Journal of Enterprise Information ManagementA process approach to distribution channel re‐engineeringAles Groznik Marinko Maslaric

Article information:To cite this document:Ales Groznik Marinko Maslaric, (2012),"A process approach to distribution channel re#engineering",Journal of Enterprise Information Management, Vol. 25 Iss 2 pp. 123 - 135Permanent link to this document:http://dx.doi.org/10.1108/17410391211204383

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A process approach todistribution channel

re-engineeringAles Groznik

Faculty of Economics, University of Ljubljana, Ljubljana, Slovenia, and

Marinko MaslaricFaculty of Technical Sciences, University of Novi Sad, Novi Sad, Serbia

Abstract

Purpose – The aim of the paper is to propose a methodology for distribution network reengineeringsince for the last few decades there has been growing interest in making more integrated businessdecisions across larger segments of the logistics and distribution networks.

Design/methodology/approach – In this paper, a methodology to assist distribution networksreengineering by integrating logistic processes within the distribution supply chain is developed. Theemphasis of methodology is on business processes modeling and reengineering in distributionnetwork.

Findings – The results confirm that distribution network reengineering needs to be a balanced,methodological process that integrates business process reengineering in combination withinformation technology. Case study findings presented illustrate that the recommendedmethodology has resulted in considerable cost savings and enhancing effectiveness of distributionnetworks.

Originality/value – The paper has extended reengineering theory and information technology into asupply chain context. Moreover, it is among the first empirical papers that specifically investigate therelationship between reengineering, information technology and distribution channel managementpractices; thus the paper fills an important gap in the supply chain literature. The case study providesimportant insights for both, academia and practitioners, to understand the importance of broadercontext of distribution channel management in order to better leverage reengineering context byexploiting information technology.

Keywords Distribution process, Business process modeling, Reengineering, Logistics,Distribution management, Business process re-engineering

Paper type Research paper

1. IntroductionTo succeed in the modern global economy, it is critical to build a logistic network thatis information rich, highly flexible, cost effective, and defined by both customer needsand internal corporate strategy. Organizations must constantly reinvent logisticnetwork to allow business growth and change. The nature of distribution process ischanging from simply holding physical inventory towards a business model that relieson information and inventory linkages with customers and suppliers. Customerexpectations now include both traditional activities associated with warehousing anddistribution and new activities like technical support, electronic order processing, andcustomized financial services to name a few. Structural changes in distributionchannels are currently taking place which are accelerating deliveries to customers

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/1741-0398.htm

Distributionchannel

re-engineering

123

Received 18 November 2010Revised 22 December 2010

Accepted 2 March 2011

Journal of Enterprise InformationManagement

Vol. 25 No. 2, 2012pp. 123-135

q Emerald Group Publishing Limited1741-0398

DOI 10.1108/17410391211204383

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(Gunasekaran et al., 2004) These new distribution channel structures, in which logisticsmanagement is typically centralized, have proven to be both extremely cost efficientand effective in improving customer services (Persson and Olhager, 2002). Moderninformation technology (IT) has been a necessary enabler of the move to morecentralized distribution structures (Vaculik et al., 2009). High operational efficiency isdependent on quick, accurate, and continuous exchange of information betweenorganizations and also between and within different functions within organizations.Rapid developments in IT have increased the availability of information, and also theopportunities to transfer information between different inter and intra-organizationalunits (Yang and Su, 2009).

However, the simple use of IT applications to improve information transfersbetween supply chain members is not enough to realize the benefits of informationsharing. A mere increase in information transfers does not mean that the efficiency oflogistics processes will be improving. The business models of existing distributionprocesses have to be changed, so as to facilitate the better use of the informationtransferred (Trkman, 2010). Literature review shows that numerous papers werepublished describing reengineering methodologies mostly focusing on major phases ofredesign (Adesola and Baines, 2005), (Harmon and Davenport, 2007), (Persson andOlhager, 2002), or exquisite detail (Castano et al., 1999), (Stefanovic et al., 2009),(Muffatto and Payaro, 2004). We find a significant lack of research on methodology ofdistribution channels renovation. The motivation of the research is to define amethodological frame that would allow academia and practitioners to restructureexisting distribution channels. The aim of this article is to describe and explain thereengineering of distribution processes from traditional distribution to distribution,applying the logistic principles and involving the centralization of logistics activity indistribution networks through using proposed methodology. The core steps of themethodology are based on business processes modeling and simulation. Anexplanatory methodology framework is developed and applied to a company casestudy. In this paper through a case study, we observed the distribution network as anetwork of one distribution center, multiple retailers and customers. The distributioncenter’s task is to deliver goods to each retailer so that the customer demands are metto the most desirable levels possible. Proposed methodology assumed an integratedlogistic decision making to assist the distribution center in performing their tasks.

