4

DESIGNING
DISTRIBUTION
NETWORKS AND
APPLICATIONS TO
ONLINE SALES
PowerPoint presentation to accompany
Chopra and Meindl Supply Chain Management, 5e
Global Edition
Copyright ©2013 Pearson Education.

1-1
4-1
 LEARNING
OBJECTIVES
1. Identify the role of distribution in the SC
2. Identify the key factors to be considered when designing a
distribution network
3. Discuss the strengths and weaknesses of various
distribution options
4. Understand how online sales have affected the design of
distribution networks in different industries

Copyright ©2013 Pearson Education. 4-2

 GOAL

Given: What is the

Product Characteristics appropriate
Markets Served
distribution
network?

Copyright ©2013 Pearson Education. 4-3

 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
Drives profitability by directly affecting supply chain cost and the
customer experience
Choice of distribution network can achieve supply chain
objectives from low cost to high responsiveness

Copyright ©2013 Pearson Education. 4-4

 SOME KEY
QUESTIONS????
Which distribution network is the best?
What value does each distributor provide?
When should a new distributor be added?
E-business killes distributors, so?
Why are distributors more significant in some countries, like
India?

Copyright ©2013 Pearson Education. 4-5

 FACTORS INFLUENCING
DISTRIBUTION NETWORK
DESIGN
Distribution network performance is 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
Profitability of the delivery network is determined
by revenue from met customer needs, and network
costs

Copyright ©2013 Pearson Education. 4-6

 FACTORS INFLUENCING
DISTRIBUTION NETWORK
DESIGN
Elements of customer service influenced by network
structure:
• Response time
• Product variety Priority among these is important!
• Product availability
• Customer experience
• Order visibility
• Returnability
Supply chain costs affected by network structure:
• Inventories
• Transportation
• Facilities and handling
• Information
Copyright ©2013 Pearson Education. 4-7
 DESIRED RESPONSE TIME
AND NUMBER OF
FACILITIES

Figure 4-1

Copyright ©2013 Pearson Education. 4-8

Where inventory needs to be for a one week order response time - typical results
--> 1 DC

Customer
DC

Copyright ©2013 Pearson Education. 4-9

Where inventory needs to be for a 5 day order response time - typical results --> 2
DCs

Customer
DC

Copyright ©2013 Pearson Education. 4-10

Where inventory needs to be for a 3 day order response time - typical results --> 5
DCs

Customer
DC

Copyright ©2013 Pearson Education. 4-11

Where inventory needs to be for a next day order response time - typical results --
> 13 DCs

Customer
DC

Copyright ©2013 Pearson Education. 4-12

Where inventory needs to be for a same day / next day order response time -
typical results --> 26 DCs

Customer
DC

Copyright ©2013 Pearson Education. 4-13

 INVENTORY COSTS AND NUMBER
OF FACILITIES

Figure 4-2

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 FACILITY COSTS AND NUMBER
OF FACILITIES

Figure 4-4

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 TRANSPORTATION COSTS AND
NUMBER OF FACILITIES

Figure 4-3

Copyright ©2013 Pearson Education. 4-16

 TRANSPORTATION COSTS
Inbound transportation costs: cost of bringing the material into a facility
Outbound transportation costs: cost of sending material out of a facility

Since lot size is usually larger in the inbound, «per unit» inbound cost is
smaler than «per unit» outbound cost, i.e.,
Inbound cost / unit < Outbound cost / unit
As #distribution centers increases, average outbound distance
decreases.
So, as long as inbound transportation economies of scale are present,
increasing the #facilities, decreases the outbound costs, resulting in in
decreased total transportation costs.
However, due the increase in the #facilities, if the inbound economies of
scale are no more present, then the inbound costs will increase, resulting
in increased transportation costs.
Copyright ©2013 Pearson Education. 4-17
 TRANSPORTATION COSTS

Manufacturer
1

Distributor
1
Manufacturer
2

Unit inbound cost is small Unit outbound cost is large

Copyright ©2013 Pearson Education. 4-18

 TRANSPORTATION COSTS

Manufacturer
1

Distributor
1
Manufacturer
2
Distributor
2

Unit inbound cost is still small Unit outbound cost is decreased

So total transportations costs decrease
Copyright ©2013 Pearson Education. 4-19
 TRANSPORTATION COSTS

