Supply Chain Management

Chapter 2
Designing the Distribution
Network in a Supply Chain

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 Introduction
The supply chain network consists of suppliers,
manufacturing centres, warehouses, distribution centres,
and retail outlets, as well as raw materials, work-in-
process inventory, and finished products that flow
between the facilities. It is the collection of physical
locations, transportation vehicles and supporting systems
through which the products and services the firm
markets are managed and ultimately delivered. All
organisations have or can purchase the components to
build a supply chain network.

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 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
 The distribution is one of the four elements of the marketing
mix. The other three parts of the marketing mix are product,
pricing, and promotion.
 Distribution is a key driver of the overall profitability of a
company because it directly impacts both the supply chain
costs and customer experience.
 Good distribution system serves the effectiveness of
realising marketing strategy. This strategy is aimed at
reaching certain levels of customer service.
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 The Role of Distribution
in the Supply Chain
 Distribution process involves each intermediary
passing the product down the chain to the next
organisation, before it finally reaches the consumer or
end-user. This process is known as the distribution
chain or the channel. Each of the elements in these
chains will have their own specific needs, which the
producer must take into account, along with those of
the all-important end-user

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 The Role of Distribution
in the Supply Chain
 A number of alternate channels of distribution may be
available:
 Distributor, who sells to retailers
 ‚Retailer (dealer), who sells to end customers
 Advertisement typically used for consumption goods
 Distribution channels may not be restricted to physical
products from producer to consumer in certain sectors. Both
direct and indirect channels may be used. Hotels, for example,
may sell their services directly or through travel agents, tour
operators, airlines, tourist boards, centralised reservation
systems, etc

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 The Role of Distribution
in the Supply Chain
 There has been some sort of innovations in the distribution of
services
 Supply chain distribution often introduces middlemen into the
economic market.
 Historically, supply chains were primarily found in the
manufacturing and production industries. These companies
transform raw materials such as timber, minerals, steel, and
fabric into valuable goods ready for use by consumers
 Manufacturing and production companies may not have
resources available for delivering products into retail stores
where consumers can safely shop and purchase items, so they
depend upon supply chain distribution to complete the process
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 The Role of Distribution
in the Supply Chain
 There is an increasing number of complicated supply
chains. So, the distribution network design plays a
keyrole in controlling the cost of doing business.
 The aim is to select the optimum numbers, locations
and capacities of plants and warehouses to open so
that all customer demand is satisfied at minimum total
costs of the distribution network (including
transportation and production costs)

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 Factors Influencing
Distribution Network Design
 Distribution network performance evaluated along
two dimensions at the highest level:
– Customer needs that are met
– 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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 Factors Influencing
Distribution Network Design
 Elements of customer service influenced by network structure:
– Response time
– Product variety
– Product availability
– Customer experience
– Order visibility
– Returnability
 Supply chain costs affected by network structure:
– Inventories
– Transportation
– Facilities and handling
– Information

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Service and Number of Facilities
(Fig. 4.1)

Number of
Facilities

Response Time

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The Cost-Response Time Frontier

Hi Local FG
Mix
Regional FG

Local WIP
Cost Central FG

Central WIP

Central Raw Material and Custom production

Custom production with raw material at suppliers

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 Inventory Costs and Number
of Facilities (Fig. 4.2)

Inventory
Costs

Number of facilities

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 Transportation Costs and
Number of Facilities (Fig. 4.3)

Transportation
Costs

Number of facilities

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 Facility Costs and Number
of Facilities (Fig. 4.4)

Facility
Costs

Number of facilities

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 Total Costs Related to
Number of Facilities
Total Costs
Total Costs

Facilities
Inventory
Transportation

Number of Facilities
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Variation in Logistics Costs and Response
Time with Number of Facilities (Fig. 4.5)
Response Time

