers, hence the volume is not as huge as in case of coal. Thus the cost of transportation through road, gives the benefit of better response times with lower costs to EdgeTex.

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