CHAPTER 4 : DESIGNING

DISTRIBUTION NETWORKS
AND APPLICATIONS TO
ONLINE SALES
Learning Objectives and Agenda
Identify the key factors to be considered when designing a
distribution network

Discuss the strengths and weaknesses of various

distribution options

Understand how online sales have affected the design of

distribution networks in different industries
The Role of Distribution in the
Supply Chain
 The Role of Distribution in the
Supply Chain
30-35 % of
the total cost
is
distribution
cost in
Apparel
retail and
Cement
industry
Appropriate Distribution network can be used to achieve variety of
supply chain objectives ranging from low cost to high responsiveness
Factors Influencing Distribution
Network Design
Distribution network performance is evaluated along two dimensions
Customer needs that are met
Cost of meeting customer needs
Two Dimensions of Distribution
Channel
Factors Influencing Distribution
Network Design
Elements of customer service Supply chain costs affected by
influenced by network structure: network structure:
Response time Inventories
Product variety Transportation
Product availability Facilities and handling
Customer experience Information
Order visibility
Returnability
Desired Response Time and
Number of Facilities
Inventory Costs and Number of
Facilities
Transportation Costs and
Number of Facilities
Facility Costs and Number of
Facilities
Logistics Cost, Response Time,
and Number of Facilities
Design Options for a Distribution
Network
Two key decisions
Will product be delivered to the customer location or picked up from a
prearranged site?
Will product flow through an intermediary (or intermediate location)?
One of six designs may be used
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/distributor storage with customer pickup
Retail storage with customer pickup
Manufacturer Storage with Direct
Shipping
Manufact
urer

Retailer

Customer
s

Product
Flow
Information
Flow
Manufacturer Storage with Direct
Shipping
Best suited for a large variety
of low demand high-value
items for which customers are
willing to wait for delivery and
accept several partial
shipments.

Likely
to have difficulty
handling returns, hurting
customer satisfaction.
In-Transit Merge Network
Factories

Retail In-Transit Merge

er by Carrier

Custom
ers

Product
Flow
Information
Flow
 In-Transit Merge Network
Best suited for low to medium
demand, high value items the
retailer is sourcing from a
limited number of
manufacturers.
Requiresa demand from each
manufacture to be effective
an can be difficult too
coordinate and implement.
Distributor Storage with Carrier
Delivery

Warehouse
Storage by
Distributor/Retail
er

Product
Information
Flow
Flow
 Distributor Storage with Carrier
Delivery
Well
suited for slow-to-fast
moving items with higher
demands and can handle
much higher level of variety
than a chain of retail stores.

Requiresa higher level of

inventory because of loss of
aggregation
Distributor Storage with Last Mile
Delivery

Distributor/Retail
er Warehouse

Product
Flow
 Distributor Storage with Last Mile
Delivery
Bestsuited when customer
orders are large enough to
provide economies of scale
and customers are willing to
pay for this convenience.

Hard to justify last mile

delivery to individual
customers on the basis of
efficiency or improved margin.
Manufacturer or Distributor Storage
with Customer Pickup
Factories

Cross Dock DC

Customer
Product
Flow
Information
Flow
 Manufacturer or Distributor Storage
with Customer Pickup
Main advantage is that it can
lower the delivery cost and
expand the set of products
sold and customers serviced.

Majorhurdle is increased
handling cost and complexity
at the pickup site.
 Retail Storage with Customer
Pickup
Most traditional type of supply
chain, inventory is stored locally
at retail stores.

Customers walk into the retails

tore or place order online or by
phone and pick t up at retail store.

Good response time due to local

storage.
 Comparative Performance of
Delivery Network Designs
Retail Storage Manufacturer Manufacturer Distributor Storage Distributor Manufacturer
with Customer Storage with Direct Storage with In- with Package storage with last storage with pickup
Pickup Shipping Transit Merge Carrier Delivery mile delivery

Response Time 1 4 4 3 2 4
Product Variety
4 1 1 2 3 1
Product Availability
4 1 1 2 3 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
 Comparative Performance of
Delivery Network Designs
Retail Storage Manufacturer Manufacturer Distributor Storage Distributor storage Manufacturer
with Customer Storage with Storage with In- with Package Carrier with last mile delivery storage with
Pickup Direct Shipping Transit 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
IMPACT OF ONLINE SALES ON CUSTOMER
SERVICE
RESPONSE TIME TO CUSTOMERS CUSTOMER EXPERIENCE
PHYSICAL PRODUCTS TAKE LONGER TO FULFILL THAN RETAIL STORE IMPROVED ACCESS, CUSTOMIZATION, AND CONVENIENCE

