How to optimize Distributor Supply Chain

Supply Chain of a distributor contains a lot difficulties. Distributor is connected to the wholesalers, retailers, e-traders and other special sales channels. These business channels have different natures and expectations. So, aggregated demand is complex to predict.

Distributor adds value to business with its strong network chain. It should choose appropriate product and promote it to the market. That leads us to the availability issue. Under uncertain demand, we need ‘appropriate’ availability. However, cash flow is vital, and a ‘must’ for distributor’s survival. Therefore, a distributor should be very careful on managing the portfolio.

On the other side, lost sales can be shocking. Because of the tough competition, its sales channels may shift to other suppliers. The consequences of lost sales can be extreme. Therefore, distributor should be investing in the right product, on the right time.

In this article, I will try to adapt the Unified Supply Model to a distributor’s supply chain. We’ll focus on the supply side, and try to solve complex problems under uncertain demand.

Demand & Leadtime: Most of the suppliers have a periodic delivery. For example, once a week. We can use it on our model as the leadtime (T). First, by using past actual sales data and method given on Demand Pattern, we calculate the periodic demand (d). Usually, it is in days. Then, we convert it to the leadtime demand (D), explained in the article Leadtime Demand.

Logistics: The logistics constraints can be the ones as I explained in Optimizing Material Supply Chain. Supplier may request logistics payment per container load (CL), for example full truck freight cost. Then, our optimum order quantity (OPQ) is as follows;

OPQ= min[ EOQ, mCL ]

where m=rndup[ D/CL ]

Or, supplier has a routine delivery to our location. So, we don’t need to load the truck full, but order with multiples of pallet load (PL). Then, OPQ formula is;

OPQ= rndup[ D / PL ] * PL

There’s a very important difference to Material Supply Chain. In the material side, we use periodic demand (d), because as a material planner, we are free on order frequency.

Generally in the distribution side, the supplier dominates the chain and dictates the delivery dates. Therefore, as a distributor we use leadtime demand (D), rather than periodic demand (d) during ordering.

Safety Stock: First, we need to calculate Customer Service Level. We use the leadtime (T) above to calculate the total inventory holding cost (hT). If there’s a rented warehouse, rental cost per product per leadtime, should also be added.

Regarding the lost sales (b), most of the distributors use the difference between the price and cost of the product. If there’s a penalty in the sales agreement to the market, it should also be added. The potential of losing the customer should be analysed very carefully. If we’re confident enough in this analysis, approximate loss can also be a part of it.

Then, with the use of the main formula given on How to optimize Inventory, we can find the safety stock.

What if we have many products from one supplier? We can apply the technique given on the article How to optimize Multiple Material Order. Just, we need to use the leadtime demand (D) rather than periodic demand (d). The remaining is same.

Finally, what if we have a storage constraints? We will analyse it on another article.

As a review, we can adapt Unified Supply Model to the distribution environment. Just, we should be careful on the demand side, and use leadtime demand in our calculations.