CHAPTER 4:

DESIGNING DISTRIBUTION
NETWORKS & APPLICATIONS TO E-
BUSINESS
BPB32303
Learning Objectives
1. Identify the key factors to be considered when
designing a distribution network
2. Discuss the strengths and weaknesses of various
distribution options
3. Understand the effect of online sales on the design of
distribution networks in different industries
The Role of Distribution in the Supply Chain

• The steps taken to move and

store a product from the supplier
stage to the customer stage in a
supply chain

• Drives profitability because it affects:

 supply chain cost
 customer experience

• Choice of distribution network can help achieve supply

chain objectives from low cost to high responsiveness
Factors Influencing Distribution Network Design
• Distribution network performance should be evaluated
by:
 Customer needs that are met.
 Cost of meeting customer needs.

Required
Number of
Facilities
Response Time

Total Logistics Costs

Response Time

Cost Inventory

Facility

Transportation Number of Facilities

Number of Facilities
Factors Influencing Distribution Network Design
• A firm must evaluate the impact of different options of
distribution network on customer service and cost.
• Profitability of the delivery network:
• Revenue from met customer needs
• Network costs
Factors Influencing Distribution Network Design
• Elements of customer service influenced by
network structure:
 Response time
 Product variety
 Product availability
 Customer experience – how easy can customer place
and receive order
 Time to market
 Order visibility – ability to track order
 Returnability
Factors Influencing Distribution Network Design
Network structure affect supply chain costs:
 Inventories
 Transportation
 Facilities and handling
 Information
Design Options for a Distribution Network
• The design of distribution network choices from the
manufacturer to the end consumer must consider two key
decisions:
1. Will product be delivered to
the customer location or
picked up from a
prearranged site?

2. Will product flow through an

intermediary (or intermediate
location)?
Design Options for a Distribution Network
• One of six designs may be used:
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/distributor storage with customer pickup
6. Retail storage with customer pickup
Manufacturer Storage with Direct Shipping
• Drop-shipping, demand aggregation, postpone
customization
• Slow-moving/low-demand/high-value items

Inventory L

Cost Factor
Manufacturer
Transportation H
Facilities and handling L
Information H
Retailer
Response time H
Product variety H

Service Factor
Product availability H
Customer experience M
Customers Order visibility L
Returnability L

Product Flow Information Flow

Manufacturer storage with direct shipping and
in-transit merge
• low- to medium-demand and high-value items
• e.g. PC from Dell along with Sony monitor

Factories
Inventory L

Cost Factor
Transportation M
Facilities and handling M
Information H
Retailer In-Transit Merge by Carrier Response time H

Service Factor
Product variety H
Product availability H
Customer experience H
Order visibility L
Customers
Returnability L

Product Flow Information Flow

Distributor Storage with Carrier Delivery

• High-level inventory at distributor

• Medium- to fast-moving items at distributor, loss of
aggregation

Factories Inventory M

Cost Factor
Transportation L
Facilities and handling M
Information M
Warehouse Storage by
Response time M
Distributor/Retailer

Service Factor
Product variety M
Product availability M
Customer experience H
Customers Order visibility M
Returnability M
Product Flow Information Flow
Distributor Storage with Last Mile Delivery

• Retailer/distributor delivering to customer’s home instead

of using package carrier.
• e.g. grocery industry, water, bag of rice at dense city

Inventory H

Cost Factor
Factories
Transportation H
Facilities and handling H
Information M
Response time L
Distributor/Retailer

Service Factor
Product variety L
Warehouse
Product availability L
Customer experience H
Order visibility M
Customers Returnability M

Product Flow Information Flow

 Manufacturer or Distributor Storage with
Customer Pickup
• Reusing existing pick-up site, customer participation

Factories
Inventory ?

Cost Factor
Transportation L
Facilities and handling ?
Retailer Information H
Cross Dock DC
Response time L

Service Factor
Product variety H
Pickup Sites Product availability H
Customer experience L
Order visibility H
Customers Returnability H

Product Flow Information Flow Customer Flow

Retail Storage with Customer Pickup
• E.g. Retail stores such as Wal-Mart & JC Penney
• Customers pick up product from retailers

Manufacturers Inventory H

Cost Factor
Transportation L
Facilities and handling H
Information ?