Manufacturer
1 Distributor
3
Distributor
1
Manufacturer
2
Distributor
2

Unit inbound cost is highly increased Unit outbound cost is slightly decreased
So total transportations costs increase
Copyright ©2013 Pearson Education. 4-20
 Total Costs Related to
Number of Facilities
Total Logistics Costs
Total Costs

Facilities
Inventory
Transportation

Number of Facilities

Copyright ©2013 Pearson Education. 4-21

 LOGISTICS COST, RESPONSE
TIME, AND NUMBER OF
FACILITIES

C2
T1
C1
T2

Figure 4-5

F1 F2
Copyright ©2013 Pearson Education. 4-22
 KEY DECISIONS IN DESIGNING A
DISTRIBUTION NETWORK
1. Will product be delivered to the customer location or
picked up from a preordinated site?

2. Will product flow through an intermediary location?

Copyright ©2013 Pearson Education. 4-23

 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

Copyright ©2013 Pearson Education. 4-24

 MANUFACTURER STORAGE WITH
DIRECT SHIPPING (DROP SHIPPING)

Figure 4-6

Copyright ©2013 Pearson Education. 4-25

 DIRECT SHIPPING
(DROP SHIPPING)
Centralization is beneficial if there is high variety, high
value items with low and unpredictable demand.
Centralized inventories leading to high product availability,
low inventory levels (higher inventory turnovers), better
forecasts.
Manufacturer can postpone customization until order
arrival.
Partial shipments introduce complexity, hard to implement
if there are more than 20-30 sourcing locations
Returns can be made 1) directly to the manufacturer 2) to
the retailer that manages a seperate return facility

Copyright ©2013 Pearson Education. 4-26

 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
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.

Table 4-1

Copyright ©2013 Pearson Education. 4-27

 MANUFACTURER STORAGE
WITH DIRECT SHIPPING
NETWORK
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.

Table 4-1
Copyright ©2013 Pearson Education. 4-28
 IN-TRANSIT MERGE
NETWORK

Figure 4-7

Copyright ©2013 Pearson Education. 4-29

 IN-TRANSIT MERGE
NETWORK
In-transit merge combines pieces of order coming
from different locations, so the customer receives
the order by single delivery.
Ex: Order a Dell pc with a Sony Monitor.
Beneficial for high value items with low to medium
demand and limited number of manufacturers (4-5
sources).
Main advantage over drop shipping: Lower
transportation cost and improved customer
experience!

Copyright ©2013 Pearson Education. 4-30

 IN-TRANSIT MERGE
Cost Factor Performance
Inventory Similar to drop-shipping.
Transportation Somewhat lower transportation costs than
drop-shipping.
Facilities and Handling costs higher than drop-shipping at
handling carrier; receiving costs lower at customer.
Information Investment is somewhat higher than for drop-
shipping.

Table 4-2

Copyright ©2013 Pearson Education. 4-31

 IN-TRANSIT MERGE
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
experience delivery has to be received.
Time to market Similar to drop-shipping.
Order visibility Similar to drop-shipping.
Returnability Similar to drop-shipping.

Table 4-2

Copyright ©2013 Pearson Education. 4-32

 DISTRIBUTOR STORAGE
WITH
CARRIER DELIVERY

Figure 4-8

Copyright ©2013 Pearson Education. 4-33

 DISTRIBUTOR STORAGE WITH
CARRIER DELIVERY

Inventory is not held by the manufacturers, but is held by

distributor/retailer in intermediate warehouses.
Package carriers are used to transport items from the
retailer to the customer. Ex: Amazon
Higher inventory capacity is needed than the manufacturer,
since demand uncertainty is aggregated at a lower level!
Better for medium to fast moving items. Better response
time, lower transportation costs when compared to
manufacturer storage.
Distributor storage can handle somewhat lower variety
than manufacturer storage but it is better than a chain of
retailers.

4-34
Copyright ©2013 Pearson Education. 4-34
 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.
handling The difference can be large for very slow-
moving items.
Information Simpler infrastructure compared to
manufacturer storage.

Table 4-3

Copyright ©2013 Pearson Education. 4-35

 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 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.

