Logistics and Supply Chain
Management
DESIGNING THE DISTRIBUTION NETWORK
IN A SUPPLY CHAIN
4-1
OUTLINE
The Role of Distribution in the Supply Chain
Factors Influencing Distribution Network Design
Design Options for a Distribution Network
E-Business and the Distribution Network
Distribution Networks in Practice
Summary of Learning Objectives
4-2
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, Proctor & Gamble
4-3
FACTORS INFLUENCING
DISTRIBUTION NETWORK DESIGN
Distribution network performance 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
4-4
FACTORS INFLUENCING
DISTRIBUTION NETWORK DESIGN
Elements of customer service influenced by network structure:
Response time
Product variety
Product availability
Customer experience
Order visibility
Returnability
Supply chain costs affected by network structure:
Inventories
Transportation
Facilities and handling
Information
4-5
SERVICE AND NUMBER OF FACILITIES (FIG. 4.1)
Number of
Facilities
Response Time
4-6
THE COST-RESPONSE TIME FRONTIER
Hi 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 Hi
4-7
INVENTORY COSTS AND NUMBER
OF FACILITIES
Inventory
Costs
Number of facilities
4-8
TRANSPORTATION COSTS AND
NUMBER OF FACILITIES
Transportation
Costs
Number of facilities
4-9
FACILITY COSTS AND NUMBER
OF FACILITIES
Facility
Costs
Number of facilities
4-10
Total Costs Related to
Number of Facilities
Total Costs
Total Costs
Facilities
Inventory
Transportation
Number of Facilities
4-11
Variation in Logistics Costs and Response
Time with Number of Facilities
Response Time
Total Logistics Costs
Number of Facilities
4-12
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
Selecting a Distribution Network Design
4-13
MANUFACTURER STORAGE WITH
DIRECT SHIPPING
Manufacturer
Retailer
Customers
Product Flow
Information Flow
4-14
CHARACTERISTICS OF MANUFACTURER STORAGE WITH DIRECT SHIPPING
(DROP SHIPPING)
Service Factors:
1. Response time: Long because of the long distance between manufacturers and
customers.
2. Product variety: Easy to provide high level of product variety.
3. Product availability: Easy to provide high level of product availability.
4. Customer experience: Good in terms of home delivery.
5. Order visibility: Difficult.
6. Returnability: Difficult and expensive.
Cost Factors:
1. Inventory cost: Low as manufacturers keep low levels of inventory.
2. Transportation costs: High because distances between manufacturers & customers are
long.
3. Facility costs: Low because the types of facilities is limited.
4. Information: Significant investment in information infrastructure so orders can be
transmitted to manufacturers.
IN-TRANSIT MERGE NETWORK
Factories
Retailer In-Transit Merge by
Carrier
Customers
Product Flow
Information Flow
4-16
DISTRIBUTOR STORAGE WITH
CARRIER DELIVERY
Factories
Warehouse Storage by
Distributor/Retailer
Customers
Product Flow
Information Flow
4-17
DISTRIBUTOR STORAGE WITH
LAST MILE DELIVERY
Factories
Distributor/Retailer
Warehouse
Customers
Product Flow
Information Flow
4-18
MANUFACTURER OR DISTRIBUTOR STORAGE WITH CUSTOMER PICKUP
Factories
Retailer Cross Dock DC
Pickup Sites
Customers
Customer Flow
Product Flow
Information Flow 4-19
COMPARATIVE PERFORMANCE OF DELIVERY
NETWORK DESIGNS
Retail Storage Manufacturer Manufacturer Distributor Storage Distributor Manufacturer
with Customer Storage with Direct Storage with In- with Package storage with last storage with pickup
Pickup Shipping Transit Merge Carrier Delivery mile delivery
Response Time 1 4 4 3 2 4
Product Variety
4 1 1 2 3 1
Product Availability
4 1 1 2 3 1
Customer Experience
5 4 3 2 1 5
Order Visibility 1 5 4 3 2 6
Returnability 1 5 5 4 3 2
Inventory 4 1 1 2 3 1
Transportation 1 4 3 2 5 1
Facility & Handling 6 1 2 3 4 5
Information
1 4 4 3 2 5
4-20
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?
4-21
