ِ‫الرحيم‬

َ ّ ‫حم ِن‬ َ ّ ‫ِبس ِم الل َّ ِه‬

ٰ ‫الر‬

Distribution Network Design

Dr. Mohammed Shamim Uddin Khan

Professor and Chairman
Department of Finance
University of Chittagong
 OUTLINES
 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

2
 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 value
and therefore drives profitability
 Choice of distribution network can achieve supply chain
objectives from low cost to high responsiveness
 Examples: Wal-Mart, Dell, Procter & Gamble, Grainger

3
FACTORS INFLUENCING DISTRIBUTION NETWORK
DESIGN

 Distribution network performance evaluated

along two dimensions:
 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

4
 FACTORS INFLUENCING THE CHOICE OF
DISTRIBUTION NETWORK DESIGN
1. Elements of customer service influenced by network structure:
 Response time
 Product variety
 Product availability
 Customer experience
 Time to market
 Order visibility
 Returnability
2. Supply chain costs affected by network structure:
 Inventories
 Transportation
 Facilities and handling
 Information
5
 NETWORK DESIGN ASPECTS
(ASPECTS THAT DIFFERENTIATE DISTRIBUTION NETWORK)

 Facilities (factories, warehouses)

How many facilities
where to locate them
which role should they have
which customers to serve from which location
 Transportation
Which transportation mode to use
(truck, rail, barge, plane)
 Inventories
Where to locate which inventories
Produce on order or deliver from stock
 Information
Central vs. decentral control

6
 TYPES OF DISTRIBUTION NETWORK
1. Manufacturer storage with direct (drop)
shipping (dell, eBags)
2. Manufacturer storage with direct shipping and
in-transit merge (dell)
3. Distributor storage with package carrier
delivery (amazon)
4. Distributor storage with last mile delivery
(peapod, fridges)
5. Manufacturer/Distributor storage with customer
pick-up (7dream.com)
6. Retail storage with customer pick-up
(traditional shops)
7
 Manufacturer

Retailer
1

Customers

Factories
Factories

Retailer In-Transit Merge

by Carrier
2 Warehouse Storage by
Distributor/Retailer
3
Customers
Customers

Factories Factories

Retailer Cross Dock DC

Distributor/Retailer
Warehouse 4 5,6
Pickup Sites

Customers
Customers
MANUFACTURER STORAGE WITH DIRECT SHIPPING

Manufacturer

Retailer

Customers

Product Flow
Information Flow
 Manufacturer Storage with Direct Shipping
Table 4.1 Performance Characteristics of Manufacturer Storage with Direct Shipping Network
Cost Factor Performance
Inventory Lower costs because of aggregation. Benefits of aggregation are highest for low-demand, high-value items. Benefits
are very large if product customization can be postponed at the manufacturer.

Transportation Higher transportation costs because of increased distance and disaggregate shipping.

Facilities and handling Lower facility costs because of aggregation. Some saving on handling costs if manufacturer can manage small
shipments or ship from production line.

Information Significant investment in information infrastructure to integrate manufacturer and retailer.

Service Factor Performance

Response time High response time of between one to two weeks because of increased distance and two stages for order processing.
Response time may vary by product, thus complicating receiving

Product variety Easy to provide a very high level of variety.

Product availability Easy to provide a high level of product availability because of aggregation at manufacturer.

Customer experience Good in terms of home delivery but can suffer if order from several manufacturers is sent as partial shipments.

Order visibility More difficult but also more important from a customer service perspective

Returnability Expensive and difficult to implement

 IN-TRANSIT MERGE NETWORK

Factories

Retailer In-Transit Merge by

Carrier

Customers

Product Flow
Information Flow
 In-Transit Merge Network
Table 4.2 Performance Characteristics of In-Transit Merge
Cost Factor Performance
Inventory Similar to drop-shipping.
Transportation Somewhat lower transportation costs than drop-shipping.
Facilities and handling Handling costs higher than drop-shipping at carrier; receiving cost lower at customer.
Information Investment is somewhat higher than for drop-shipping.

