Dr. Habtamu A.

14-Jun-22 1
At the end of the session, you will be able to:
 Discuss the role of distribution and factors
influencing distribution network design
 Identify design options for a distribution network
 Appreciate the role of network design in the SC
 Identify factors affecting the network design
decisions

Dr. Habtamu A. 14-Jun-22 2

-Distribution refers to the steps taken to move and
store a product from the supplier stage to a customer
stage in sc.
-Distribution occurs b/n every pair of stage in the sc.
-Raw materials and components are moved from
supplier to manufactures, where as finished products
are moved from the manufacturer to the end
customers.
-Distribution is a key driver of the over all
profitability of a firm b/c it directly impacts both the
sc cost and the customer experience .
Dr. Habtamu A 14-Jun-22 3
 At the highest level, performance of distribution network should
be evaluated along two dimensions:-
1. Customer needs that are met
2. Cost of meeting customer needs
 Thus, a firm must evaluate the impact on customer service and
cost as it compares different distribution network options.
 The customer needs that are met influence the company’s
revenues, which along with cost decide the profitability of the
delivery network.
 Although customer service consists of many components, we focus
on those measures that are influenced by the structure of the
distribution network.
 These include:-
- Response time
- Product variety
- Product availability
- Customer experience
- Order visibility
- Return ability Dr. Habtamu A. 14-Jun-22 4
Continued…
Response time: is the time b/n when customer places an
order and receives delivery.
Product variety: is the number of different product
configurations that a customer desires from the
distribution network.
Availability: is the probability of having a product in
stock when a customer order arrives.
Customer experience: includes the ease with which the
customer can place and receive their order.
Order visibility: is the ability of the customer to track
their order from placement to delivery.
Return ability: is the ease with which a customer can
return unsatisfactory merchandise and the ability of the
network to handle such returns.
Dr. Habtamu A. 14-Jun-22 5
Continued…
 It may seem at first that a customer always wants the
highest level of performance along all these dimensions.
 In practice, however ,this is not the case.
Eg. Customers ordering a book at Amazon.com are willing
to wait longer than those that drive to a nearby Borders
store to get the same book. In contrast, customers can
find a far larger of books at Amazon compared to the
Boarders store.
 Firms that target customers who can tolerate a large
responsive time require few locations that may be far
from the customer and can focus on increasing the
capacity of each location.

 In contrast, firms that target customers who value

short responsive times need to locate close to them
and must have many facilities with each location having
low capacity.
Dr. Habtamu A 14-Jun-22 6
Continued…
Thus, a decrease in the response time customers
desire, increase the number of facilities required in
the network.
 Changing the distribution network design affects the
following supply chain costs :
 Inventories
 Transportation
 Facilities and handling
 Information
Inventories
 As the number of facilities in a sc increase, the
inventory and resulting inventory costs also increase.
 To decrease inventory costs, firms try to consolidate
and limit the number of facilities in the sc network.

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Continued…
 Transportation
 Inbound transportation costs are the costs
incurred in bringing materials in to a facility.
Whereas, outbound transportation costs are the
costs incurred in sending materials out of a
facility.
 Outbound transportation costs per unit tends to
be higher than inbound costs, b/c inbound lot
sizes are typically larger.
 Facilities and handling
 Facility costs decrease as the number of facilities
are reduced b/c a consolidation of facilities
allows a firm to exploit economies of scale.
 Therefore, total logistics costs are the sum of
inventory, transportation and facility costs for a
sc network. Dr. Habtamu A 8
14-Jun-22
 Therefore, the customers service and costs
components listed earlier (response time, product
variety, product availability, customer experience,
order visibility, return ability) are the primary
measures used to evaluate different delivery network
designs.

 In general, no distribution network will outperform

others along all dimensions.

 Thus, it is important to ensure that the strengths of

the distribution network fit with the strategic
position of the firm.

