Designing the Distribution Network in a
Supply Chain
Introduction
◦ As firms continue their searches for new ways to lower
costs and improve service to their customers, the issue of
where to locate logistics and manufacturing facilities has
never been more complex or critical.
◦ In addition to enhancing the efficiency and effectiveness
of a logistics/supply chain operation, the redesign of a
firm’s overall network can help to differentiate a firm in
the marketplace.
The Need for Long-Range Planning
◦ In the short run, a firm’s logistics/supply chain network
and the locations of its key facilities are fixed.
◦ Site availability, leases, contracts, and investments make
changing facility locations impractical in the short run.
◦ In the long run, however, the design of the overall
network must be thought of as variable.
Strategic Importance of Logistics/Supply Chain
Network Design
◦ All businesses operate in a very dynamic environment in
which change is the only constant.
◦ It is questionable whether any existing logistics/supply
chain network can be truly up to date.
Changing Customer Service Requirements
◦ Logistical requirements of customers are changing in
numerous ways.
◦ Some customers have intensified their demands for more
efficient and more effective logistics services.
◦ Others are seeking relationships with suppliers who can take
logistical capabilities and performance to new, unprecedented
levels.
◦ As a result, the need to reevaluate and redesign
logistics/supply chain networks is of great contemporary
interest.
◦ While customer service requirements may experience change,
the types of customers served may also evolve over time.
The Role of Distribution
in the Supply Chain
Distribution: the steps taken to move and store a
product from the supplier stage to the customer
stage in a supply chain
Distribution directly affects cost and the customer
experience and therefore drives profitability
Choice of distribution network can achieve supply
chain objectives from low cost to high
responsiveness
Examples: Wal-Mart, Dell, Proctor & Gamble,
Grainger
Channel Partners
Wholesalers
Dealers
Stockist
Van dealers
Selling agents
Manufacturing agents
Brokers
Retailers
Distribution Task: Exchange Function
Buying
Selling
Title transfer
Negotiations
Distribution Task: Logistical Function
Storage
Transportation
Requirement scheduling
Distribution Task: Facilitating Function
Credit financing
Payment collection
Promotion
After sales service
Market information
Channel Effectiveness
Degree of control on channel partners
Backup supply efficiency
Degree of integration in channel activities
Channel Logistics Programme Variants
Delivery frequency
Distributor Delivery time
Stockist Lot size
Dealer Packaging
Agent Transportation mode
Retailer Customer service norms
Factors Influencing
Distribution Network Design
Distribution network performance
evaluated along two dimensions at the
highest level:
◦ Customer needs that are met
◦ Cost of meeting customer needs
Distribution network design options must
therefore be compared according to their
impact on customer service and the cost to
provide this level of service
Limitations to Channel Logistics Programme
Order processing time
Inventory norms
Transportation cost
Network Design Decisions
Facility role
Facility location
Capacity allocation
Market and supply allocation
Factors Influencing
Network Design Decisions
Strategic
Technological
Macroeconomic
Political
Infrastructure
Competitive
Logistics and facility costs
Factors Influencing
Distribution Network Design
Elements of customer service influenced by network structure:
◦ Response time
◦ Product variety
◦ Product availability
◦ Customer experience
◦ Order visibility
◦ Returnability
Supply chain costs affected by network structure:
◦ Inventories
◦ Transportation
◦ Facilities and handling
◦ Information
Response time and number of facilities
Increasing the number of facilities moves them
closer to the end consumer. This reduces the
response time.
As Amazon has built warehouses, the average
time from the warehouse to the end consumer
has decreased.
McMaster-Carr provides 1-2 day coverage of
most of the U.S from 6 facilities.
W.W. Grainger is able to increase coverage to
same day delivery using about 370 facilities.
The Cost-Response Time Frontier
Hi Local FG
Mix
Regional FG
Local WIP
Cost Central FG
Central WIP
Central Raw Material and Custom production
Custom production with raw material at suppliers
Low
Low Response Time Hi
Response time and Number of Facilities
Number of
Facilities
Response Time
Inventory Costs and Number of Facilities: Inventory costs increase, facility costs increase, and
transportation costs decrease as we increase the number of facilities.