Table 4-3

Copyright ©2013 Pearson Education. 4-36

 DISTRIBUTOR STORAGE
WITH
LAST MILE DELIVERY

Figure 4-9

Copyright ©2013 Pearson Education. 4-37

 DISTRIBUTOR STORAGE WITH
LAST MILE DELIVERY
Disributor/retailer delivers the product to the customer’s
home instead of using a package carrier.
Requires distributor warehouse to be very close to the
customer, so more warehouses are needed when
compared to package delivery.
Suitable for fast moving items where disaggregation does
not lead to significant increase of inventory.
Hard to justify this option when labor cost is high.
Can only be justified when there is large customer
demand at this higher price. Very short response time,
better customer experience and returnability.
Last mile delivery should be integrated with the existing
distribution network.

4-38
Copyright ©2013 Pearson Education. 4-38
 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 Facility costs higher than manufacturer
handling 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.

Table 4-4

Copyright ©2013 Pearson Education. 4-39

 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 Very good, particularly for bulky items. Slightly higher
experience than distributor storage with package carrier delivery.
Time to market Less of an issue and easier to implement than
manufacturer storage or distributor storage with
package carrier delivery.
Order visibility Easier to implement than other previous options.
Returnability Harder and more expensive than a retail network.

Table 4-4

Copyright ©2013 Pearson Education. 4-40

 MANUFACTURER OR DISTRIBUTOR
STORAGE WITH CUSTOMER PICKUP

Figure 4-10

Copyright ©2013 Pearson Education. 4-41

 MANUFACTURER OR DISTRIBUTOR
STORAGE WITH CUSTOMER PICKUP
Inventory is stored at the manufacturer or
distributor warehouse (cross dock), customer
place orders on line or via call center and come to
designated pickup points to collect their orders.
Ex: 7-Eleven Japan
Inventory and transportation costs are low due to
appropriate aggregation

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Copyright ©2013 Pearson Education. 4-42
 CROSS-DOCK VS. MIT FACILITY

Copyright ©2013 Pearson Education. 4-43

 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 Facility costs can be high if new facilities have
handling 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.

Table 4-5

Copyright ©2013 Pearson Education. 4-44

 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 Lower than other options because of the lack of
experience 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.

Table 4-5
Copyright ©2013 Pearson Education. 4-45
 Retail Storage with Customer Pickup
 Inventory is stored locally at retail stores. Customers walk into
the retail store or place an order online or by phone and pick it
up at the retail store.
 Best for fast moving items
 Very short response time due to local storage, lower
transportation cost
 Increased inventory and facility costs

4-46
Copyright ©2013 Pearson Education. 4-46
 RETAIL STORAGE WITH
CUSTOMER PICKUP
Cost Factor Performance
Inventory Higher than all other options.
Transportation Lower than all other options.
Facilities and Higher than other options. The increase in
handling 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.

Table 4-6

Copyright ©2013 Pearson Education. 4-47

 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 Related to whether shopping is viewed as a positive
experience 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.

Table 4-6

Copyright ©2013 Pearson Education. 4-48

COMPARATIVE PERFORMANCE OF
DELIVERY NETWORK DESIGNS (TAB4.7)
Retail Storage
Manufacturer Manufacturer Distributor Storage Distributor Manufacturer or
with Customer
Storage with Direct Storage with In- with Package storage with last distributor storage
Pickup
Shipping Transit Merge Carrier Delivery mile delivery with pickup

Response Time 4 4 3 2 4 1

Product Variety 4
1 1 2 3 1
Product Availability 2 3 4
1 1 1
Customer Experience
4 3 2 1 5 1-5

Order Visibility 5 4 3 2 6 1

Returnability 5 5 4 3 2 1

Inventory 1 1 2 3 1 4

Transportation 4 3 2 5 1 1

Facility & Handling 1 2 3 4 5 6

Information 4 4 3 2 5 1
(1: Best performance, 6: Weakest performance)
Copyright ©2013 Pearson Education. 4-49
 LINKING PRODUCT CHARACTERISTICS AND
CUSTOMER PREFERENCES TO NETWORK
DESIGN
Manufacturer Manufacturer Distributor Distributor storage Manufacturer Retail Storage
Storage with Storage with Storage with with last mile delivery storage with pickup with
Direct Shipping In-Transit Package Carrier Customer
Merge Delivery Pickup

High demand product

-2 -1 0 +1 -1 +2
Medium demand product
-1 0 +1 0 0 +1
Low demand product
+1 0 +1 -1 +1 -1
Very low demand product
+2 +1 0 -2 +1 -2
Many product sources
-1 -1 +2 +1 0 +1
High product value
+2 +1 +1 0 -2 -1
Quick desired response
-2 -2 -1 +1 -2 +2
High product variety
+2 0 +1 0 +2 -1
Low customer effort
+1 +2 +2 +2 -1 -2
(+2: very suitable, +1: somewhat suitable, 0: neutral, -1: somewhat unsuitable, -2: very unsuitable)
Copyright ©2013 Pearson Education. 4-50
 ONLINE SALES AND THE
DISTRIBUTION NETWORK
Explore how internet has affected the structure and performance of
various distribution networks.
– What drove the successful introduction of online sales in some
networks and not others?

