Chapter - 4

Designing Distribution Networks

and Applications to e-Business
 Strategic Supply Chain
Management
Chapter # 4 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
 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

• Right choice of distribution network grows the supply chain

surplus by satisfying customer needs at the lowest possible
cost.

Strategic Supply Chain

Management
 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
– Product variety
– Product availability
– Customer experience
– Time to market
– Order visibility
– Return ability
• Supply chain costs affected by network structure:
– Inventories
– Transportation
– Facilities and handling
– Information

Strategic Supply Chain PGDSCM

Management Strategic SCM
 Relationship Between Desired Response Time
and Number of Facilities
Required Number
of Facilities

Desired Response Time

Strategic Supply Chain

Management
 Relationship Between Number of Facilities and
Inventory Costs
Inventory Cost

To decrease inventory costs, firms

try to consolidate and limit the
number of facilities.

Number of Facilities

Strategic Supply Chain

Management
 Relationship Between no of Facilities and
Transportation Cost
•Inbound transportation costs are larger than
outbound transportation cost per unit. Typically
as the lot sizes are larger for inbound cost.
Transportation
• As long as inbound transportation economies
Cost
of scale are maintained, increasing no of
facilities decreases total transportation cost
• but if the no of facilities increased to a point
where inbound lot sizes are very small and
result significant loss of economies of scale
then increasing no of facilities will increase total
transportation cost.

Number of Facilities

Strategic Supply Chain

Management
 Relationship Between no of Facilities
and Facilities Cost
Facilities Costs

Number of Facilities

Strategic Supply Chain

Management
 Relationship Between Total Costs
and Number of Facilities
Total Costs
Total Costs

Facilities

Inventory

Transportation

Number of Facilities
A firm should add facilities beyond the cost minimizing point only if increase in revenues because of better
responsiveness is greater than the increase in costs because of additional facilities.

Strategic Supply Chain

Management
 Design Options
for a Distribution Network
• Manufacturer Storage with Direct Shipping (drop –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

Strategic Supply Chain

Management
 Manufacturer Storage with
Direct Shipping
Manufacturer

Retailer

Customers

Product Flow
Information Flow

Strategic Supply Chain

Management
 In-Transit Merge Network
Factories

Retailer In-Transit Merge by

Carrier

Customers

Product Flow
Information Flow

Strategic Supply Chain

Management
 Distributor Storage with Carrier Delivery
Factories

Warehouse Storage by
Distributor/Retailer

Customers

Product Flow
Information Flow

Strategic Supply Chain

Management
 Distributor Storage with Last Mile Delivery

Factories

Distributor/Retailer
Warehouse

Customers

Product Flow
Information Flow

Strategic Supply Chain

Management
 Manufacturer or Distributor Storage with
Customer Pickup
Factories

Retailer Cross Dock DC

Pickup Sites

Customers

Customer Flow
Product Flow
Information Flow
 E-Business and the Distribution Network
Impact on Customer Service
• Response Time to Customer : In selling physical products that
cannot be downloaded, an e-business without a physical retail outlet
takes longer to fulfill a customer request than a retail store because of
the shipping time involved.

• Product Variety : An e-business finds it easier to offer a large

selection of products than a bricks-and-mortar store. Example :
Amazon.com offers a much larger selection of books than a typical
bookstore.

• Product Availability : An e-business can greatly increase the speed

with which information on customer demand is disseminated
throughout the supply chain, giving rise to more accurate forecasts.

Strategic Supply Chain

Management
 E-Business and the Distribution Network
Impact on Customer Service

• Customer Experience : An e-business affects customer experience in terms of

access, customization, and convenience. Unlike most retail stores that are open
only during business hours, an e-business allows access to customers who may
not be able to place orders during regular business hours.

• Faster Time to Market : A firm can use e-business to introduce new products
much more quickly than a firm that uses physical channels.

• Order Visibility : The internet makes it possible to provide visibility of order status.
From a customer’s perspective, it is crucial to provide the visibility.

• Return ability : Return ability is harder with online orders, which typically arrive
from a centralized location. It is much easier to return a product purchased at a
retail store.

Strategic Supply Chain

Management
 E-Business and the Distribution Network
Impact on Customer Service

• Direct Sales to Customers : An e-business allows manufacturers and

other members of the supply chain that do not have direct contact with
customers in traditional channels to enhance revenues by bypassing
intermediaries and selling directly to customers, thereby collecting the
intermediary’s incremental revenue.

• Flexible Pricing, Product Portfolio, and Promotions : An e-business

can easily alter prices by changing one entry in the database linked to its
Web site. This ability allows an e-business to maximize revenues by
setting prices based on current inventories and demand.

• Efficient Fund Transfer : An e-business can enhance revenues by

speeding up collection.

Strategic Supply Chain

Management
 E-Business and the Distribution Network
Impact on Cost

• Inventory : An e-business can lower inventory levels and inventory cost

by improving supply chain coordination and creating a better match
between supply and demand.

• Facilities : An e-business can reduce network facilities cost by

centralizing operations thereby decreasing the number of facilities
required.

• Transportation : If a firm can put its product in a form that can be

downloaded, the Internet will allow it to save on the cost and time for
delivery.

• Information : An e-business can share demand information throughout

its supply chain to improve visibility.

Strategic Supply Chain

Management
 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

Strategic Supply Chain

Management
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Strategic Supply Chain

Management
Strategic Supply Chain
Management

Ejazur Rahman