UNIT VIII

Distribution Networks in a
Supply Chain
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 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
 Distribution Networks in Practice

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 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, Proctor & Gamble,
Grainger

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 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

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 Factors Influencing Distribution Network
Design
 Elements of customer service influenced by network structure:
Response time

 Product variety
 Product availability
 Customer experience
 Order visibility
 Returnability
 Supply chain costs affected by network structure:
 Inventories
 Transportation
 Facilities and handling
 Information

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 Service and Number of
Facilities
Number of
Facilities

Response Time
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 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

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 Inventory Costs and Number
of Facilities (Fig. 4.2)
Inventory
Costs

Number of facilities

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 Transportation Costs and
Number of Facilities (Fig. 4.3)
Transportation
Costs

Number of facilities

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 Facility Costs and Number
of Facilities (Fig. 4.4)
Facility
Costs

Number of facilities

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 Total Costs Related to
Number of Facilities
Total Costs
Total Costs

Facilities
Inventory
Transportation

Number of Facilities
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 Variation in Logistics Costs and Response
Time with Number of Facilities (Fig. 4.5)
Response Time

Total Logistics Costs

Number of Facilities
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 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
 Selecting a Distribution Network Design

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 Manufacturer Storage with
Direct Shipping
Manufacturer

Retailer

Customers

Product Flow
Information Flow

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 Performance Characteristics of
Manufacturer Storage with Direct
Shipping
Cost Factor Performance
Inventory Lower costs because of aggregation
especially for low-demand high value
items
Transportation Higher transportation costs as increased
distance and disaggregate shipping

Facilities Lower cost because of aggregation

Information Significant investment to integrate
manufacturer and retailer

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 Performance Characteristics of
Manufacturer Storage with Direct
Shipping
Service Factor Performance
Response time Long response time
Product variety Easy to provide a very high level of variety

Product Easy to provide High level

availability
Customer Good in terms of home delivery but can
experience suffer if order from several manufacturers
Time to market Fast
Order Visibility More difficult
Returnability Expensive and difficult

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 In-Transit Merge Network
Factories

Retailer In-Transit Merge by

Carrier

Customers

Product Flow
Information Flow

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 Performance Characteristics of In-
Transit Merge Network
Cost Factor Performance
Inventory Lower costs because of aggregation
especially for low-demand high value
items
Transportation Lower transportation costs compared to
Direct Shipping
Facilities Handling costs higher at carrier
Information Sophisticated infrastructure required so
Investment is higher compared to Direct
Shipping

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 Performance Characteristics of In-
Transit Merge Network
Service Factor Performance
Response time Long response time
Product variety Easy to provide a very high level of variety

Product Easy to provide High level

availability
Customer Better than Direct shipping
experience
Time to market Fast
Order Visibility More difficult
Returnability Expensive and difficult

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 Distributor Storage with
Carrier Delivery
Factories

Warehouse Storage by
Distributor/Retailer

Customers

Product Flow
Information Flow
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 Performance Characteristics of
Distributor Storage with Carrier
Cost Factor Performance
Inventory Higher than manufacturer. Good for
faster moving items. Demand
Aggregation at lower level compared to
manufacturer
Transportation Lower Cost

Facilities Higher cost significant for slower moving

items
Information Simpler infrastructure

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 Performance Characteristics of
Distributor Storage with Carrier
Service Factor Performance
Response time Short response time
Product variety Lower variety

Product Not so easy to provide same level of

availability availability as manufacturer
Customer Better
experience
Time to market Higher
Order Visibility Easy
Returnability Easy

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 Distributor Storage with
Last Mile Delivery
Factories

Distributor/Retailer
Warehouse

Customers

Product Flow
Information Flow
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 Performance Characteristics of
Distributor Storage with Last-Mile
Delivery
Cost Factor Performance
Inventory Higher than Distributor storage with
carrier delivery

Transportation Very High Cost compared to all other

options
Facilities Higher cost compared to manufacturer
storage or distributor with package
carrier
Information Similar to distributor with package
carrier

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 Performance Characteristics of
Distributor Storage with Last-Mile
Delivery
Service Factor Performance
Response time Quick
Product variety Lower variety

Product More expensive

availability
Customer Very Good
experience
Time to market Slightly Higher
Order Visibility Very Easy
Returnability Very Easy

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 Manufacturer or Distributor
Storage with Customer Pickup
Factories

