Design of Distribution Networks in Supply Chain

Design of Distribution Network

Distribution in Supply Chain
• Distribution – the steps taken to move and
store a product from the supplier stage to the
customer stage in a supply chain.
• Drives profitability by directly affecting supply
chain cost and the customer experience.
• Choice of distribution network can achieve
supply chain objectives from low supply chain
cost to high responsiveness.

Factors Influencing
Distribution Network Design
• Distribution network performance is evaluated along two
dimensions:
1. Value provided to the customer
2. Cost of meeting customer needs
• A firm must evaluate the impact of distribution network on
customer service and cost for different distribution network
options.
• Profitability of the delivery network determined by revenue
from customer needs satisfied and the network costs.

Factors Influencing
• Customer value (or) service is influenced by
the following aspects of network structure:
– Response time
– Product variety
– Product availability
– Customer experience
– Time to market
– Order visibility
– Returnability

Factors Influencing
• Changing the distribution network affects
the following supply chain costs:
– Inventories
– Transportation
– Facilities and handling
– Information
• Sourcing & pricing too affect the choice of
distribution networks.

Desired Response Time and Number of
Facilities

Inventory Costs and Number
of Facilities

Transportation Costs and
Number of Facilities
• Inbound transportation costs
• Outbound transportation costs

Facility Costs and Number
of Facilities

Logistics Cost, Response Time, and Number
of Facilities
Total Logistics Cost = Facility Cost +
Transportation Cost + Inventory Cost

Design Options for a
Distribution Network
• Distribution network choices from the
manufacturer to the end consumer
• Two key decisions
1. Will product be delivered to the customer
location or picked up from a prearranged site?
2. Will product flow through an intermediary (or
intermediate location)?

Design Options for a
Distribution Network
• One of six designs may be used
1. Manufacturer storage with direct shipping
2. Manufacturer storage with direct shipping and
in-transit merge
3. Distributor storage with carrier delivery
4. Distributor storage with last-mile delivery
5. Manufacturer/distributor storage with customer
pickup
6. Retail storage with customer pickup

Manufacturer Storage with
Direct Shipping (Drop Shipping)

Manufacturer Storage with Direct Shipping
Network
Cost Factor Performance
Inventory Lower costs because of aggregation. Benefits of
aggregation are highest for low-demand, high-value
items. Benefits are large if product customization can
be postponed at the manufacturer.
Transportation Higher transportation costs because of increased
distance and disaggregate shipping.
Facilities and handling Lower facility costs because of aggregation. Some
saving on handling costs if manufacturer can manage
small shipments or ship from production line.
Information Significant investment in information infrastructure to
integrate manufacturer and retailer.

Manufacturer Storage with Direct Shipping Network
Service Factor Performance
Response time Long response time of one to two weeks because of
increased distance and two stages for order processing.
Response time may vary by product, thus complicating
receiving.
Product variety Easy to provide a high level of variety.
Product availability Easy to provide a high level of product availability because
of aggregation at manufacturer.
Customer
experience
Good in terms of home delivery but can suffer if order from
several manufacturers is sent as partial shipments.
Time to market Fast, with the product available as soon as the first unit is
produced.
Order visibility More difficult but also more important from a customer
service perspective.
Returnability Expensive and difficult to implement.

In-Transit Merge
Inventory Similar to drop-shipping.
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.

In-Transit Merge
Response time Similar to drop-shipping; may be marginally higher.
Product variety Similar to drop-shipping.
Product availability Similar to drop-shipping.
Customer experience Better than drop-shipping because only a single
delivery has to be received.
Time to market Similar to drop-shipping.
Order visibility Similar to drop-shipping.
Returnability Similar to drop-shipping.

Distributor Storage with
Carrier Delivery

Carrier Delivery
Inventory Higher than manufacturer storage. Difference is
not large for faster moving items but can be
large for very slow-moving items.
Transportation Lower than manufacturer storage. Reduction is
highest for faster moving items.
Facilities and
handling
Somewhat higher than manufacturer storage.
The difference can be large for very slow-
moving items.
Information Simpler infrastructure compared to
manufacturer storage.

Carrier Delivery
Response time Faster than manufacturer storage.
Product variety Lower than manufacturer storage.
Product
availability
Higher cost to provide the same level of availability
as manufacturer storage.
Customer
experience
Better than manufacturer storage with drop-
shipping.
Time to market Higher than manufacturer storage.
Order visibility Easier than manufacturer storage.
Returnability Easier than manufacturer storage.

Last Mile Delivery

Last Mile Delivery
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 storage
or distributor storage with package carrier
delivery, but lower than a chain of retail stores.
Information Similar to distributor storage with package
carrier delivery.