Generate score cards based on how online sales affect

– the supply chain’s ability to meet customer needs, i.e., customer
service, and
– the cost of meeting those needs

Copyright ©2013 Pearson Education. 4-51

 IMPACT OF ONLINE SALES
ON CUSTOMER SERVICE
•Response time to customers
– For physical products, online fulfillment is slower than retail store
– For information goods, e.g. digital movies, music, books, online
fulfillment is faster than retail store
•Product variety
– Online store provides larger selection of items than bricks-and-
mortar store
E.g. [Link] provides higher variety than its retail
stores.
•Product availability
– Aggregating inventory and better information on customer
preferences improves product availability in online.

Copyright ©2013 Pearson Education. 4-52

 IMPACT OF ONLINE SALES ON
CUSTOMER SERVICE
Customer experience
• Improved access: order can be given any time, from anywhere in the world
• Customization
• Convenience: Don’t have to leave home to purchase, faster with guidance
based on previous purchases
Time to market
• A new product design is ready for sale as soon as it is produced,
e.g. [Link] sells a new tv earlier than it is available in the stores.
Order Visibility
• Crucial and much better in online sales
Returnability
• Harder with online orders than the retail stores since the orders will be
consolidated in a centralized location
• Proportion of returns is likely to be much higher in online due to lack of
physical experience before purchasing the product.
Copyright ©2013 Pearson Education. 4-53
 IMPACT OF ONLINE SALES ON
CUSTOMER SERVICE
Direct Sales to Customers
• Online ordering provide the distributors and manufacturers
the chance to contact customer and get feedback directly
• Social networking channels allow firms to directly pitch
products and promotion
Flexible Pricing, Product Portfolio, and Promotions
• Since the catalog items and prices can be easily changed,
online firms manage revenues from product portfolio more
effectively than traditional channels
• Promotion information can be conveyed to customers quickly
and inexpensively
Efficient Funds Transfer
• More efficient in online or mobile systems
Copyright ©2013 Pearson Education. 4-54
 IMPACT OF ONLINE SALES ON
COST
Inventory
• If customers can wait, lower inventory levels are attained due to
aggregation at higher levels of the supply chain
Note: The benefit of aggregation is small for high demand, low
variability items
• Inventories are less if it is possible to postpone variety until after
the customer order is received
Facilities
• Includes costs 1) related to the number and location of facilities in
a network and 2) costs associated with the operations in these
facilities
• Lower in online due to centralization of operations, lower staffing
costs
• Higher handling and delivery costs, especially in groceries.

Copyright ©2013 Pearson Education. 4-55

 IMPACT OF ONLINE SALES ON
COST
Transportation
• Lower cost of “transporting” information goods in digital form
• For nondigital, aggregating inventories increases outbound
transportation
Information
• Share demand, planning, and forecasting information throughout
its supply chain
• Additional costs to build and maintain the information infrastructure

Copyright ©2013 Pearson Education. 4-56

 ONLINE SALES SCORECARD
Area Impact
Response time
Product variety
Product availability
Customer experience The value of setting up online sales is
Time to market not the same in every industry.
Order visibility Amazon increased profits in online, but
Direct sales many online groceries have gone out of
Flexible pricing, portfolio, promotions
business
Efficient funds transfer
Inventory
Facilities
Transportation
Information
Key: +2 = very positive; +1 = positive; 0 = neutral; −1 = negative; −2 = very negative.

Table 4-9
Copyright ©2013 Pearson Education. 4-57
 USING ONLINE SALES TO SELL
COMPUTER HARDWARE
After more than a decade
of success in selling its
products only online, Dell
started to sell its standard
consumer products
through retail stores like
Walmart in 2007.

