Chapter 4

Designing the Distribution Network

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
• Summary of Learning Objectives

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 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)

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 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?

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 Manufacturer Storage with Direct
Shipping (Drop Shipping)
• Example: eBags
Manufacturers • Products are shipped directly to
the consumer from the
manufacturer
• Retailer is an information
collector:
– Passes orders to the
manufacturers
Retailer – It does not hold product inventory
• Inventory is centralized at
manufacturer
• Drop shipping offers the
manufacturer the opportunity to
postpone customization
Consumers • Effective for high value, large
variety, low demand products
• High transportation cost
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 Manufacturer Storage with Direct
Shipping and In-Transit Merge
• Example:
– Furniture retailers merge
Manufacturers couches and coffee tables
produced by different
manufacturers
– Dell merges a Dell PC with a Sony
flat screen
• Shipments from multiple
Mergers manufactures are merged before
Retailer
making a single delivery to the
consumer
• Shipments to Mergers are larger
so economies of scale is achieved
• Mergers increase facility costs
Consumers • Response time may go up

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 Distributor Storage with Carrier
Delivery
• Example: Amazon
Manufacturers • Inventory is held at a warehouse
which ships to customer by
carriers
• With respect to direct shipping
– Inventory aggregation is less
– Higher inventory costs
Distributor Distributor
Warehouse Warehouse – Facility costs are higher
– Less information to track
• Warehouses are physically closer
to consumers which leads to
– Faster response time
Consumers – Lower transportation cost
• Not effective for slow moving
items
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 Distributor Storage with Last Mile
Delivery
• Example: Milk delivery, Grocery
delivery (Peapod, Albertsons),
Denver Mattress
Manufacturers • 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
Distributor Distributor aggregating loads to have
economies of scale
Warehouse Warehouse
• 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
Consumers

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 Manufacturer or Distributor
Storage With Customer Pickup
• Example: 7dream.com
• Customers come to pick up sites
Manufacturers (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.
Distributor Distributor Consumers must be alerted when
Warehouse Warehouse 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
Consumers • Increased handling cost

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 Retail Storage with Customer
Pickup
• Example: Retail stores such as
Wal-Mart and JCPenney
Manufacturers • Customers pick up product from
retailers
– Low transportation cost
– High facility cost
– Relative easy returnability
– Increased inventory cost
Distributor Distributor • No order tracking necessary
Warehouse Warehouse – If the product is available at the
retailer, the consumer buys.
Otherwise goes to another
retailer
Retailer Retailer Retailer
• Effective for fast moving items

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 Comparing Distribution Networks
Retail Manufacturer Manufacturer Distributor Distributor Manufacturer
storage with storage with storage with storage with storage with storage with
customer direct in transit package last mile customer
pickup shipping merge delivery delivery 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
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6 = weakest performance
 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

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 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
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 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?

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