The next section briefly reviews basic principles about the distribution channelreengineering. Section 3 introduces the term of business process modeling. Section 4defines the proposed methodology. Section 5 formulates the case study and outlinesbusiness process models for the current and proposed state for the distributionnetwork under consideration, and details a simulation study. Section 6 discusses theresults and concludes.

2. Applying distribution channel reengineering with business processmodellingIn reengineering theories, organizational hierarchies and the representation oforganizations in terms of different functions are replaced with a process-orientedperspective. Organizational structures are redesigned, by focusing on businessprocesses, and their outcome. According to (Persson, 1995) we can distinguish threedifferent restructuring concepts: total quality management (TQM), time-based

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management (TBM) and business process reengineering (BPR), and the mostimportant contribution of these theories has been to extend a process orientation into astrategy paradigm. The process-oriented design for the logistics and distributionsystems is based on efficient use of IT (Groznik and Trkman, 2006). Informationsharing between members of a distribution supply chain using new IT should beincreased to reduce uncertainty and improve the logistic performances. However,companies need to invest large amount of money for redesigning internalorganizational and technical processes, changing traditional and fundamentalproduct distribution channels and customer service procedure to achieve IT-enabledsupply chain. The main problem when developing an innovative IT-integrateddistribution systems is lack of integration between IT and business model (Andersenand Rask, 2003), (Skerlavaj et al., 2010). Hence, formation of a business model is crucialfor full utilization of improved information system. Information should be readilyavailable to all companies in distribution channel, and the business processes shouldbe structured, so as to allow the full use of this information. The objective of this paperis to offer insights into distribution channel reengineering using business processmodeling and simulation.

Business process reengineering is enabled by business process modelling. Abusiness process model is an abstraction of a business that shows how businesscomponents are related to each other and how they operate. Its ultimate purpose is toprovide a clear picture of the company’s current state and to determine its vision for thefuture. Modelling a complex business requires the application of multiple views. Eachview is a simplified description (an abstraction) of a business from a particularperspective or vantage point, covering particular concerns and omitting entities notrelevant to this perspective. To describe a specific business view process mapping isused. It consists of tools that enable us to document, analyze, improve, streamline, andredesign the way the company performs its work. Process mapping provides a criticalassessment of what really happens inside a given company (Cull and Eldabi, 2010).The usual goal is to define two process states: AS-IS and TO-BE. The AS-IS statedefines how a company’s work is currently being performed. The TO-BE state definesthe optimal performance level of AS-IS. In other words, to streamline the existingprocess and remove all rework, delays, bottlenecks and assignable causes of variation,there is a need to achieve the TO-BE state. Business process modelling and theevaluation of different alternative scenarios (TO-BE models) for improvement bysimulation are usually the driving factors of the business renovation process(Bosilj-Vuksic et al., 2002). Business process modeling complexity increases with thenumber of companies being modeled as shown by Albani and Dietz (Albani and Dietz,2009). Therefore, we decided to propose a methodology that would integratedistribution channel reengeniring and business process modelling.

3. The distribution channel reengineering methodologyThe methodology presented in this section is the outcome of an iterative process fromtheory, practice, and case studies. There have been a number of papers publisheddescribing reengineering methodologies (Adesola and Baines, 2005), (Castano et al.,1999), (Fuente et al., 2010), (Harmon and Davenport, 2007), (Stefanovic et al., 2009).Most focus on major phases of redesign (Adesola and Baines, 2005), (Chuah et al., 2010),(Harmon and Davenport, 2007), (Persson and Olhager, 2002), others go into exquisite

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detail (Castano et al., 1999), (Stefanovic et al., 2009), (Muffatto and Payaro, 2004). Ourgoal was to propose a methodology that would represent a comprehensive tool for bothacademia and practitioners to apply it to distribution channel reengineering in order toincrease the successful rate of reengineering project.

The proposed methodology is a generic six-step approach that guides the actions toassists business process reengineering in logistic/distribution networks. It is a guide,not a procedure or manual. The structure for the methodology is shown in Figure 1.