Total Logistics Costs

Number of Facilities
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 Design Options for a
Distribution Network
The distribution networks have their relative strengths and weaknesses. Based
on the choices for the two decisions, there are five distinct distribution network
designs that are classified as follows
Manufacturer Storage with Direct Shipping
Manufacturer Storage with Direct Shipping and In-Transit Merge
Distributor Storage with Carrier Delivery
Distributor Storage with Last Mile Delivery
Manufacturer or Distributor Storage with Consumer Pickup
Retail Storage with Consumer Pickup
Selecting a Distribution Network Design

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 Manufacturer storage with direct
shipping (Drop shipping)
 The product is shipped directly from the manufacturer to the end customer,
bypassing the retailer (who takes the order and initiates the delivery
request). All inventories are stored at the manufacturer. Information flows
from the customer, via the retailer, to the manufacturer, while product is
shipped directly from the manufacturer to customers.
 The biggest advantage of drop shipping is the ability to centralise
inventories at the manufacturer. A manufacturer can aggregate demand and
provide a high level of product availability with lower levels of inventory
than individual retailers.
 The benefits from such sort of centralisation are highest for high value, low
volume items with unpredictable demand and vice verse. Thus, drop
shipping would not offer a significant inventory advantage to an online
grocer selling a staple item like detergent.

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 Manufacturer storage with direct
shipping (Drop shipping)
 Transportation costs are high with drop shipping because the average
outbound distance to the end consumer is large and package carriers must be
used to ship the product that have high shipping costs per unit compared to
truckload carriers.
 With drop shipping, a customer order with items from several manufacturers
will involve multiple shipments to the customer. This loss in aggregation in
outbound transportation further increases cost.
 Supply chains save on the fixed cost of storage facilities when using drop
shipping because all inventories are centralised at the manufacturer.
 There can be some savings of handling costs too because the transfer from
manufacturer to retailer no longer occurs. Handling costs can be significantly
reduced if the manufacturer has the capability to ship orders directly from the
production line.
 A good information infrastructure is needed so that the retailer can provide
product availability information to the customer even though the inventory is
located at the manufacturer
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 Manufacturer storage with direct
shipping (Drop shipping)
 Response times tend to be large when drop shipping is used because the
order has to be transmitted from the retailer to the manufacturer and
shipping distances are on average longer from the manufacturer’s
centralised site.
 Manufacturer storage with drop shipping allows a high level of product
variety to be made available to the customer
 Drop shipping provides a good customer experience in the form of delivery
to the customer location. The experience, however, suffers when a single
order containing products from several manufacturers is delivered in partial
shipments

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 Distributor storage with package
carrier delivery
 Under this option, inventory is not held by manufacturers at the factories but is held
by distributors or retailers in intermediate warehouses and package carriers are used
to transport products from the intermediate location to the final customer.
Information and product flows when using distributor storage with delivery by a
package carrier.
 Transportation costs are somewhat lower for distributor storage compared to manufacturer
storage because an economic mode of transportation (e.g. truckload) can be employed for
inbound shipments to the warehouse, which is closer to the customer.
 Unlike manufacturer storage where multiple shipments may need to go out for a single
customer order with multiple items, distributor storage allows outbound orders to the customer
to be bundled into a single shipment further reducing transportation cost .
 For faster moving items, transportation savings from distributor storage relative to
manufacturer storage increase.
 Compared to manufacturer storage, facility costs are somewhat higher with distributor storage
because of a lack of aggregation. From a facility cost perspective, distributor storage is not
good for extremely slow moving items

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 Distributor storage with package
carrier delivery
 The information infrastructure needed with distributor
storage is significantly less complex than the
manufacturer storage.
 Response time with distributor storage is better than
with manufacturer storage because distributor
warehouses are closer to customers and the entire
order is aggregated at the warehouse on shipping.
 Distributor storage can handle somewhat lower
variety than manufacturer storage

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Manufacturer Storage with
Direct Shipping

