Distribution Planning

What is it?

 The process of analyzing and optimizing your distribution network to ensure

efficient and cost-effective delivery of goods to customers.

Topic 1: Distribution Planning Strategy and Channel

Design

Distribution Planning Strategy:

This part focuses on the big picture of getting your products from your production
facilities to your customers. It involves defining your overarching approach and goals
for distribution, considering factors like cost, speed, reach, and customer service.

Key elements of a distribution planning strategy:

 Target markets: Who are you trying to reach with your products?
 Service level requirements: What level of delivery speed and availability do
you need to offer?
 Product characteristics: Are your products fragile, bulky, or time-sensitive?
 Cost considerations: What is your budget for transportation and warehousing?
 Inventory management: How will you balance inventory levels between
different locations?

Different Distribution Planning Strategies:

 Centralized distribution: All inventory is stored in one central location and then
shipped to customers. This is efficient for managing inventory but can be slow
and expensive for distant customers.
 Decentralized distribution: Inventory is stored in multiple locations closer to
customers. This can be faster and more convenient but increases
warehousing and logistics costs.
 Hybrid distribution: Combines elements of both centralized and decentralized
strategies.

Example:

A clothing company sells online and through retail stores nationwide. They use a
hybrid distribution strategy with a central warehouse for most items and smaller
regional warehouses for high-demand items in specific areas. This allows them to
offer fast delivery within those regions while controlling overall inventory costs.

Network Configuration:

This part deals with the physical structure of your distribution network, including
warehouses, distribution centers, and transportation routes. It's about where you
store and move your products to fulfill your chosen distribution strategy.

Key elements of network configuration:

 Number and location of facilities: How many warehouses and distribution

centers do you need, and where should they be located?
 Transportation modes: What methods will you use to move your products
(e.g., trucks, airplanes, ships)?
 Inventory positioning: How much inventory will you store at each location?
 Information technology: How will you track and manage your inventory and
shipments across the network?

Different Network Configurations:

 Direct distribution: The company sells directly to customers without

intermediaries.
 Indirect distribution: The company uses intermediaries, such as wholesalers
or retailers, to reach customers.
 Multi-channel distribution: The company uses a combination of direct and
indirect channels.

Example:

A food manufacturer uses a network configuration with regional distribution centers

that supply both large grocery stores and smaller independent retailers. This allows
them to reach a wider customer base while maintaining efficient delivery within each
region.
Topic 2: Delivery Channels: Outputs, Structure & Selection

Delivery Channel Service Outputs:

Delivery channels serve as bridges between producers and consumers, offering

various outputs that impact customer experience and purchase decisions. Let's
explore some key ones:

1. Bulk-Breaking (Breaking Bulk):

 What it is: Dividing large quantities of products into smaller units for individual
purchase or distribution.
 Example: A wholesaler buys grains in bulk and packages them into smaller
bags for sale to retailers or consumers.
 Impact: Makes products more accessible and affordable to a wider
audience. Enables efficient transportation and storage.

2. Spatial Convenience:

 What it is: Bringing products closer to customers, reducing the time and effort
required to access them.
 Example: Online shopping with home delivery eliminates the need for physical
store visits. Convenience stores offer immediate access to everyday items.
 Impact: Increases customer satisfaction and purchase likelihood by reducing
physical effort and travel time.

3. Waiting and Delivery Time:

 What it is: The time it takes for customers to receive their orders after placing
them.
 Example: Same-day delivery services offer speedy fulfillment, while traditional
mail order might take longer.
 Impact: Faster delivery times can increase customer satisfaction and
loyalty, but balancing speed with cost is crucial.

4. Variety (Assortment):

 What it is: The range and depth of product options offered through a channel.
 Example: Specialty stores focus on a specific product category with a wide
variety within that category. Supermarkets offer a diverse selection of different
product categories.
  Impact: Wide variety attracts customers seeking specific options, while
curated assortments can create a focused shopping experience.

Channel Structure:

This refers to the arrangements between different levels of intermediaries involved in

getting products from producers to consumers. Here are some common structures:

1. Direct Channel: Producer sells directly to consumers, eliminating intermediaries.

Examples: Online stores, factory outlets.

