Designing the Distribution Network in a

Supply Chain
Introduction

◦ As firms continue their searches for new ways to lower

costs and improve service to their customers, the issue of
where to locate logistics and manufacturing facilities has
never been more complex or critical.

◦ In addition to enhancing the efficiency and effectiveness

of a logistics/supply chain operation, the redesign of a
firm’s overall network can help to differentiate a firm in
the marketplace.
The Need for Long-Range Planning

◦ In the short run, a firm’s logistics/supply chain network

and the locations of its key facilities are fixed.

◦ Site availability, leases, contracts, and investments make

changing facility locations impractical in the short run.

◦ In the long run, however, the design of the overall

network must be thought of as variable.
Strategic Importance of Logistics/Supply Chain
Network Design

◦ All businesses operate in a very dynamic environment in

which change is the only constant.

◦ It is questionable whether any existing logistics/supply

chain network can be truly up to date.
Changing Customer Service Requirements
◦ Logistical requirements of customers are changing in
numerous ways.

◦ Some customers have intensified their demands for more

efficient and more effective logistics services.

◦ Others are seeking relationships with suppliers who can take

logistical capabilities and performance to new, unprecedented
levels.

◦ As a result, the need to reevaluate and redesign

logistics/supply chain networks is of great contemporary
interest.

◦ While customer service requirements may experience change,

the types of customers served may also evolve over time.
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
Channel Partners
Wholesalers
Dealers
Stockist
Van dealers
Selling agents
Manufacturing agents
Brokers
Retailers
Distribution Task: Exchange Function
 Buying
 Selling
 Title transfer
 Negotiations
Distribution Task: Logistical Function
 Storage
 Transportation
 Requirement scheduling
Distribution Task: Facilitating Function
 Credit financing
 Payment collection
 Promotion
 After sales service
 Market information
Channel Effectiveness
 Degree of control on channel partners
 Backup supply efficiency
 Degree of integration in channel activities
Channel Logistics Programme Variants

Delivery frequency
Distributor Delivery time
Stockist Lot size
Dealer Packaging
Agent Transportation mode
Retailer Customer service norms
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
Limitations to Channel Logistics Programme

Order processing time

Inventory norms
Transportation cost
 Network Design Decisions
Facility role
Facility location
Capacity allocation
Market and supply allocation
 Factors Influencing
Network Design Decisions
Strategic
Technological
Macroeconomic
Political
Infrastructure
Competitive
Logistics and facility costs
 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
Response time and number of facilities
Increasing the number of facilities moves them
closer to the end consumer. This reduces the
response time.
As Amazon has built warehouses, the average
time from the warehouse to the end consumer
has decreased.
McMaster-Carr provides 1-2 day coverage of
most of the U.S from 6 facilities.
W.W. Grainger is able to increase coverage to
same day delivery using about 370 facilities.
 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
 Response time and Number of Facilities

Number of
Facilities

Response Time
 Inventory Costs and Number of Facilities: Inventory costs increase, facility costs increase, and
transportation costs decrease as we increase the 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 decrease and then increase as we
increase the number of facilities.
The responsiveness improves as we increase the
number of facilities.
A supply chain should always operate above the
lowest cost point.
Operating beyond that point makes sense if the
revenue generated from better responsiveness
exceeds the cost of better responsiveness.
 Total Costs Related to
Number of Facilities
Total Costs
Total Costs

Facilities
Inventory
Transportation

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

Percent
Service Level
Within
Promised
Facilities
Time
Inventory
Transportati
on
Labor

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

Total Logistics Costs

Number of Facilities
A few examples from USA
Where inventory needs to be for a one week order response time - typical
results --> 1 DC

Customer
DC
Where inventory needs to be for a 5 day order response time - typical results
--> 2 DCs

Customer
DC
Where inventory needs to be for a 3 day order response time - typical results
--> 5 DCs

Customer
DC
Where inventory needs to be for a next day order response time - typical
results --> 13 DCs

Customer
DC
Where inventory needs to be for a same day / next day order response time -
typical results --> 26 DCs

Customer
DC
Three broad categories of distribution
Direct shipment to retailers, common
when the retail store requires fully loaded
trucks, but risk poling effects negated.
Cross-Docking, warehouses function as
inventory coordination points rather than
as inventory storage points
Inventory at warehousing
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
Manufacturer Storage with
Direct or Drop Shipping

Manufacturer

Retailer

Customers

Product Flow
Information Flow
Performance characteristics
 Manufacturer Storage with In-Transit Merge Network

Factories

Retailer In-Transit Merge by

Carrier

Customers

Product Flow
Information Flow
Performance characteristics
Distributor Storage with
Carrier Delivery

Factories

Warehouse Storage by
Distributor/Retailer

Customers

Product Flow
Information Flow
Performance characteristics
Distributor Storage with
Last Mile Delivery

Factories

Distributor/Retailer
Warehouse

Customers

Product Flow
Information Flow
Performance characteristics
 Manufacturer or Distributor Storage with
Customer Pickup

Factories

Retailer Cross Dock DC

Pickup Sites

Customers

Customer Flow
Product Flow
Information Flow
Performance characteristics
Network with Retail Storage with
Consumer Pick-Up
Performance characteristics
Comparative Performance of Delivery
Network Designs
Key: 1 corresponds to the strongest
performance and 6 the weakest
performance (ref: next slide)
 Comparative Performance of Delivery Network Designs
Retail Manufacturer Distributor Distributor Manufacturer
Storage Manufacturer Storage with Storage with storage with storage with
with Storage with In-Transit Package last mile pickup
Consumer Direct Shipping Merge Carrier delivery
Pickup 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 5 4 3 2 1 5
Experience
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
 Linking Product Characteristics and Customer Preferences to
Network Design
 When designing the delivery network we should account for product and
market characteristics.
 High demand products will have transportation cost play a significant
role. Use network with good transportation cost (retail stores)
 Very low demand products will have inventory play a significant role.
Use network with low inventory costs (direct shipping)
 Many product sources: transportation + information plays a role.
Distributor storage with package carrier
 Few product sources but high customization: manufacturer storage with
merge in transit
 High product variety: inventory cost will be significant. Use distributor
storage
 Low customer effort: Distributor storage with package carrier delivery or
last mile delivery depending upon desired response time
Linking Product Characteristics and
Customer Preferences to Network Design
Key: +2 = very suitable; +1 = somewhat
suitable; 0 = neutral; -1 = somewhat
unsuitable; -2 = very unsuitable (ref:
next slide)
Linking Product Characteristics and Customer Preferences to
Network Design

Retail Manufacturer Manufacturer Distributor Distributor Manufacturer

Storage Storage with Storage with Storage with storage with last storage with
with Direct In-Transit Package Carrier mile delivery pickup
Consumer Shipping Merge Delivery
Pickup
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
E-Business and the Distribution Network
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 Performance at
Dell
Impact of E-Business on Performance at
Amazon.com
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
 Variants Influencing Channel
Logistics Programmes
Channel length
 Levels of channel structure

Channel width
 Number of partners
 Geographical coverage

Marketing Strategy (Physical Distribution)

 Intensive
 Selective
 Exclusive