Supply Chain

Management
Chapter 4
Designing the Distribution
Network in a Supply Chain

1/4/2020 1
 Outline
The Role of Distribution in the Supply
Chain
Factors Influencing Distribution Network
Design
Design Options for a Distribution Network
The Value of Distributors in the Supply
Chain
Distribution Networks in Practice
Summary of Learning Objectives
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 Factors Influencing
Distribution Network Design
Elements of customer service influenced by network structure:
– Response time
– Product variety
– Product availability
– Customer experience
– Order visibility
– Return ability
Supply chain costs affected by network structure:
– Inventories
– Transportation
– Facilities and handling
– Information

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Service and Number of Facilities
Number of •Borders provides its customers books on same day
but requires about 400 stores (less capacity)
Facilities •Amazon, takes a week to deliver a book but uses
only 6 locations to store these books

Response Time
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 Inventory Costs and Number
of Facilities
Inventory
Costs

Amazon turns inventory 12 times a year

borders does it only twice a year

Number of facilities

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 Transportation Costs and
Number of Facilities
Transportation Inbound Transportation costs are lesser as compared
to outbound transportation cost as inbound lot sizes
Costs are typically larger

Cost of small inbound lot sizes

dominates from here

Number of facilities

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 Facility Costs and Number
of Facilities
Facility
Costs

Number of facilities

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 Total Costs Related to
Number of Facilities
Total Costs
Total Costs

Facilities
Inventory
Transportation

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

Total Logistics Costs

Number of Facilities
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 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
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 Manufacturer Storage with
Direct Shipping
Drop Shipping Model

Manufacturer

Retailer

Customers

Only information flows via retailer Product Flow

E.g: Online retailers such as eBags,
& Nordstrom.com Information Flow

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 Features
Ability to centralize inventory at manufacturer
High level of production availability
Low levels of inventory
Key issue is ownership structure of the
inventory as inventory allocation to retailer
removes the advantage of aggregation
Benefits are highest for high valued items
with unpredictable low demand
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Performance Characteristics (Cost)
Cost Factor Performance

Inventory Lower costs because of aggregation. Even large

if product customization can be postponed at the
manuf.
Transportation Higher because of inc. distance & disaggregate
shipping

Facilities & Lower facility cost & savings on handling cost

handling

Information Significant investment required in information

infrastructure

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 Performance Characteristics (Service)
Service Factor Performance

Response Time Long because of increased dist.

Product variety High

Product High
availability
Customer Good for home delivery but can suffer if order from several
Experience manuf. is sent as partial shipment
Time to market Fast

Order Visibility Difficult

Returnability Expensive & difficult to maintain

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 Manufacturer Storage with In-Transit Merge
Network
Combining of pieces of order coming from different locations to make a single delivery
to customer
Factories

Retailer In-Transit Merge by

Carrier

Customers

Used by direct sellers

like Dell Product Flow
Information Flow
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 Features
Aggregate inventories & postpone customization
is a significant advantage
Transportation costs are low as compared to
pure drop shipping
High coordination required
High facility cost in comparison to drop shipping
Best suited to low to medium demand, high
value items with unpredictable demand
Increase in no. of manufacturers increases the
complexity of coordination
Dell & Sony team is successful because product
variety is high but few sourcing locations with
relatively large total demand from each location
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 Performance (Cost)
Cost Factor Performance

Inventory Similar to drop shipping

Transportation Slightly less than drop shipping

Facilities & Higher than drop shipping

handling
Information Investment is slightly higher than
drop shipping
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 Performance Characteristics (Service)
Service Factor Performance
Response Time Long because of increased dist. ( marginally higher than
drop shipping)
Product variety High

Product availability High

Customer Better than drop shipping as single delivery is received

Experience
Time to market Fast

Order Visibility Difficult

Returnability Expensive & difficult to maintain

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 Distributor Storage with
Carrier Delivery
Inventory is held by retailers or distributors in intermediate warehouses & package
carriers are used for transportation of goods
Factories

Warehouse Storage by
Distributor/Retailer

Customers

Amazon.com, WW Grainger
use it along with Product Flow
Drop Shipping model Information Flow
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 Features
Higher inventory
Suitable for products with higher demand
Amazon & W. W Grainger stores medium & fast
moving products at their warehouse while slow
further upstream
Less transp. cost for FM goods as compared to
manuf. storage
Less complex information infrastructure as
distributor acts as buffer b/w manuf. & customer

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 Performance (Cost)
Cost Factor Performance

Inventory Higher than manuf. storage.

Difference not larger for FM goods
Transportation Lower than manuf. storage.
Reduction is highest for FM goods
Facilities & Higher than manuf. storage
handling
Information Simpler infrastructure compared to
manuf. storage
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 Performance Characteristics (Service)
Service Factor Performance

Response Time Faster than manuf. storage

Product variety Lower than manuf. storage

Product Higher cost to provide the same level of availability as

availability manuf. storage
Customer Better than manuf. storage with drop shipping
Experience
Time to market Higher than manuf. storage

Order Visibility Easier than manuf. storage

Returnability Easier than manuf. storage

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 Distributor Storage with last Mile Delivery
Distributor/Retailer delivers at door step instead of package carrier

Factories

Distributor/Retailer
Warehouse

Grocery & milk delivery Customers

Product Flow
Information Flow

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 Performance (Cost)
Cost Factor Performance

Inventory Higher than distributor storage

with package delivery
Transportation High cost given minimal scale of
economies. Higher than any other
option
Facilities & Higher than manuf./distributor
handling storage with package delivery but
less than chain of retail stores
Information Similar to distributor storage with
package delivery
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 Performance Characteristics (Service)
Service Factor Performance