 Pros: Higher profit margins, control over branding and customer relationships.
 Cons: Requires significant marketing and distribution capabilities.

2. Indirect Channel: One or more intermediaries (wholesalers, retailers, distributors)

are involved in product distribution. Examples: Wholesalers selling to retailers, online
marketplaces.

 Pros: Reduced marketing and distribution costs for producers, wider market
reach.
 Cons: Less control over pricing, branding, and customer relationships.

3. Multi-Channel: Producers use a combination of direct and indirect channels to

reach customers. Examples: Selling online and through physical stores, partnering
with multiple retailers.

 Pros: Broadest market reach, caters to diverse customer preferences and

buying habits.
 Cons: Requires managing diverse channels and ensuring brand consistency
across all touchpoints.

Channel Selection:

Choosing the right channels depends on various factors:

 Target market: Who are you trying to reach? What are their buying habits and
preferences?
 Product characteristics: Are your products perishable, bulky, or complex?
 Cost considerations: Compare costs associated with different channels
(marketing, distribution, etc.).
 Control and service level: How much control do you want over branding and
customer experience?
 Competitive landscape: How are your competitors reaching their customers?
Topic 3: Transportation Management: Keeping Your Goods
Moving Smoothly

Transportation Management Process:

This overarching process ensures efficient and cost-effective movement of your

goods, encompassing several key stages:

 Transportation Planning:
o Analyzing needs and defining objectives (e.g., delivery time, cost).
o Selecting transportation modes (truck, air, rail) based on product needs
and budget.
o Choosing routes and carriers considering efficiency, reliability, and
cost.
 Transportation Procurement:
o Negotiating rates and contracts with carriers.
o Managing vendor relationships and performance.
 Transportation Execution:
o Booking shipments, coordinating with carriers.
o Tracking shipments in real-time.
o Managing documentation and customs clearance.
 Transportation Settlement:
o Processing invoices and freight bills.
o Auditing freight charges and managing disputes.
 Performance Analysis:
o Monitoring key metrics (e.g., delivery time, cost, damage rates).
o Identifying areas for improvement and optimizing processes.

Example: A furniture manufacturer plans to ship furniture from their factory to various
retailers across the country. They analyze costs and needs, choosing trucks for land
transportation and ocean freight for overseas shipments. They negotiate contracts
with reputable carriers, book shipments, and track them in real-time. After delivery,
they process invoices and analyze performance metrics to identify cost-saving
opportunities.

Transportation Controlling Activities:

These activities focus on monitoring and managing costs throughout the
transportation process:

 Cost budgeting and forecasting: Setting realistic spending limits for

transportation.
 Freight rate benchmarking: Comparing rates from different carriers to ensure
competitiveness.
 Freight audit and payment: Verifying and optimizing freight invoices.
 Fuel cost management: Implementing strategies to reduce fuel consumption
and costs.
 Claims management: Filing and recovering compensation for damaged or lost
goods.

Example: A clothing company implements a fuel management program, training

drivers on eco-friendly driving techniques and optimizing delivery routes to reduce
fuel consumption. They also conduct regular freight audits to identify and recover
any overcharges from carriers.

Transportation Scheduling Activities:

These activities ensure timely and efficient movement of goods:

 Order consolidation: Combining small orders into larger shipments for cost
savings.
 Route optimization: Planning efficient routes considering distance, traffic, and
delivery windows.
 Carrier selection: Choosing reliable carriers with consistent on-time
performance.
 Load planning: Optimizing truckloads to maximize space utilization and
minimize empty miles.
 Real-time tracking: Monitoring shipment progress and proactively addressing
any delays.

Example: An e-commerce company uses route optimization software to plan efficient

delivery routes for their fleet of vans. They track shipments in real-time and
communicate proactively with customers about any potential delays.

Transportation Risk Management:

This involves identifying and mitigating potential risks that could disrupt your supply
chain:

 Carrier risk: Assessing the financial stability and reliability of carriers.