An outline of the content of the proposed methodology is given in the following.. Understanding business needs, goals and objectives: The first step on the road to a

reengineering distribution system is to assemble a team of strategic decisionmakers and influences from a variety of corporate levels. Not only is it importantto fostering a universal sense of ownership in the process by these key personnel,but these people will also source the needed data on past and current operations,as well as about future corporate plans.

. Collecting relevant data and understanding the business process. Once the goals ofthe distribution channel reengineering process have been defined, it should befairly clear what types of data need to be collected for analysis. Also, we need toidentify the business process architecture.

. Establishing base case. Now that all the date has been collected and process hasbeen defined, it is time to use that information to create an AS-IS model of currentdistribution channel operations, called a base case. The base case will be used as

Figure 1.The proposedmethodology fordistribution channelreengineering

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a standard against which potential future-state operating scenarios will becompared.

. Redesign process-analyzing and evaluating potential future-state scenarios. Oncethe AS-IS model is established, it is time to time to build TO-BE models aspotential scenarios of future conditions and compare them with current reality.To do this it is important to first establish and prioritize which variables willpresent key factors in the analysis. These variables could be inventory costs,transportation costs, required service levels, ordering costs, labor availability etc.

. Selecting optimal future-state. After all it is time to assess the various future-statescenarios which is developed by manipulating the data that established basecase. For this we use simulation. After business process model simulation wecompare these options and chose the model that best supports organization’sstrategic plans related with distribution process.

. Review new process. At the end we need to develop strategic view of the newbusiness process, set process targets and performances, and to develop plan tomeet targets. Lack of performance measures significantly affects management ina supply chain environment (Sambasivan et al., 2009).

4. Distribution channel reengineering: a case studyFrom the distribution point of view, the oil industry is a specific business, and formany reasons it is still generally based on the traditional model. The product ismanufactured, marketed, sold and distributed to customers. In other industries,advanced logistic and distribution operations is becoming increasingly driven bydemand-pull requirements from the customer. There is strong vertically integratednature of oil companies and that may be a potential advantage. In other industries,much attention is focused on value chain integration across multiple manufacturers,suppliers, and customers. In the oil industry, more links in the logistic chain are “inhouse”, suggesting simpler integration. In practice, there is still a long way to go toachieve full integration of logistic processes in the oil distribution chain.

A case study has been used as a research method to underline the theoreticalfindings set out in previous sections, i.e. to show how the distribution channelreengineering can be adopted with business process modelling. In addition, thepurpose of the case study is to show how the benefits of the distribution channelreengineering can be assessed by using the proposed combination of business processmodelling and simulation.

The case study is used extensively as a research strategy in practice-oriented fieldssuch as management (Yin, 2003). The presented research is only partly of anexploratory nature in researching the possibility of assessing distribution channelrenovation and integration benefits. Still, the case study is an appropriate researchmethod as the research questions are of the “how” type in their substance. This type ofresearch questions is likely to lead to the use of case studies, histories, and experimentsas the preferred research strategies (Yin, 2003).

The case study presented in this paper deals with the fulfilment/procurementprocess in an SC that contains a petrol company (with multiple petrol stations atdifferent locations) and a supplier which transports the petrol to the petrol stationsfrom a few large warehouses.

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The business process modelling, and renovation project was initiated by the Serbianpetrol company in order to reduce operating costs, shorten lead times, and improvestock management. The project started with the formation of a project group,consisting of members of the petrol company, the transport company, and consultants.The researchers were in the role of consultants. The first step of the project was aworkshop for the project group in which the members were acquainted with the projectgoals and methodology. After the workshop, key business process groups wereidentified by discussion and brainstorming. One of the most crucial processes was theprocurement process.

The processes were modelled by interviewing people from the companies, whichperform the activities. During the interviews, consultants were able to collect the dataand prepare the business processes models. Since the models reflect businessoperations, key personnel from both companies were involved, and the final version ofthe AS-IS models was validated, by the relevant managers of both companies. Then,the consultants analysed the key business processes on the basis of their models. Theresults of the analyses became the starting-point for the renovation of the businessprocesses. Apart from business process data, we also used industry-specific data (e.g.oil prices, tank volumes), which is available from the literature (Trkman et al., 2007).According to collected data, organizational model, developed process objectives,identified business process architecture we could develop the model of the currentdistribution process.

