Designing the Distribution

Network in a Supply Chain

 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 occurs between every pair of stages in
the 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
 Factors Influencing
Distribution Network Design
Distribution network performance evaluated along
two dimensions given as:
Customer needs that are met (related with service)
Cost of meeting customer needs (related with cost)

Distribution network design options must be

compared according to their impact on customer
service and the cost to provide this level of service
 Factors Influencing
Distribution Network Design
Elements of customer service influenced by network structure:
Response time
Product variety
Product availability
Priority among these is important!
Customer experience
Time to market
Order visibility
Returnability
Drivers of Supply chain costs affected by network structure:
Inventories
Transportation
Facilities and handling
Information
Service and Number of Facilities
Number of
Facilities

Response Time
 Inventory Costs and Number
of Facilities

Inventory
Costs

Number of facilities
 Transportation costs
Inbound transportation costs: cost of bringing the material into
a facility

Outbound transportation costs: cost of sending material out of

a facility
Since lot size is larger in the inbound, usually

Outbound transportation cost/unit > Inbound transportation

cost/unit

As # distribution centers increases, average outbound distance

decreases, thus the fraction of outbound transportation cost
decreases.
 Transportation Costs and
Number of Facilities

Transportation
Costs

Number of facilities
 Facility Costs and Number
of Facilities

Facility
Costs

Number of facilities
 Total Costs Related to
Number of Facilities
Total Costs
Total Costs

Facilities
Inventory
Transportation

Number of Facilities
Variation in Logistics Costs and Response Time
with Number of Facilities
Response Time

Total Logistics Costs

Number of Facilities
 Cost / Responsiveness Trade-off
Cost
Total cost
SC response time

Inventory cost

Facility cost

Transportation cost

Number of Facilities
 Key Decisions in Designing a
Distribution Network

1. Will product be delivered to the customer

location?

2. Will product flow through an intermediary

location?

Based on industry and product type network

designing options are chosen
Design Options for a Distribution Network

1. Manufacturer Storage with Direct Shipping

2. Manufacturer Storage with Direct Shipping and In-Transit
Merge
3. Distributor Storage with Carrier Delivery
4. Distributor Storage with Last Mile Delivery
5. Manufacturer or Distributor Storage with Consumer Pickup
6. Retail Storage with Consumer Pickup
1. Manufacturer Storage with Direct
Shipping

Manufacturer

Retailer

Customers

Product Flow
Information Flow
 Drop Shipping
Centralization is beneficial if there is high variety,
high value items with low and unpredictable demand.
Centralized inventories leading to high product
availability, low inventory levels better forecasts.
Manufacturer can postpone customization until order
arrival.
Partial shipments introduce complexity, hard to
implement if there are more than 20-30 sourcing
locations
 Performance Characteristics:
Drop Shipping
Inventory Lower due to aggregation. Benefit is larger if low demand,
high value items, if there is postponement
Transportation Higher due to increased distances and partial shipping
Cost
Facilities and Lower fixed costs. Better handling costs if direct shipment
Factor handling from production line.
Information Higher, since info flow is essential b/w manuf. and retailer.

Response time High response time, worse if there is partial shipment

Product variety Easy to provide high level of variety
Product availability Higher due to aggregation
Customer experience Good since there is home delivery but partial shipments
Service
factor may increase complexity.
Order visibility Very important for customer but more difficult since an
integration of retailer and manuf. info systems is needed
Returnability Expensive and difficult. Return to manuf. vs. return to seperate
facility.
 2. In-Transit Merge Network
Factories

Retailer In-Transit Merge by

Carrier

Customers

Product Flow
Information Flow
 In-Transit Merge Network
In-transit merge combines pieces of order coming
from different locations, so the customer receives the
order by single delivery.
Ex: Order a Dell pc with a Sony Monitor.
Beneficial for high value items with low to medium
demand, 4-5 sources.
Main advantage over drop shipping: Lower
transportation cost and improved customer
experience.
 Performance Characteristics:
In-Transit Merge Network
Inventory Similar to drop shipping

Transportation Somewhat lower than drop shipping

Cost Facilities and Higher handling costs than drop shipping; lower receiving
Factor handling costs at customer
Information Higher than drop shipping

Response time Similar to or higher than drop shipping

Product variety Similar to drop shipping

Service Product availability Similar to drop shipping

factor Customer experience Better due to single delivery
Order visibility Similar to drop shipping (or somewhat more difficult)
Returnability Similar to drop shipping
3. Distributor Storage with
Carrier Delivery

Factories

Warehouse Storage by
Distributor/Retailer

Customers

Product Flow
Information Flow
 Distributor Storage with
Carrier Delivery
Inventory is not held by the manufacturers, but is held by
distributor/retailer in intermediate warehouses.
Package carriers are used to transport items from the retailer to
the customer. Ex: Amazon
Higher inventory capacity is needed than the manufacturer,
since demand uncertainty is aggregated at a lower level!
Better for medium to fast moving items. Better response time,
lower transportation costs when compared to manufacturer
storage.
Distributor storage can handle somewhat lower variety than
manufacturer storage but it is better than a chain of retailers.
 Performance Characteristics:
Distributor Storage with Carrier Delivery
Inventory Higher than manufacturer storage. Difference is not large for
fast moving items.
Transportation Lower than manufacturer storage. Reduction is highest for fast
Cost moving items.
Factor Facilities and Somewhat higher than manufacturer storage
handling
Information Simpler structure compared to manufacturer storage.

