Optimized distribution supply chain for improved customer service

Abstract

In an attempt to attract consumers, companies are offering an increasingly wide range of product varieties to cater to each consumers individual needs and desires. This behavior leads to fragmentation of demand that increases supply chain complexity and cost. At Company X, this behavior is also visible. There is a proliferation of product types and sizes as these are increasingly used for product differentiation by both the company and original equipment manufacturers that use its products. This, in turn, lowers demand per product and disaggregates it, resulting in higher variability. Some of Company Xs products that are affected by the changes in demand patterns, and consequently have relatively low demand, are also highly profitable. This relatively small, but increasingly important segment of the market is not well served by the existing supply chain that has been optimized for large, steady flows of products. Service levels for products with the new demand patterns are low, leading to customer dissatisfaction and lost sales. We hypothesize that Company X can improve its customer service, as measured by service level, fill rate, and on time delivery rate, for consumer products by adopting a segmented supply chain. The current supply chain is optimized for products that have a steady and large demand, but it undersupplies products with low or variable demand. A segmented supply chain would allow each segment of products to be served by a supply chain that is optimized to that segments demand characteristics. Traditional manufacturing would provide a low-unit-cost source of products, while a new, agile small-scale manufacturing source would provide a responsive source of products.