Lecture

DESIGNINING THE
3 DISTRIBUTION
NETWORK
 DESIGNING
DISTRIBUTION

4 NETWORKS AND
APPLICATIONS TO
ONLINE SALES

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DESIGNING DISTRIBUTION NETWORKS
Introduction

• What do we express when we use

term “distribution”?

• Are all products distributed in the

same way?

• What distribution patterns do you

recognize?

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DESIGNING DISTRIBUTION NETWORKS
Example importance of network
• Distribution impacts for 35% of the
revenue. Wal-Mart and Seven-
Eleven have build their success of
their entire business around
outstanding distribution, design and
operation.

• Dell choose to distribute directly to

customers in stead of HP who sells
via wholesale/retail.

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DESIGNING DISTRIBUTION NETWORKS
The role of distribution
• Distribution refers to the steps taken to move and
store a product from the supplier stage to a customer
stage.

• Factors influencing distribution networks along two

dimensions:
– Customer needs are met
– Cost of meeting customer needs

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DESIGNING DISTRIBUTION NETWORKS
Factors influencing distribution networks
• Important service factors:
– Response time: high response time -> more facilities
– Product variety: number of different products
– Product availability: level of products available in stock
– Customer experience: easy of placing orders
– Time to market: time to bring a new product to the
market
– Order visibility: ability to track and trace orders
– Returnability: easy of returning the product by
customer

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DESIGNING DISTRIBUTION NETWORKS
Distribution networks and costs
• Total logistics costs are the sum inventory,
transportation and facility costs:

Total logistics costs

Costs

Facilities costs
Inventories costs
Transportation costs

Number of facilities

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DESIGNING DISTRIBUTION NETWORKS
Customer expectations
• Customer do not always expect the highest level of
performance, it depends:

Barnes & Noble: The Amazon.com: The

customer want to pickup a customer is willing to wait
book direct up in a book for a delivery of a book
shop (some or more days)
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DESIGNING DISTRIBUTION NETWORKS
Design options
• Key decisions related to design options are:
– Will product be delivered to the customer location or
picked up from a pre arrange site
– Will product flow through an intermediary (or
intermediary location)

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DESIGNING DISTRIBUTION NETWORKS
Design options
• 6 typical distribution networks:
– 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

• These networks will be discussed in the next slides.

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E-SUPPLY CHAIN CONCEPTS
Distribution networks #1
• Manufacturer storage with direct shipping

Manufacturers

Retailer

Customer

Product flow

Information flow

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E-SUPPLY CHAIN CONCEPTS
Distribution networks #2
• In-transit merge network

Factories

Retailer In-transit merge by carrier

Customer

Product flow

Information flow

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E-SUPPLY CHAIN CONCEPTS
Distribution networks #3
• Distributor storage with carrier delivery

Factories

Warehouse storage by
Distributor/retailer

Customer

Product flow

Information flow

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E-SUPPLY CHAIN CONCEPTS
Distribution networks #4
• Distributor storage with last-mile delivery

Factories

Distributor/retailer
warehouse

Customer

Product flow

Information flow

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E-SUPPLY CHAIN CONCEPTS
Distribution networks #5
• Manufacturer/distributor warehouse storage with
consumer pickup
Factories

Retailer Cross-dock DC

Pickup sites

Product flow

Information flow

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E-SUPPLY CHAIN CONCEPTS
Distribution networks #6
• Retail storage with customer pickup

Factories

Distributors

Retailers

Product flow

Information flow

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DESIGNING DISTRIBUTION NETWORKS
Online sales and distribution network
• Impact of online sales to customer:
– Response time to customers
– Product variety
– Product availability
– Customer experience
– Faster time to market
– Order visibility
– Returnability
– Direct sales to customer
– Flexible pricing, product portfolio and promotions
– …

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DESIGNING DISTRIBUTION NETWORKS
Online sales and distribution network
• Impact of online sales on cost
– Inventory: can be lower because of centralizing,
depending on business
– Facilities: can be lower by centralizing
– Transportation: can be higher
– Information: can be shared

