Designing distribution

network
in a Supply Chain

1
 Role of distribution
Distribution

Steps taken to move & store a product from

the supplier stage to a customer stage in a
supply chain
Occurs between every pair of stages
Directly affects cost and customer experience
& hence overall profitability

2
 Network choice
Achieve supply chain objective
Companies in same industry select different
networks
Using distributors
What determines design choice?

3
Basis for evaluating distribution
network performance

Customer needs that are met

Cost of meeting customer needs

4
Elements of customer service
influenced by network structure
Response time
Product variety
Product availability
Customer experience
Time to market
Order visibility
Returnability

What level of performance customer wants in above?

5
 Supply chain costs affected by
network structure
Inventories

Transportation

Facilities and handling

Information

6
 Desired Response Time and
Number of Facilities
Number of
Facilities

Response Time
7
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

8
 Inventory Costs and Number
of Facilities
Inventory
Costs

Number of facilities

9
 Transportation Costs and
Number of Facilities
Transportation
Costs

Number of facilities

10
 Facility Costs and Number
of Facilities
Facility
Costs

Number of facilities

11
 Total Costs vs. Number of Facilities
Total Costs
Total Costs

Facilities
Inventory
Transportation

Number of Facilities
12
Logistics Costs & Response Time
vs. Number of Facilities
Response Time

Total Logistics Costs

Number of Facilities
13
Design Options for a Distribution
Network
Key decisions

Product to be delivered or picked up?

Intermediary?

Where to store?

14
Design Options for a Distribution
Network
Manufacturer Storage with Direct Shipping
Manufacturer Storage with Direct Shipping and
In-Transit Merge
Distributor Storage with package carrier Delivery
Distributor Storage with Last Mile Delivery
Manufacturer/ Distributor Storage with Consumer
Pickup
Retail Storage with Consumer Pickup
15
Manufacturer Storage with
Direct Shipping
Manufacturer

Retailer

Customers

Product Flow
Information Flow

16
 Manufacturer Storage with
Direct Shipping
Centralize inventory at manufacturer
High availability with low inventory
Ownership structure of inventory
High value, low demand items with uncertain demand

Postponement
Lowers inventory

Can increase product variety

Fast time to market
17
 Manufacturer Storage with
Direct Shipping
Transportation costs high
Average outbound distance
Package carriers
Multiple shipments for a customer
Fixed facilities cost low
Warehousing

Handling costs may increase

18
 Manufacturer Storage with
Direct Shipping
Response time large
Good information infrastructure needed
Customer experience
Order visibility
Handling returns difficult

19
 Manufacturer Storage with
Direct Shipping

Best suited for

Low demand high value items
Customers willing to wait & accept partial
shipments
Postponement
Few sourcing locations per order
Ideal for direct sellers who BTO20
 In-Transit Merge Network

Factories

Retailer In-Transit Merge by

Carrier

Customers

Product Flow
Information Flow
21
In-Transit Merge Network
Combines pieces of order from different
locations
Single delivery to customer
Aggregation
Postponement
Lower transport costs
Facility & processing cost higher
Lower receiving cost

22
In-Transit Merge Network
Information infrastructure

Coordination may be more difficult

Response time marginally higher

Product variety, availability, time to market
similar
Returnability problem
Improved customer experience
Best if 4-5 sourcing locations 23
In-Transit Merge Network
Advantages:
Lower transport cost
Better customer experience

Disadvantage
Additional merge effort

Best for
Low to medium demand high value items
Obtained from few manufacturers

24
Distributor Storage with
Carrier Delivery
Factories

Warehouse Storage by
Distributor/Retailer

Customers

Product Flow
Information Flow
25
 Distributor Storage with
Carrier Delivery
Inventory held by distributors/ retailers
Package carriers between intermediate
location to customers
Higher inventory than last options
Medium to fast moving items
Postponementif warehouse has
assembly capacity
26
 Distributor Storage with
Carrier Delivery
Transport costs lower
Facility cost higher
Processing & handling costs comparable
Information infrastructure less complex
Better response time
Customer convenience, returnability better
Time to market higher
Order visibility easier
27
Distributor Storage with
Last Mile Delivery
Factories

Distributor/Retailer
Warehouse

Customers

Product Flow
Information Flow
28
 Distributor Storage with
Last Mile Delivery
No package carrier used
Limited radius can be served
Warehouse closer to customer
More warehouses

Higher inventory
Fast moving items

Transport cost highest

Facility & processing costs high
29
 Distributor Storage with
Last Mile Delivery
IT infrastructure similar
Capabilities to schedule deliveries

Response time faster

Product variety lower
Ensuring availability costly
Less than retail stores

30
 Distributor Storage with
Last Mile Delivery

Customer experience good

Time to market high
Order visibility not an issue
Returnability good
More expensive than retail

31
 Distributor Storage with
Last Mile Delivery

Best suited where

Labor costs low
Customer segment large
Eliminate free delivery
Couple with existing distribution network
Exploit economies of scale
Increase utilization
32
 Manufacturer or Distributor Storage
with Customer Pickup
Factories

