Designing the Distribution Network in a
Supply Chain
Contents:
Objectives
The Role of Distribution in the Supply Chain
Factors Influencing Distribution Network Design
Supply chain costs affected by network structure
Design Options for Distribution Network
Selecting Distribution Network Design
OBJECTIVES:
To identify the key factors to be considered when
designing a distribution network.
To discuss strengths and weaknesses of various
distribution options.
To understand the role that distribution play in
supply chain.
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.
4-4
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
4-5
Elements of customer service influenced
by network structure:
– Response time
– Product variety
– Product availability
– Customer experience
– Order visibility
– Returnability
Response time: is the time between when a customer
places an order and receives delivery.
Product variety: is the number of different products /
configurations that a customer desires from the
distribution network.
Availability: is the probability of having a product in stock
when a customer order arrives.
Customer experience: includes the ease with which the
customer can place and receive their order.
Order visibility: is the ability of the customer to track
their order from placement to delivery.
Returnability: is the ease with which a customer can
return unsatisfactory merchandise and the ability of
the network to handle such returns.
Supply chain costs affected by network structure:
– Inventories
– Transportation
– Facilities and handling
– Information infrastructure
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
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
Design Options for Distribution Network
There are two key decisions when designing a
distribution network:
Will product be delivered to the customer location or
picked up from a preordained site?
Will product flow through an intermediary
(intermediate location)?
Possible distribution network design:
– 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 shipping
o This option is also referred to as drop shipping.
o All inventories are stored at the manufacturer.
o Information flows from the customer to the
manufacturer via the retailer, while product is
shipped directly from the manufacturer to
customers.
o Slow-moving/low-demand/high-value items.
Manufacturer
Retailer
Customers
Product Flow Information Flow
Performance characteristics
Cost factor performance
Inventory Low cost because of aggregation. benefits
of aggregation are highest for low-
demand, high value items.
Transportation Higher transportation cost because of
increased demand.
Facilities and handling Lower facility costs because of
aggregation. some saving on handling
cost.
information Significant investment in information
infrastructure.
Service factor Performance
Response time high response time because of increased distance
Product variety Easy to provide a very high level of variety
Product availability Easy to provide a very high level of product availability
because of aggregation at manufacturer.
Customer experience Good in terms of home delivery but can suffer if order
several manufacturers sent as partial shipments.
Order visibility More difficult but also important.
returnability Expensive and difficult to implement.
Manufacturer storage with direct shipping
and in-transit merge
In transit merge combines pieces of the order
coming from different locations so that the customer
gets a single delivery.
low- to medium-demand and high-value items.
e.g. PC from Dell along with Sony monitor
Factories
Retailer In-Transit Merge by Carrier
Customers
Product Flow Information Flow
Performance characteristics
Cost factor performance
Inventory Low cost because of aggregation. benefits of aggregation
are highest for low-demand, high value items.
Transportation Somewhat lower transportation costs than drop-shipping.
Facilities and handling Handling costs higher than drop-shipping at carrier ;
receiving costs lower at customer.
Information Investment is Somewhat higher than for drop-shipping.
Service factor Performance
Response time high response time because of increased distance
Product variety Easy to provide a very high level of variety
Product availability Easy to provide a very high level of product availability
because of aggregation at manufacturer.
Customer experience Better than drop-shipping because a single delivery has to
be received.
Order visibility More difficult bit also important.
returnability Expensive and difficult to implement.
Distributor storage with carrier delivery
Under this option, inventory is held by
distributors/retailers in intermediate warehouses.
Package carriers are used to transport products from
the intermediate location to the final customer.
Medium- to fast-moving items.
Factories
Warehouse Storage by
Distributor/Retailer
Customers
Product Flow Information Flow
Performance characteristics
Cost factor performance
Inventory Higher than manufacturer storage. Difference is not large
for faster moving items.
Transportation lower than manufacturer storage. Reduction is higher for
faster moving items.
Facilities and handling Somewhat higher than manufacturer storage. the
Difference can be large for slow moving items.
Information Similar infrastructure compared to manufacturer storage.
Service factor Performance
Response time Faster than manufacturing storage
Product variety lower than manufacturing storage
Product availability Higher cost to provide the same level of product availability
as manufacturer storage
Customer experience Better than manufacturing storage with drop-shipping.
