SUPPLY CHAIN MANAGEMENT

SESSION 3

Designing Distribution Networks

Factors Influencing Distribution Network Design

Distribution network performance evaluated along

two dimensions

• Value provided to the customer

• Cost of meeting customer needs

Factors Influencing Distribution Network Design

 Value Propositions of Network Structure  Supply chain costs affected by network

Response time structure:
Product variety  Inventories
Product Availability  Transportation
Customer experience  Facilities and handling
Time to market
 Information
Order visibility

Returnability
Desired Response Time & Number of Facilities

• Increasing the number of facilities moves them closer to the end consumer. This reduces the response time.
• 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.
 Cost, Time and Network Structure

• Inventory Costs and Number of Facilities

• Transportation Costs and Number of Facilities
• Facility Costs and Number of Facilities
• Total Logistics Cost and Number of facilities
• Response Time and Number of Facilities
Design Options for a Distribution Network

• Distribution network choices from the manufacturer to the end consumer

• Two key decisions

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

• One of six designs may be used

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/distributor storage with customer pickup
6. Retail storage with customer pickup
Manufacturer Storage with Direct Shipping

e.g., Low Demand Products of W.W. Granger Company

Manufacturer Storage with Direct Shipping

Cost Factor Performance

Inventory Lower costs because of aggregation. Benefits of aggregation are highest

for low-demand, high-value items. Benefits are large if product
customization can be postponed at the manufacturer.

Transportation Higher transportation costs because of increased distance and

disaggregate shipping.

Facilities and handling Lower facility costs because of aggregation. Some 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.
Manufacturer Storage with Direct Shipping
Service Factor Performance
Response time Long response time of one to two weeks because of increased distance and
two stages for order processing. Response time may vary by product, thus
complicating receiving.

Product variety Easy to provide a high level of variety.

Product availability Easy to provide a high level of product availability because of aggregation at
manufacturer.
Customer experience Good in terms of home delivery but can suffer if order from several
manufacturers is sent as partial shipments.
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.
In-Transit Merge Network

e.g., Low to High Demand, High Value Products of Apple Company

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In-Transit Merge Network

Cost Factor Performance

Inventory Similar to drop-shipping.
Transportation Somewhat lower transportation costs than drop-
shipping.
Facilities and handling Handling costs higher than drop-shipping at carrier;
receiving costs lower at customer.
Information Investment is somewhat higher than for drop-shipping.
In-Transit Merge Network

Service Factor Performance

Response time Similar to drop-shipping; may be marginally higher.

Product variety Similar to drop-shipping.

Product availability Similar to drop-shipping.

Customer experience Better than drop-shipping because only a single delivery is received.

Time to market Similar to drop-shipping.

Order visibility Similar to drop-shipping.

Returnability Similar to drop-shipping.

Distributor Storage with Carrier Delivery

e.g., Apple, Mc Master-Carr Company

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Distributor Storage with Carrier Delivery
Cost Factor Performance

Inventory Higher than manufacturer storage. Difference is not large for faster
moving items but can be large for very slow-moving items.

Transportation Lower than manufacturer storage. Reduction is highest for faster

moving items.

Facilities and handling Somewhat higher than manufacturer storage. The difference can be
large for very slow-moving items.

Information Simpler infrastructure compared to manufacturer storage.

Distributor Storage with Carrier Delivery
Service Factor Performance
Response time Faster than manufacturer storage.
Product variety Lower than manufacturer storage.
Product availability Higher cost to provide the same level of availability as
manufacturer storage.
Customer experience Better than manufacturer storage with drop-shipping.
Time to market Higher than manufacturer storage.
Order visibility Easier than manufacturer storage.
Returnability Easier than manufacturer storage.
Distributor Storage with Last Mile Delivery

e.g., Amazon Fresh, Google Express Company

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Distributor Storage with Last Mile Delivery

Cost Factor Performance

Inventory Higher than distributor storage with package carrier delivery.

Transportation Very high cost given minimal scale economies. Higher than any
other distribution option.

Facilities and handling Facility costs higher than manufacturer storage or distributor
storage with package carrier delivery, but lower than a chain of
retail stores.