Last Mile Delivery
Response time Very quick. Same day to next-day delivery.
Product variety Somewhat less than distributor storage with package
carrier delivery but larger than retail stores.
Product
availability
More expensive to provide availability than any other
option except retail stores.
Customer
experience
Very good, particularly for bulky items. Slightly higher
than distributor storage with package carrier delivery.
Time to market Less of an issue and easier to implement than
manufacturer storage or distributor storage with
package carrier delivery.
Order visibility Easier to implement than other previous options.
Returnability Harder and more expensive than a retail network.

Manufacturer or Distributor Storage with
Customer Pickup

Customer Pickup
Inventory Can match any other option, depending on the
location of inventory.
Transportation Lower than the use of package carriers, especially
if using an existing delivery network.
Facilities and
handling
Facility costs can be high if new facilities have to
be built. Costs are lower if existing facilities are
used. The increase in handling cost at the pickup
site can be significant.
Information Significant investment in infrastructure required.

Customer Pickup
Response time Similar to package carrier delivery with manufacturer or
distributor storage. Same-day delivery 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.
Experience is sensitive to capability of pickup location.
Time to market Similar to manufacturer storage options.
Order visibility Difficult but essential.
Returnability Somewhat easier given that pickup location can handle returns.

Retail Storage with Customer Pickup
Inventory Higher than all other options.
Transportation Lower than all other options.
Facilities and
handling
Higher than 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.

Retail Storage with Customer Pickup
Response time Same-day (immediate) pickup 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.
Time to market Highest among distribution options.
Order visibility Trivial for in-store orders. Difficult, but essential, for
online and phone orders.
Returnability Easier than other options because retail store can
provide a substitute.

Impact of Online Sales on Customer Service
• Response time to customers
– Physical products take longer to fulfill than retail store
– Instantaneous access to digital content
• Product variety
– Easier to offer larger selection
• Product availability
– Aggregating inventory and better information on
customer preferences improves product availability

• Customer experience
– Improved access, customization, and convenience
• Faster time to market
• Order Visibility
• Returnability
– Harder with online orders
– Proportion of returns likely to be much higher

• Direct Sales to Customers
– Social networking channels allow firms to directly pitch
products and promotion
• Flexible Pricing, Product Portfolio, and
Promotions
– Manage revenues from product portfolio more
effectively than traditional channels
– Promotion information can be conveyed to customers
quickly and inexpensively
• Efficient Funds Transfer

Impact of Online Sales on Cost
• Inventory
– Lower inventory levels if customers will wait
– Postpone variety until after the customer order is
received
• Facilities
– Costs related to the number and location of
facilities in a network
– Costs associated with the operations in these
facilities

Impact of Online Sales on Cost
• Transportation
– Lower cost of “transporting” information goods in
digital form
– For non-digital, aggregating inventories increases
outbound transportation
• Information
– Share demand, planning, and forecasting
information throughout its supply chain
– Additional costs to build and maintain the
information infrastructure

Using Online Sales to Sell Books: Amazon
• Impact of online sales on customer
service
– Internet has not shortened supply chains
– Increased selection, convenience
• Impact of online sales on cost
– Reduced inventory costs
– Lower facility costs
– Higher total transportation costs
– Increase in information costs

Impact of Online Sales on Performance
Area Physical books e-books
Response time –1 +1
Product variety +2 +2
Product availability +1 +2
Customer experience +1 +1
Time to market +1 +2
Order visibility 0 0
Direct sales 0 +1
Flexible pricing, portfolio, promotions +1 +1
Efficient funds transfer 0 0
Inventory +1 +2
Facilities +1 +1
Transportation –2 +1
Information –1 –1

Using Online Sales to Sell Books: Amazon
• A supply chain network for books
– Traditional bookstores pressured from both ends
– Amazon more efficient

Using the Internet to Rent Movies: Netflix
• Impact of online sales on customer
service
– Staggering selection and an excellent
recommendation engine
– Video streaming through a variety of devices
– Customers received their DVDs within 24
hours of being shipped

Using the Internet to Rent Movies: Netflix
• Impact of online sales on cost
– Reduced inventory costs
– Lower facility costs
– Considerably higher total transportation costs,
increased streaming will reduce transportation
costs
– Increase in information costs

Impact of Online Sales on Performance
Area Impact for DVDs
Impact for Digital
Content
Response time –1 +2
Product variety +2 +2
Product availability +1 +2
Customer experience +1 +1
Time to market –1 –1
Order visibility 0 0
Direct sales 0 0
Flexible pricing, portfolio, promotions +1 +1
Efficient funds transfer 0 0
Inventory +2 +2
Facilities +1 +1
Transportation –2 0
Information –1 –1

Distribution Networks in Practice
• 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

Design of Distribution Networks in Supply Chain

More Related Content

Similar to Design of Distribution Networks in Supply Chain (20)

Recently uploaded (20)

Design of Distribution Networks in Supply Chain

Editor's Notes