Supply chain management refers to the “management of a network of interconnected businesses involved in the ultimate provision of products and service packages required by end users” (Jespersen and Skjott, 2005, p. 3). Supply chain activities include transportation and storage of goods which may include work-in-progress and raw materials.
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Supply chain management is an important aspect of every business since it helps in creating competitive advantages. It helps in increasing the efficiency of sourcing and delivering goods to the customers in a cost-effective manner (Jespersen and Skjott, 2005, p. 4). This means that a firm must adopt the most suitable supply chain strategy in order to succeed. This paper analyzes the direct shipping strategy in supply chain.
Direct Shipping Theory
Direct shipping is a supply chain strategy whereby the producers of particular goods deliver their products directly to the end consumers (Chopra, 2003, pp. 123-140). The application of the direct shipping strategy is illustrated in figure 1 in the appendix. The retailers in this case are not involved in the delivery of the goods. In most cases the retailers do not keep the stock of goods being demanded by the end consumers.
They instead obtain the order information from the end users and transfer it to the manufacturers (Chopra, 2003, pp. 123-140). Once the orders are filled, the goods are directly transported from the manufacturing plants to the end consumers.
The characteristics of direct shipping strategy are as follows. First, firms using this strategy depend on the services of an express logistics company to ship the products from the producers to the end consumers (Creazza and Dallari, 2010, pp. 154-164). The logistics company thus integrates the end users and the producers. Second, the direct shipping strategy is based on a pull system.
This means that the production and distribution in the supply chain is based on the actual demand as reflected by the orders placed by the end consumers (Creazza and Dallari, 2010, pp. 154-164). Third, a supply chain using direct shipping is characterized by lean inventory which is normally held by the producers and the consumers only (Capato, Fratocchi and Pelagagge, 2005, pp. 876-899).
Fourth, direct shipping is an information-intensive process that requires a high level of synchronization of the operations of all parties in the supply chain. Finally, the direct shipping strategy can only be efficient if it is supported by an effective e-commerce system that helps in synchronizing the operations of the supply chain partners.
Direct Shipping Models
There are two models of direct shipping strategy namely the pure direct shipping and the direct shipping with in-transit merge. The characteristics of these two models can be explained as follows.
Pure Direct Shipping
In this case, the order information flows from the customers to the producers through the retailers. Thus the retailers’ role is to link the consumers and the producers. The retailers are expected to adopt an effective information system that enables them to provide information about the availability of products.
Once the orders are processed, the goods are transported directly to the customer without passing through the retailers’ warehouse (Katz, Pagell and Bloodgood, 2003, pp. 291-302). The orders from different suppliers are delivered separately. Thus a customer who needs different parts of a product will have to receive several deliveries from different suppliers.
Even though order information is sent to the producers through the retailers, the consumers are expected to maintain visibility on the operations of the manufacturer (Katz, Pagell and Bloodgood, 2003, pp. 291-302). This system helps in reducing the time needed to source and deliver goods to the end consumers since the intermediaries play a passive role in the transportation of the goods.
Direct Shipping with In-Transit Merge
In this case, the logistics company acts as a hub for consolidating the deliveries (Katz, Pagell and Bloodgood, 2003, pp. 291-302). The retailers send the order information to suppliers of the various products demanded by the consumer. However, the goods are not delivered separately even if they are from different suppliers.
The transporter consolidates the deliveries by collecting all the goods from all the suppliers (Katz, Pagell and Bloodgood, 2003, pp. 291-302). The goods are then received by the customer as one delivery. Thus the customer is able to reduce the costs of receiving the good since all supplies are received as one delivery.
This system calls for a sophisticated information and communication technology to facilitate integration of the activities of the transporters with other partners in the supply chain (Katz, Pagell and Bloodgood, 2003, pp. 291-302). Besides, a lot of information is needed to help in coordinating the supply chain activities effectively. Consequently, it can be expensive to implement and to operate.
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Evaluation of the Direct Shipping Strategy
Reliability refers to the ability of the supply chain system to ensure timely delivery of goods to the end consumers (Li, Chen and Chu, 2010, pp. 412-419). Direct shipping helps in reducing the delivery lead time in the supply chain. This is due to the fact that the producers use a pull manufacturing system. In most cases, producers postpone customization of their products.
This enables them to assemble the various product parts into a complete good when the customer’s order is received. Thus they take a relatively short time to fulfill orders (Li, Chen and Chu, 2010, pp. 412-419). Besides, transporting the goods directly to the customer helps in saving time by eliminating the need to deliver the goods through retailers’ warehouses.
Direct shipping helps in improving the responsiveness of the supply chain due to the following reasons. First, the producers are able to “respond to a wide range of quantity demanded” (Chopra, 2003, pp. 123-140) since they use a pull production system. Second, it enables the supply chain to handle a variety of products since the inventory is maintained by the manufacturers (Chopra, 2003, pp. 123-140).
Third, the manufacturers are able to supply goods that meet the specific needs of the consumers since they interact directly with them. This facilitates both process and product innovation. Finally, direct shipping enhances positive customer experiences since it focuses on reducing lead time and supply chain uncertainties in regard to product availability.
Direct shipping promotes interactions between the customers, producers, the retailers and the transporters. Most direct shipping systems are supported by information and communication technologies such as electronic data interchange which help in liking the information systems of all partners in the supply chain.
Thus the partners are interconnected in a manner that enables them to easily share information on demand and product visibility (Darratt, 2003, pp. 53-63). The strong relationship between the partners enhances cooperation among the firms in the supply chain and this helps in improving the overall efficiency of the system.