The objective of the step 3 (see Figure 1) was to map out in a structured way thedistribution processes of the observed petrol company. The modelling tool used in thiscase study was iGrafx Process. The AS-IS model was initially designed so that thepersonnel involved in the distribution processes could review them, and after that thefinal model shown in Figure 2 was developed.

The core objective of distribution chains is to deliver the right product at the righttime, at the right price and safely. In a highly competitive market, each aims to carrythis out more effectively, more efficiently and more profitably than the competitors.Because both the prices and quality of petrol in Europe are regulated, the main qualityindicator in petrol distribution is the number of stock-outs. The main cost drivers aretherefore: number of stock-outs, stock level at the petrol station and process executioncosts. Lead-time is defined as the time between the start (measurement of the stocklevel) and the end (either the arrival at a petrol station or the decision not to place anorder) of the process.

The main problems identified when analyzing the AS-IS model relate to thecompany’s performance according to local optimization instead of global optimization.The silo mentality is identified as prime constraint in the observed case study. Otherproblems are in inefficient and costly information transfer mainly due to theapplication of poor IT. There is no optimization of the performance of the distributionchain as a whole. Purchasing, transport and shipping are all run by people managinglocal, individual operations. They have targets, incentives, and local operationalpressures. Everything was being done at the level of the functional silo despite thedefinition that local optimization leads to global deterioration. Based on the mentionedproblems, some improvements were proposed. The main changes lied in improvedintegration of whole parts of the distribution channel and centralized distributionprocess management.

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The emphasis in business process reengineering is put on changing how informationtransfers are achieved. A necessary, but no means sufficient condition for this is toimplement new IT, which enable efficient and cost effective information transfers.Hence, IT support is not enough as deep structural and organizational changes areneeded to fully realize the potential benefits of applying new IT. In this case study wedevelop two different propositions for business process reengineering (two TO-BEmodels) to show how the implementation of new IT without business processrenovation and the related organizational changes does not mean the full optimizationof distribution network performances. The first renewed business model (TO-BE 1) is

Figure 2.AS-IS model of the process

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shown in Figure 3 and represents the case of implementing IT without structuralchanges to distribution processes. In the TO-BE 1 model, there is no integrated andcoordinated activity through the distribution channel. Inventory management at thepetrol stations and distribution centre is still not coordinated.

The TO-BE 2 model assumes that the processes in the whole distribution channelare full integrated and the distribution centre takes responsibility for the wholeprocurement process. The TO-BE 2 business model is shown in Figure 4. The mainidea is that a new organizational unit within the distribution centre takes on a strategicrole in coordinating inventory management and in providing a sufficient inventorylevel at the petrol stations and distribution centre to fulfill the demand of the endcustomer. It takes all the important decisions regarding orders in order to realize thisgoal. Other changes proposed in the TO-BE 2 model are the automatic measurement ofpetrol levels at petrol stations and the automatic transfer such data to the central unitresponsible for petrol replenishment; the predicting of future demand by usingprogressive tools; and using operations research methods to optimize thetransportation paths and times. The role of IT in all of these suggestions is crucial.

5. DiscussionUsing iGrafx Process, we simulated business process to investigate the impact ofbusiness process reengineering on the defined distribution performances: lead timesand transactional costs. iGrafx Process uses discrete event simulation to estimate theconsequence of possible experiments. For estimating changes in process executioncosts and lead times, a three-month simulation of the AS-IS and both TO-BE modelswas run. In the AS-IS model a new transaction is generated daily (the level of petrol ischecked once a day); in the TO-BE it is generated on an hourly basis (the level of stockis checked automatically every hour). The convincing results are summarized inTable I. The label “Yes” refers to those transactions that lead to the order and deliveryof petrol, while the label “No” means a transaction where an order was not made sincethe petrol level was sufficient.