Response Time Very quick (same or next day)

Product variety Lower than package delivery but larger than retail stores

Product availability More expensive to provide availability than any other except
retail stores
Customer Very good, particularly for bulky items
Experience
Time to market slightly higher than distributor storage with package delivery

Order Visibility Easier than with package delivery

Returnability Easier to implement but harder than retail network

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 Manufacturer or Distributor
Storage with Customer Pickup
Factories

Retailer Cross Dock DC

Pickup Sites

Customers

7-eleven Customer Flow

Product Flow
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Information Flow
 Performance (Cost)
Cost Factor Performance

Inventory Can match any other design

depending on location of inventory
Transportation Lower than package delivery,
especially if using an existing
network
Facilities & High if new facilities have to be
handling build
Information Significant investment

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 Performance Characteristics (Service)
Service Factor Performance

Response Time Similar to package delivery

Product variety Similar to manuf. or dist. Storage options

Product Similar to manuf. or dist. Storage options

availability
Customer Lower than any other because of lack of home delivery
Experience
Time to market Similar to mauf. Storage options

Order Visibility Difficult but essential

Returnability Somewhat easier given that pickup location can handle

returns
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 Local Storage at Consumer Pickup
Sites
Most traditional
Inventory stored at retail stores
W.W Grainger (B2B) & Albertsons –
Grocery (B2C)

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 Performance (Cost)
Cost Factor Performance

Inventory Higher than all other options

Transportation Lower than all other options

Facilities & Higher than other options. The

handling increase in handling cost at the
pickup site can be significant for
online & phone orders
Information Some investment in infra.
Required for online & phone
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 Performance Characteristics (Service)
Service Factor Performance

Response Time Same day (immediate) pickup possible for items stored
locally at pick up site
Product variety Lower than all other options

Product More expensive to provide than all other options

availability
Customer Related to whether shopping is viewed as +ve or –ve
Experience experience
Time to market Highest

Order Visibility Trivial for in store orders. Difficult for online or phone
orders

Returnability Easiest

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

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 Impact of E-Business on Customer Service
Response time to customers
Product Variety
Customer Service: Access, customization &
convenience
Faster time to market
Order Visibility
Returnability
Direct Sales to Customers
Flexible pricing, Product Portfolio, & Promotions
Efficient Funds Transfer

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 Impact of E-Business on Cost
Inventory- low inventory, aggregation of
inventory far from customer ( high for low
demand & high variability and Vice versa),
postponement
Facilities- cost related to no. & location of
facilities in a network: centralization reduces the
facility cost
- Cost related to operations in facilities: customer
participation reduces not required resources
hence lower op. costs. Exceptionally in network
of customer pickup e-business increases the
cost of operation like in Peapod

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 Impact of E-Business on Cost
Transportation: reduces for digital
products but increases cost for
transportation on outbound side due to
aggregation as compared to inbound
transportation
Information: Increase but benefits can be
realized . Some infrastructure may already
be there.
Value of setting up an E-Business may not be same . E.g: Dell & Webvan

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 E-Business:Dell

Customer Service
less responsive as compared to other sellers having push strategy
No assistance in selecting PC
Exploits responsiveness of e-business
Wide variety
Customization
Product to market easy (adv. In short life cycles)
Retailer & Distributor Margin are reduced & Dell’s profit increased
Pays to supplier’s in 30 days while receives payment from
customers much earlier so its doing business on a negetive working
capital

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E-Business:Cost (DELL/PC Industry)

INVENTORY COSTS
• Aggregation of inventory in few locations
due to e-business
• Pull system is possible
• Assembly postponement
• Component commonality

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E-Business:Cost (DELL/PC Industry)
FACILITY COSTS
• No physical distribution or retail outlets
• Customer participation is more in
manufacturing & order placement so less
processing cost
• Call center representatives are very less
due to high customer participation

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E-Business:Cost (DELL/PC Industry)
TRANSPORTATION COST
• Total transportation cost are higher
• Higher outbound transportation cost due to
disagregation
INFORMATION COST
• High cost
Things could have been better: GATEWAY’ s FAILURE

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 E-Business: Performance of Dell
AREA IMPACT
Response Time -1
Product Variety +2
Customer Experience +1
Product Availability +1
Time to Market +2
Order Visibility +1
Direct Sales +2
Flexible pricing, portfolio, +2
promotions
Efficient funds transfer +2
Inventory +2
Facilities +2
Transportation -1
Information
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0 41
 E-Business: Performance of Amazon.com
AREA IMPACT
Response Time -1
Product Variety +2
Customer Experience +1
Product Availability +1
Time to Market +1
Order Visibility 0
Direct Sales 0
Flexible pricing, portfolio, +1
promotions
Efficient funds transfer 0
Inventory +1
Facilities +1
Transportation -2
Information
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 E-Business: Performance of Peapod
AREA IMPACT
Response Time -1
Product Variety 0
Customer Experience +1
Product Availability 0
Time to Market 0
Order Visibility -1
Direct Sales 0
Flexible pricing, portfolio, +1
promotions
Efficient funds transfer 0
Inventory 0
Facilities -1
Transportation -2
Information
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-1 43
 E-Business: Performance of Grainger.com
AREA IMPACT
Response Time 0
Product Variety +2
Customer Experience +1
Product Availability 0
Time to Market +1
Order Visibility +1
Direct Sales 0
Flexible pricing, portfolio, +1
promotions
Efficient funds transfer 0
Inventory 0
Facilities +1
Transportation 0
Information
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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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