Supply Chain
Management
Sunil Chopra(3rd Edition)
Chapter 4
Designing the Distribution Network in a Supply Chain
M. A. Khan
SCM-MBA09-Spring10 1
(M A Khan)
Today’s Discussion
• 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
SCM-MBA09-Spring10 2
(M A Khan)
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
SCM-MBA09-Spring10 3
(M A Khan)
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
SCM-MBA09-Spring10 4
(M A Khan)
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 SCM-MBA09-Spring10 5
(M A Khan)
Service and Number of
Facilities (Fig. 4.1)
Number of
Facilities
Response Time
SCM-MBA09-Spring10 6
(M A Khan)
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
SCM-MBA09-Spring10 7
(M A Khan)
Inventory Costs and Number
of Facilities (Fig. 4.2)
Inventory
Costs
Number of facilities
SCM-MBA09-Spring10 8
(M A Khan)
Transportation Costs and
Number of Facilities (Fig. 4.3)
Transportation
Costs
Number of facilities
SCM-MBA09-Spring10 9
(M A Khan)
Facility Costs and Number
of Facilities (Fig. 4.4)
Facility
Costs
Number of facilities
SCM-MBA09-Spring10 10
(M A Khan)
Total Costs Related to
Number of Facilities
Total Costs
Total Costs
Facilities
Inventory
Transportation
Number of Facilities
SCM-MBA09-Spring10 11
(M A Khan)
Variation in Logistics Costs and Response
Time with Number of Facilities (Fig. 4.5)
Response Time
Total Logistics Costs
Number of Facilities
SCM-MBA09-Spring10 12
(M A Khan)
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
SCM-MBA09-Spring10 13
(M A Khan)
Manufacturer Storage with
Direct Shipping (Fig. 4.6)
Manufacturer
Retailer
Customers
Product Flow
Information Flow
SCM-MBA09-Spring10 14
(M A Khan)
DROP SHIPPING
SCM-MBA09-Spring10 15
(M A Khan)
In-Transit Merge Network
(Fig. 4.7)
Factories
Retailer In-Transit Merge by
Carrier
Customers
Product Flow
Information Flow
SCM-MBA09-Spring10 16
(M A Khan)
In-Transit Merge Network
SCM-MBA09-Spring10 17
(M A Khan)
Distributor Storage with
Carrier Delivery (Fig. 4.8)
Factories
Warehouse Storage by
Distributor/Retailer
Customers
Product Flow
Information Flow
SCM-MBA09-Spring10 18
(M A Khan)
SCM-MBA09-Spring10 19
(M A Khan)
Distributor Storage with
Last Mile Delivery (Fig. 4.9)
Factories
Distributor/Retailer
Warehouse
Customers
Product Flow
SCM-MBA09-Spring10 Information Flow 20
(M A Khan)
SCM-MBA09-Spring10 21
(M A Khan)
Manufacturer or Distributor
Storage with Customer Pickup
Factories
Retailer Cross Dock DC
Pickup Sites
Customers
Customer Flow
(Fig. 4.10) SCM-MBA09-Spring10 Product Flow 22
(M A Khan) Information Flow
SCM-MBA09-Spring10 23
(M A Khan)
Comparative Performance of
Delivery Network Designs (Table 4.7)
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 Carrier last mile pickup
Pickup 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 SCM-MBA09-Spring10
4 4 3 2 5 24
(M A Khan)
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
SCM-MBA09-Spring10 25
(M A Khan)
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
SCM-MBA09-Spring10 26
(M A Khan)
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
SCM-MBA09-Spring10 27
(M A Khan)
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?
SCM-MBA09-Spring10 28
(M A Khan)
SCM-MBA09-Spring10 29
(M A Khan)
