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Supply Chain Management: Strategy, Factors Affecting Distribution Network

Planning, and Operation Design (1 of 3)
Seventh Edition, Global Edition
• Distribution network performance evaluated along two
dimensions
Chapter 4 1. Value provided to the customer
2. Cost of meeting customer needs
Designing Distribution
Networks and Applications • Evaluate the impact on customer service and cost for
to Omni-Channel Retailing different distribution network options
• Profitability of the delivery network determined by
revenue from met customer needs and network costs

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Factors Affecting Distribution Network

Learning Objectives Design (2 of 3)

4.1 Identify the key factors to be considered when • Elements of customer service influenced by network
designing a distribution network. structure:
4.2 Discuss the strengths and weaknesses of various – Response time
distribution options. – Product variety
4.3 Describe how omni-channel retail may be structured to – Product availability
be both cost effective and responsive to customer needs. – Customer experience
– Time to market
– Order visibility
– Returnability

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Distribution Network Design in the Supply Factors Affecting Distribution Network

Chain Design (3 of 3)

• Distribution – the steps taken to move and store a • Supply chain costs affected by network structure:
product from the supplier stage to the customer stage in – Inventories
a supply chain – Transportation
• Drives profitability by directly affecting supply chain cost – Facilities
and the customer value – Information
• Choice of distribution network can achieve supply chain
objectives from low cost to high responsiveness

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Desired Response Time and Number of

Facilities Facility Costs and Number of Facilities

Figure 4-1 Relationship Between Desired Response Time and Number Figure 4-4 Relationship Between Number of Facilities and Facility
of Facilities Costs

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Logistics Cost, Response Time, and

Inventory Costs and Number of Facilities Number of Facilities

Figure 4-2 Relationship Between Number of Facilities and Inventory Figure 4-5 Variation in Logistics Cost and Response Time with Number
Costs of Facilities

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Transportation Costs and Number of

Facilities Summary of Learning Objective 1

A manager must consider the customer needs to be met

and the cost of meeting these needs when designing the
distribution network. Some key customer needs to be
considered include response time, product
variety/availability, convenience, order visibility, and
returnability. Important costs that managers must consider
include inventory, transportation, facilities and handling,
and information. Increasing the number of facilities
decreases the response time and transportation cost but
increases inventory and facility cost.
Figure 4-3 Relationship Between Number of Facilities and
Transportation Cost

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Manufacturer Storage with Direct

Design Options for a Distribution Network (1 of 2) Shipping Network (1 of 2)

• Distribution network choices from the manufacturer to the Table 4-1 Performance Characteristics of Manufacturer Storage with
end consumer Direct Shipping Network

Cost Factor Performance

• Two key decisions
Inventory Lower costs because of aggregation. Benefits of
1. Will product be delivered to the customer location or aggregation are highest for low-demand, high-value
items. Benefits are large if product customization can be
picked up from a prearranged site?
postponed at the manufacturer.
2. Will product flow through an intermediary (or Transportation Higher transportation costs because of increased
intermediate location)? distance and disaggregate shipping.
Facilities and Lower facility costs because of aggregation. Some
handling saving on handling costs if manufacturer can manage
small shipments or ship from production line.
Information Significant investment in information infrastructure to
integrate manufacturer and retailer.

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Manufacturer Storage with Direct

Design Options for a Distribution Network (2 of 2) Shipping Network (2 of 2)

• One of six designs may be used Table 4-1 [Continued]

1. Manufacturer storage with direct shipping Service Factor Performance

Response time Long response time of one to two weeks because of increased
2. Manufacturer storage with direct shipping and in- distance and two stages for order processing. Response time
transit merge may vary by product, thus complicating receiving.
Product variety Easy to provide a high level of variety.
3. Distributor storage with carrier delivery
Product availability Easy to provide a high level of product availability because of
4. Distributor storage with last-mile delivery aggregation at manufacturer.
Customer experience Good in terms of home delivery but can suffer if order from
5. Manufacturer/distributor storage with customer pickup several manufacturers is sent as partial shipments.
6. Retail storage with customer pickup Time to market Fast, with the product available as soon as the first unit is
produced.
Order visibility More difficult but also more important from a customer service
perspective.
Returnability Expensive and difficult to implement.