Order visibility Easier than manufacturing storage
Returnability Easier than manufacturing storage
Distributor storage with last mile delivery
Last mile delivery refers to the distributor/retailer
delivering the product to the customer’s home
instead using package carriers.
e.g. water, bag of rice at dense city.
Factories
Distributor/Retailer
Warehouse
Customers
Product Flow Information Flow
Performance characteristics
Cost factor Performance
Inventory Higher than distributor storage with package carrier
delivery.
Transportation Very high cost given minimal scale economies. higher
than any other distribution option.
Facilities and handling Facility costs higher than manufacturer or distributor
storage with package carrier delivery. But lower than a
chain of retail stores.
Information Similar to distributor storage with package carrier
delivery.
Service factor Performance
Response time Very quick.
Product variety Some what less than distributor storage with package
carrier delivery but larger than retail stores.
Product availability More expensive to provide availability than other option
except retail stores.
Customer experience Very good particularly for bulk items.
Order visibility Less than an issue and easier to implement than
manufacturing storage or distributor storage with package
carrier delivery.
Returnability Easier to implement than other options. Harder and more
expensive than a retail network.
Manufacturer or distributor storage with
consumer pickup
In this option inventory is stored at manufacturer or
distributor warehouse but the customer place their
order online or on phone and then come to
designated pickup points to collect their orders.
Reusing existing pick-up site, customer participation.
Factories
Retailer Cross Dock DC
Pickup Sites
Customers
Product Flow Information Flow Customer Flow
Performance characteristics
Cost factor Performance
Inventory Can match any other option depending on the location
of inventory.
Transportation Lower than use of package carriers.
Facilities and handling Facility costs can be very high if new facilities have to
be built. costs are lower if existing facilities are used.
Information Significant investment in infrastructure required.
Service factor Performance
Response time Similar to package carrier delivery with manufacturing
storage or distributor storage. Same day delivery is possible
for items stored locally at pickup site.
Product variety Similar to other manufacturer or distributor storage
options.
Product availability Similar to other manufacturer or distributor storage
options.
Customer experience Lower than other options because of the lack of home
delivery
Order visibility Difficult but essential.
Returnability Some what easier given that pickup location can handle
returns.
Retailer storage with customer pickup
Inventory is stored locally at retail stores.
Customer walk into the store or place an order
online or on phone and pick it up at the retail store.
Fast moving items
Performance characteristics
Cost factor Performance
Inventory Higher than all other options.
Transportation Lower than all other options.
Facilities and handling Higher than all other options. The increase in handling
cost at the pickup site can be significant for online and
phone orders.
Information Some investment in infrastructure required for online
and phone orders.
Service factor Performance
Response time Same day(immediate) delivery is possible for items stored
locally at pickup site.
Product variety Lower than all other options.
Product availability More expensive to provide than all other options.
Customer experience Related to whether shopping is viewed as a positive or
negative experience by customer.
Order visibility Trivial for in-store orders. Difficult, but essential for online
and phone orders.
Returnability Easier than other options given that pickup location can
handle returns.
Selecting Distribution Network Design
• A network designer needs to consider product
characteristics as well as network requirements.
There are two methods
Comparative performance.
Performance for different product/customer.
Comparative performance
1: best performance
Manufacturer
Manufacturer
Manufacturer storage with Distributor Distributor Retail
or distributor
storage with direct storage with storage with storage with
storage with
direct shipping and carrier last mile consumer
consumer
shipping in-transit delivery delivery pickup
pickup
merge
Inventory 1 1 2 3 1 4
Transportation 4 3 2 5 1 1
Facilities and handling 1 2 3 4 5 6
Information 4 4 3 2 5 1
Response time 4 4 3 2 4 1
Product variety 1 1 2 3 1 4
Product availability 1 1 2 3 1 4
Customer experience 4 3 2 1 5 5
Order visibility 5 4 3 2 6 1
Returnability 5 5 4 3 2 1
Performance for different product/customer
characteristics:
– +2: Very suitable, …, -2: very unsuitable
Manufacturer
Manufacturer
Manufacturer storage with Distributor Distributor Retail
or distributor
storage with direct storage with storage with storage with
storage with
direct shipping and carrier last mile consumer
consumer
shipping in-transit delivery delivery pickup
pickup
merge
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 source -1 -1 +2 +1 0 +1
High product value +2 +1 +1 0 -1 -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
THANK YOU
