Distribution Network in a Supply Chain

Distribution in Supply Chain:

• Set of activities and processes to move and store a
product from the supplier stage to the customer stage,
which includes the movement of
• Raw materials and components from supplier to
manufacturer
• Finished goods from manufacturer to the end customers
through distributor and retailer
Factors Influencing Distribution Network Design

• Customer service
• Response time
• Product variety
• Product availability
• Customer experience
• Time to market
• Order visibility
• Returnability

• Supply chain cost

• Inventory
• Transportation
• Facilities and handling
Impact of Distribution Network on Supply Chain Cost

• Facility cost
– Increases with number of facilities

Facility cost

No. of facilities
Impact of Distribution Network on Supply Chain Cost

• Inventory cost:
– Increases with number of facilities
– The square root law based increase due to safety stock aggregation
benefit
Inventory cost

No. of facilities
Impact of Distribution Network on Supply Chain Cost
• Transportation cost :
– Inbound transportation cost
– Outbound transportation cost
• Outbound transportation cost/unit is higher than inbound transportation
cost/unit
– If the number of facilities is increased, outbound transportation cost
decreases
– Transportation cost first decreases with number of facilities till the economies
of scale associated with inbound transportation is maintained; after this point,
increase in number of facilities increases the transportation cost

Transportation cost

No. of facilities
Impact of Distribution Network on Supply Chain Cost

• Response time
 Decreases with number of facilities

• Total logistics cost

 First decreases then increases with number of facilities

Response time

Total logistics cost

No. of facilities
 Design Options for a Distribution Network

• Key questions

• Will product be delivered to the customer location or picked up from a

prearranged site ?
• Will product flow through an intermediary (or intermediate location) ?

• Some designs:

1. Manufacturer storage with direct shipping

2. Manufacturer storage with direct shipping and in-transit merge
3. Distributor storage with carrier delivery
4. Distributor storage with last-mile delivery
5. Manufacturer/distributor storage with customer pickup
6. Retail storage with customer pickup
OPTION 1 : Manufacturer Storage with Direct Shipping (Drop Shipping)

Manufacturer

Retailer

Customers

Product Flow Information Flow

OPTION 1 : Manufacturer Storage with Direct Shipping (Drop Shipping)
OPTION 1 : Manufacturer Storage with Direct Shipping (Drop Shipping)

Cost factors Performance

Inventory •Lower cost because of aggregation.

•Benefits of aggregation are highest for low-demand, high-value
items.
•Benefits are very high if product customization can be postponed
at the manufacturer.
Transportation •Higher transportation cost because of increased distance and
disaggregate shipping.
Facilities and •Lower facilities costs because of aggregation.
handling

Information •Significant investment in information infrastructure to integrate

manufacturer and retailer.
OPTION 1 : Manufacturer Storage with Direct Shipping (Drop Shipping)

Service factors Performance

Response Time • High response time because of increased distance and two-stage of
order processing.
• Response time may vary with product, thus complicating receiving.
Product variety •Easy to provide a very high level of variety.

Product •Easy to provide a very high level of product availability because of

availability aggregation at manufacturer.
Customer •Good in terms of home delivery but can suffer if order from several
experience manufacturers is sent as partial shipments.
Order visibility •Difficult but important from a customer service perspective.

Returnability •Expensive and difficult to implement.

OPTION 2 : Manufacturer Storage with Direct Shipping and In-transit Merge

Factories

Retailer In-transit merge by

carrier

Customers

Product Flow Information Flow

OPTION 2 : Manufacturer Storage with Direct Shipping and In-transit Merge

Dell PCs merged their CPUs with the Sony monitors at the in-transit merge by carrier
OPTION 2 : Manufacturer Storage with Direct Shipping and In-transit Merge

Cost factors Performance

Inventory (similar to drop shipping)
•Lower cost because of aggregation.
•Benefits of aggregation are highest for low-demand, high-value items.
•Benefits are very high if product customization can be postponed at
the manufacturer.
Transportation • Somewhat lower transportation cost than drop-shipping.

Facilities and •Handling cost higher than drop-shipping at carrier; receiving cost
handling lower at customer.
Information •Investment higher than drop-shipping.
OPTION 2 : Manufacturer Storage with Direct Shipping and In-transit Merge

Service factors Performance

Response Time (similar to drop shipping)

•High response time because of increased distance and two-stage of
order processing.
• Response time may vary with product, thus complicating receiving.
Product variety (similar to drop shipping)
Easy to provide a very high level of variety.
Product (similar to drop shipping)
availability •Easy to provide a very high level of product availability because of
aggregation at manufacturer.
Customer •Better than drop-shopping due to single delivery.
experience
Order visibility (similar to drop shipping)
•Difficult but important from a customer service perspective.
Returnability (similar to drop shipping)
Expensive and difficult to implement.
OPTION 3 : Distributor Storage with Carrier Delivery

Factories

Warehouse Storage by
Distributor/Retailer

Customers

Product Flow Information Flow

OPTION 3 : Distributor Storage with Carrier Delivery
 OPTION 3 : Distributor Storage with Carrier Delivery
Cost factors Performance
Inventory • Higher than manufacturer storage.
• Difference is not large for faster moving items.
Transportation • Lower than manufacturer storage.
• Reduction is higher for faster moving items.
Facilities and handling • Somewhat higher than manufacturer storage.
• The difference can be large for slow moving items.
Information • Investment is somewhat higher than for drop-shipping.