The comparison of simulation results (see Table I) show that proposed changes(TO-BE 1 and TO-BE 2) significantly lower the transactional costs as well as averagelead times. There is also significant distinction between proposed TO-BE 1 and TO-BE2 models in regards to transactional costs and average lead times. Implementation ofIT without structural changes to distribution processes (TO-BE 1) merely changes thetransactional costs and average lead times. These results support our view that mereIT implementation does not bring business outcome, since the implementation alonedoes not significantly affects costs and lead times. In order to foster business value outof IT implementation, company has to apply distribution channel reengineering withbusiness process modeling. The comparison of our AS-IS and TO-BE 2 model show theaverage process costs are reduced by almost 50 per cent (Yes (AS-IS) vs Yes (TO-BE2)), while the average lead times are cut by 62 per cent (Yes (AS-IS) vs Yes (TO-BE 2)).From this it is clear that this renovation project is justifiable from the cost and timeperspectives. Furthermore, using case study we clarified that companies reengineeringtheir distribution networks have to adopt systematical approach in order to streamlinetheir processes. The significance of our paper is that it not only clarifies that mere ITimplementation will not result in an expected business change, but also providesmethodology that systematically assists in distribution network reengineering. The

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Figure 3.TO-BE 1 model of the

process

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Figure 4.TO-BE 2 model of theprocess

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results in Table I show that a full improvement in logistic performances is onlypossible in the case of implementing both IT, which enables efficient informationsharing and the redesign of business processes. The mere implementing of IT withoutstructural and organizational changes in business processes would not contribute torealizing the full benefit.

Changes described in the TO-BE 2 model, have later been adopted, by the petrolcompany. The validity of the model was tested by ex-post comparison of simulated andreal business operations data. The comparison validated the TO-BE 2 model since thedata from operations fit simulations. The validation also supports the methodology ofdistribution network reengineering. Continuous monitoring and improving of thebusiness model is necessary. The visibility of the process in the whole chain and theability to estimate further changes with a developed methodology will serve as animportant enabler of a continuous improvement.

6. ConclusionsIn the paper, we presented a methodology for distribution network reengineering. Thegoal was to overcome numerous reengineering methodologies that focus either onmajor phases of redesign or are too detailed. The presented methodology represents acomprehensive tool for both academia and practitioners to apply it to distributionchannel reengineering in order to increase the successful rate of reengineering project.

The methodology has been tested on a petrol distribution company in order toexplore the effect of information sharing with regard to the performance. The businessprocess reengineering in distribution channel, realized through proposed methodology,described in this paper helped achieve significant savings for the case study companyby improving effectiveness in distribution network. The conclusions of the simulationexperiments are significant savings in cost and time measures.

The validity of the model in the case study was tested, by comparing the AS-IS andTO-BE 2 model and simulations to the actual state in the company. Results of thecomparison validated the model. The presented case study shows the applicability ofthe proposed methodology; however further case studies have to be done in the futureto prove the validity.

The study also has some limitations. In the case study, initiator and the businessdriver of distribution channel reengineering was the petrol company. The petrolcompany influenced the importance of the change with their supply chain positionpower. That limitation is closely related to social, human related issues. Presentedchanges in the distribution channel significantly twist the focus employees have tofollow. Instead of local, company optima, employees have to seek solutions on overallsupply chain levels. Companies forming the supply chain have to transform their

Transaction No. Av. lead time (hrs) Av. work (hrs) Av. wait (hrs) Average costs (e)

Yes (AS-IS) 46 33.60 11.67 21.93 60.10No (AS-IS) 17 8.43 2.40 6.03 8.47Yes (TO-BE 1) 46 27.22 10.26 16.96 56.74No (TO-BE 1) 1489 0.00 0.00 0.00 0.00Yes (TO-BE 2) 46 12.85 4.88 7.98 32.54No (TO-BE 2) 1489 0.00 0.00 0.00 0.00

Table I.Comparison of simulationresults for the AS-IS and

TO-BE models

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organisational cultures and leadership styles in order to support the overall supplychain benefits.

The proposed approach is applicable to a wide range of supply chains in differentindustries, regardless of the number of organisations participating. The methodologycan be applied to multi-tier supply chains with no major changes. The proposedmethodology encompasses six generic steps that bring any supply chain intodistribution channel reengineering. Nevertheless, we should be aware that from thebusiness point of view one time application of the methodology would not yieldoptimum results. Continuous monitoring and improving of the business model isnecessary, meaning that the proposed methodology should become the panacea ofdistribution channel reengineering.

Future research will focus on incorporating the proposed methodology fordistribution network reengineering into broader change management perspective. Thiswould involve the assurance that the methodology would be applicable as a changemanagement tool. Currently, the proposed methodology focuses on costs and leadtimes. The methodology should be extended into stock level and resource optimisation.

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Corresponding authorAles Groznik can be contacted at: ales.groznik@ef.uni-lj.si

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