Service Factor Performance

Response time Similar to drop-shipping; may be marginally higher
Product variety Similar to drop-shipping
Product availability Similar to drop-shipping
Customer experience Better than drop-shipping because a single delivery has to be received
Order visibility Similar to drop-shipping.
Returnability Similar to drop-shipping.
DISTRIBUTOR STORAGE WITH CARRIER DELIVERY

Factories

Warehouse Storage by
Distributor/Retailer

Customers

Product Flow
Information Flow
 Distributor Storage with Carrier Delivery
Cost Factor Performance
Inventory Higher than manufacturer storage. Difference is not large for faster-moving items.
Transportation Lower than manufacturer storage. Reduction in highest for faster-moving items.
Facilities and handling Somewhat higher than manufacturer storage. The difference can be large for very slow-
moving items
Information Simpler infrastructure compared to manufacturer storage

Service Factor Performance

Response time Faster than manufacturer storage
Product variety Lower than manufacturer storage
Product availability Higher cost to provide the same level of availability as manufacturer storage
Customer experience Better than manufacturer storage with drop shipping
Time to market Higher than manufacturer storage
Order visibility Easier than manufacturer storage
Returnability Easier than manufacturer storage
DISTRIBUTOR STORAGE WITH LAST MILE DELIVERY

Factories

Distributor/Retailer
Warehouse

Customers

Product Flow
Information Flow
 Distributor Storage with Last Mile Delivery
Cost Factor Performance
Inventory Higher than distributor storage with package carrier delivery
Transportation Very high cost given minimal scale of economies. Higher than any other distribution
option
Facilities and handling Higher than manufacturer storage or distributor storage with package carrier delivery, but
lower than a chain of retail stores
Information Similar to distribution storage with package carrier delivery

Service Factor Performance

Response time Very quick. Same day to next-day delivery
Product variety Somewhat less than distributor storage with package carrier delivery but larger than retail
stores
Product availability More expensive to provide availability than any other option except retail stores
Customer experience Very good, particularly for bulky items
Time to market Slightly higher than distributor storage with package carrier delivery
Order visibility Easier than distributor storage with package carrier delivery
Returnability Easier than distributor storage with package carrier delivery
 MANUFACTURER OR DISTRIBUTOR OR RETAIL
STORAGE WITH CUSTOMER PICKUP

Factories

Retailer Cross Dock DC

Pickup Sites

Customers

Customer Flow
Product Flow
Information Flow 17
Manufacturer or Distributor or Retail Storage with
customer pick-up
Cost Factor Performance
Inventory Can match any other option depending on the location of inventory
Transportation Lowest is having existing delivery network

Facilities and handling Depend on usages of existing facility or new built facilities. Handling cost increases.

Information Significant investment in infrastructure required

Service Factor Performance

Response time Similar to package carrier delivery manufacturer or distributor storage options
Product variety Similar to manufacturer or distributor storage options
Product availability Similar to manufacturer or distributor storage options
Customer experience Lower than other options
Time to market Similar to manufacturer or distributor storage options
Order visibility Difficult but essential
Returnability Somewhat easier considering pick-up location can handle returns 18
DISTRIBUTION NETWORK FOR E-BUSINESS

Customer
Customer Pull
Pull
Retail Store
Dell

Dell

Supplier
Supplier

Dell’s Online Supply Chain Dell’s Retail Supply Chain

 Impact of E-Business on Customer Service

 Impact of E-Business on Cost
 Using E-Business: Dell, Amazon, Peapod, Grainger
IMPACT OF E-BUSINESS ON CUSTOMER SERVICE

 Response time
 Product variety
 Product Availability
 Customer experience
 Time to market
 Order Visibility
 Returnability
 Direct Sales to Customers
 Flexible Pricing, Product Portfolio, and Promotions
 Efficient Funds Transfer
IMPACT OF E-BUSINESS ON COST
 Inventory
 Facilities
 Transportation
 Information
 KEY STRATEGIC DECISIONS

 Number and role of facilities

 Location of each facility

 Size of each facility

 Allocating space for products in each warehouse

 Which products customers will receive from which

facility
 KEY TACTICAL DECISIONS
 Selection of transportation mode (e.g.,
truck, air, rail, barge) and of which
variant within each mode (next day, 48
hrs certain, 48 hrs uncertain)

 Delivery frequency between DCs and to

customers
EFFECTS OF INCREASING THE NUMBER OF WAREHOUSES

 Improvement in service level (reduction in travel

times)
 Increase in inventory cost (increase in safety
stocks) required to protect against uncertainties
 Increase in overhead and setup cost
 Reduction in outbound transportation cost (from
warehouses to customers)
 Increase in inbound transportation (from
suppliers/manufacturers to warehouses)
 DIFFERENCE IN- AND OUTBOUND TRANSPORTATION

 Inbound transport usually in Full Truck Loads or Containers (20,

40, 45 ft)

why: products are normally NOT directly needed, so we can

consolidate orders in order to save costs

 Outbound transport depends typically on the customer

- who determines transport? Seller or buyer – varies from market
to market.
- the shipment size depends on the amount the customer buys, that
can be a small amount.