By 2014, servers were still configured to order, but standardized laptops were
assembled to stock. Hence the laptops could be sold in retail stores!

Since 2005 Apple has had considerable success selling its phones and
computers through retail stores.
Gateway failed in retail stores since they didn’t use the advantage of retail
system by offering the customers fast and standard options as well.
What is the relative value of selling online channels compared to retail
stores for selling computer hardware?
Copyright ©2013 Pearson Education. 4-58
 USING ONLINE SALES TO
SELL COMPUTER
HARDWARE: DELL
Impact of online sales on customer service
• Delay in fulfilling customer request
• Improved variety, availability, customer experience, time to
market, order visibility
Impact of online sales on cost
• Reduced inventory costs (for low demand and high demand
variability hardware)
• Lower facility costs
• Higher total transportation costs
• Incremental increase in information costs

Copyright ©2013 Pearson Education. 4-59

 IMPACT OF ONLINE SALES ON
PERFORMANCE Servers Laptops
Table 4-10
Impact for Impact for
Customized Standard Low-
Area Hardware Cost Hardware
Response time –1 –2
Product variety +2 0
Product availability +1 +1
Customer experience +2 +1
Time to market +2 +1
Order visibility +1 0
Direct sales +2 +1
Flexible pricing, portfolio, promotions +2 +1
Efficient funds transfer +2 +2
Inventory +2 +1
Facilities +2 +1
Transportation –1 –2
Information 0 0

Copyright ©2013 Pearson Education. 4-60

 USING ONLINE SALES TO
SELL COMPUTER
HARDWARE: DELL
A tailored supply chain network
• A hybrid model can be very effective: Take advantage of the strengths
of both online sales and traditional retail and distribution channels
• Online is better for highly customized hardware (server), since it is hard
to forecast their demands. Aggregation improves the demand forecast,
leading to lower costs through better planning. Furthermore they have
high cost, so the impact of cost efficiency gained is significant .
Retail channel is better for standard lower cost products (laptop) whose
demands are easier to forecast.
• Sell new products online, even the standard ones. When the sales of
the standard product increase, these models can be added to the retail
channel.
• Sell standard hardware at retail stores, sell its customized models
online.
• Selling standardized hardware at retail stores, allows faster response
with lower transportation costs, without adding much to inventory
holding costs.
Copyright ©2013 Pearson Education. 4-61
 USING ONLINE SALES TO
SELL BOOKS: AMAZON
[Link] was launched in 1995 as a printed book seller.
music, toys, electronics, software and home improvement equipment, and e-
books
Direct sales has not shortened the cycle time in book industry.
Traditional books customers
• don’t want to wait for days
• e-book is still not very attractive
Other customers
• Search for hard-to-find books
• Recommend books based on their previous purchases
• Provide reviews and comments
• New titles are faster at online
• Order conveniently and have shipped to home directly
Online provides fast response, availability for e-books. Variety can be added.
Copyright ©2013Online is best for low-volume books whose demand is difficult to forecast. 4-62
Pearson Education.
 USING ONLINE SALES TO
SELL BOOKS: AMAZON
Impact of online sales on customer service
• Internet has not shortened the cycle time in supply chains
• Increased selection, convenience
Impact of online sales on cost
• Reduced inventory costs
• Lower facility costs
• Higher total transportation costs
• Increase in information costs

Copyright ©2013 Pearson Education. 4-63

 IMPACT OF ONLINE SALES ON
PERFORMANCE
Table 4-11

Area Physical books e-books

Response time –1 +1
Product variety +2 +2
Product availability +1 +2
Customer experience +1 +1
Time to market +1 +2
Order visibility 0 0
Direct sales 0 +1
Flexible pricing, portfolio, promotions +1 +1
Efficient funds transfer 0 0
Inventory +1 +2
Facilities +1 +1
Transportation –2 +1
Information –1 –1

Copyright ©2013 Pearson Education. 4-64

 USING ONLINE SALES TO
SELL BOOKS: AMAZON
Selling hardware online is more advantageous than selling books
online
• Product differentiation can be postponed until a server order is
placed. Books are produced before the order arrives.
• Transportation cost is a much higher proportion of their price
for books
For e-books online is much more advantageous compared to
traditional bookstores

