Supply Chain Management

Chapter 4
Designing the Distribution
Network in a Supply Chain

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Important Topic

What is the role of distribution in Supply Chain Management?

What factors influence distribution network design? (Slide: 6, 7, 8 )
What does inbound & outbound transport cost? (Slide: 11 )
Describe different types of distribution network.
What will be the distribution network for different for different product & service? (It
depends on the product, type, price, category, and commoditization).

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 Outline
 The Role of Distribution in the Supply Chain
 Factors Influencing Distribution Network Design
 Design Options for a Distribution Network
 The Value of Distributors in the Supply Chain
 Distribution Networks in Practice
 Summary of Learning Objectives

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 Goal

Given: What is the

 Product Characteristics appropriate
 Markets Served distribution
network?

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 The Role of Distribution
in the Supply Chain
 Distribution: the steps taken to move and store a
product from the supplier stage to the customer stage
in a supply chain
 Distribution directly affects cost and the customer
experience and therefore drives profitability
 Choice of distribution network can achieve supply
chain objectives from low cost to high responsiveness
 Examples: Wal-Mart, Dell, HP, Proctor & Gamble

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 Some key questions????
 Which distribution network is the best?
 What value does each distributor provide?
 When should a new distributor be added?
 E-business killes distributors, so?
 Why are distributors more significant in some
countries, like India?

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 Factors Influencing
Distribution Network Design
 Distribution network performance is evaluated along
two dimensions at the highest level:
– Customer needs that are met
– Cost of meeting customer needs
 Distribution network design options must therefore be
compared according to their impact on customer
service and the cost to provide this level of service

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 Factors Influencing
Distribution Network Design
 Elements of customer service influenced by network structure:
– Response time
– Product variety
– Product availability Priority among these is important!
– Customer experience
– Order visibility
– Returnability
 Supply chain costs affected by network structure:
– Inventories
– Transportation
– Facilities and handling
– Information

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 Service and Number of Facilities
(Fig. 4.1)

Response Time

Number of
Facilities
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The Cost-Response Time Frontier

High Local FG
Mix
Regional FG

Local WIP
Cost Central FG

Central WIP

Central Raw Material and Custom production

Custom production with raw material at suppliers

Low
Low Response Time High

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 Inventory Costs and Number
of Facilities (Fig. 4.2)

Inventory
Costs

Number of facilities

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 Transportation costs
Inbound transportation costs: cost of bringing the material into a facility

Outbound transportation costs: cost of sending material out of a facility

 Since lot size is larger in the inbound, usually

Outbound transportation cost/unit > Inbound transportation cost/unit

 As # distribution centers increases, average outbound distance decreases,

thus the fraction of outbound transportation cost decreases.

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 Transportation Costs and
Number of Facilities (Fig. 4.3)

Transportation
Costs

Number of facilities

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 Facility Costs and Number
of Facilities (Fig. 4.4)

Facility
Costs

Number of facilities

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 Total Costs Related to
Number of Facilities
Total Costs
Total Costs

Facilities
Inventory
Transportation

Number of Facilities
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Variation in Logistics Costs and Response Time with Number of Facilities (Fig.
4.5)

Response Time

Total Logistics Costs

Number of Facilities
4-16
 Key Decisions in Designing a
Distribution Network
1. Will product be delivered to the customer location or
picked up from a preordinated site?

2. Will product flow through an intermediary location?

4-17
 Design Options for a
Distribution Network
 Manufacturer Storage with Direct Shipping
 Manufacturer Storage with Direct Shipping and In-
Transit Merge
 Distributor Storage with Carrier Delivery
 Distributor Storage with Last Mile Delivery
 Manufacturer or Distributor Storage with Consumer
Pickup
 Retail Storage with Consumer Pickup

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 Manufacturer Storage with
Direct (Drop) Shipping (Fig. 4.6)

Manufacturer

Retailer

Customers

Product Flow
Information Flow

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 Drop Shipping
 Centralization is beneficial if there is high variety, high value
items with low and unpredictable demand.
 Centralized inventories leading to high product availability,
low inventory levels (higher inventory turnovers), better
forecasts.
 Manufacturer can postpone customization until order arrival.
 Partial shipments introduce complexity, hard to implement if
there are more than 20-30 sourcing locations
Ex: Furniture orders from both Kelebek Mobilya and Sauders

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 Performance Characteristics:
Drop Shipping
Inventory Lower due to aggregation. Benefit is larger if low demand,
high value items, if there is postponement
Transportation Higher due to increased distances and partial shipping
Cost
Facilities and Lower fixed costs. Better handling costs if direct shipment
Factor handling from production line.
Information Higher, since info flow is essential b/w manuf. and retailer.

