Term II: Supply Chain Management (SCM)

Session 4-5: Designing the Distribution Network in a

Supply Chain

Rohit Gupta
Operations Management Area
Email: rohit.gupta@iimranchi.ac.in
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.
 Drives profitability by directly affecting supply chain cost and the customer experience.
 Choice of distribution network can achieve supply chain objectives from low cost to
high responsiveness.

Factors Influencing Distribution Network Design

 Distribution network performance evaluated along two dimensions

• Customer needs that are met
• Cost of meeting customer needs

 Evaluate the impact on customer service and cost for different distribution network
options.
Elements of customer service influenced by network structure

 Response time
 Product variety
 Product availability
 Customer experience
 Order visibility
 Returnability

Effect of network structure on supply chain costs

 Inventories
 Transportation
 Facilities and handling
 Information
Relevant trade-offs in choice of distribution system

Number of Facilities vs. Response time

Inventory Costs vs.
Number of Facilities

Transportation Costs Vs.

Number of Facilities
Facility Costs Vs.
Number of Facilities

(Logistics Cost &

Response Time) Vs.
Number of Facilities
Design options for a Distribution Network

Managers must make two key decisions when designing a distribution network:

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

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

Based on these above questions, one of six distinct distribution network designs may be
used to move products from factory to customer.

 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/distributor storage with customer pickup
 Retail storage with customer pickup
Manufacturer storage with direct shipping

In this option, product is shipped directly

from the manufacturer to the end customer,
bypassing the retailer (who takes the order
and initiates the delivery request).

This option is also referred to as drop-

shipping.

The retailer carries no inventory.

Information flows from the customer, via the

retailer, to the manufacturer, and product is
shipped directly from the manufacturer to
customers.
Performance Characteristics: Cost Factor

Cost Factor Performance

Lower costs because of aggregation. Benefits of aggregation are
Inventory
highest for low-demand, high-value items.
Higher transportation costs because of increased distance and
Transportation
disaggregate shipping.
Lower facility costs because of aggregation. Some saving on
Facilities and
handling costs if manufacturer can manage small shipments or ship
handling
from production line.
A good information infrastructure is needed between the retailers and
the manufacturer so the retailer can provide product availability
Information
information to the customer, even though the inventory is located at
the manufacturer.
Performance Characteristics: Service Factor
Service Factor Performance
Response times tend to be long when drop-shipping is used because the
Response Time order must be transmitted from the retailer to the manufacturer and shipping
distances are generally longer from the manufacturer’s centralized site.

Product Variety Easy to provide a high level of variety

Product Easy to provide a high level of product availability because of aggregation at
Availability manufacturer
Customer Good in terms of home delivery but can suffer if order from several
Experience manufacturers is sent as partial shipments
Time-to-Market Fast, with the product available as soon as the first unit is produced.
More difficult but also more important from a customer service
Order Visibility
perspective.
The handling of returns is more expensive because each order may involve
Returnability
shipments from more than one manufacturer.
Manufacturer storage with direct shipping and In-Transit Merge

Unlike pure drop-shipping, under which each

product in the order is sent directly from its
manufacturer to the end customer, in-transit merge
combines pieces of the order coming from
different locations so the customer gets a single
delivery.

As with drop shipping, the ability to aggregate

inventories and postpone product customization is
a significant advantage of in-transit merge.

An order with products from different

manufacturers thus requires only one delivery to
the customer.
Performance Characteristics: Cost Factor

Cost Factor Performance

Inventory Similar to drop-shipping.
Transportation Somewhat lower transportation costs than drop-shipping.
Facilities and Handling costs higher than drop-shipping at carrier;
handling receiving costs lower at customer.
Information Investment is somewhat higher than for drop-shipping.
Performance Characteristics: Service Factor

Service Factor Performance

Response Time Similar to drop-shipping; may be marginally higher.
Product Variety Similar to drop-shipping
Product
Similar to drop-shipping
Availability
Customer
Better than drop-shipping because only a single delivery is received.
Experience
Time-to-Market Similar to drop-shipping
Order Visibility Similar to drop-shipping
Returnability Similar to drop-shipping
Distributor Storage with carrier delivery

Under this option, inventory is not held by

manufacturers at the factories but it is held by
distributors/retailers in intermediate warehouses
and package carriers are used to transport products
from the intermediate location to the final
customer.

