Delivery Network
design(Distribution
Network design)
Learning Objectives
4.1 Identify the key factors to be considered when
designing a Delivery network(distribution network).
4.2 Discuss the strengths and weaknesses of
various distribution options.
4.3 Describe how omni-channel retail may be
structured to be both cost effective and responsive
to customer needs.
Delivery/Distribution Network
Design 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
• Drives profitability by directly affecting supply
chain cost and the customer value
• Choice of distribution network can achieve supply
chain objectives from low cost to high
responsiveness
Factors Affecting Distribution Network
Design (1 of 3)
• Distribution network performance evaluated along
two dimensions
1. Value provided to the customer
2. Cost of meeting customer needs
• Evaluate the impact on customer service and cost
for different distribution network options
• Profitability of the delivery network determined by
revenue from met customer needs and network
costs
Factors Affecting Distribution
Network Design (2 of 3)
• Elements of customer service influenced by
network structure:
• Response time
• Product variety
• Product availability
• Customer experience
• Time to market
• Order visibility
• Returnability
Factors Affecting
Distribution(delivery) Network
Design (3 of 3)
• Supply chain costs affected by network structure:
• Inventories
• Transportation
• Facilities
• Information
Desired Response Time and Number of
Facilities
Figure 4-1 Relationship Between Desired Response Time and Number of Facilities
Inventory Costs and Number of Facilities
Figure 4-2 Relationship Between Number of Facilities and Inventory Costs
Transportation Costs and Number of
Facilities
Figure 4-3 Relationship Between Number of Facilities and Transportation Cost
Facility Costs and Number of Facilities
Figure 4-4 Relationship Between Number of Facilities and Facility Costs
Logistics Cost, Response Time, and
Number of Facilities
Figure 4-5 Variation in Logistics Cost and Response Time with Number of Facilities
Design Options for a Delivery/Distribution
Network (1 of 2)
• 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 Delivery/Distribution Network (2 of 2)
• 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
Figure 4-6 Manufacturer Storage
with Direct Shipping
Manufacturer Storage with Direct
Shipping Network (1 of 2)
Table 4-1 Performance Characteristics of Manufacturer Storage with Direct
Shipping Network
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 Lower facility costs because of aggregation. Some saving on
handling 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 Network (2 of 2)
Table 4-1 [Continued]
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.
Figure 4-7 In-Transit Merge
Network
In-Transit Merge (1 of 2)
Table 4-2 Performance Characteristics of In-Transit Merge
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 (2 of 2)
Table 4-2 [Continued]
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 Better than drop-shipping because only a single delivery is
experience received.
Time to market Similar to drop-shipping.
Order visibility Similar to drop-shipping.
Returnability Similar to drop-shipping.
Figure 4-8 Distributor Storage with
Carrier Delivery
Distributor Storage with Carrier
Delivery (1 of 2)
Table 4-3 Performance Characteristics of 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 Somewhat higher than manufacturer storage. The
handling difference can be large for very-slow-moving items.
Information Simpler infrastructure compared to manufacturer
storage.
Distributor Storage with Carrier
Delivery (2 of 2)
Table 4-3 [Continued]
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 Better than manufacturer storage with drop-shipping.
experience
Time to market Higher than manufacturer storage.
Order visibility Easier than manufacturer storage.
Returnability Easier than manufacturer storage.
Figure 4-9 Distributor Storage with
Last Mile Delivery
Distributor Storage with Last Mile
Delivery (1 of 2)
Table 4-4 Performance Characteristics of 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 (2 of 2)
Table 4-4 [Continued]
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 longer 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.
Figure 4-10 Manufacturer or
Distributor Storage with Customer
Pickup
Manufacturer or Distributor
Storage with Customer Pickup (1 of 2)
Table 4-5 Performance Characteristics of Network with Customer Pickup Sites
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 (2 of 2)
Table 4-5 [Continued]
Service Factor Performance
Response time Similar to package carrier delivery with manufacturer or
distributor storage. Same-day pickup is possible for items stored
at regional DC.
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 or distributor storage options.
Order visibility Difficult but essential.
Returnability Somewhat easier, given that pickup location can handle returns.
Figure 4-11 Retail Storage with
Customer Pickup
Retail Storage with Customer Pickup (1 of 2)
Table 4-6 Performance Characteristics of Retail Storage with Customer Pickup
Sites
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 (2 of 2)
Table 4-6 [Continued]
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 Related to whether shopping is viewed as a positive or
experience 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.
Comparative Performance of Delivery
Network Designs (1 of 3)
Table 4-7 Comparative Performance Rank of Delivery Network Designs
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
Response 1 4 4 3 2 4
time
Product 4 1 1 2 3 1
variety
Product 4 1 1 2 3 1
availability
Comparative Performance of Delivery
Network Designs (2 of 3)
Table 4-7 [Continued]
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
Customer Varies From 1 4 3 2 1 5
experience to 5
Time to market 4 1 1 2 3 1
Order visibility 1 5 4 3 2 6
Returnability 1 5 5 4 3 2
Comparative Performance of Delivery
Network Designs (3 of 3)
Table 4-7 [Continued]
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
Inventory 4 1 1 2 3 1
Transportation 1 4 3 2 5 1
Facility and 6 1 2 3 4 5
handling
Information 1 4 4 3 2 5
Key: 1 corresponds to the best performance and 6 the worst performance.
Delivery Networks for Different Product/
Customer Characteristics (1 of 2)
Table 4-8 Performance of 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
Medium-demand +1 −1 0 +1 0 0
product
Low-demand −1 +1 0 +1 −1 +1
Product
Delivery Networks for Different Product/
Customer Characteristics (2 of 2)
Table 4-8 [Continued]
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
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.