Copyright ©2013 Pearson Education. 4-65

 USING ONLINE SALES TO
SELL BOOKS: AMAZON
A Tailored supply chain network for books
Traditional bookstores (Borders, and Barnes&Nobles) are
pressured from both ends
• Offer full price for low-demand books, discounts for best-
sellers
Amazon more efficient by online sales
• Offer discounts for low-demand books sold online
• Sell best-sellers in Walmart and Costco
• Offer e-books online

Copyright ©2013 Pearson Education. 4-66

 USING THE INTERNET TO
SELL GROCERIES: PEAPOD
Impact of online sales on customer service
• Sell convenience and the time savings
• Offers less variety
• Creating a personalized shopping experience and customized
advertising and promotions

Copyright ©2013 Pearson Education. 4-67

 USING THE INTERNET TO
SELL GROCERIES: PEAPOD
Impact of online sales on cost
• Reduced inventory costs
• Higher facility costs due to picking operation
• Significantly higher total transportation costs
• Increase in information costs

Copyright ©2013 Pearson Education. 4-68

 IMPACT OF ONLINE SALES ON
PERFORMANCE
Table 4-12

Area Impact
Response time –1
Product variety 0
Product availability 0
Customer experience +1
Time to market 0
Order visibility –1
Direct sales 0
Flexible pricing, portfolio, promotions +1
Efficient funds transfer 0
Inventory 0
Facilities –1
Transportation –2
Information –1

Copyright ©2013 Pearson Education. 4-69

 USING INTERNET TO SELL
GROCERIES: PEAPOD
Tailored supply chain for groceries
Complement the strengths of their existing retail network
Offer an entire array of services at differing prices based on the
amount of work the customer does
• Offer online convenience to customers who are willing to pay
more
• Use retail shops for the customers who go for lower price.
Shipping costs and outbound costs are zero.
• Store purchase with home delivery option
• Online order, pickup from store

Copyright ©2013 Pearson Education. 4-70

 USING THE INTERNET TO
RENT MOVIES: NETFLIX
Founded in 1997, Netflix have grown more than 35 million
subscribers by 2013 and was the world’s largest subscription
service sending DVDs by mail and streaming movies and tv
episodes over internet.
Customers could order from wide range of DVDs to be delivered
at their homes
Netflix was one of the major factors that drove DVD rental chain
Blockbuster into bankruptcy in 2010.

Copyright ©2013 Pearson Education. 4-71

 USING THE INTERNET TO
RENT MOVIES: NETFLIX
Impact of online sales on customer service
• Excellent selection and recommendation engine
• Video streaming through a variety of devices
• Customers received their DVDs within 24 hours of being
shipped

Impact of online sales on cost

• Reduced inventory costs
• Lower facility costs
• Considerably higher total transportation costs, increased
streaming will reduce transportation costs
• Increase in information costs

Copyright ©2013 Pearson Education. 4-72

 IMPACT OF ONLINE SALES ON
PERFORMANCE
Table 4-12
Impact for Impact for
Area DVDs Digital Content
Response time –1 +2
Product variety +2 +2
Product availability +1 +2
Customer experience +1 +1
Time to market –1 –1
Order visibility 0 0
Direct sales 0 0
Flexible pricing, portfolio, promotions +1 +1
Efficient funds transfer 0 0
Inventory +2 +2
Facilities +1 +1
Transportation –2 0
Information –1 –1

Copyright ©2013 Pearson Education. 4-73

 USING THE INTERNET TO
RENT MOVIES: NETFLIX
Tailored Supply Chain for Renting Movies
• Netflix used a centralized model to supply a wide variety of
old movies either by DVD or streaming.
• Redbox has vending m/c’s providing limited variety, new
movies, children’s movies. Go online and reserve movies in
specific m/c’s. pay by credit card.
• The supply chain model where Redbox provided recent
releases from vending m/c’s and Netflix provided wide variety
of items from centralized model provided both recent releases
and a wide assortment at a much lower cost than
Blockbuster’s retail chain.

Copyright ©2013 Pearson Education. 4-74

 DISTRIBUTION
NETWORKS IN PRACTICE

1. The ownership structure of the distribution network can

have as big as an impact as the type of distribution
network
2. It is important to have adaptable distribution networks
3. Product price, commoditization, and criticality affect the
type of distribution system preferred by customers
4. Integrate the Internet with the existing physical network

Copyright ©2013 Pearson Education. 4-75

 SUMMARY OF 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

Copyright ©2013 Pearson Education. 4-76