Discover the potential outcomes of eliminating a level in a three-level retail distribution network. Explore the impact on transportation costs, order frequency, deliveries, and risk pooling benefits.
Table of Contents
Question
A retailer that operates a three-level distribution network is considering eliminating one level in the network and shipping directly from the regional warehouses to the retail outlets. Which of the following outcomes is most likely to result?
A. Total transportation costs will decrease.
B. Retail outlet order frequency will decrease.
C. Deliveries to the retail outlets will decrease in number.
D. Risk pooling benefits will decrease.
Answer
D. Risk pooling benefits will decrease.
Explanation
Eliminating one level in a three-level distribution network and shipping directly from regional warehouses to retail outlets is likely to result in decreased risk pooling benefits. Risk pooling is the practice of aggregating demand variability across locations to reduce overall inventory levels and costs. By eliminating an intermediate level, such as a central warehouse, the retailer loses the ability to pool inventory and buffer against demand fluctuations at individual retail outlets.
With direct shipments from regional warehouses to retail outlets, each location must carry more safety stock to maintain service levels, leading to higher overall inventory levels and costs. The reduction in risk pooling benefits may also result in increased stockouts and lower customer service levels at the retail outlets.
While transportation costs might decrease due to fewer overall shipments, order frequency and the number of deliveries to retail outlets are likely to increase to compensate for the loss of risk pooling benefits and maintain adequate inventory levels at each location.
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