Response time L

Service Factor
Distributor Distributor Product variety L
Warehouse Warehouse
Product availability H
Customer experience ?
Order visibility L
Retailer Retailer Retailer
Returnability H

Consumers
Impact of Online Sales on Customer Service
• Response time to customers
– Physical products take longer to fulfill than retail store
– No delay for information goods

• Product variety
– Easier to offer larger selection

• Product availability
– Aggregating inventory and better information on customer
preferences improves product availability
Impact of Online Sales on Customer Service
• Customer experience
• Improved access, customization, and convenience

• Faster time to market

• Order Visibility

• Returnability
• Harder with online orders
• Proportion of returns likely to be much higher
Impact of Online Sales on Customer Service
• Direct Sales to Customers
• Social networking channels allow firms to directly pitch products
and promotion

• Flexible Pricing, Product Portfolio, and Promotions

• Manage revenues from product portfolio more effectively than
traditional channels
• Promotion information can be conveyed to customers quickly and
inexpensively

• Efficient Funds Transfer

Impact of Online Sales on Cost
• Inventory
• Lower inventory levels if customers will wait
• Postpone variety until after the customer order is received

• Facilities
• Costs related to the number and location of facilities in a network
• Costs associated with the operations in these facilities
Impact of Online Sales on Cost
• Transportation
• Lower cost of “transporting” information goods in digital form
• For non-digital, aggregating inventories increases outbound
transportation

• Information
• Share demand, planning, and forecasting information throughout
its supply chain
• Additional costs to build and maintain the information infrastructure
Using Online Sales to Sell Computer Hardware
Using Online Sales to Sell Computer Hardware
• Impact of online sales on customer service
• Delay in fulfilling customer request

• Impact of online sales on cost

• Reduced inventory costs
• Lower facility costs
• Higher total transportation costs
• Incremental increase in information costs
Using Online Sales to Sell Computer Hardware
• A tailored supply chain network
• A hybrid model can be very effective
• More significant as hardware becomes more of a
commodity
• Take advantage of the strengths of both online sales
and traditional retail and distribution channels
Using Online Sales to Sell Books
• Impact on customer service
• Internet has not shortened supply chains
• Increased selection, convenience
• Impact on cost
• Reduced inventory costs
• Lower facility costs
• Higher total transportation costs
• Increase in information costs
Using Online Sales to Sell Books
• A supply chain network for books
• Traditional bookstores pressured from both ends
• Amazon more efficient
Using the Internet to Sell Groceries
• Impact on customer service
• Sell convenience and the time savings
• Offers less variety
• Creating a personalized shopping experience and
customized advertising and promotions
• Impact on cost
• Reduced inventory costs
• Higher facility costs due to picking operation
• Significantly higher total transportation costs
• Increase in information costs
Using Internet to Sell Groceries
• Value of online sales to a traditional grocery
chain
• Complement the strengths of their existing network
• Offer an entire array of services at differing prices based
on the amount of work the customer does
Using the Internet to Rent Movies
• Impact of online sales on customer service
• Staggering selection and an excellent recommendation
engine
• Video streaming through a variety of devices
• Customers received their DVDs within 24 hours of being
shipped
Using the Internet to Rent Movies
• Impact of online sales on cost
• Reduced inventory costs
• Lower facility costs
• Considerably higher total transportation costs,
increased streaming will reduce transportation costs
• Increase in information costs
Distribution Networks in Practice
1. The ownership structure of the distribution network
can have as big as an impact as the type of
distribution network.
2. It is important to have adaptable distribution
networks.
3. Product price, commoditization, and criticality affect
the type of distribution system preferred by customers.
4. Integrate the Internet with the existing physical
network.
Summary of Learning Objectives
1. Identify the key factors to be considered when
designing a distribution network.
2. Discuss the strengths and weaknesses of various
distribution options.
3. Understand how online sales have affected the design
of distribution networks in different industries.
THE END
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