Hence orders from mulitple customers are usually combined in

one trip (so-called milkrun), but customers are not always on the
same location. Hence more costly transport
SERVICE AND NUMBER OF FACILITIES

Number of
Facilities

Response Time
INVENTORY COSTS AND NUMBER OF FACILITIES

Inventory
Costs

Number of facilities
 TRANSPORTATION COSTS AND NUMBER OF FACILITIES

Transportation
Costs

Number of facilities
FACILITY COSTS AND NUMBER OF FACILITIES

Facility
Costs

Number of facilities
 Cost Buildup as a Function of Facilities
Total Costs
Cost of Operations

Percent Service
Level Within
Promised Time

Facilities
Inventory
Transportatio
nLabor

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

Total Logistics Costs

Number of Facilities
FACTORS INFLUENCING NETWORK DESIGN DECISIONS

 Strategic factors
 Technological factors
 Macroeconomic factors
 Tariffs and Tax incentives
 Political factors
 Infrastructure factors
 Competitive factors
 STRATEGIC FACTORS
 Focus on Cost Leadership
 Low cost location
 Far from market
 Bigger service area with big sized few facilities. (e.g. home plus,
e-mart etc.)
 Less skilled workforce
 Focus on Responsiveness
 Closer to market
 Highly skilled workforce
 Many small capacity facilities. (e.g. Seven-Eleven, Family Mart
etc.)
 Nike’s China and Indonesia factories focus on cost and
produce mass market lower-priced shoes. Whereas it’s
Korea and Taiwan focus on responsiveness and produced
high priced new designs
 STRATEGIC FACTORS
Classification of possible strategic roles
 Offshore facility - low cost facility for export production

 Source facility - low cost facility for global production

 Server facility - regional production facility

 Contributor facility - regional production with

development
skills
 Outpost facility - regional production facility built to gain
local skills
 Lead facility - facility that leads in development and
process technologies
TECHNOLOGICAL FACTORS

 Economies of scale
 Required Investment
 Flexibility of the production technology
 Coca-Cola sets up many bottling plants all
over the world
 MACROECONOMIC FACTORS
 Tariffs and Tax incentives
tariffs - duties to be paid when products / equipment is
moved international
- tax incentives - reduction in tariffs or taxes that countries
charge
- free trade zones - duties and tariffs are levied for exports

 Exchange rate and demand risk

 Japanese car manufacturing in USA
 Loss of Daimler, BMW, and Porsche
POLITICAL, INFRASTRUCTURE, SOCIO-ECONOMIC FACTORS

 Political Stability
 Independent and clear legal systems
 Good infrastructure
 Shanghai, Tianjin, or Guangzhou
 Govt. Industrial Policy etc.
 COMPETITIVE FACTORS

 Positive externalities between firms

- instances in which the collocation of multiple firms
benefit all of them (e.g. Silicon valley, MIT technological
area)

 Locating to split the market: to be closer to customers

 Customer response time and local presence

LOGISTIC FACTORS

 Inventory costs

 Transportation costs
- inbound transportation costs to bring the material to
the plants
- outbound transportation costs to bring the products
to the customers

 Facility (setup and operating) costs

 Time needed to supply customers

 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
 NETWORK OPTIMIZATION MODELS
–BASIC COST MINIMIZATION MODEL

 Consider opening possible facilities for serving customers or closing

existing facilities at given sites

yi = {1 if facility i is open, o else} = decision variable

yi-L= low capacity facility, yi-H = high capacity facility
fi = Fixed cost per year for operating facility i
(independent of its throughput)
cij = Processing and transportation costs per year for serving
customer j from facility i
Dj = Customer j’s demand per year
Ki = Facility i’s capacity per year
xi j = The amount of supply from facility i to customer j. decision
variable
 MODELING “MANUFACTURERS STORAGE WITH DIRECT
SHIPMENT” DISTRIBUTION SYSTEM

Customers (j)
Manufacturer (i)
Build Demand
Capacity
cost
Cij Xij
f1 K1 Y1 1 D1

2 D2
f2 K2 Y2

Y3 3 D3
f3 K3

m
n