Chap 4 Designing the Distribution Network in a Supply Chain
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This document discusses factors that influence distribution network design and different design options for distribution networks. It outlines key considerations for distribution network design like meeting customer needs through good service and minimizing supply chain costs. Different distribution network designs are presented, including direct shipping from manufacturers, distribution through warehouses, and retail stores. Their relative strengths in areas like response time, product variety, and costs are compared. The impacts of e-business and real-world examples of distribution networks are also covered.
Chap 4 Designing the Distribution Network in a Supply Chain
- 1. © 2007 Pearson Education© 2007 Pearson Education Designing the Distribution Network in a Supply Chain 4-1 Chapter 4
- 2. © 2007 Pearson Education 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 • Summary of Learning Objectives 4-2
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- 11. © 2007 Pearson Education Factors Influencing Distribution Network Design • Performance of a distribution network should be evaluated along two dimensions – Customer needs that are met (customer service) • Response time (Time it takes for a customer to receive an order) • Product variety (Number of different products that are offered) • Product availability (Probability of having a product in stock) • Customer experience (Ease of placing and receiving orders) • Order visibility (Ability of customers to track their orders) • Returnability (Ease of returning unsatisfactory merchandise) – Cost of meeting customer needs (supply chain cost) • Inventory (All raw materials, WIP, and finished goods) • Transportation (Moving inventory from point to point) • Facility & handling (Locations where product is stored, assembled, or fabricated) • Information (Data and analysis of all drivers in a supply chain) 4-11
- 12. © 2007 Pearson Education Design Options For a Distribution Network • Two key decisions when designing a distribution network – Will the product be delivered to the customer location or picked up from a preordained site? – Will product flow through an intermediary? 4-12
- 13. © 2007 Pearson Education Manufacturer Storage with Direct Shipping (Drop Shipping) • Example: eBags • Products are shipped directly to the consumer from the manufacturer • Retailer is an information collector: – Passes orders to the manufacturers – It does not hold product inventory • Inventory is centralized at manufacturer • Drop shipping offers the manufacturer the opportunity to postpone customization • Effective for high value, large variety, low demand products • High transportation cost Retailer Manufacturers Consumers
- 14. © 2007 Pearson Education Manufacturer Storage with Direct Shipping and In-Transit Merge • Example: – Furniture retailers merge couches and coffee tables produced by different manufacturers – Dell merges a Dell PC with a Sony flat screen • Shipments from multiple manufactures are merged before making a single delivery to the consumer • Shipments to Mergers are larger so economies of scale is achieved • Mergers increase facility costs • Response time may go up RetailerMergers Consumers Manufacturers
- 15. © 2007 Pearson Education Distributor Storage with Carrier Delivery • Example: Amazon • Inventory is held at a warehouse which ships to customer by carriers • With respect to direct shipping – Inventory aggregation is less – Higher inventory costs – Facility costs are higher – Less information to track • Warehouses are physically closer to consumers which leads to – Faster response time – Lower transportation cost • Not effective for slow moving items Distributor Warehouse Manufacturers Consumers Distributor Warehouse
- 16. © 2007 Pearson Education Distributor Storage with Last Mile Delivery • Example: Milk delivery, Grocery delivery (Peapod, Albertsons), Denver Mattress • Warehouse delivers to customers instead of carrier – Warehouses are located closer to consumers – Transportation costs go up because warehouses are not as effective as package carriers in aggregating loads to have economies of scale • Warehouse may need to own a trucking fleet so the physical infrastructure costs are higher. – Products must be flowing fast to justify the infrastructure – Processing cost are high Distributor Warehouse Manufacturers Consumers Distributor Warehouse
- 17. © 2007 Pearson Education Manufacturer or Distributor Storage With Customer Pickup • Example: 7dream.com • Customers come to pick up sites (warehouse, retailer) to get the products – If consumers are willing to pick up the products, let them do so. Otherwise, they would be charged for the delivery costs • Order tracking is crucial. Consumers must be alerted when their order is ready for pick up. Once a consumer arrives at the pick up site, the products must be quickly located. • Significant amount of information is required • Increased handling cost Distributor Warehouse Manufacturers Consumers Distributor Warehouse
- 18. © 2007 Pearson Education Retail Storage with Customer Pickup • Example: Retail stores such as Wal-Mart and JCPenney • Customers pick up product from retailers – Low transportation cost – High facility cost – Relative easy returnability – Increased inventory cost • No order tracking necessary – If the product is available at the retailer, the consumer buys. Otherwise goes to another retailer • Effective for fast moving items Retailer Consumers RetailerRetailer Distributor Warehouse Manufacturers Distributor Warehouse
- 19. © 2007 Pearson Education Comparing Distribution Networks Retail storage with customer pickup Manufacturer storage with direct shipping Manufacturer storage with in transit merge Distributor storage with package delivery Distributor storage with last mile delivery Manufacturer storage with customer pickup Reponse time 1 4 4 3 2 4 Product variety 4 1 1 2 3 1 Product availability 4 1 1 2 3 1 Cusomter experience 1-5 4 3 2 1 5 Time to market 4 1 1 2 3 1 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 and handling 6 1 2 3 4 5 Information 1 4 4 3 2 5 1 = strongest performance 6 = weakest performance
- 20. © 2007 Pearson Education 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 4-20
- 21. © 2007 Pearson Education 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 4-21
- 22. © 2007 Pearson Education Summary of Learning Objectives • What are the key factors to be considered when designing the distribution network? • What are the strengths and weaknesses of various distribution options? • What roles do distributors play in the supply chain? 4-22