Amazon use this approach combined with drop

shipping from a manufacturer.

Relative to manufacturer storage, distributor storage will require a higher level of inventory because the
distributor/retailer warehouse aggregates demand uncertainty to a lower level than the manufacturer.

In some instances, postponement of product differentiation can be implemented with distributor storage,
but it does require that the warehouse develop some assembly capability.

The concept of postponement is to delay the point of commitment of work-in-process inventory into a
particular end product and, thereby, gain leverage in terms of efficient asset utilization in a dynamic and
uncertain environment.
Performance Characteristics: Cost Factor

Cost Factor Performance

Higher than manufacturer storage. Difference is not large for faster
Inventory
moving items but can be large for very slow-moving items.
Lower than manufacturer storage. Reduction is highest for faster
Transportation
moving items.
Facilities and Somewhat higher than manufacturer storage. The difference
handling can be large for very slow-moving items.
Information Simpler infrastructure compared to manufacturer storage.
Performance Characteristics: Service Factor

Service Factor Performance

Response Time Faster than manufacturer storage.
Product Variety Lower than manufacturer storage.
Product Higher cost to provide the same level of availability as manufacturer
Availability storage.
Customer
Better than manufacturer storage with drop-shipping.
Experience
Time-to-Market Higher than manufacturer storage.
Order Visibility Easier than manufacturer storage.
Returnability Easier than manufacturer storage.
Distributor Storage with Last Mile Delivery

Last mile delivery refers to the distributor/retailer

delivering the product to the customer’s home
instead of using a package carrier.

Reliance Fresh/Big Basket are using last-mile

delivery in the grocery industry.

The automotive spare parts industry is one in

which distributor storage with last-mile delivery is
the dominant model.

Distributor storage with last mile delivery requires higher levels of inventory than all options other than
retail stores, because it has a lower level of aggregation.
Performance Characteristics: Cost Factor

Cost Factor Performance

Inventory Higher than distributor storage with package carrier delivery.
Very high cost given minimal scale economies. Higher than any
Transportation
other distribution option.
Facility costs higher than manufacturer storage or distributor
Facilities and
storage with package carrier delivery, but lower than a chain of
handling
retail stores.
Information Similar to distributor storage with package carrier delivery.
Performance Characteristics: Service Factor

Service Factor Performance

Response Time Very quick. Same day to next-day delivery.
Somewhat less than distributor storage with package carrier delivery but
Product Variety
larger than retail stores.
Product More expensive to provide availability than any other option except retail
Availability stores.
Customer
Very good, particularly for bulky items.
Experience
Time-to-Market Slightly higher than distributor storage with package carrier
delivery.
Less of an issue and easier to implement than manufacturer
Order Visibility
storage or distributor storage with package carrier delivery.
Easier to implement than other previous options. Harder and more expensive
Returnability
than a retail network.
 Manufacturer or Distributor storage with customer pickup

In this approach, inventory is stored at the

manufacturer or distributor warehouse but
customers place their orders online or on the
phone and then come to designate pickup points to
collect their orders.

Orders are shipped from the storage site to the

pickup points as-needed.