Dr. Habtamu A 14-Jun-22 9

 Managers must make two key decisions when designing a
distribution net work .
1. Will product be delivered to the customer location or picked up
from a preordained site?
2. Will product flow through an intermediary or (intermediate
location)?
- Based on the firm’s industry and the answers to these two questions,
one of six distinct distribution network designs may be used to move
products from factory to industry, which are classified as follows:
1. Manufacturer storage with direct shipping
2. Manufacturers storage with shipping and in-transit merge
3. Distributor storage with package carrier delivery
4. Distributor storage with last-mile delivery.
5. Manufacturer/ distributor storage with customer pickup.
6. Retail storage with customer pickup 14-Jun-22 10
1.Manufacturing storage with direct shipping
-In this option, product is shipped directly from the
manufacturer to the end customer, by passing the retailer (who
takes the order and initiates the delivery requests). This option
is also referred to as drop-shipping, with product delivered
directly from the manufacturer to the customer.

Advantages
Lower inventory costs b/c of aggregation
Lower facilities and handling costs (b/c of direct shipping)
High level of product variety
High level product availability
Good customer experience (b/c of delivery to the customers
location)
Order visibility (b/c two stages in sc are involved in every
customer order) and etc.
Dr. Habtamu A 14-Jun-22 11
Fig 6.1: Manufacturer Storage with Direct Shipping
(Drop Shipping)

Mfr

Retailer

Customer
Product Flow
Dr. Habtamu A. 14-Jun-22 12
Information Flow
Disadvantages
 High transportation costs (b/c of distance)
 It requires significant investment in information
infrastructure to integrate manufacturer and retailer
 Long responsive time (b/c of distance)
 Return ability is expensive and difficult to implement
and etc.
2. Manufacturer storage with direct shipping and in
transit merge
– unlike direct drop-shipping, under which each
product in the order is sent directly from its
manufacture to the end customer, in transit merge
combines pieces of the order coming from different
locations so that customers gets a single delivery.
Dr. Habtamu A. 14-Jun-22 13
Fig. 6.2: In-transit merge Net work

Factories

In-transit merge
Retailer By Carrier

Customers Customers

Product Flow
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Information Flow
Advantages:
 Lower inventory costs
 High level of product variety
 High level product availability
 Order visibility
 Better customer experience and etc.
Disadvantages:
 Higher handling costs b/c of merge
 Large responsive time b/c of the need to perform
merge.
 Return ability is expensive and difficult to implement
and etc.

Dr. Habtamu A 14-Jun-22 15

3. Distribution storage with carrier delivery
- under this option, inventory is not held by
manufacturers at the factories. But is held by the
distributor/ retailers in intermediate warehouses, and
package carriers are used to transport products from the
intermediate location to the final customer.

Advantages:
Lower transportation costs than manufacturer storage
Simpler information infrastructure compared to the
manufacturer storage
Faster responsive time than manufacturer storage (SRT)
Better customer experience than manufacturer storage
with drop shipping
Easier order visibility than manufacturer storage
Easier return ability than manufacturer storage and so
on.
Dr. Habtamu A 14-Jun-22 16
Fig. 6.3: Distributor Storage with Carrier Delivery

Factories

Distributor
Storage

Customers

Product Flow
Information Flow
Dr. Habtamu A 14-Jun-22 17
Disadvantages:
 Higher inventory costs than manufacturer storage
 Some what higher facilities and handling costs
than manufacturer storage
 Lower product variety than manufacturer storage
 Lower product availability and etc.
4.Distributor storage with last mile
delivery
- last mile delivery refers to the distributor/ retailer
delivering the product to the customers home
instead of using a package carrier.
- Unlike package carrier delivery, last mile delivery
requires the distributor warehouse to be much
closer to the customer.
Dr. Habtamu A 14-Jun-22 18
Fig. 6.4: Distributor Storage with Last-Mile Delivery

