Supply Chain Management

Chapter 4 – Designing the Distribution Network in a Supply Chain

Dr. Rishabh Rathore

ICFAI Business School, Hyderabad
Learning Objectives

1. Identify the key factors to be considered when designing a

distribution network.

2. Discuss the strengths and weaknesses of various distribution

options.

3. Understand how online sales have affected the design of

distribution networks in different industries.

4. Describe how onmi-channel retail may be structured to be both

cost effective and responsive to customer needs
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: seven eleven, Wal-Mart, Dell, Proctor & Gamble,
Grainger
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The Role of Distribution in the Supply Chain

• The process of designing a distribution network has two broad

phases.
• In the first phase, the broad structure of the supply chain network is
visualized. This phase decides the number of stages in the supply
chain and the role of each stage.
• The second phase then takes the broad structure and converts it
into specific locations and their capability, capacity, and demand
allocation.
• This chapter focuses on issues that affect the design of the broad
distribution network.
Factors Influencing Distribution Network Design

• Distribution network performance evaluated along two

dimensions at the highest level:
• Value provided to the customer
• 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
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 Example:
 Until 2007, Dell distributed its PCs directly to end consumers, whereas companies
such as HP distributed through resellers.
 Dell customers waited several days to get a PC, whereas customers could walk away
with an HP computer from a reseller.
 Starting in June 2007, Dell also started selling its PCs through retailers such as
Walmart.
 In the late 1990s, Gateway opened Gateway Country stores, wherein customers could
examine the products and have salespeople help them configure a PC that suited
their needs.
 Gateway, however, chose to sell no products at the stores; all PCs were shipped
directly from the factory to the customer.
 By April 2004, Gateway had closed all its stores because of their poor financial
performance.
 Apple Computer, in contrast, has opened many retail stores that sell computers.

 These companies have chosen different distribution models.

 How can we evaluate this wide range of distribution choices?
 Which ones serve the companies and their customers better?
 P&G has chosen to distribute directly to large supermarket chains while obligating smaller
players to buy P&G products from distributors. Products move directly from P&G to the larger
chains but move through an additional stage when going to smaller supermarkets.
 Texas Instruments, which once used only direct sales, now sells about 30 percent of its
volume to 98 percent of its customers through distributors, while serving the remaining 2
percent of customers with 70 percent of the volume directly (Raman and Rao, 1997).
 What value do these distributors provide?
 When should a distribution network include an additional stage, such as a
distributor?

 Distributors play a much more significant role for consumer goods distribution in
a country such as India compared with the United States.
 Why might this be the case?
 W.W. Grainger stocks about 300,000 SKUs that can be sent to customers within a day of order
placement.
 The remaining slower-moving products are not stocked but instead are shipped directly from the
manufacturer when a customer places an order.
 It takes several days for the customer to receive the product in such cases.
 Are these distribution choices appropriate?
 How can they be justified?
 Factors Influencing Distribution Network Design

• Elements of customer service influenced by network

structure:
• Response time
• Product variety
• Product availability
• Customer experience
• Order visibility
• Returnability 4-8
Factors Influencing Distribution Network Design
• Response time is the amount of time it takes for a customer to receive an order.
• Product variety is the number of different products or configurations that are
offered by the distribution network.
• Product availability is the probability of having a product in stock when a
customer order arrives.
• Customer experience includes the ease with which customers can place and
receive orders and the extent to which this experience is customized. It also
includes purely experiential aspects, such as the possibility of getting a cup of
coffee and the value that the sales staff provides.
• Time to market is the time it takes to bring a new product to the market.
• Order visibility is the ability of customers to track their orders from placement to
delivery.
• Returnability is the ease with which a customer can return unsatisfactory
merchandise and the ability of the network to handle such returns.
Service and Number of Facilities

Number of
Facilities

Response Time
Factors Influencing Distribution Network Design

• Supply chain costs affected by network structure:

• Inventories
• Transportation
• Facilities and handling
• Information
The Cost-Response Time Frontier

Local FG
Hi
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
Inventory Costs and 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
Variation in Logistics Costs and Response Time
with Number of Facilities
Response Time

Total Logistics Costs

Number of Facilities
Design Options for a Distribution Network

• Distribution network choices from the manufacturer to the end

consumer.
• Managers must make two key decisions when designing a
distribution network:
1. Will product be delivered to the customer location or picked up
from a prearranged site?
2. Will product flow through an intermediary (or intermediate
location)?
Design Options for a Distribution Network
• Based on the firm’s industry and the answers to these two questions,
one of six distinct distribution network designs may be used to move
products from factory to customer.

• These designs are classified as follows:

1. Manufacturer Storage with Direct Shipping
2. Manufacturer Storage with Direct Shipping and In-Transit Merge
3. Distributor Storage with Carrier Delivery
4. Distributor Storage with Last Mile Delivery
5. Manufacturer or Distributor Storage with Consumer Pickup
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6. Retail Storage with Consumer Pickup
Selecting a Distribution Network Design
Manufacturer Storage with Direct Shipping

Manufacturer

Retailer

Customers

Product Flow
Information Flow
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
Retail storage with Customer pickup
Comparative Performance of Delivery Network Designs
Linking Product Characteristics and Customer Preferences to
Network Design
Exercise – Find the distribution strategy

• Rivigo • Amazon and eBay

• Leap India • AMUL
• Shadowfax • CARS24
• 4tigo • Ratnadeep
• Delhivery • Mcmaster Carr
• IKEA • W.W. Crainger
• Vijetha • Automobiles spare parts
• Apple
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

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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

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Omni Channel Alternatives
Omni Channel Alternatives