Designing the Distribution Network in

a Supply Chain
Veeresh Tripathi
Assistant Professor,
S. M. S. - Varanasi
 Design For Logistics:
Many firms now consider SCM issues in the design phase of
product development

One example is Office furnitures & computer tables , furniture

comes in simple to assemble kits that allows them to store the
furniture in the same warehouse-like locations where they are
displayed and sold

Shipping container designs for FedEx and UPS – airfreight

Efficient Design of the Supplier Base
Part of streamlining the supply chain is reducing the number and
variety of suppliers
The Japanese have been very successful in this arena (they’re an Island
– so getting materials there has always been a problem)
In the mid 1980’s Xerox trimmed its number of suppliers from 5,000 to
400.
Overseas suppliers were chosen based on cost
Local suppliers were chosen based on delivery speed
In 1996, Ford Motor reduced their supplier count by more than 60%.
Network Design Phases
Phase 1 - define a supply chain strategy
Capabilities to support supply chain strategy
Phase 2 – define the regional facility configuration.
Identify regions, potential roles & capacity
Phase 3 – select desirable sites.
Sites within each region to choose for facilities
Phase 4 – location choice.
Select precise locations and allocate capacity.
Distribution in SC
The steps taken to move and store a product from the
supplier stage to the customer stage in a supply chain.
Factors Influencing Distribution Network Design
Two dimensions for evaluation:
◦Customer needs that are met
◦Cost of meeting customer needs
Impact on customer service vs associated
cost
 Factors Influencing
Distribution Network Design
Elements of customer service influenced by network structure:
◦ Response time
◦ Product variety
◦ Product availability
◦ Customer experience (ease of placing & receiving orders)
◦ Order visibility (ability to track orders)
◦ Returnability (ability to return unsatisfactory orders through network)
Supply chain costs affected by network structure:
◦ Inventories
◦ Transportation
◦ Facilities and handling
◦ Information
 Relevant trade-offs in choice of distribution system:
Total Logistics Costs vs
Number of Facilities Total logistics Costs
Total Costs

Facilities
Inventory
Transportation

Number of Facilities
with Number of Facilities

Response Time

Total Logistics Costs

Number of Facilities
 SC Network Design Decisions
1. Facility Role.
2. Facility Location.
3. Capacity Allocation.
4. Market & Supply Allocation.
This relates to the choice of location of supply points near demand points,
Including production facilities, stocking points and sourcing points in creating
a supply chain. It impacts revenue, cost and level of service. In general,
network-related decisions are based on manufacturing costs, taxes, duties
and duty drawback, tariffs, local content, distribution costs, and production
limitations.
 Factors Influencing Network Design Decisions
1. Strategic factors.
• Offshore facility (low-cost facility for export production)
• Source facility (low-cost facility for global production)
• Server facility (regional production facility)
• Contributor facility (regional production facility with development skills)
• Outpost facility (regional production facility built to gain local skills)
• Lead facility (facility that leads in development and process technologies)
2. Technological factors
3. Macroeconomic factors
• Tariffs & tax incentives
• Exchange rates & demand risk
4. Political factors
5. Infrastructure factors
6. Competitive factors
• Positive Externalities between firms
• Locating to split the market.
7. Customer response time & local presence.
8. Logistics & facility costs.
 Design Options for a Distribution Network

Manufacturer Storage with Direct Shipping (ex.dell)

Manufacturer Storage with Direct Shipping and In-Transit Merge
(ex. Dell pc with sony TFT)
Distributor Storage with Carrier Delivery (ex.amazon)
Distributor Storage with Last Mile Delivery (ex.Fedex.)
Manufacturer or Distributor Storage with Consumer Pickup
(Automobiles)
Retail Storage with Consumer Pickup (Super Bazaars)
In-Transit Merge Network
Factories

Retailer In-Transit Merge by

Carrier

Customers

Product Flow
Information Flow
Distributor Storage with
Carrier Delivery

Factories

Warehouse Storage by
Distributor/Retailer

Customers

Product Flow
Information Flow
Distributor Storage with
Last Mile Delivery

Factories

Distributor/Retailer
Warehouse

Customers

Product Flow
Information Flow
Manufacturer or Distributor Storage with Customer
Pickup