NO DELAY FOR INFORMATION GOODS FASTER TIME TO MARKET

PRODUCT VARIETY ORDER VISIBILITY

EASIER TO OFFER LARGER SELECTION
RETURNABILITY
HARDER WITH ONLINE ORDERS
PROPORTION OF RETURNS LIKELY TO BE MUCH HIGHER

PRODUCT AVAILABILITY
DIRECT SALES TO CUSTOMERS
AGGREGATING INVENTORY AND BETTER INFORMATION ON CUSTOMER
SOCIAL NETWORKING CHANNELS ALLOW FIRMS TO DIRECTLY PITCH
PREFERENCES IMPROVES PRODUCT AVAILABILITY
PRODUCTS AND PROMOTION
CUSTOMER EXPERIENCE
IMPROVED ACCESS, CUSTOMIZATION, AND CONVENIENCE FLEXIBLE PRICING, PRODUCT PORTFOLIO, AND PROMOTIONS
FASTER TIME TO MARKET MANAGE REVENUES FROM PRODUCT PORTFOLIO MORE EFFECTIVELY

ORDER VISIBILITY THAN TRADITIONAL CHANNELS

PROMOTION INFORMATION CAN BE CONVEYED TO CUSTOMERS
HARDER WITH ONLINE ORDERS
QUICKLY AND INEXPENSIVELY
PROPORTION OF RETURNS LIKELY TO BE MUCH HIGHER
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

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
 Online Sales Scorecard
Area Impact
Response time

Product variety

Product availability

Customer experience

Time to market

Order visibility

Direct sales

Flexible pricing, portfolio, promotions

Efficient funds transfer

Inventory

Facilities

Transportation

Information
Using Online Sales to Sell Computer Hardware: Dell
Impact of online sales on
customer service
Delay in fulfilling customer
request

Impact of online sales on

cost
Reduced inventory costs
Lower facility costs
Higher total transportation
costs
Incremental increase in
information costs
 Impact of Online Sales on Performance
Impact for Customized Impact for Standard
Area Hardware Low-Cost Hardware
Response time 1 2

Product variety +2 0

Product availability +1 +1

Customer experience +2 +1

Time to market +2 +1

Order visibility +1 0

Direct sales +2 +1

Flexible pricing, portfolio, promotions +2 +1

Efficient funds transfer +2 +2

Inventory +2 +1

Facilities +2 +1

Transportation 1 2

Information 0 0
 Using Online Sales to Using Online Sales
Sell Computer to Sell Books:
Hardware: Dell Amazon
A tailored supply chain network
Impact of online sales on customer service
A hybrid model can be very Internet has not shortened supply chains
effective Increased selection, convenience
More significant as hardware Impact of online sales on cost
becomes more of a commodity Reduced inventory costs
Lower facility costs
Take advantage of the strengths
Higher total transportation costs
of both online sales and
Increase in information costs
traditional retail and distribution
channels A supply chain network for books
Traditional bookstores pressured from both
ends
Amazon more efficient
 Using the Internet to Sell Groceries: Peapod
Impact of online sales on customer Impact of online sales on cost
service Reduced inventory costs
Sell convenience and the time Higher facility costs due to picking
savings operation
Offers less variety Significantly higher total
Creating a personalized shopping transportation costs
experience and customized Increase in information costs
advertising
Value andsales
of online promotions
to a traditional
grocery chain
Complement the strengths of their
existing network
Offer an entire array of services at
differing prices based on the
amount of work the customer does
 Using the Internet to Rent Movies: Netflix
Impact of online sales on Impact of online sales on cost
customer service Reduced inventory costs
Staggering selection and an Lower facility costs
excellent recommendation Considerably higher total
engine transportation costs,

Video streaming through a increased streaming will

variety of devices reduce transportation costs

Increase in information
Customers received their
costs
DVDs within 24 hours of
being shipped
Unique Way of Distribution of Movies
Distribution of Agricultural Products
Distribution of Agricultural Products
Typical Network
Distribution of Agricultural Products

Examples:

ITC
Food
Bazar
Amul
Distribution of Dairy Products
Distribution Network of FMCG Products

Project Shakti by HUL

 Distribution Network in Practice
The ownership structure of the distribution network can have as big as
an impact as the type of distribution network

It is important to have adaptable distribution networks

Product price, commoditization, and criticality affect the type of

distribution system preferred by customers

Integrate the Internet with the existing physical network

Food for Thought : Future of Distribution
THANK YOU