Manufacturer

Retailer

Customers

Product Flow
Information Flow

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 Manufacturer storage with direct
shipping and in-transit merge
 Unlike drop shipping where each product in the order is sent directly from
each manufacturer to the end customer, in-transit merge combines pieces of
the order coming from different locations so that the customer gets a single
delivery.
 The ability to aggregate inventories and postpone product customisation is a
significant advantage of intransit merge
 The transportation costs are lower than drop shipping because of the merge that
takes place at the carrier hub prior to delivery to the customer.
 An order with products from many manufacturers thus requires only one delivery to
the customer. Fewer deliveries save transportation cost and simplify receiving
process.
 Overall supply chain facility and handling costs are somewhat higher than drop
shipping
 Sophisticated information infrastructure is needed to allow the in-transit merge.
 Response times may be higher because of the need to perform the merge

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 In-Transit Merge Network (Fig. 4.7)
Factories

Retailer In-Transit Merge by

Customers

Product Flow
Information Flow

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 Distributor Storage with
Carrier Delivery (Fig. 4.8)

Factories

Warehouse Storage by
Distributor/Retailer

Customers

Product Flow
Information Flow
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 Distributor storage with last mile
delivery
 Last mile delivery refers to the distributor / retailer delivering the product to the customer’s home instead of
using a package carrier. Peapod and Albertson’s have used last mile delivery in the grocery industry. Unlike
package carrier delivery, last mile delivery requires the distributor warehouse to be much closer to the
customer, increasing the number of warehouses required.
 Distributor storage with last mile delivery requires higher levels of inventory because it has a lower level of
aggregation.
 Transportation costs are highest using last mile delivery. This is because package carriers aggregate delivery
across many retailers and are able to obtain better economies of scale than available to a distributor or
retailer attempting last mile delivery.
 Last mile delivery is cheaper in dense cities.
 Transportation costs are reasonable for bulky products where the customer is willing to pay for home
delivery. For example, home delivery for water and large bags of rice has proved quite successful in China,
where the high population density has helped decrease delivery costs
 Facility and processing costs are very high using this option given the large number of facilities required.
For example, a grocery store doing last mile delivery performs all the processing until the product is
delivered to the customer’s home unlike a supermarket where there is much more customer participation.
 The information infrastructure with last mile delivery requires the additional capability of scheduling
deliveries
 Response times are faster than the use of package carriers.

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 Manufacturer or distributor
storage with costumer pickup
 In this approach, inventory is stored at the manufacturer or distributor warehouse
but customers place their orders online or on the phone and then come to designate
pickup points to collect their orders. Orders are shipped from the storage site to the
pickup points as needed.
 Inventory costs using this approach can be kept low with either manufacturer or
distributor storage to exploit aggregation.
 Transportation cost is lower than any solution using package carriers because
significant aggregation is possible when delivering orders to a pickup site.
 Facility costs are high if new pickup sites have to be built
 The main advantage of a network with consumer pickup sites is that it can lower
delivery cost, thus expanding the set of products sold as well as customers served
online.
 The major hurdle is the increased handling cost at the pickup site.

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 Distributor Storage with
Last Mile Delivery (Fig. 4.9)

Factories

Distributor/Retailer
Warehouse

Customers

Product Flow
Information Flow
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 Manufacturer or Distributor Storage
with Customer Pickup (Fig. 4.10)
Factories

Retailer Cross Dock DC

Pickup Sites

Customers

Customer Flow
Product Flow
Information Flow 4-30
 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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Distribution Network Design in the
Supply Chain
 The objective of strategic distribution network planning is to determine a plan that
indicates the most economic way to ship and receive product while maintaining or
increasing customer service requirements, i.e., to maximise profits and optimise
service. Strategic distribution network planning typically answers the following:
 How many distribution centres should exist?
 Where should the distribution centre(s) be located?
 How much inventory should be stocked at each distribution centre?
 What customers should be serviced by each distribution centre?
 How should the customer `order` from the distribution centre?
 How the distribution should centres `order` from vendors?
 How frequently should shipments be made to each customer?
 What should the service levels be?
 What transportation methods should be utilised?
 How to measure the balance between logistic costs and customer service correlation?

