Electronic supply chains. Virtual warehouse, physical warehouse, and direct delivery strategy

In this article – the fourth in a series on electronic supply chains – we present a mixed chain model, including both a virtual and a physical warehouse, supplemented by a direct delivery strategy from the manufacturer to retail stores. Let us recall that separating the two streams occurring in the supply chain – thanks to e-business technologies: the product flow stream and the information flow stream – which remain in close interdependence in a traditional chain, gives the manufacturer the opportunity for additional profits. In an electronic supply chain, the manufacturer retains its advantageous position at the beginning of the product flow stream, while changing its disadvantageous position at the end of the information flow stream to a position closer to the end customer. In a mixed model, the manufacturer can serve a more diverse range of customers.

Virtual warehouse, physical warehouse, and direct delivery strategy
The electronic supply chain models presented in the two previous articles – the model with a virtual warehouse created and controlled by the manufacturer and a physical warehouse, and the model with a virtual warehouse and a direct delivery strategy – can be used together, as shown in Fig. 1. Red arrows indicate the flow of orders, black arrows indicate the flow of goods.
In the considered model, based on the volume of current demand, a decision is dynamically made whether to pass it to the physical warehouse for fulfillment or to handle it independently. The decision criterion is an analysis of costs – primarily transport costs – and potential profits. The advantages of the considered model are as follows:
1. It does not eliminate physical warehouses from the manufacturer’s circle of partners and does not cause them to focus on the manufacturer’s competitors,
2. It allows the manufacturer to present itself to physical warehouses as a supplier of orders,
3. It allows the manufacturer to direct orders to those physical warehouses with which it has signed the most favorable agreements,
4. It allows for negotiating more favorable agreements with physical warehouses in exchange for the promise of directing orders to them,
5. It allows the manufacturer to handle, with the participation of physical warehouses, those orders whose independent handling is economically unjustified,
6. It allows the manufacturer to take over the direct handling of the most lucrative retail orders, which leads to capturing the physical warehouse’s profits and converting a large part of the physical warehouse’s current costs into the manufacturer’s profit by eliminating one link from the goods supply chain,
7. It allows the manufacturer to flexibly control the development of the independently served market, depending on the prevailing conditions – the degree of preparation of the manufacturer’s relevant departments, the advancement of the promotion of the virtual ordering form, the availability of transport, etc.,
8. It will not allow the manufacturer to be surprised by competing manufacturers who, thanks to the use of e-business technologies, could offer lower prices to retailers,
9. It will not allow the manufacturer to be surprised by potential creators of competing virtual warehouses who, instead of the manufacturer, could capture the profits generated by eliminating physical warehouses from the goods supply chain.

The article comes from the magazine “Logistyka”, No. 3/2006.