Information Similar to distributor storage with package carrier delivery.

Distributor Storage with Last Mile Delivery

Service Factor Performance

Response time Very quick. Same day to next-day delivery.
Product variety Somewhat less than distributor storage with package carrier delivery but
larger than retail stores.
Product availability More expensive to provide availability than any other option except retail
stores.
Customer experience Very good, particularly for bulky items.
Time to market Slightly higher than distributor storage with package carrier delivery.
Order visibility Less of an issue and easier to implement than manufacturer storage or
distributor storage with package carrier delivery.
Returnability Easier to implement than other previous options. Harder and more expensive
than a retail network.
Manufacturer or Distributor Storage with Customer Pickup

e.g., Walmart, 7-Eleven Company

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Manufacturer or Distributor Storage with
Customer Pickup

Cost Factor Performance

Inventory Can match any other option, depending on the location of inventory.

Transportation Lower than the use of package carriers, especially if using an existing
delivery network.
Facilities and handling Facility costs can be high if new facilities have to be built. Costs are
lower if existing facilities are used. The increase in handling cost at
the pickup site can be significant.
Information Significant investment in infrastructure required.
Manufacturer or Distributor Storage with
Customer Pickup
Service Factor Performance
Response time Similar to package carrier delivery with manufacturer or distributor
storage. Same-day delivery possible for items stored locally at pickup site.
Product variety Similar to other manufacturer or distributor storage options.
Product availability Similar to other manufacturer or distributor storage options.
Customer experience Lower than other options because of the lack of home delivery. Experience
is sensitive to capability of pickup location.
Time to market Similar to manufacturer storage options.
Order visibility Difficult but essential.
Returnability Somewhat easier, given that pickup location can handle returns.
Retail Storage with Customer Pickup
Retail Storage with Customer Pickup

Cost Factor Performance

Inventory Higher than all other options.

Transportation Lower than all other options.

Facilities and handling Higher than other options. The increase in handling cost at
the pickup site can be significant for online and phone
orders.

Information Some investment in infrastructure required for online and

phone orders.
Retail Storage with Customer Pickup
Service Factor Performance
Response time Same-day (immediate) pickup possible for items stored locally at
pickup site.

Product variety Lower than all other options.

Product availability More expensive to provide than all other options.
Customer experience Related to whether shopping is viewed as a positive or negative
experience by customer.

Time to market Highest among distribution options.

Order visibility Trivial for in-store orders. Difficult, but essential, for online and phone
orders.

Returnability Easier than other options because retail store can provide a substitute.
 Delivery Networks for Different Product/ Customer Characteristics
Blank Retail Manufacturer Manufacturer Distributor Distributor Manufacturer/
Storage with Storage Storage with Storage with Storage with Distributor
Customer with Direct In-Transit Package Last-Mile Storage with
Pickup Shipping Merge Carrier Delivery Customer
Delivery Pickup
High-demand +2 −2 −1 0 +1 −1
product Blank Retail Manufacturer Manufacturer Distributor Distributor Manufacturer/
Medium-demand Storage
+1 with Storage
−1 Storage
0 with Storage
+1 with Storage
0 with Distributor
0
product Customer with Direct In-Transit Package Last-Mile Storage with
Pickup Shipping Merge Carrier Delivery Customer
Low-demand −1 +1 0 Delivery
+1 −1 Pickup
+1
Product
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

Alternatives in Omni-Channel Retailing
Alternatives in Omni-Channel Retailing
 Traditional Retail (e.g., Kirana Stores)  Online Information + Home Delivery (e.g., IKEA)
 Face-to-face interaction  Aggregation of inventories
 Customer leaves with product  Few locations
 Many facilities close to customers  High transportation costs
 High level of inventory
 Low transportation costs
 Showrooms ( e.g., JioMart)  Online Information + Pickup (e.g., Amazon)
 Face-to-face interaction  Reduces outbound transportation costs
 Product ordered for later pickup  Customer must travel to pickup location
 Low level of inventory
 Smaller facilities
 More transportation and information
infrastructure than traditional retail
Relative Costs for Omni-Channel Alternatives