Designing the Distribution

Network in a Supply Chain

Ch 4 & Ch 5(5.1-5.3)
Supply Chain Management by
Sunil Chopra, Peter Meindl
Physical Distribution Channel

 The method and means by which a product or a

group of products are physically transferred, or
distributed, from their point of production to the
point at which they are made available to the final
customer.

 This end point is a retail outlet, shop or factory,

but it may also be the customer’s house.
Trading or Transaction Channel

The trading channel is concerned with the non physical aspects of the product
transfer. These aspects concern the sequence of negotiation, the buying and
selling of the product, and the ownership of the goods as they are transferred
through the various distribution channels
 Goal

Given: What is the

 Product Characteristics appropriate
 Markets Served distribution
network?
 Channel Selection
Main points that need to be addressed-
To make the product readily available to the market consumers at which it is
aimed.
To enhance the prospect of sales being made.
To achieve co-operation with regard to any relevant distribution factors.
To achieve a given level service.
To minimize total logistics and total costs.
To receive fast and accurate feedback of information.
 Channel Selection
To make the product readily available to the market consumers at which it is aimed-
 Most important factor here is to ensure that the product is represented in the right
type of outlet or retail store.
 Having identified the correct market place for the goods, the company must make
certain that the appropriate physical distribution channel is selected to achieve this
objective.
 Channel Selection
To enhance the prospect of sales being made-
 Does the deliverer arrange the merchandise in the shop?
 Are special displays used?
 Does the product need to be demonstrated or explained?
 Channel Selection
To achieve co-operation with regard to any relevant distribution factors(Supplier’s
or receiver’s point of view)-
Minimum order sizes/unit load types/product handling characteristics/material
handling aids/vehicle size/delivery time/etc.
 Channel Selection
To achieve a given level service(From both supplier’s and customer’s viewpoints)-
 Becomes basis of comparing suppliers
 May be the basis of subsequent buying decisions
 Channel Selection
To minimize total logistics and total costs-
 Selected channel will reflect certain cost which will reflect in product price
 Channel Selection
To receive fast and accurate feedback of information-
 Good flow of relevant information is essential.
 Will include sales trends, inventory levels, damage reports,etc.
3rd Party Logistics(3PL)

DIFFERENT
SERVICES THAT
ARE OFFERED
Breadth of Outsourcing

 Vast choice of different operation and services that can be

outsourced.
 Many users want to outsource only certain part of their
operation.
 Identification of major benefits of outsourcing.
 Clarity in terms of responsibility change over.
 Outsourcing Continuum
Total Internal Asset Management

Total External Asset Management

Basic Services
 Value Added Services
 Specialist & Niche Services- Operations are specially designed for a particular
product(automotive/hanging garments)
 Time Definite Services- To Support JIT operations
 Production & Assembly-Where assembly of the products take place outside the
manufacturing environment but within logistics operation.
 Repacking- Blister pack of two different products
 Refurbishment- Supporting logistics of some used products back to manufacturer for reuse in the
new products.
 Value Added Services
 Packaging Returns- Reverse Logistics Operations to the recycling centres
 Inbound Logistics- Coordination of the raw material, components, packaging
products( transport/stock control/ordering/order progress chasing)
 Pre Retailing- Products are prepared for the immediate use in the retailing environment.
( Garment unpacking/Labelling/Refinishing)
 E- fulfillment – Home delivery of internet orders.
Key Drivers for 3PL

 Cost Factors
 Service Factors
 Organizational Factors(focus on the core business)
 Physical Factors (greater flexibility of infrastructure usage)
Key Trade Offs between Multi
User and Dedicated Services
Dedicated Multi User

Advantages • Organization & Resources are focused • Scale economies gained by sharing
exclusively on the customer resources between number of clients
• Specialism and Loyalty of Staff • Consolidation of loads enable higher
• Specialism of depots, handling equipment delivery frequency
and delivery vehicles • Ability to find out clients with different
• Confidentiality of customer’s product seasonality to maximize utilization of
specifications/promotional activity assets.