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Factors Affecting Network Design Decisions
 Following are the factors that influence the decision of distribution network design
 Centralisation vs. Regionalisation
 In distribution network planning, there is a well-established relationship between
the number of distribution points, transportation costs and customer service targets. ‚
Graphically, the point at which these three entities merge is the optimum balance of
facility and transportation costs to develop a low-cost, high service distribution
network. ‚ As the distribution networks become more centralised, the internal
support structures such as facility management, order entry, customer service and
data processing also do the same. Degree of centralisation achieved determines the
cost savings over decentralised networks. ‚
 However, service levels, limitations on total facility size and risk mitigation must be
factored into the decision

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 Factors Affecting Network Design
Decisions
 Energy
Considerable shifts in the cost of energy (for example, electricity, fuel, etc.) can have an
impact on operating costs and, as a result, on distribution.
‚ Distribution projects may fail once the cost of energy turns into an influencing factor,
for example, energyintensive facilities such as refrigerated warehouses.
Thus, it is critical to work with all energy providers to determine the load that an
operation would put on the local energy system and develop solutions that conserve
energy while achieving goals. Some interesting energy solutions can be abatement
programs (high power generator or solar power) to run normally on a reduced
energy load or high-efficiency units.
Even if the transportation is handled via third party carriers, rising fuel costs make a
very sensitive component of distribution costs.
Some strategies to consider mitigating this can be cube out containers, transportation
management systems, private fleet concerns etc.

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 Factors Affecting Network Design
Decisions
 Flexibility
 When designing a distribution facility, versatile equipment should be
specified.
 In the beginning, the latest technology can make a good start but becomes
a waste of money if it can’t keep a pace with unpredictable events.
 Planning for probable or doubtful changes in the distribution profile should
drive the warehouse design and equipment specifications.
 For the majority of distribution operations, flexible equipment is the more
practical choice.

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 Factors Affecting Network Design
Decisions
 Global marketplace
 Preparedness is the critical element in a global marketplace.
 The supply chain is ever-changing and has a global impact that needs to be
considered. ‚
 This could be as minor as a domestic customer wanting direct shipments to an
international location, or as major as an acquisition by a global company or addition
of a key global account.
 Transportation systems should be designed with exports in mind. Proper customs
documentation and international shipping paperwork should be done. Operations
should be designed in a manner that product re-labelling or special packaging for
international customers can be done easily.
 Facilities may be needed to accommodate inbound or outbound airfreight or ocean
freight containers.
 Customer service functions may need to operate in 24-hour mode to assist customers
in all time zones.

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 Factors Affecting Network Design
Decisions
 Government involvement
 The involvement of government has an impact on distribution. ‚
 The distribution system should be aware of legislation that involves their industry.
 Many decisions are made daily at a local, state, and federal level that impact
distribution operations. Taxes, labour regulations, transportation restrictions and
infrastructure decisions are continually up for review and discussion at every level of
government.
Information systems
 Today distribution execution systems must be: i. Real-time: Customer requirements are moving
toward being able to instantly track an order through every step of the fulfilment process to
delivery. The information is linked to internet where a customer can easily log in and see the
exact status of their order. Real-time interfaces and host system updates enable the customer. ii.
Paperless: Language and educational barriers result in error-prone paper documents that are
often misinterpreted, at best resulting in loss within the distribution operation or, worse still, lost
customers due to fulfilment issues. The solution is paperless systems requiring operator
validation. iii. Standardised: Standardised, industry-tailored software is now the rule

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 Factors Affecting Network Design
Decisions
 Modularity
 As companies in the distribution space move, their business will typically jump to a
new distributor or distributors. ‚ The ability to quickly take on significant business
volumes dictates that modularity is a necessity for a thriving distribution
organisation.
 Modularity must be evident in: i. Assets: Distribution assets must be modular,
providing the ability to easily expand facilities, capacities and equipment to meet
increasing demands and diverse products. Many companies design this into a
facility. ii. Work assignments: The workforce must be able to handle new work
assignments and transfer knowledge to new employees effectively. iii. Labour
management systems: These systems must be able to handle the addition of new
operations quickly and economically so that performance can be measured and costs
can be kept under control