Retailer Cross Dock DC

Pickup Sites

Customers

Customer Flow
Product Flow
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 Performance Characteristics with
Customer Pickup Sites
Cost Factor Performance
Inventory Can match any other option depending
on location
Transportation Lower than Package carriers

Facilities Can be very high if new facilities have to

be built. Handling cost is significant
Information Significant investment in infrastructure
required ranges from minimal to
significant

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 Performance Characteristics with
consumer pickup sites
Service Factor Performance
Response time Similar to package carrier delivery
Product variety Similar to manufacture/distributor storage

Product Similar to manufacture/distributor storage

availability
Customer Lower than other options as no home
experience delivery
Time to market Similar to manufacturer storage
Order Visibility Difficult
Returnability Easier pickup locations handle returns

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 Performance characteristics of Retail
Storage with Customer pickup
Cost Factor Performance
Inventory Higher than all other options
Transportation Lower than all other options
Facilities Highest

Information Significant investment in infrastructure

required for online and phone orders

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 Performance characteristics of Retail
Storage with Customer pickup
Service Factor Performance
Response time Immediate pickup
Product variety Lower than all other options
Product More expensive
availability
Customer Depends upon likes of customer
experience
Time to market Highest
Order Visibility Difficult
Returnability Easier pickup locations handle returns

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 Comparative Performance of Delivery
Network Designs
Retail Storage Manufacturer Manufacturer Distributor Distributor Manufacturer
with Customer Storage with Direct Storage with In- Storage with storage with storage with
Pickup Shipping Transit Merge Package Carrier last mile pickup
Delivery delivery
Response Time 1 4 4 3 2 4

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

Order Visibility 1 5 4 3 2 6

Returnability 1 5 5 4 3 2

Inventory 4 1 1 2 3 1

Transportation 1 4 3 2 5 1

Facility & Handling 6 1 2 3 4 5

Information 1 4 4 3 2 5
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 Linking Product Characteristics and Customer
Preferences to Network Design
Retail Manufacturer Manufacturer Distributor Storage Distributor storage Manufacturer
Storage with Storage with Storage with with Package with last mile storage with
Customer Direct Shipping In-Transit Carrier Delivery delivery pickup
Pickup Merge

High demand product +2 -2 -1 0 +1 -1

Medium demand product +1 -1 0 +1 0 0

Low demand product -1 +1 0 +1 -1 +1

Very low demand product -2 +2 +1 0 -2 +1

Many product sources +1 -1 -1 +2 +1 0

High product value -1 +2 +1 +1 0 -2

Quick desired response +2 -2 -2 -1 +1 -2

High product variety -1 +2 0 +1 0 +2

Low customer effort -2 +1 +2 +2 +2 -1

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 E-Business and the Distribution
Network
 Impact of E-Business on Customer Service
 Response time : high for downloadable products and low for
physical products
 Product Variety : easier to offer large selection of products
space is not a constraint
 Product Availability : Demand information can be easily
disseminated throughout the supply chain giving rise to more
accurate forecasts leading to a better match and availability
of product
 Customer experience
 24x7 store available
 Cut down on distance
 Personalized buying experience
 Faster time to market
 Order Visibility possible through internet
 Returnability is harder with online orders

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 E-Business and the Distribution
Network
 Impact of E-Business on Cost
 Lower Inventory Levels and Cost because of aggregation
of online orders
 Facilities less number and low cost incurred for certain
products due to centralized operations however for
grocery items handling cost and transportation cost is
more
 Transportation : For downloadable products no transportation
cost but for physical products outbound transportation cost is high
due to aggregation of orders
 Information : Significant IT infrastructure required to share
information across all stages of the supply chain

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 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 :
Distribution networks usually have different ownership
structures. Attempting to optimize over a distribution
network with multiple enterprises requires great
coordinating skills for the success of the supply chain

2. The choice of a distribution network has very long-

term consequences
example
Auto Dealers of Cars in Automobile Industry
PC Industry

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 Distribution Networks in
Practice
3. Consider whether an exclusive distribution
strategy is advantageous
Choice between multiple competiting distributors
(lower margins and high competition)
and exclusive distributor (higher margins and low
competition)
4. Product, price, commoditization, and criticality
have an impact on the type of distribution
system preferred by customers
5. Integrate Internet with existing physical
network
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