Factories

Distributor/
Retailer
Warehouse

Customers
Product Flow
Information Flow
Dr. Habtamu A 14-Jun-22 19
Advantages:
 Simpler information infrastructure
 Very quick responsive time
 Very good customer experience
 Easier return ability than other options and etc.
Disadvantages:
 Higher inventory costs
 Very high transportation costs, given minimal scale
economies
 Higher facilities and handling costs than manufacturer
storage
 Some what less products variety
 Lower product availability and etc.
Dr. Habtamu A
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5. Manufacture 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 phone and then travel to designated pickup points to collect
their merchandise.
-Orders are shipped from the storage site to the pickup point as
needed.
Advantages:
Lower inventory costs
Lower transportation costs than the use of package carrier (use
of truck load)
Good responsive time (SRT)
Return ability is some what easier given that pick up location can
handle the returns
High product variety
High product availability and so on.
Dr. Habtamu A 14-Jun-22 21
Fig. 6.5: Manufacturer or Distributor Warehouse Storage with
Consumer Pickup
Customer Flow Information
Product Flow Flow Factories

Cross-Dock DC
Retailer

Pickup Sites

Customers

Dr. Habtamu A 14-Jun-22 22

Disadvantages:
 Facility and handling costs are very high if new facility
is to be built
 Significant information investment in infrastructure is
required
 Customer experience is lower than other options b/c of
the lack of home delivery and so on.
6. Retail storage with customer pickup
- in this option, often viewed as the most traditional
type of SC, inventory is stored locally at retail stores.
- Customers walk in to the retail store or place an
order online or by phone and pick it up at the retail
store.
Dr. Habtamu A 14-Jun-22 23
Advantages:
 Lower transportation costs than all the others
 Shorter responsive time (immediate pick up)
 Easier return ability than other options given
that pick up location can handle return ability
and etc.
Disadvantages:
 Higher inventory costs
 Higher facilities and handling costs
 Some information investment in infrastructure
required for online and phone orders and etc.
Dr. Habtamu A
.
14-Jun-22 24
The role of network design in the SC
- Supply chain network design decisions are
classified as follows:
1. Facility role- what role should each facility
play?
-What processes are performed at each facility?
2. Facility location- where should facilities be
located?
3. Capacity allocation- how much capacity
should be allocated to each facility?
4. Market and Supply allocation- what
markets should each facility serve?
- Which supply source should feed
Dr. Habtamu A
each facilities? 25
14-Jun-22
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Factors Influencing Network Design Decision

1. Strategic Factors– a firms competitive strategy has a

significant impact on network design decisions with in the
SC.
Eg: firms that focus on cost leadership tends to find the
lowest cost location for their manufacturing facilities.
-Firms focus on responsiveness tends to locate facilities
closer to the market.
It is important for a firm to identify the mission or
strategic role of each facility when designing its global
network.

Dr. Habtamu A 14-Jun-22 26

2. Technology Factor
3. Macro-economic Factors- this includes taxes,
tariffs, exchange rates.
i. Tariffs and tax incentives
 Tariffs refers to any duties that must be paid when
product or equipment are moved across
international, state or cities boundary.

 Tax incentives are a reduction in tariffs or taxes

that countries, states and cities often provide to
encourage firms to locate their facilities in a
specific areas.

Dr. Habtamu A. 14-Jun-22 27

Continued…
ii. Exchange rate and demand risks- f luctuations in
exchange rate are common and have a significant impact on
the profit of any sc serving global market.
4. Political factor – the political stability of the country
under consideration plays a significant role in location
choices.
-Companies prefer to locate facilities in politically stable
countries where the rules of commerce and ownership are
well defined.
5. Competitive Factor – companies must consider
competitor’s strategy, size and location when designing
their sc networks.
-A fundamental decision firms make is whether to locate
their facilities close to competitors or far from them.
-The form of competition and factors such as raw material
or labor availability inf luence this decision.
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