Factories

Retailer Cross Dock DC

Pickup Sites

Customers

Customer Flow
Product Flow
Information Flow
 Comparative Performance of Delivery
Network Designs
Distributor Distributor
Retail Storage Manufacturer Manufacturer Manufacturer
with Customer Storage with Storage with storage with storage with
Storage with In-
Pickup Package Carrier last mile pickup
Direct Shipping Transit Merge
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 Experience 5
5 4 3 2 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 & Handling 6 1 2 3 4 5
Information 1 4 4 3 2 5
*Ranking – 1 indicates best performance along given dimension.
Linking Product Characteristics and Customer
Preferences to Network Design
Retail Manufacturer Manufacturer Distributor Distributor Manufacturer
Storage with Storage with Storage with Storage with storage with last storage with
Customer Direct In-Transit Package Carrier mile delivery pickup
Pickup Shipping Merge Delivery
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
*Ranking – +2 very suitable, +1 somewhat suitable, 0 neutral , -1 somewhat unsuitable , -2 very unsuitable.
 Conventional Network

Materials Customer
Vendor Finished Customer
DC Store
DC Goods DC DC

Customer
Component Store
Vendor Manufacturing
DC Plant Customer Customer
Warehouse DC Store
Components
DC Customer
Vendor Store
DC Finished
Customer
Goods DC
Final DC Customer
Assembly Store
Tailored Network: Multi-Echelon
Finished Goods Network
Local DC
Cross-Dock Store 1
Regional Customer 1
Finished DC
Goods DC Store 1
Local DC
Cross-Dock
National Store 2
Customer 2
Finished
DC
Goods DC
Local DC Store 2
Cross-Dock
Regional
Finished Store 3
Goods DC

Store 3
Network Optimization
Allocating demand to production facilities
Locating facilities and allocating capacity
Key Costs:

• Fixed facility cost

• Transportation cost
• Production cost
• Inventory cost
• Coordination cost
Which plants to establish? How to configure the network?
 HUL outbound logistics-snapshot
All-India buffer depot (tier-1), regional depot (tier-2), JIT depots
(tier-3)
Hub & Spoke system
Hub – mother & regional depots
Spoke – radiates to stockists, retailers
Slow moving items sent to All-India buffer depots for FTL delivery
to regional depots.
Small lots from all-India and regional depots sent to JIT godowns
Ownership of stockists mostly outsourced to clearing and
forwarding agents (C&FA) – responsible for order processing &
replenishment
Connectivity in outbound logistics and distribution at
HLL, now HUL
Raw material Packaging materials
suppliers supplier

Head Office Manufacturing units- All-India buffer

In-house, Third party depot
Rolling Sales
forecast and
marketing
plan
Regional Regional buffer depot
offices
JIT godowns

Stockists

Wholesalers Retailers

Consumers
 HP Supply chain
Everyday HP delivers 1.3 million inkjet cartridges, 1,10,000 printers,
75,000 PC systems, and 3500 servers.
 As per data of 2008, HP ships more than 1 million printers per week
and more than 4.8 million PC units annually.
Out of 7000 suppliers, more than 600 suppliers are contracted for
manufacturing and materials supply located at more than 1200 locations
worldwide.
75% of total expenditure on inputs sourced from suppliers of Asian
Pacific regions, 20% from North, central & South America, and 5% from
Europe, Middle East & Africa
HP spend about $50 billion or about 64% of sales revenue on supply
chain activities
The network of supply chain at HP
Supplier Retaile Consumer
IC Mfg US DCs
s r s
Supplier Europe Retaile Consumer
PCBs FAT
s DCs r s
Supplier Far Retaile Consumer
Subassembly East
s r s
DCs

Suppliers

PCB = Printed Circuit IC Mfg = Integrated circuit

Boards Manufacturing
Dcs = Distribution Centres FAT = Final Assembly and Testing
Any
?