Service factors Performance

Response time • Faster than manufacturer storage.

Product variety • Lower than manufacturer storage.

Product availability
Customer experience
Order visibility
Returnability
• Higher cost to provide the same level of availability as manufacturer
storage.
• Better than manufacturer storage with drop-shipping.
• Easier than manufacturer storage.
• Easier than manufacturer storage.
OPTION 4 : Distributor Storage with Last-mile Delivery through Milk-run

Factories

Distributor/Retailer
Warehouse

Customers

Product Flow Information Flow

OPTION 4 : Distributor Storage with Last-mile Delivery through Milk-run

Spare parts distribution

OPTION 4 : Distributor Storage with Last-mile Delivery through Milk-run

Cost factors Performance

Inventory • Higher than distributor storage with package carrier delivery.

• Very high cost given minimal scale economies.

Transportation • Very high cost given minimal scale economies.

Facilities and • Facility costs higher than manufacturer storage or

handling distributor storage with package carrier delivery.

Information • Similar to distributor storage with package carrier delivery.

OPTION 4 : Distributor Storage with Last-mile Delivery through Milk-run

Service factors Performance

Response time • Very quick. Same day to next day delivery

Product variety • Somewhat less than distributor storage with package carrier delivery
but larger than retail stores.
Product • More expensive to provide availability than any other option except
availability retail stores.
Customer • Very good, particularly for bulky items.
experience
Order visibility • Less of an issue and easier to implement than manufacturer storage or
distributor storage with package carrier delivery.
Returnability • Easier to implement than other options.
• Harder and more expensive than a retail network.
OPTION 5 : Manufacturer or Distributor Storage with Customer Pickup

Factories

Retailer Cross-dock distribution

center

Pickup
Sites
Customers

Customer Flow Product Flow Information Flow

7dream.com operated by Seven-Eleven Japan

OPTION 5 : Manufacturer or Distributor Storage with Customer Pickup
homecentre---click and collect
OPTION 5 : Manufacturer or Distributor Storage with Customer Pickup

Cost factors Performance

Inventory • Can match any option depending on the location of inventory.

Transportation • Lower than the use of package carriers, especially if using an existing
delivery network.

Facilities and • Facility costs can be high if new facilities have to be built.
handling • Costs are lower if existing facilities can be used.
• Increase in handling cost at the pickup site can be significant.
Information • Investment in infrastructure required.
OPTION 5 : Manufacturer or Distributor Storage with Customer Pickup
Service factors Performance

Response time • Similar to package carrier delivery with manufacturer or distributor

storage.
• Same day delivery possible for items stored locally at pick up sites.
Product variety • Similar to other manufacturer or distributor storage options.

Product availability • Similar to other manufacturer or distributor storage options.

Customer experience • Lower than other options because of the lack of home delivery.
• In areas with high density of population loss of convenience may be
small.
Order visibility • Difficult but essential.

Returnability • Somewhat easier given that pickup location can handle returns.
 OPTION 6 : Retail Storage with Customer Pickup

Cost factors Performance

Inventory • Higher than all other options.

Transportation • Lower than all other options.

Facilities and • Higher than all other options.

handling • Increase in handling cost at the pickup site can be high for online and
phone orders.
Information • Some investment in infrastructure required for online orders.
 OPTION 6 : Retail Storage with Customer Pickup

Service factors Performance

Response Time • Same day (immediate) pickup possible for items stored locally at
pick up sites.
Product variety • Lower than all other options.

Product availability • More expensive to provide than any other option.

Customer • Related to whether shopping is viewed as a positive or negative

experience experience by customer.
Order visibility • Trivial for in-store orders. Difficult, but essential, for online and
phone orders.
Returnability • Easier than all other options given that pickup location can handle
returns.
 Online Sales and the Distribution Network
Impact on customer service
• Response time:
– Longer time for physical products
• Product variety:
– High variety
• Product availability:
– High
• Customer experience:
– 24 × 7
– Personalized experience
• Time to market:
– Faster
• Order visibility:
– Essential and possible
• Returnability:
– Essential and harder
• Flexible pricing and promotions:
– Easy to adjust the prices
– Social networking
 Online Sales and the Distribution Network

Impact on cost
• Inventory:
– Low--- due to inventory aggregation and postponement
• Facilities:
– Operating cost---less staff leading to less cost
– Fixed cost---low
• Transportation:
– High
• Information:
– High
 Online Sales and the Distribution Network

Analysis of Dell
• Impact on customer service:
– Order fulfilment---delayed ( more for sever when compared with laptop)
– Product variety and availability---better
– New product launching---better
– Order visibility---better
– Customer experience---improved
– Pricing ---flexible
• Impact on cost:
– Inventory cost---low due to aggregation and postponement
– Facility cost---low
– Transportation cost---high. Higher percentage for laptop when compared
with server
– Information cost---not significant given the benefits