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Figure 4-6 Manufacturer Storage with

Direct Shipping Figure 4-7 In-Transit Merge Network

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Distributor Storage with Carrier

In-Transit Merge (1 of 2) Delivery (1 of 2)

Table 4-2 Performance Characteristics of In-Transit Merge Table 4-3 Performance Characteristics of Distributor Storage with
Carrier Delivery

Cost Factor Performance Cost Factor Performance

Inventory Similar to drop-shipping. Inventory Higher than manufacturer storage. Difference is
not large for faster-moving items but can be large
Transportation Somewhat lower transportation costs than drop-
for very slow-moving items.
shipping.
Transportation Lower than manufacturer storage. Reduction is
Facilities and handling Handling costs higher than drop-shipping at carrier;
highest for faster-moving items.
receiving costs lower at customer.
Facilities and Somewhat higher than manufacturer storage.
Information Investment is somewhat higher than for drop-shipping.
handling The difference can be large for very-slow-moving
items.
Information Simpler infrastructure compared to manufacturer
storage.

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Distributor Storage with Carrier

In-Transit Merge (2 of 2) Delivery (2 of 2)
Table 4-2 [Continued] Table 4-3 [Continued]

Service Factor Performance Service Factor Performance

Response time Similar to drop-shipping; may be marginally higher. Response time Faster than manufacturer storage.
Product variety Similar to drop-shipping. Product variety Lower than manufacturer storage.
Product availability Similar to drop-shipping. Product availability Higher cost to provide the same level of availability as
Customer Better than drop-shipping because only a single manufacturer storage.
experience delivery is received. Customer Better than manufacturer storage with drop-shipping.
Time to market Similar to drop-shipping. experience
Order visibility Similar to drop-shipping. Time to market Higher than manufacturer storage.
Returnability Similar to drop-shipping. Order visibility Easier than manufacturer storage.
Returnability Easier than manufacturer storage.

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Figure 4-8 Distributor Storage with Figure 4-9 Distributor Storage with Last
Carrier Delivery Mile Delivery

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Distributor Storage with Last Mile Manufacturer or Distributor Storage with

Delivery (1 of 2) Customer Pickup (1 of 2)
Table 4-4 Performance Characteristics of Distributor Storage with Last- Table 4-5 Performance Characteristics of Network with Customer
Mile Delivery Pickup Sites

Cost Factor Performance Cost Factor Performance

Inventory Higher than distributor storage with package carrier Inventory Can match any other option, depending on the location
delivery. of inventory.
Transportation Very high cost given minimal scale economies. Higher Transportation Lower than the use of package carriers, especially if
than any other distribution option. using an existing delivery network.
Facilities and handling Facility costs higher than manufacturer storage or Facilities and handling Facility costs can be high if new facilities have to be
distributor storage with package carrier delivery, but built. Costs are lower if existing facilities are used. The
lower than a chain of retail stores. increase in handling cost at the pickup site can be
Information Similar to distributor storage with package carrier significant.
delivery. Information Significant investment in infrastructure required.

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Distributor Storage with Last Mile Manufacturer or Distributor Storage with

Delivery (2 of 2) Customer Pickup (2 of 2)
Table 4-4 [Continued] Table 4-5 [Continued]
Service Factor Performance
Service Factor Performance
Response time Similar to package carrier delivery with manufacturer or
Response time Very quick. Same day to next-day delivery.
distributor storage. Same-day pickup is possible for items
Product variety Somewhat less than distributor storage with package carrier stored at regional DC.
delivery but larger than retail stores.
Product variety Similar to other manufacturer or distributor storage options.
Product availability More expensive to provide availability than any other option
Product availability Similar to other manufacturer or distributor storage options.
except retail stores.
Customer Lower than other options because of the lack of home
Customer experience Very good, particularly for bulky items.
experience delivery. Experience is sensitive to capability of pickup
Time to market Slightly longer than distributor storage with package carrier location.
delivery.
Time to market Similar to manufacturer or distributor storage options.
Order visibility Less of an issue and easier to implement than manufacturer
Order visibility Difficult but essential.
storage or distributor storage with package carrier delivery.
Returnability Somewhat easier, given that pickup location can handle
Returnability Easier to implement than other previous options. Harder and returns.
more expensive than a retail network.

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Figure 4-10 Manufacturer or Distributor Figure 4-11 Retail Storage with Customer
Storage with Customer Pickup Pickup

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Comparative Performance of Delivery

Retail Storage with Customer Pickup (1 of 2) Network Designs (2 of 3)
Table 4-6 Performance Characteristics of Retail Storage with Customer Table 4-7 [Continued]
Pickup Sites
Blank Retail Manufacturer Manufacturer Distributor Distributor Manufacturer/
Storage with Storage Storage with Storage Storage Distributor
Cost Factor Performance Customer with Direct In-Transit with with Storage with
Pickup Shipping Merge Package Last-Mile Customer
Inventory Higher than all other options. Carrier Delivery Pickup
Delivery
Transportation Lower than all other options.
Customer Varies From 1 4 3 2 1 5
Facilities and handling Higher than other options. The increase in handling experience to 5

cost at the pickup site can be significant for online and Time to market 4 1 1 2 3 1

phone orders. Order visibility 1 5 4 3 2 6

Information Some investment in infrastructure required for online Returnability 1 5 5 4 3 2

and phone orders.