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DESIGNING DISTRIBUTION NETWORKS
Dell: selling online computer hardware
• Impact of online sales on costs in
the PC industry:
– Customer: online order -> longer
response time
– Inventory costs: lower, because of
aggregation of stocks
– Facility costs: growing because of
growing business
– Transportation costs: higher
because of outbound costs
– Information costs: (slightly) higher
because of build-to-order model.
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DESIGNING DISTRIBUTION NETWORKS
Amazon: selling online books
• Impact of online sales on costs in
the book industry:
– Customer: online order -> longer
response time
– Inventory costs: lower, because of
aggregation of stocks
– Facility costs: lower because no
finished products warehouses
– Transportation costs: higher
because of outbound costs
– Information costs: (slightly) higher
because of webshop model.
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DESIGNING DISTRIBUTION NETWORKS
Peapod: selling online groceries
• Impact of online sales on costs in
the grocery industry:
– Customer: convenient because no
shop visit
– Inventory costs: lower, because of
aggregation of stocks
– Facility costs: lower because no
retail outlets
– Transportation costs: significant
higher because of outbound costs
– Information costs: (slightly) higher
because of ict needs.
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DESIGNING DISTRIBUTION NETWORKS
Netflix: renting online DVD’s
• Impact of online renting on costs in
the movie rent industry:
– Customer: convenient because can
rent online, receive in 24 hours
– Inventory costs: lower, because of
aggregation of stocks
– Facility costs: lower because no
retail outlets
– Transportation costs: significant
higher because of outbound costs
– Information costs: higher because
of ICT needs.
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DESIGNING DISTRIBUTION NETWORKS
Distribution networks in practice
• Distribution networks in practice
– The ownership structure of the distribution network
can have as big an impact at the type of distribution
network
– It is important to have adaptable distribution networks
– Product price, commoditization, and critically affect the
type of distribution system
– Integrate the internet with the existing physical
network

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 NETWORK DESIGN

5 IN THE SUPPLY
CHAIN

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NETWORK DESIGN IN SUPPLY CHAIN
Introduction

• What do we mean when using the

term “network design”?

• What is the relevance of network

design?

• How can you decide on a certain

location (for plant, warehouse)

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NETWORK DESIGN IN SUPPLY CHAIN
Introduction
• Toyota has plants located world
wide in each market that it serves.

• Before 1997 plants only had

capacity to serve “own” market.
After 1997 plants can serve also
other markets.
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NETWORK DESIGN IN SUPPLY CHAIN
The role of network design
• Supply chain network design decisions are classified
as follows:
– Facility role: What role? What process at facility?
– Facility location: Where should it be located?
– Capacity allocation: How much capacity?
– Market and supply allocation: What markets should it
serve?

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NETWORK DESIGN IN SUPPLY CHAIN
The role of network design
• Factors influencing network design decisions
– Strategic factors
– Technological factors
– Macroeconomic factors (tariffs, tax incentives,
exchange rate, freight & fuel costs)
– Political factors
– Infrastructure factors
– Competitive factors
– Customer response time and local presence
– Logistics and facility costs

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NETWORK DESIGN IN SUPPLY CHAIN
Framework for network design solutions
Competitive strategy PHASE I
Supply chain Global competition
Internal constraints strategy

Production technologies Tariffs and tax incentives

PHASE II
Competitive environment Regional Regional demand
facility (size, growth, homogeneity, local specifications)

configuration
Political, exchange rate,
Production technologies
demand risk

PHASE III
Competitive strategy Available infrastructure
Desirable sites

PHASE IV
Competitive strategy Location Logistical costs
choices

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NETWORK DESIGN IN SUPPLY CHAIN
Phase I
• Objective:
– Define a broad supply chain design

• Activities:
– Clear definition of strategy
– Define the necessary capabilities
– Forecast the evolution of global competition
– Define constraints on capital and growth

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NETWORK DESIGN IN SUPPLY CHAIN
Phase II
• Objective:
– Identify regions where facilities will be located

• Activities:
– Forecast demand per country or region
– Identify if economies of scale can play a role
– Identify demand risk, exchange rate risk, political risk,
regional tariffs, tax incentives, im/export restrictions
– Identify competitors do we need to be nearby or far
away

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NETWORK DESIGN IN SUPPLY CHAIN
Phase III
• Objective:
– Select a set of desirable potential sites within each
region

• Activities:
– Selection of sites based on desired production strategy,
including:
• Hard infrastructure requirements like: suppliers, transportation,
communication, warehousing
• Soft infrastructure requirements like: skilled workforce,
workforce turnover, community receptivity to
business/industry.

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NETWORK DESIGN IN SUPPLY CHAIN
Phase IV
• Objective:
– Determine precise location

• Activities:
– Design the network (maximizing total profits)

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NETWORK DESIGN IN SUPPLY CHAIN
Gravity locations model

100,100

Location C = X, Y
C1 = 30, 90 Sales = 200
C2 = 50, 10 Sales = 100
C3 = 90, 70 Sales = 100

Ideal location is:

X = (30+50+90) / 3 = 57
Customer location Y = (90+10+70) / 3 = 57
Supplier location

Central warehouse

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