Response time High response time, worse if there is partial shipment

Product variety Easy to provide high level of variety
Product availability Higher due to aggregation

Service Customer experience Good since there is home delivery but partial shipments
factor may increase complexity.
Order visibility Very important for customer but more difficult since an
integration of retailer and manuf. info systems is needed
Returnability Expensive and difficult. Return to manuf. vs. return to 4-21
 In-Transit Merge Network (Fig. 4.7)
Factories

Retailer In-Transit Merge by

Carrier

Customers

Product Flow
Information Flow

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 In-Transit Merge Network
 In-transit merge combines pieces of order coming from
different locations, so the customer receives the order by single
delivery.
Ex: Order a Dell pc with a Sony Monitor.
 Beneficial for high value items with low to medium demand,
4-5 sources.
 Main advantage over drop shipping: Lower transportation cost
and improved customer experience!

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 Performance Characteristics:
In-Transit Merge Network
Inventory Similar to drop shipping
Transportation Somewhat lower than drop shipping
Cost Facilities and Higher handling costs than drop shipping; lower receiving
Factor handling costs at customer
Information Higher than drop shipping

Response time Similar to or higher than drop shipping

Product variety Similar to drop shipping
Service Product availability Similar to drop shipping
factor Customer experience Better due to single delivery
Order visibility Similar to drop shipping (or somewhat more difficult)
Returnability Similar to drop shipping

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 Distributor Storage with
Carrier Delivery (Fig. 4.8)

Factories

Warehouse Storage by
Distributor/Retailer

Customers

Product Flow
Information Flow
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 Distributor Storage with
Carrier Delivery
 Inventory is not held by the manufacturers, but is held by
distributor/retailer in intermediate warehouses.
 Package carriers are used to transport items from the retailer to
the customer. Ex: Amazon
 Higher inventory capacity is needed than the manufacturer,
since demand uncertainty is aggregated at a lower level!
 Better for medium to fast moving items. Better response time,
lower transportation costs when compared to manufacturer
storage.
 Distributor storage can handle somewhat lower variety than
manufacturer storage but it is better than a chain of retailers.

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 Performance Characteristics:
Distributor Storage with Carrier Delivery
Inventory Higher than manufacturer storage. Difference is not large
for fast moving items.
Transportation Lower than manufacturer storage. Reduction is highest for
Cost fast moving items.
Factor Facilities and Somewhat higher than manufacturer storage
handling
Information Simpler structure compared to manufacturer storage.

Response time Faster than manufacturer storage.

Product variety Lower than manufacturer storage.
Product availability Lower than manufacturer storage. Extra investment is
Service needed forlarger availability
factor
Customer experience Better than manufacturer storage with drop shipping.
Order visibility Easier than manufacturer storage.
Returnability Easier than manufacturer storage.
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 Distributor Storage with
Last Mile Delivery (Fig. 4.9)

Factories

Distributor/Retailer
Warehouse

Customers

Product Flow
Information Flow
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 Distributor Storage with
Last Mile Delivery
 Disributor/retailer delivers the product to the customer’s home
instead of using a package carrier.
 Requires distributor warehouse to be very close to the customer,
so more warehouses are needed when compared to package
delivery.
 Suitable for fast moving items where disaggregation does not
lead to significant increase of inventory.
 Hard to justify this option when labor cost is high.
 Can only be justified when there is large customer demand at
this higher price. Very short response time, better customer
experience and returnability.
 Last mile delivery should be integrated with the existing
distribution network.
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 Performance Characteristics:
Distributor Storage with Last Mile Delivery
Inventory Higher than distributer storage with package delivery, since
uncertainty is aggregated in lower level with larger # of
distributers
Transportation Higher than any other distribution option. Maybe somewhat
Cost cheaper in large and dense cities
Factor Facilities and Higher than all options but lower than chain of retail stores.
handling
Information Similar to distributor storage with package carrier delivery.

Response time Very quick, in 1 day.

Product variety Somewhat less than distributor storage but larger than retail.
Product availability Lower than other options except retail stores. Extra
investment is needed for larger availability
Service
Customer experience Very good
factor
Order visibility Easier than manufacturer storage or distributor with carrier
delivery.
Returnability Easier than other options, more expensive and difficult than 4-30
 Manufacturer or Distributor Storage
with Customer Pickup (Fig. 4.10)
Factories

Retailer Cross Dock DC

Pickup Sites

Customers

Customer Flow
Product Flow
Information Flow 4-31
 Manufacturer or Distributor Storage
with Customer Pickup
 Inventory is stored at the manufacturer or distributor
warehouse (cross dock), customer place orders on line or via
call center and come to designated pickup points to collect
their orders.
Ex: 7-Eleven Japan
 Inventory and transportation costs are low due to appropriate
aggregation

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 Performance Characteristics:
Manufacturer or Distributor Storage
with Customer Pickup
Inventory Can be as low as possible by appropriate aggregation
Transportation Lower than the use of package carriers
Cost Facilities and Can be very high if new facilities have to be built. The
Factor handling increase in the handling cost at the pickup site can be large.
Information High investment is required