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Comparative Performance of Delivery

Retail Storage with Customer Pickup (2 of 2) Network Designs (3 of 3)
Table 4-6 [Continued] Table 4-7 [Continued]

Service Factor Performance

Blank Retail Manufacturer Manufacturer Distributor Distributor Manufacturer/
Response time Same-day (immediate) pickup possible for items Storage with Storage Storage with Storage with Storage Distributor
stored locally at pickup site. Customer with Direct In-Transit Package with Storage with
Pickup Shipping Merge Carrier Last-Mile Customer
Product variety Lower than all other options. Delivery Delivery Pickup
Inventory 4 1 1 2 3 1
Product availability More expensive to provide than all other options.
Transportation 1 4 3 2 5 1
Customer Related to whether shopping is viewed as a positive
experience or negative experience by customer. Facility and 6 1 2 3 4 5
handling
Time to market Highest among distribution options. Information 1 4 4 3 2 5
Order visibility Trivial for in-store orders. Difficult, but essential, for
online and phone orders. Key: 1 corresponds to the best performance and 6 the worst performance.

Returnability Easier than other options because retail store can

provide a substitute.

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Comparative Performance of Delivery Delivery Networks for Different Product/

Network Designs (1 of 3) Customer Characteristics (1 of 2)
Table 4-7 Comparative Performance Rank of Delivery Network Table 4-8 Performance of Delivery Networks for Different
Designs Product/Customer Characteristics

Blank Retail Manufacturer Manufacturer Distributor Distributor Manufacturer/

Storage Storage Storage with Storage with Storage with Distributor Blank Retail Manufacturer Manufacturer Distributor Distributor Manufacturer/
with with Direct In-Transit Package Last-Mile Storage with Storage with Storage Storage with Storage with Storage Distributor
Customer Shipping Merge Carrier Delivery Customer Customer with Direct In-Transit Package with Storage with
Pickup Delivery Pickup Pickup Shipping Merge Carrier Last-Mile Customer
Response 1 4 4 3 2 4 Delivery Delivery Pickup
time High-demand +2 −2 −1 0 +1 −1
Product 4 1 1 2 3 1 product
variety
Medium-demand +1 −1 0 +1 0 0
Product 4 1 1 2 3 1 product
availability
Low-demand −1 +1 0 +1 −1 +1
Product

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Delivery Networks for Different Product/ Figure 4-12 Alternatives in Omni-Channel

Customer Characteristics (2 of 2) Retailing
Table 4-8 [Continued]

Blank Retail Manufacturer Manufacturer Distributor Distributor Manufacturer/

Storage Storage Storage with Storage Storage Distributor
with with Direct In-Transit with with Storage with
Customer Shipping Merge Package Last-Mile Customer
Pickup Carrier Delivery Pickup
Delivery

Very-low-demand −2 +2 +1 0 −2 +1
product
High product value −1 +2 +1 +1 0 +2

Quick desired +2 -2 −2 −1 +1 -2
response
High product variety −1 +2 0 +1 0 +2

Low customer effort −2 +1 +2 +2 +2 −1

Key: +2 = very suitable; +1 = somewhat suitable; 0 = neutral; −1 = somewhat

unsuitable; −2 = very unsuitable.
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Alternatives in Omni-Channel
Summary of Learning Objective 2 Retailing (1 of 3)

Distribution networks that ship directly to the customer are • Traditional Retail
better suited for a large variety of high-value products that – Face-to-face interaction
have low and uncertain demand. These networks incur – Customer leaves with product
lower facility costs and carry low levels of inventory but
incur high transportation cost and provide a slow response – Many facilities close to customers
time. Distribution networks that carry local inventory are – High level of inventory
suitable for products with high demand, especially if – Low transportation costs
transportation is a large fraction of total cost. These
networks incur higher facility and inventory cost but lower
transportation cost and provide a faster response time.