Disadvantages • Total cost of the operations are borne by • Conflicting demands of each customer
the customer can compromise service.
• Seasonal underutilization of resources. • Staff do not gain specialist customer
knowledge
• Equipment is not specialized and may not
exactly meet individual customer
requirements.
Typical Failures that have been
claimed
Lack of senior management involvement in coordination and review
 Increased service requirements can’t be maintained.
 Limited skills in planning and replenishment process, focus mainly on
transactional processes.
 Lack of network design and management capabilities at global/continental
level
 Lack of IT intervention
 Contractors are often activity driven as opposed to being value driven.
 Fourth Party Logistics
 4PL is where an external organization is able to provide a user with an overall
supply chain wide solution by incorporating the resources and expertise of any
number of third parties to best effect.

 4PL will be involved both in design and the management of client logistics
system and will act as a coordinator for many types of service, which may
include distribution, information systems, financial services, etc.
4PL can offer number of enhanced services-
 A total supply chain perspective
 Visibility along the supply chain
 Measurement along the supply chain(cost & performance)
 Open Systems
 Technical Vision
 Flexibility
 Tailored Structures and systems
• Supply Chain Visionary
• Multiple customer relationship
• Supply Chain Re-engineering
• Project management
• Service Integrator
• Continuous Innovation

• Experience Logisticians
• Optimization Engines
• Decision support
• Neutral Positioning
• Continuous improvement

• IT integration
• IT infrastructure Provision
• Real Time Data Tracking
• Convert data to information
• Provide info to point of need
• Technical Support

• Transportation
• Warehousing
• Manufacturing(Outsourcing)
• Procurement Service
Main advantages of 4PL

 Addressing Strategic Failures

 Minimizing time and effort spent on logistics by user
 Multiple logistics providers will be handled by single
organization
 Broader supply Chain services
 4Pl can source different specialists with best- in- class
credentials
 Main advantages of 4PL
Addressing Service and cost failures
 Freeing of the user’s company’s capital for core/mainstream use by selling assets.
 Continuous monitoring and improvement of supply chain processes, performance
and costs
 Benchmarking of supply chain process against world class companies.
 Continuous monitoring and reassessment of service level achievements
 Development and use of core expertise from all logistics participants
 Main advantages of 4PL
Addressing Operational failures-
 Makes it easier to eradicate old industrial relations issues
 Should enable to transfer of selective personnel
 More flexible working environment
 Company ‘culture’ can be created
 Main advantages of 4PL
Additional Benefits-
 Provision of ‘knowledge management’ the bringing together and effective sharing of
knowledge among the identified stakeholders.
 Provision of supply chain accountability for achieving desired performance.
 The provider assumes risk on behalf of the user in return for share of the profit.
So far adoption of 4PL concept is very limited, being restricted
to some new ventures and to some large global organizations.
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, HP, Proctor & Gamble
Some key questions????

 Which distribution network is the best?

 What value does each distributor provide?
 When should a new distributor be added?
 E-business kills distributors, so?
 Why are distributors more significant in some
countries, like India?
Factors Influencing
Distribution Network Design

 Distribution network performance is 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
Priority among these is important!
 Customer experience
 Order visibility
 Returnability
 Supply chain costs affected by network structure:
 Inventory
 Transportation
 Facilities and handling
 Information
 Service and Number of Facilities

Response Time

Number of
Facilities
The Cost-Response Time Frontier

High 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 High
 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
Key Decisions in Designing a
Distribution Network

1. Will product be delivered to the

customer location or picked up from a
preordinated site?

