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Chapter 4: Distribution

Network Design
Objective

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
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,
Grainger
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
Factors Influencing Distribution Network Design

Elements of customer service influenced by network


structure
Response time (Time it takes for a customer to receive an order)
Product variety (Number of different products that are offered)
Product availability (Probability of having a product in stock)
Customer experience (Ease of placing and receiving orders)
Order visibility (Ability of customers to track their orders)
Returnability (Ease of returning unsatisfactory merchandise)
Supply chain costs affected by network structure:
Inventories
Transportation
Facilities and handling
Information
Service and Number of Facilities

Number of
Facilities

Response
Time
Where inventory needs to be for a one week
order response time - typical results --> 1 DC

Customer
DC
3 day order response time - typical results --
> 5 DCs

Customer
DC
Same day / next day order response time -
typical results --> 26 DCs

Customer
DC
Inventory Costs and Number of Facilities

Inventory
Costs

Number of facilities
Inbound and outbound shipping with more facilities

Supplier Manufacturer Customer

Inbound shipment Outbound shipment


Add more facilities.

Supplier Manufacturer Distributor Retailer Customer

Inbound shipment Outbound shipment


Transportation Costs and Number of Facilities

Transportation
Costs

Transportation

Number of facilities
Less outbound shipping with more facilities.
Less shipping costs with more facilities, if economies of scale in
transportation.
Facility Costs and Number of Facilities

Facility
Costs

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

Response Time

Total Logistics Costs

Number of Facilities
Factors influencing Distribution Network Design

• Elements of supply chain cost influenced by network


structure
Inventory (All raw materials, WIP, and finished goods)
Transportation (Moving inventory from point to point)
Facility & handling (Locations where product is stored, assembled, or
fabricated)
Information (Data and analysis of all drivers in a supply chain)
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
Factors influencing Distribution Network Design

• Remember the elements of supply chain costs

Inventory
Transportation
Facility & handling
Information
Factors Influencing Distribution Network Design

Remember the elements of customer service

Response time
Product variety
Product availability
Customer experience
Order visibility
Returnability
Cross-Docking
1. Manufacturer Storage with Direct Shipping

E.g.: Nordstrom catalogues

Manufacturer

Retailer

Customers

Product Flow

Information
Flow
2. In-Transit Merge Network

Factories

Retailer In-Transit Merge by


Carrier

Customers

Product Flow
Information
Flow
How to reduce shipment costs for moderate
demand?: In-Transit Merge
No economies of scale in transportation costs can be achieved
with direct shipping.
Consider merging shipments at Mergers. Shipments to Mergers
are larger so economies of scale is achieved.
Mergers increase facility costs.
Mergers can be done within trucks: Cross-docking becomes
useful.
Response time may go up.
More coordination required
Low to medium demand
Example:
Dell merges a Dell PC with a Sony flat screen
3. Distributor Storage with Carrier Delivery

Factories

Warehouse Storage by
Distributor/Retailer

Customers

Product Flow
Information Flow
How to reduce transportation costs/response times?:
Distributor Storage with Carrier Delivery
Keep finished goods inventory at a warehouse which ships to
consumers using carriers.
Amazon vs. D&R

Shipments from manufacturers to warehouses are in TL or LTL


Shorter order fulfillment time
Shorter distance for outbound shipment (i.e. lower transp. Cost)
With respect to In-Transit Merge
Inventory aggregation is less
Higher inventory costs
Facility costs are higher
Only warehouses need real time demand/order status information.
4. Distributor Storage with Last Mile Delivery

Factories

Distributor/Retailer
Warehouse

Customers

Product Flow
Information Flow
How to provide more delivery service?:
Distributor Storage with Last Mile Delivery
Similar to Distributor Storage with Carrier Delivery except that the
warehouse delivers to the consumers using Milk Runs.
Transportation costs go up because warehouses are not as effective as
package carriers
Warehouse may need to own a trucking fleet
Response times are shorter
Warehouses are located closer to consumers
A private fleet can deliver faster
Less aggregation, higher inv cost
Home delivery is high customer service; appreciated by the customers for
bulky products, e.g. a washer
Consumer must pay for delivery costs.
Grocery delivery, milk delivery, auto spare parts
5. Manufacturer or Distributor Storage with
Customer Pickup

Factories

Retailer Cross Dock DC

Pickup
Sites

Customers
Customer Flow
Product Flow
Information Flow
How to reduce/eliminate consumer’s delivery cost?:
Manufacturer or Distributor Storage with Consumer Pickup
If consumers are willing to pick up the products easily, let them do so.
Otherwise, they would be charged for the delivery costs.
Similar to Last Mile Delivery except that the consumers come to pick
up
Order tracking is crucial. Consumers must be alerted when their order
is ready for pick up.
Significant information infrastructure is required.
Low inventory costs
High facility costs
Order visibility required
How to push products closer to consumers?: Retail
Storage with Consumer Pickup

Manufacturers

Retailer Retailer Retailer

Consumers
How to push products closer to consumers?: Retail
Storage with Consumer Pickup

This is the most common form of shopping.

Very similar to consumer pick up from warehouses except that


the consumers go to retailers which are closer to consumers and
more conveniently located for pick ups.

Less inventory aggregation

No order tracking necessary; if the product is available at the


retailer, the consumer buys. Otherwise goes to another retailer

Minimal information infrastructure


Comparing Distribution Networks

Retail Manufacturer Manufacturer Distributor Distributor Manufacturer


storage with storage with storage with storage with storage with storage with
customer direct in transit package last mile customer
pickup shipping merge delivery delivery pickup
Reponse time 1 4 4 3 2 4
Product variety 4 1 1 2 3 1
Product availability 4 1 1 2 3 1
Cusomter experience 1-5 4 3 2 1 5
Time to market 4 1 1 2 3 1
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 and handling 6 1 2 3 4 5
Information 1 4 4 3 2 5

1 = strongest performance
6 = weakest performance
Comparing Distribution Networks

Retail Manufacturer Manufacturer Distributor Distributor Manufacturer


storage with storage with storage with storage with storage with storage with
customer direct in transit package last mile customer
pickup shipping merge delivery delivery pickup
High demand
Medium demand
Low demand
Very low demand
Many sources
High product value
Quick response
High product variety
Low customer effort

Green = very suitable


Red = very unsuitable
Impact of click-and-mortar on Customer Service
Response time to customers
Product variety
Product availability
Customer experience
Time to market
Returnability
Impact of click-and-mortar on SC Costs

Inventory
Facilities
Transportation
Information
Discussion Questions

What types of distribution networks are best suited for


commodity items? Highly differentiated products?

Why has e-business been more successful in the PC


industry compared to the grocery industry?

Is e-business likely to be more beneficial in the early part


or the mature part of a product’s life cycle?

Amazon.com sells books, music, electronics, software,


toys, and home improvement products online. In which
product category does e-business offer the greatest
advantage compared to a retail store chain?