  Route risk: Identifying potential disruptions due to weather, traffic, or political
instability.
 Cargo risk: Implementing measures to prevent damage, theft, or loss of
goods.
 Compliance risk: Ensuring adherence to customs regulations and other legal
requirements.
 Contingency planning: Developing backup plans to address disruptions and
minimize their impact.

Example: A pharmaceutical company procures insurance to cover cargo risks

associated with their temperature-sensitive products. They also have contingency
plans in place to reroute shipments in case of unexpected disruptions.
Topic 4: Distribution Center Network Design and
Performance Measurement: Optimizing Your Distribution
Hubs

Location of Distribution Centers:

Choosing the right location for your distribution centers (DCs) plays a crucial role in
ensuring efficient and cost-effective delivery to your customers. Here are key factors
to consider:

 Proximity to markets: Locate DCs closer to your main customer base to

minimize transportation times and costs.
 Transportation infrastructure: Choose locations with good access to major
highways, airports, or seaports for efficient movement of goods.
 Operating costs: Analyze factors like land, labor, and utility costs to find
locations that balance affordability with strategic advantages.
 Inventory management: Consider storage capacity needs and desired
inventory turnover rates when selecting DC size and location.
 Expansion potential: Think about future growth and choose locations that can
accommodate potential expansion of your network.

Example:

Step 1: Define your key location factors.

Transportation: Proximity to customers, suppliers, major highways, airports, etc.

Labor: Availability and cost of skilled labor.

Real estate: Availability and cost of suitable property.

Taxes and incentives: State and local tax rates, special incentives for businesses.

Operating costs: Utilities, security, insurance, etc.

Step 2: Assign weights to each factor.

This reflects the relative importance of each factor for your business. For example, if
transportation is crucial, give it a higher weight than taxes.

Step 3: Score potential locations on each factor.

Use a standardized scoring system (e.g., 1-5) to compare potential locations on each
factor.

Step 4: Calculate a weighted score for each location.

Multiply the individual factor scores by their weights and sum the results to get a total
score for each location.

Step 5: Identify the location with the highest score.

This location is likely the best fit based on your defined priorities.

Numeric example based on the above process:

Key location factors with weights:

Calculation:

The weighted score for each warehouse is calculated by multiplying the score for
each factor by the weight of that factor, and then summing the products. For
example, the weighted score for warehouse AB is calculated as follows:

Weighted score for AB = (1 * 5) + (4 * 1) + (3 * 3) + (2 * 4) + (4 * 2)

= 34

Selection:
The warehouse with the highest weighted score is the best location. In this example,
the warehouse with the highest weighted score is CD, with a score of 43. Therefore,
CD is the best location for the new warehouse.

Number of Distribution Centers:

The optimal number of DCs depends on your specific needs and goals. Here are
some common approaches:

 Centralized model: One large DC serves the entire market, offering

economies of scale but potentially longer delivery times for distant customers.
 Decentralized model: Multiple smaller DCs located closer to
customers, improving delivery speed but increasing overall costs.
 Hybrid model: Combines centralized and decentralized elements, balancing
cost-efficiency with responsiveness to diverse customer needs.

Example: A national grocery chain uses a hybrid model with large regional DCs for
bulk product storage and smaller local DCs for faster restocking of individual stores.

Example:

The optimal number of warehouses requires more information than just location
scoring. It depends on various factors affecting your supply chain, like:

1. Product demand: This includes total demand, demand distribution

(regional/national), and demand seasonality.
2. Order size and frequency: Are individual orders small and frequent, or large
and infrequent?
3. Delivery speed requirements: Do customers need fast delivery times, or is
slower shipping acceptable?
4. Inventory management strategy: Do you prefer centralized or decentralized
inventory control?
5. Transportation costs: How much does it cost to move products between
warehouses and customers?

Below is the hypothetical scenario to showcase a numerical approach to

estimating the number of warehouses:

Scenario:

 You are an online retailer selling electronics nationwide.

 Your annual demand is 1 million units, evenly distributed across the country.
 Customers expect 2-day delivery for most orders.
 You use a centralized inventory management strategy.
 Your average order size is 2 units.
  Your variable transportation cost per unit is $0.05 per KM.