Example: Seven-Eleven
Performance Characteristics: Cost Factor

Cost Factor Performance

Can match any other option, depending on the location of
Inventory
inventory.
Lower than the use of package carriers, especially if using an
Transportation
existing delivery network.
Facility costs can be high if new facilities have to be built. Costs
Facilities and
are lower if existing facilities are used. The increase in handling
handling
cost at the pickup site can be significant.
Information Significant investment in infrastructure required.
Performance Characteristics: Service Factor

Service Factor Performance

Similar to package carrier delivery with manufacturer or distributor storage.
Response Time
Same-day delivery possible for items stored locally at pickup site.
Product Variety Similar to other manufacturer or distributor storage options.
Product
Similar to other manufacturer or distributor storage options.
Availability
Customer Lower than other options because of the lack of home delivery. Experience
Experience is sensitive to capability of pickup location.
Time-to-Market Similar to manufacturer storage options.
Order Visibility Difficult but essential.
Returnability Somewhat easier, given that pickup location can handle returns.
Retail storage with customer pick up
In this option, often viewed as the most traditional type of supply chain, 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.

Examples of companies that offer multiple options of order placement include Walmart and Tesco

Performance Characteristics: Cost Factor

Cost Factor Performance

Inventory Higher than all other options.
Transportation Lower than all other options.
Facilities and Higher than other options. The increase in handling cost at the
handling pickup site can be significant for online and phone orders.

Some investment in infrastructure required for online and

Information
phone orders.
Performance Characteristics: Service Factor

Service Factor Performance

Same-day (immediate) pickup possible for items stored locally at
Response Time
pickup site.
Product Variety Lower than all other options.
Product
More expensive to provide than all other options.
Availability
Customer Related to whether shopping is viewed as a positive or negative
Experience experience by customer.
Time-to-Market Highest among distribution options.
Trivial for in-store orders. Difficult, but essential, for online and
Order Visibility
phone orders.
Returnability Easier than other options because retail store can provide a substitute.
Impact of Online Sales on Customer Service

Service Factor Performance

Product variety Easier to offer larger selection
Product Aggregating inventory and better information on customer
availability preferences improves product availability
Customer
Improved access, customization, and convenience.
experience
Physical products take longer to fulfill than retail store. No delay for
Response time
information goods
Order visibility High
Physical products take longer to fulfill than retail store. No
Returnability
delay for information goods
Time to market Faster
 Direct Sales to Customers
Other advantages  Flexible Pricing, Product Portfolio, and Promotions
 Efficient Funds Transfer
Impact of Online Sales on Cost

Cost Factor Performance

 Lower inventory levels if customers will wait
Inventory
 Postpone variety until after the customer order is received
 Lower cost of “transporting” information goods in digital form
Transportation  For nondigital, aggregating inventories increases outbound
transportation
Facilities  Costs related to the number and location of facilities in a
and network
handling  Costs associated with the operations in these facilities
 Share demand, planning, and forecasting information throughout
its supply chain
Information
 Additional costs to build and maintain the information
infrastructure
 Example1: Dell

Impact on customer service

Delay in fulfilling customer request

Impact on cost
 Reduced inventory costs
 Lower facility costs
 Higher total transportation costs
 Incremental increase in information costs

A tailored supply chain network requirement

 A hybrid model can be very effective.

 More significant as hardware becomes more of a commodity.
 Take advantage of the strengths of both online sales and traditional retail
and distribution channels.
Example 2
Amazon: Using Online Sales to Sell Books

Impact on customer service

 Internet has not shortened supply chains
 Increased selection, convenience
Impact on cost
 Reduced inventory costs
 Lower facility costs
 Higher total transportation costs
 Increase in information costs

A tailored supply chain network

 Traditional bookstores pressured from both ends
 Amazon more efficient
Example 3
Netflix: Using the Internet to Rent Movies

Impact on customer service

 Staggering selection and an excellent recommendation engine
 Video streaming through a variety of devices
 Customers received their DVDs within 24 hours of being shipped

Impact on cost
 Reduced inventory costs
 Lower facility costs
 Considerably higher total transportation costs, increased streaming will reduce
transportation costs
 Increase in information costs

A tailored supply chain network

 Centralized model to supply wide variety of movies
 Other vendors have chosen different models