Response time Faster than manufacturer storage.

Product variety Lower than manufacturer storage.
Product availability Lower than manufacturer storage. Extra investment is needed
Service forlarger availability
factor
Customer experience Better than manufacturer storage with drop shipping.
Order visibility Easier than manufacturer storage.
Returnability Easier than manufacturer storage.
4. Distributor Storage with
Last Mile Delivery

Factories

Distributor/Retailer
Warehouse

Customers

Product Flow
Information Flow
 Distributor Storage with
Last Mile Delivery
Disributor/retailer delivers the product to the customers home
instead of using a package carrier.
Requires distributor warehouse to be very close to the
customer, so more warehouses are needed when compared to
package delivery.
Suitable for fast moving items where disaggregation does not
lead to significant increase of inventory.
Can only be justified when there is large customer demand at
this higher price. Very short response time, better customer
experience and returnability.
Last mile delivery should be integrated with the existing
distribution network.
 Performance Characteristics:
Distributor Storage with Last Mile Delivery
Inventory Higher than distributer storage with package delivery, since
uncertainty is aggregated in lower level with larger # of
distributers
Transportation Higher than any other distribution option. Maybe somewhat
Cost cheaper in large and dense cities
Factor Facilities and Higher than all options but lower than chain of retail stores.
handling
Information Similar to distributor storage with package carrier delivery.

Response time Very quick, in 1 day.

Product variety Somewhat less than distributor storage but larger than retail.
Product availability Lower than other options except retail stores. Extra
investment is needed for larger availability
Service
factor Customer experience Very good
Order visibility Easier than manufacturer storage or distributor with carrier
delivery.
Returnability Easier than other options, more expensive and difficult than
retail network.
 5. Manufacturer or Distributor Storage with
Customer Pickup
Factories

Retailer Cross Dock DC

Pickup Sites

Customers

Customer Flow
Product Flow
Information Flow
 Manufacturer or Distributor Storage with
Customer Pickup
Inventory is stored at the manufacturer or distributor
warehouse (cross dock), customer place orders on
line or via call center and come to designated pickup
points to collect their orders.
Ex: 7-Eleven Japan
Inventory and transportation costs are low due to
appropriate aggregation
 Performance Characteristics:
Manufacturer or Distributor Storage
with Customer Pickup
Inventory Can be as low as possible by appropriate aggregation

Transportation Lower than the use of package carriers

Cost Facilities and Can be very high if new facilities have to be built. The
Factor handling increase in the handling cost at the pickup site can be large.
Information High investment is required

Response time Similar to packae carrier delivery with manufacturer or

distributor storage. Same day delivery is possible for items
stored at crossdoc site
Product variety Similar to other manufacturer or distributor storage options.
Service Product availability Similar to other manufacturer or distributor storage options.
factor Customer experience Lower than other options due to absence of home delivery.
Discrepency is less if pickup points are dense.
Order visibility Essentially required but difficult
Returnability Easy if pickup points can handle returns.
 6. Retail Storage with Customer Pickup
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.
Best for fast moving items
Very short response time due to local storage, lower
transportation cost
Increased inventory and facility costs
 Performance Characteristics:
Retailer Storage with Customer Pickup
Inventory Higher than all options

Transportation Lower than all other options

Cost Facilities and Higher than other options. The increase in the handling cost at
Factor handling the pickup site can be large.
Information High investment is required for online and phone orders

Response time Same day, very quick

Product variety Lower than all other options.
Product availability Very expensive to provide high levels
Service
Customer experience Assesed according to customer request
factor
Order visibility Trivial for in-store orders. Essentially required for online and
phone orders.
Returnability Easy if pickup points can handle returns.
 Comparative Performance of Delivery
Network Designs
Retail Storage Manufacturer Storage Manufacturer Storage Distributor Storage Distributor Manufacturer
with Customer with Direct Shipping with In-Transit Merge with Package storage with last storage with pickup
Pickup 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
 Linking Product Characteristics and Customer
Preferences to Network Design
Retail Storage Manufacturer Manufacturer Distributor Storage with Distributor storage Manufacturer
with Customer Storage with Storage with In- Package Carrier with last mile delivery storage with
Pickup Direct Shipping Transit Merge Delivery pickup

High demand product

+2 -2 -1 0 +1 -1
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
 E-Business and the Distribution Network

Impact of E-Business on Customer Service

Impact of E-Business on Cost
Using E-Business: Dell, Amazon, Peapod,
Grainger
 Distribution Networks in Practice
The ownership structure of the distribution network
can have as big as an impact as the type of distribution
network
The choice of a distribution network has very long-
term consequences
Consider whether an exclusive distribution strategy is
advantageous
Product, price, commoditization, and criticality have
an impact on the type of distribution system preferred
by customers