Resilience refers to the ability of the supply chain to successfully deal with unforeseen threats. A supply chain system will be resilient if it can bounce back to normal operation after a significant disruption (Darratt, 2003, pp. 53-63). The direct shipping strategy promotes resilience since its delivery cycle is calculated in terms of days (Cetinkaya, Uster and Easwaran, 2009, pp. 460-475).
This enhances flexibility which enables the suppliers to adjust quickly to the changes in the market (Sari, 2008, pp. 575-586). It also promotes redundancy which helps in avoiding the risks associated with disruptions. For example, the suppliers normally increase the size of their inventory so that they can fulfill all orders even if there is a disruption in their production systems in the short-term.
Direct shipping is a supply chain strategy whereby goods are transported directly to the end users from the manufacturers. The retailers do not hold any stock of goods demanded by their customers. They act as a link between the end users and the producers by transferring the order information from the consumers to the producers (Chopra, 2003, pp. 123-140).
The main advantage of this system is that it helps in reducing delivery lead time. It also enables the supply chain partners to reduce the cost of handling goods on transit since goods are shipped directly to their end users (Chopra, 2003, pp. 123-140). However, it can lead to high transportation costs if the distance between the consumers and the producers is very long.
Figure 1: the direct shipping strategy
Movement of goods
The above figure illustrates the application of direct shipping strategy in supply chain management. The figure indicates the goods are transported directly from the manufacturers to the end users. The retailers are bypassed in the process of transporting the goods. The manufacturers are responsible for storing all the stock of goods. Thus the retailers do not hold any stock of finished goods.
Returns or goods that do not meet the expectations of the customers are handled in two ways. First, the goods can be returned directly to the producers by the customers (Chopra, 2003, pp. 123-140). Second, the goods can be returned to the producers through the retailers. In this case, the retailers establish a storage facility to consolidate the returns before delivering them to their producers.
The first option involves high transportation costs especially if the distance to be covered is very long (Chopra, 2003, pp. 123-140). The second option on the other hand is expensive to implement since the retailers have to establish a facility for each producer.
The information about the orders placed by the customers is directed to the producers through the retailers. The retailers act as a link between the producers and the end users by facilitating exchange of information that helps in order processing. The retailers’ information systems are usually integrated with those of the producers and the consumers.
Communication technologies such as RFID and electronic data interchange (EDI) helps in integrating the activities of all partners in the supply chain (Katz, Pagell and Bloodgood, 2003, pp. 291-302). This helps them to provide the end users with information on product availability while enabling them to track their orders throughout the supply chain.
Advantages of Direct Shipping
The direct shipping strategy is associated with the following benefits. First, the producers are able to aggregate demand (Katz, Pagell and Bloodgood, 2003, pp. 291-302). Thus they are able to ensure product availability even if they hold low levels of inventory. Second, the manufacturers are able to postpone customization of their products until the customers place their orders.
Consequently, the manufacturers are able to maintain low levels of inventory which enables them to reduce storage costs (Cetinkaya, Uster and Easwaran, 2009, pp. 460-475). Third, storage of goods by the manufacturer facilitates availability of a wide variety of products to the customers. Finally it enhances positive customer experiences since the goods are delivered directly to them.
Disadvantages of the Direct Shipping Strategy
The direct shipping strategy is associated with the following disadvantages. First, the transportation costs are usually high. This is because the “outbound distance to the end consumer is normally large” (Katz, Pagell and Bloodgood, 2003, pp. 291-302).
Besides, direct shipping necessitates the use of package carriers which are associated with higher costs per unit as compared to “truckloads or less-than-truckloads” (Katz, Pagell and Bloodgood, 2003, pp. 291-302).
Second, it is associated with high costs of receiving goods since orders from different suppliers are usually received through multiple deliveries.
Finally, the response time is some times high since the order information has to be transferred to the manufacturers through the retailers. Besides, the transportation takes a long time due to the long distance involved. The response time is usually high if the supply chain lacks an efficient communication system.
Case Studies of Companies Using Direct Shipping
Amazon uses the direct shipping strategy to deliver its products to the end users. Since it sells its products (books) to the end users, it does not depend on regional stores to distribute its products (Kirkpatrick, 2009). The firm has established only five sales centers in North America to handle all its sales activities in the entire region (Kirkpatrick, 2009).
The customers place their orders directly through the company’s sales website or through the sales centers. Once the orders are received, they are fulfilled at Amazon’s warehouse and shipped directly to the customers.
The logistics services are provided by external companies that act as a link between the firm and its customers. However, the delivery cycle takes a long time. Amazon takes at least a week to fulfill an order and deliver the goods to the end users (Kirkpatrick, 2009).
Unlike other computer manufactures such as Hewlett Packard that sell their products through regional stores, Dell sells its computers directly to the end users (Dell, 2007). The sales transactions are handled trough an e-commerce system that facilitates both business to business transactions as well as direct sales to individual clients. Its production plant focuses on manufacturing various parts of the computers (Dell, 2007).
However, customization of the computers is postponed until orders are placed by the customers. Once orders are received from the customers, the computers are assembled according to the needs or specifications of the clients (Dell, 2007). This usually takes a couple of days especially if the size of the order is large. External logistics firms are then contracted to deliver the products to the clients.
The long time taken to customize the computers and to transport them to the end users increases the firm’s delivery lead time. On average, Dell takes three weeks to fulfill an order while its competitors who sell their computers through regional stores fulfill orders within a day (Dell, 2007).
Even though the firm takes long to fulfill its orders, it is able to satisfy the specific needs of its customers by customizing the computers according to their specifications.
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