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Alternatives in Omni-Channel
Online Sales and Omni-Channel Retailing Retailing (2 of 3)

• Omni-channel retailing • Showrooms

– The use of multiple channels to interact with – Face-to-face interaction
customers and fulfill their orders – Product ordered for later pickup
– Three flows – Low level of inventory
 Information – Smaller facilities
 Products – More transportation and information infrastructure
 Funds than traditional retail

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Alternatives in Omni-Channel
Retailing (3 of 3) Performance of Channels (3 of 3)

• Online Information + Home Delivery • Returnability

– Aggregation of inventories – Easier with physical locations
– Few locations – Proportion of returns likely to be higher when
– High transportation costs information exchange is remote

• Online Information + Pickup • Direct Sales to Customers

– Reduces outbound transportation costs – Manufacturers can use remote information exchange
– Customer must travel to pickup location for direct access to customers
• Efficient Funds Transfer
– Internet and smartphones

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Performance of Channels in Terms of

Performance of Channels (1 of 3) Cost (1 of 2)

• Response time to customers • Inventory

– Picking up physical products faster than other – Lower inventory levels if customers will wait
channels – Postpone variety until after the customer order is
– Online channel may be fastest for information goods received
• Product variety • Facilities
– Easier to offer larger selection remotely – Costs related to the physical facilities in a network
• Product availability – Costs associated with the operations in these facilities
– Aggregating inventory improves product availability

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Performance of Channels in Terms of

Performance of Channels (2 of 3) Cost (2 of 2)

• Customer experience • Transportation

– Channels have complementarity strengths – Lower cost of “transporting” information goods in
digital form
• Faster time to market
– For nondigital, aggregating inventories increases
– Online/showrooms are quicker than retailing
outbound transportation
• Order Visibility
• Information
– Critical for showrooms or online
– Investment higher for channels that provide
– Automatic in retail information remotely

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Relative Costs for Omni-Channel Framework for Omni-Channel

Alternatives Retailing (3 of 4)
Table 4-9 Relative Costs for Omni-Channel Alternatives Table 4-11 Product Value and Omni-Channel Retailing

Blank Traditional Showrooms Online Online Blank Low Value Product High Value Product
Retail + Home Information + Information +
Delivery Home Pickup Traditional Retail Compete on price for Compete on service for products
Delivery predictable demand with uncertain demand and high
products information complexity
Inventory High Low - Low Low - Medium
Medium Showrooms Compete on high variety at Compete on price for
reasonable price for high customizable, high information
Facilities High Medium Low Low - Medium information complexity complexity products
Transportation Low High High Medium Products
by retailer Online Information Compete on service Compete on price and variety
Transportation High High Low Medium + Home Delivery
by customer Online Information Compete on ability to More competitive on price than
Information Low High High High + Pickup provide service at a home delivery option
lower price

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Framework for Omni-Channel Framework for Omni-Channel

Retailing (1 of 4) Retailing (4 of 4)

• Product characteristics and customer needs influence Table 4-12 Product Information Complexity and Omni-Channel
choice of channel Retailing

• Product dimensions Blank Low Information Complexity High Information Complexity

Product Product
– Demand uncertainty Traditional Compete on price for Compete on service for uncertain
Retail predictable demand products demand products
– Value
Showrooms Not suitable Compete on price for uncertain
– Information complexity demand products
Online Compete on price for uncertain Compete on service in terms
• Customer dimensions Information + demand products of variety and availability for
Home Delivery uncertain demand products
– Willingness to pay
Online Compete on price for uncertain A slightly cheaper option to
 Price conscious/service conscious Information + demand products compete on service in terms
Pickup of variety and availability for
uncertain demand products

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Framework for Omni-Channel

Retailing (2 of 4) Summary of Learning Objective 3
Table 4-10 Product Demand Uncertainty and Omni-Channel Retailing Omni-channel retailing has the potential to combine the
complementary strengths of physical stores and the online
Blank Predictable Demand Unpredictable Demand Product channel. Physical stores are good at letting customers
Product
experience high information complexity products in person. They
Traditional Retail Compete on price Compete on service for high
information complexity products are also cost effective at selling products with predictable
Showrooms Not suitable Compete on price and variety demand. The online channel, in contrast, is cost effective at
for high information complexity selling products with unpredictable demand but cannot let
products customers experience high information complexity products. An
Online Information + Compete on service Compete on price and variety effective portfolio results if brick-and-mortar stores sell
Home Delivery
predictable demand items, serve as showrooms for high
Online Information + Compete on ability to More competitive on price than
Pickup provide service at a lower home delivery option information complexity items with unpredictable demand, and
price serve as pickup locations for the online channel, while the online
channel delivers unpredictable demand items to the customer.

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