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 Factors Affecting Network Design
Decisions
 Off-highway vehicles
 In many countries, issues regarding the environment and air quality
continue. ‚ These issues for stringent air-quality regulations will impact the
warehouse. ‚ Electric vehicles will take over as the preferred models in the
warehouse.
 Pace
 Access to a web site can now order product, specify their service requirements, pay
for their order on-line, and track the order right to their doorstep. ‚ For distributors,
this means that the pace of distribution must increase significantly to account for the
reduced times, shorter product lives, increased inventory turnover and greater
customer expectations that is considered standard in the modern business-to-
business and business-to-consumer marketplace

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 Factors Affecting Network Design
Decisions
 Price ‚
 The service and quality are key factors in selecting a distribution partner. ‚ Modern
free enterprise demands efficient, effective and low-cost distribution. ‚ The goal of a
successful distribution operation should be to operate within their core values at the
lowest cost possible. The path to competitive pricing is to operate efficiently and
flexibly at low cost. •
 Accountability ‚ A successful distribution operation must have accountability. ‚
Accountability is made possible by effective leadership, clear communications and
efficient systems and equipment to enable productive operations and a fulfilling
work environment. Effective leadership make difficult decisions while maintaining
the commitment of the organisation. Accountability requires establishing standards,
identifying improvement opportunities and measuring performance.
 • Reverse logistics ‚ The challenge is the question of handling the products that are
coming back into the operation. ‚ The decision on whether to accept the product,
whether a refused shipment, an authorized customer return, or an unexpected return
must be planned for and communicated with the distribution operation. •

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 Factors Affecting Network Design
Decisions
 Third party logistics ‚
 A growing number of companies are turning to third party logistics
organisations to handle the customer fulfilment in the supply chain.
‚ Companies that are accustomed to true partnering with customers and
suppliers have less trouble moving to the third party logistics and achieving
the potential cost savings. ‚ The key steps are to conduct a complete search
for the right third party logistics vendor, thoroughly review cost proposals and
contracts to ensure there is financial benefit, and work with the third party
logistics.
 Variety :‚ Special packaging, pricing, labelling and delivery requirements are
becoming the norm and must be addressed in any distribution plan. These
tasks should be designed into the operation. ‚ Many companies invest large
amounts of capital setting up specialised packing or value-added services to
gain competitive advantages. ‚ Properly planned, these services can give
profits, providing differentiation in a competitive marketplace.

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 Supply Chain Model
 The supply chain models, which address both the upstream and downstream sides. • The
Supply-Chain Operations Reference model (SCOR) measures total supply chain performance.
It is a process reference model for supply-chain management, spanning from the supplier’s
supplier to the customer’s customer. It is the most widely used model. • It includes delivery and
order fulfilment performance, production flexibility, warranty and returns processing costs,
inventory and asset turns, and other factors in evaluating the overall effective performance of a
supply chain
 SCOR is based on five distinct management processes: Plan, Source, Make, Deliver, and
Return
 Plan - Processes that balance aggregate demand and supply to develop a course of action which
best meets sourcing, production, and delivery requirements
 Source - Processes that procure goods and services to meet planned or actual demand. ‚ Make -
Processes that transform product to a finished state to meet planned or actual demand. ‚
Deliver - Processes that provide finished goods and services to meet planned or actual demand,
typically including order management, transportation management, and distribution
management. ‚ Return - Processes associated with returning or receiving returned products for
any reason. These processes extend into post-delivery customer support

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 Summary of Learning Objectives
 What are the key factors to be considered when
designing the distribution network?
 What are the strengths and weaknesses of various
distribution options?
 What roles do distributors play in the supply chain?

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