2. Will product flow through an

intermediary location?
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
Manufacturer Storage with
Direct (Drop) 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 (higher inventory
turnovers), 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

Service Customer experience Good since there is home delivery but partial shipments
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
 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 Factor Facilities and Higher handling costs than drop shipping; lower receiving
handling costs at customer
Information Higher than drop shipping

Response time Similar to or higher than drop shipping

Product variety Similar to drop shipping
Product Similar to drop shipping
Service availability
factor Customer Better due to single delivery
experience
Order visibility Similar to drop shipping (or somewhat more difficult)
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

 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
Cost highest for fast 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 Lower than manufacturer storage. Extra investment
Service availability is needed forlarger availability
factor Customer Better than manufacturer storage with drop
experience shipping.
Order visibility 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
 Disributor/retailer delivers the product to the customer’s 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.

 Hard to justify this option when labor cost is high.

 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

Cost Factor Transportation Higher than any other distribution option. Maybe
somewhat cheaper in large and dense cities
Facilities and handling Higher than all options but lower than chain of retail stores.

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
Service investment is needed for larger availability
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.
 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.
 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
Factor handling at 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
factor Customer experience Assesed according to customer request
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
(1-strongest performance and 6 is weakest performance)

Retail Storage
Manufacturer Manufacturer Distributor Storage Distributor Manufacturer or
with Customer
Storage with Direct Storage with In- with Package storage with last distributor storage
Pickup
Shipping Transit Merge Carrier Delivery mile delivery with pickup

Response Time 4 4 3 2 4 1

Product Variety 4
1 1 2 3 1
Product Availability 2 3 4
1 1 1
Customer Experience
4 3 2 1 5 5

Order Visibility 5 4 3 2 6 1

Returnability 5 5 4 3 2 1

Inventory 1 1 2 3 1 4

Transportation 4 3 2 5 1 1

Facility & Handling 1 2 3 4 5 6

Information 4 4 3 2 5 1
 Linking Product Characteristics and Customer4-
Preferences to Network Design 61
(+2 very Suitable, +1-Suitable, 0-neutral, -1 somewhat unsuitable, -2-very unsuitable)

Manufacturer Manufacturer Distributor Distributor storage Manufacturer Retail Storage

Storage with Storage with Storage with with last mile delivery storage with pickup with
Direct Shipping In-Transit Package Customer
Merge Carrier Pickup
Delivery
High demand product
-2 -1 0 +1 -1 +2
Medium demand product
-1 0 +1 0 0 +1
Low demand product
+1 0 +1 -1 +1 -1
Very low demand product
+2 +1 0 -2 +1 -2
Many product sources
-1 -1 +2 +1 0 +1
High product value
+2 +1 +1 0 -2 -1
Quick desired response
-2 -2 -1 +1 -2 +2
High product variety
+2 0 +1 0 +2 -1
Low customer effort
+1 +2 +2 +2 -1 -2
 The Value of Distributors
in the Supply Chain

 Distributing Consumer Goods in India

 Selling fast moving consumer goods with large # retailers,
 Distributors close to retailers is crucial to reduce transportation costs
and reduce response time
 Distributing MRO (maintenance, repair, operations) Products
 Demand is uncertain, low product value, high variety
 Distributors close to customers is crucial to reduce transportation costs
and reduce response time
 Keep aggregate safety inventory
 Distributing Electronic Components
 Intel, Texas Inst., Motorola are few suppliers for large # of original
equipment manufacturers (OEMs).
 80:20 applies so sell directly to big OEMs.
 Use distributors for small OEMs.
 Value of Distributors

 Distributors add value to the SC when

 Demand is large in small quantities
 There are several manufacturers.
 SC performance improves due to
 Reduced inbound transportation cost due to TL shipments
from manufacturer to distributor.
 Reduced outbound trans. cost since several retailers are
satisfied in one shipment.
 Reduction in inventory costs by keeping aggregate safety
stocks as compared to retailer stocks.
 Stable orders from manufacturer to retailer.
 Better response time than manufacturers.
 High product variety at one large store
 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
 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
 Please read the article sent on your group email a few
minutes ago before we start the class
Factors Influencing
Network Design Decisions
 Strategic
 Technological
 Macroeconomic
 Political
 Infrastructure
 Competitive
 Logistics and facility costs

5-68