Response time Similar to packae carrier delivery with manufacturer or

distributor storage. Same day delivery is possible for items
stored at crossdoc site
Product variety Similar to other manufacturer or distributor storage options.
Service Product availability Similar to other manufacturer or distributor storage options.
factor Customer experience
Lower than other options due to absence of home delivery.
Discrepency is less if pickup points are dense.
Order visibility Essentially required but difficult
Returnability Easy if pickup points can handle returns.
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Retail Storage with Customer Pickup
 Inventory is stored locally at retail stores. Customers walk into
the retail store or place an order online or by phone and pick it
up at the retail store.
 Best for fast moving items
 Very short response time due to local storage, lower
transportation cost
 Increased inventory and facility costs

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 Performance Characteristics:
Retailer Storage with Customer Pickup
Inventory Higher than all options
Transportation Lower than all other options
Cost Facilities and Higher than other options. The increase in the handling cost
Factor handling at the pickup site can be large.
Information High investment is required for online and phone orders

Response time Same day, very quick

Product variety Lower than all other options.
Product availability Very expensive to provide high levels
Service
Customer experience Assesed according to customer request
factor
Order visibility Trivial for in-store orders. Essentially required for online
and phone orders.
Returnability Easy if pickup points can handle returns.

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Comparative Performance of Delivery
Network Designs (Table 4.7)
Retail Storage
Manufacturer Manufacturer Distributor Storage Distributor Manufacturer or
with Customer
Storage with Direct Storage with In- with Package storage with last distributor storage
Pickup
Shipping Transit Merge Carrier Delivery mile delivery with pickup

Response Time 4 4 3 2 4 1

Product Variety 4
1 1 2 3 1
Product Availability 2 3 4
1 1 1
Customer Experience
4 3 2 1 5 5

Order Visibility 5 4 3 2 6 1

Returnability 5 5 4 3 2 1

Inventory 1 1 2 3 1 4

Transportation 4 3 2 5 1 1

Facility & Handling 1 2 3 4 5 6

Information 4 4 3 2 5 1
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 Linking Product Characteristics and
Customer Preferences to Network Design
Manufacturer Manufacturer Distributor Distributor storage Manufacturer Retail Storage
Storage with Storage with Storage with with last mile delivery storage with pickup with
Direct Shipping In-Transit Package Carrier Customer
Merge Delivery Pickup

High demand product

-2 -1 0 +1 -1 +2
Medium demand product
-1 0 +1 0 0 +1
Low demand product
+1 0 +1 -1 +1 -1
Very low demand product
+2 +1 0 -2 +1 -2
Many product sources
-1 -1 +2 +1 0 +1
High product value
+2 +1 +1 0 -2 -1
Quick desired response
-2 -2 -1 +1 -2 +2
High product variety
+2 0 +1 0 +2 -1
Low customer effort
+1 +2 +2 +2 -1 -2

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 The Value of Distributors
in the Supply Chain
 Distributing Consumer Goods in India
– Selling fast moving consumer goods with large # retailers,
– Distributors close to retailers is crutial to reduce transportation costs and
reduce response time
 Distributing MRO (maintenance, repair, operations) Products
– Demand is uncertain, low product value, high variety
– Distributors close to customers is crutial to reduce transportation costs
and reduce response time
– Keep aggregate safety inventory
 Distributing Electronic Components
– Intel, Texas Inst., Motorola are few suppliers for large # of original
equipment manufacturers (OIMs).
– 80:20 applies so sell directly to big OIMs.
– Use distributors for small OIMs.

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 Value of Distributors
 Distributors add value to the SC when
– Demand is large in small quantities
– There are several manufacturers.
 SC performance improves due to
– Reduced inbound transportation cost due to TL shipments from
manufacturer to distributor.
– Reduced outbound trans. cost since several retailers are satisfied in one
shipment.
– Reduction in inventory costs by keeping aggregate safety stocks as
compared to retailer stocks.
– Stable orders from manufacturer to retailer.
– Better response time than manufacturers.
– High product variety at one large store

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 Distribution Networks in Practice
 The ownership structure of the distribution network
can have as big as an impact as the type of distribution
network
 The choice of a distribution network has very long-
term consequences
 Consider whether an exclusive distribution strategy is
advantageous
 Product, price, commoditization, and criticality have
an impact on the type of distribution system preferred
by customers
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 E-Business and the Distribution
Network
 Impact of E-Business on Customer Service
 Impact of E-Business on Cost
 Using E-Business: Dell, Amazon, Peapod, Grainger

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 Distribution Networks in Practice
 The ownership structure of the distribution network
can have as big as an impact as the type of distribution
network
 The choice of a distribution network has very long-
term consequences
 Consider whether an exclusive distribution strategy is
advantageous
 Product, price, commoditization, and criticality have
an impact on the type of distribution system preferred
by customers
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 Summary of Learning Objectives
 What are the key factors to be considered when
designing the distribution network?
 What are the strengths and weaknesses of various
distribution options?
 What roles do distributors play in the supply chain?

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