Distribution Planning Revisited: New Models for New Challenges

Recent business and technological trends have transformed the structure and performance requirements for distribution channels in many industries. Higher service level expectations of retail customers, distribution outsourcing by manufacturers, and the proliferation of advanced information technologies drive these transformations, presenting new problems in supply chain management. Motivated by a project with a leading building-products manufacturer, this paper addresses some of these new issues. Over the past two decades, this manufacturer witnessed the migration of building-products sales from independent specialty retailers to large retail chains, prompting it to create a new network of independent distributors to meet the service expectations of these ‘big-box’ retailers. This paper addresses three important challenges in managing the new distribution network. We first develop a fee-setting model to decide the manufacturer’s compensation scheme for the services provided by its independent distributors. Next, we address a tactical distribution planning problem, incorporating resource acquisition and deployment decisions, for scheduled deliveries when demand is highly variable. Lastly, we investigate possible mechanisms for limiting retail store-order variability, and analyze the system-wide cost benefits resulting from variability reduction. In addition to identifying new modeling opportunities and discussing their implications for the building-products manufacturer, this paper highlights several new research opportunities resulting from the evolving dynamics of supply chain management. 1 This work was partially supported by the Institute for the Study of Business Markets at Penn State University, University Park, PA.