Inventory
Costs
Number of facilities
Transportation Costs and
Number of Facilities
Transportation
Costs
Number of facilities
Facility Costs and Number
of Facilities
Facility
Costs
Number of facilities
Total Costs Related to
Number of Facilities
Total costs decrease and then increase as we
increase the number of facilities.
The responsiveness improves as we increase the
number of facilities.
A supply chain should always operate above the
lowest cost point.
Operating beyond that point makes sense if the
revenue generated from better responsiveness
exceeds the cost of better responsiveness.
Total Costs Related to
Number of Facilities
Total Costs
Total Costs
Facilities
Inventory
Transportation
Number of Facilities
Cost Buildup as a Function of Facilities
Total Costs
Cost of Operations
Percent
Service Level
Within
Promised
Facilities
Time
Inventory
Transportati
on
Labor
Number of Facilities
Variation in Logistics Costs and Response
Time with Number of Facilities
Response Time
Total Logistics Costs
Number of Facilities
A few examples from USA
Where inventory needs to be for a one week order response time - typical
results --> 1 DC
Customer
DC
Where inventory needs to be for a 5 day order response time - typical results
--> 2 DCs
Customer
DC
Where inventory needs to be for a 3 day order response time - typical results
--> 5 DCs
Customer
DC
Where inventory needs to be for a next day order response time - typical
results --> 13 DCs
Customer
DC
Where inventory needs to be for a same day / next day order response time -
typical results --> 26 DCs
Customer
DC
Three broad categories of distribution
Direct shipment to retailers, common
when the retail store requires fully loaded
trucks, but risk poling effects negated.
Cross-Docking, warehouses function as
inventory coordination points rather than
as inventory storage points
Inventory at warehousing
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
Manufacturer Storage with
Direct or Drop Shipping
Manufacturer
Retailer
Customers
Product Flow
Information Flow
Performance characteristics
Manufacturer Storage with In-Transit Merge Network
Factories
Retailer In-Transit Merge by
Carrier
Customers
Product Flow
Information Flow
Performance characteristics
Distributor Storage with
Carrier Delivery
Factories
Warehouse Storage by
Distributor/Retailer
Customers
Product Flow
Information Flow
Performance characteristics
Distributor Storage with
Last Mile Delivery
Factories
Distributor/Retailer
Warehouse
Customers
Product Flow
Information Flow
Performance characteristics
Manufacturer or Distributor Storage with
Customer Pickup
Factories
Retailer Cross Dock DC
Pickup Sites
Customers
Customer Flow
Product Flow
Information Flow
Performance characteristics
Network with Retail Storage with
Consumer Pick-Up
Performance characteristics
Comparative Performance of Delivery
Network Designs
Key: 1 corresponds to the strongest
performance and 6 the weakest
performance (ref: next slide)
Comparative Performance of Delivery Network Designs
Retail Manufacturer Distributor Distributor Manufacturer
Storage Manufacturer Storage with Storage with storage with storage with
with Storage with In-Transit Package last mile pickup
Consumer Direct Shipping Merge Carrier delivery
Pickup 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
Linking Product Characteristics and Customer Preferences to
Network Design
When designing the delivery network we should account for product and
market characteristics.
High demand products will have transportation cost play a significant
role. Use network with good transportation cost (retail stores)
Very low demand products will have inventory play a significant role.
Use network with low inventory costs (direct shipping)
Many product sources: transportation + information plays a role.
Distributor storage with package carrier
Few product sources but high customization: manufacturer storage with
merge in transit
High product variety: inventory cost will be significant. Use distributor
storage
Low customer effort: Distributor storage with package carrier delivery or
last mile delivery depending upon desired response time
Linking Product Characteristics and
Customer Preferences to Network Design
Key: +2 = very suitable; +1 = somewhat
suitable; 0 = neutral; -1 = somewhat
unsuitable; -2 = very unsuitable (ref:
next slide)
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
Consumer 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
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
Impact of E-Business on Performance at
Dell
Impact of E-Business on Performance at
[Link]
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
Variants Influencing Channel
Logistics Programmes
Channel length
Levels of channel structure
Channel width
Number of partners
Geographical coverage
Marketing Strategy (Physical Distribution)
Intensive
Selective
Exclusive