Retailer Cross Dock DC

Pickup Sites

Customers

Customer Flow
Product Flow
33
Information Flow
Manufacturer or Distributor Storage
with Customer Pickup
Orders shipped from storage to pickup points
Low inventory costs
Low transport costs
Facility costs high if new pickup points
Processing costs high
Comparable at manufacturer/ warehouse
High at pickup sites
Significant information infrastructure
34
Manufacturer or Distributor Storage
with Customer Pickup
Response time same as package carriers
Variety & availability comparable to distributor/
manufacturer storage
Some loss of customer experience
Order visibility important
Returns handled at pickup sites

35
Manufacturer or Distributor Storage
with Customer Pickup
Advantages
Lower delivery costs
Increased set of products sold
More customers served online

Disadvantages
Increased handling costs
Pickup sites
Build new
Develop capabilities in old

36
Retail Storage with Customer
Pickup
Most traditional
High inventory costs
Best for fast moving goods
Transport cost low
Facility cost high
Information infrastructure
Minimal if customers order at store
High for online orders

37
 Retail Storage with Customer
Pickup
Good response time
Lower product variety
Expensive to provide high availability
Customer experience varies
Time to market highest

38
 Retail Storage with Customer
Pickup
Order visibility important
Returnability fairly good
Best for
Fast moving items

Customers value fast response

39
Selecting a distribution
network design

40
 Comparative Performance of
Delivery Network Designs
Retail Distributor Distributor
Storage with Manufacturer Manufacturer Storage with storage with Manufacturer
Customer Storage with Storage with In- Package Carrier last mile storage with
Pickup Direct Shipping Transit Merge Delivery delivery pickup

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 varies
4 3 2 1 5
Experience

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
41
 Product Characteristics & Customer
Preferences vs. Network Design
Retail Manufacturer Manufacturer Distributor Distributor Manufacturer
Stora Storage Storage Storage with storage storage
ge with with In- Package with last with
with Direct Transit Carrier mile pickup
Custo Shipping Merge Delivery delivery
High demand product mer
+2Picku -2 -1 0 +1 -1
p
Medium demand product
+1 -1 0 +1 0 0
Low demand product
-1 +1 0 +1 -1 +1
Very low demand
product -2 +2 +1 0 -2 +1
Many product sources
+1 -1 -1 +2 +1 0
High product value
-1 +2 +1 +1 0 -2
Quick desired response
+2 -2 -2 -1 +1 -2
High product variety
-1 +2 0 +1 0 +2
Low customer effort
-2 +1 +2 +2 +2 -1

42
E-business & Distribution Network
Impact on customer service
Response time to customers
Delay for physical products
No delay for downloadable products

Greater product variety

Improved product availability
Faster dissemination of customer demand
Aggregation of inventory
Customer experience
Access, customization, convenience
43
E-business & Distribution Network

Impact on customer service

Faster time to market
Order visibility better
Returnability difficult
Direct sales to customer
Higher margins

Flexible pricing, product portfolio & promotions

Efficient funds transfer
44
E-business & Distribution Network
Impact on cost
Inventory costs lower
Better coordination
Aggregation
Postponement
Facilities costs lower
Number & location costs
Centralization
Operations
Customer participation lower resource costs
Order fulfillment cost lower
Fewer stages
Handling costs higher for groceries
45
E-business & Distribution Network
Impact on cost
Transportation costs
Higher for physical products

Increased outbound distance

Information
Share to improve visibility
Reduce overall cost by improving coordination
Cost of information infrastructure

46
 Examples of E-business
PCs
Dell

Books
Amazon.com

Grocery
Peapod

MRO supplies
Grainger.com
47
 Value of Distributors
in the Supply Chain

Distributing Consumer Goods in India

Distributing MRO Products
Distributing Electronic Components

48
 Distributing Consumer Goods in
India
Numerous small retail outlets
FMCGs of low value
Transport cost important
Retailers small size
Small replenishment lots
Store variety of products
Manufacturers need to
Bring FTLs close to market
Distribute locally using milk runs with smaller vehicles
49
 Distributing Consumer Goods in
India
Intermediaries
Receive FTL
Store inventory
Break bulk
Give smaller deliveries to retailers

Aggregate products from multiple manufacturers

Lower replenishment response time

50
Lower transport costs
 Distributing MRO Products
Emergency
Small quantities
Unplanned orders
Large variety of items required
From various manufacturers

Distributors act as intermediaries

Store inventory
More stable replenishment orders
Easier response for manufacturers
TL deliveries possible
Carry emergency inventory for customers
Decreases total safety stock in SC
Value of aggregation high for slow moving products
51
Distributing Electronic Components
Few major component manufacturers
Intel, Texas Instruments, Motorola

Produce for large number of OEMs

80:20 rule holds
20% OEMs use 80% of components
Small OEMs through distributors

52
 Value added by distributors

Reduction in inbound transport costs

TL shipments from manufacturer to distributor

Reduction in outbound transport costs

Aggregate over different manufacturers

Reduction in inventory costs

Aggregates safety inventory

53
 Value added by distributors

Stable
order stream from distributor to
manufacturer
Lowers cost by planning production better

Carry inventory closer to point of sale

Better response time

Offer one-stop shopping

For products from several manufacturers
54
 Distribution Networks in
Practice
Ownership structure

Long-term consequences of network choice

Exclusive distribution strategy?
Product, price, commoditization, and
criticality affects customer preferences
Integrate internet with existing physical
network
55