Step 1: Estimate delivery distance and cost:

Divide the US into regions based on potential warehouse locations. - A, B, C, D

Calculate the average distance from each region to customers within that region. - A-
100KM, B-90KM, C-80KM, D-110KM

Multiply the average distance by the variable transportation cost to get the average
transportation cost per unit for each region.

Step 2: Estimate warehouse capacity need:

Divide the annual demand by the average order size to get the total number of
orders. - Annual Demand for warehouse A-1000000, B-1009900, C-1110000, D-
1000011

Consider safety stock based on demand variability and lead times. - Safety stock for
warehouse A-10000, B-10011, C-11100, D-10900

Add safety stock to the total number of orders to get the required warehouse
capacity.

Step 3: Analyze cost trade-off:

Compare the fixed cost of adding a new warehouse with the variable transportation
cost savings it brings. - Fixed cost of adding a new warehouse - A-$10000000, B-
$10000999, C-$10099000, D-$10011000

Calculate the total cost (fixed + variable) for different warehouse scenarios (A, B, C,
D warehouses).

Choose the scenario with the lowest total cost.

Warehouse A:

 Variable transportation cost per unit: 100KM * $0.05 = $5

 Total variable transportation cost: 1000000 units * $5 = $5,000,000
 Total cost (fixed + variable): $10,000,000 + $5,000,000 = $15,000,000

Warehouse B:

 Variable transportation cost per unit: 90KM * $0.05 = $4.50

 Total variable transportation cost: 1009900 units * $4.50 = $4,544,550
 Total cost (fixed + variable): $10,000,999 + $4,544,550 = $14,545,549

Warehouse C:

 Variable transportation cost per unit: 80KM * $0.05 = $4

  Total variable transportation cost: 1110000 units * $4 = $4,440,000
 Total cost (fixed + variable): $10,099,000 + $4,440,000 = $14,539,000

Warehouse D:

 Variable transportation cost per unit: 110KM * $0.05 = $5.50

 Total variable transportation cost: 1000011 units * $5.50 = $5,500,060.50
 Total cost (fixed + variable): $10,011,000 + $5,500,060.50 = $15,511,060.50

Comparison:

Based on the calculations, Warehouse C appears to be the optimal choice with

the lowest total cost of $14,539,000. However, it's important to consider other factors
beyond just cost:

 Service level: Can Warehouse C consistently meet your 2-day delivery

requirement across its region?
 Inventory management: Will managing inventory across multiple
warehouses be feasible?
 Scalability: Can Warehouse C accommodate future growth in demand?

By weighing these additional factors alongside the cost analysis, you can make a
more informed decision about the optimal number of warehouses and their locations.

Type of Distribution Centers:

Different types of DCs serve different purposes and offer varying levels of
functionality:

 Cross-docking facilities: Receive and quickly redistribute goods without

significant storage, ideal for fast-moving items.
 Fulfillment centers: Store, pick, pack, and ship individual customer
orders, suited for e-commerce operations.
 Transloading facilities: Bulk goods are transferred between different
transportation modes for long-distance journeys.
 Value-added service (VAS) centers: Perform additional services like
kitting, labeling, or light assembly before distribution.

Example: A clothing manufacturer operates a central cross-docking facility for bulk

fabric and yarn, and regional fulfillment centers strategically located near major retail
hubs for faster garment distribution.

Performance Measurement:
Monitoring key metrics helps evaluate your DC network's effectiveness and identify
areas for improvement:

 Order fulfillment lead time: Measures the time between order placement and
delivery.
 Inventory turnover rate: Indicates how efficiently inventory is used and
replenished.
 Picking and packing accuracy: Ensures orders are shipped correctly and
without errors.
 Damage rate: Tracks the percentage of goods arriving damaged at their
destination.
 Transportation cost per unit: Measures the average cost of moving goods
through your network.

By analyzing these metrics regularly and comparing them to industry benchmarks,

you can optimize your DC network design and operations for improved efficiency,
cost-effectiveness, and customer satisfaction.

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