Unit 2 -Supply Chain Network

BA 4021 SUPPLY CHAIN MANAGEMENT 1
UNIT II – SUPPLY CHAIN NETWORK
Distribution Network Design – Role in supply chain, Influencing factors, design options, online sales
and distribution network, Distribution Strategies; Network Design in supply chain – Role, influencing
factors, framework for network design, Impact of uncertainty on Network Design.
2.1 DISTRIBUTION
Distribution is a key driver of the overall profitability of a firm because it directly impacts both the
supply chain costs and the customer experience. Good distribution can be used to achieve a variety of
supply chain objectives ranging from low cost to high responsiveness. As a result, companies in the
same industry often select very different distribution networks.
(Example)
Dell distributes its PCs directly to end consumers, while companies like Hewlett Packard (HP) and
Compaq distribute through resellers. Dell customers wait several days to get a PC while customers can
walk away with an HP or Compaq PC from a reseller.
2.1.1 Distribution Network

In a supply chain, a distribution network is an interconnected group of storage facilities and
transportation systems that receive inventories of goods and then deliver them to customers. It is an
intermediate point to get products from the manufacturer to the end customer, either directly or
Dr.C.THIRUMAL AZHAGAN
through a retail network. A fast and reliable distribution network is essential in today's instant
gratification society of consumers.
A distribution network is a connected group of storage facilities and transportation systems. It is
formed in accordance with a distribution strategy designed to move goods from manufacturer to
wholesalers, retailers or buyers.
2.1.2 Distribution Management

Distribution management is the process used to oversee the movement of goods from supplier to
manufacturer to wholesaler or retailer and finally to the end consumer. Numerous activities and
processes are involved, including raw good vendor management, packaging, warehousing, inventory,
supply chain, logistics and sometimes even blockchain.
2.1.3 Factors That Influence Distribution Management

Many things can influence distribution management. The five most common are:
1. Unit perishability – if it’s a perishable item then time is of the essence to prevent loss,
2. Buyer purchasing habits – peaks and troughs in purchasing habits can influence distribution
patterns and therefore varying distribution needs that can be predicted,
3. Buyer requirements — e.g. changes in a retailer’s or manufacturer’s just in time inventory
demands,
4. Product mix forecasting – optimal product mixes vary according to seasons and weather or
other factors and
5. Truckload optimization – relies on logistics and fleet management software to ensure every
truck is full to capacity and routed according to the most efficient path.
2.1.4 Technologies that Aid in Distribution

As technology becomes smarter, more and more solutions arise to streamline the distribution process.
One of the main ways to optimize the distribution workflow is to employ a distribution software.
Whether you’re a manufacturer conducting your own distribution or a distributor looking to improve
operations, a software solution can be a beneficial option. Here are some of the new technologies
included in distribution software that can positively influence your business.
Automation
Automation capabilities can increase the speed at which work is completed and free up employee time.
This ability is offered for various tasks, and specific functionality differs based on the distribution
software vendor that you go with. An example of how this might look in practice is through the
automatic assignment of items to a vehicle based on where the other materials in that vehicle are going
and its planned route.
Internet of Things (IoT)
The internet of things is especially helpful in increasing productivity in the distribution process. Many
distribution systems include RFID tracking that enables users to scan items and track their locations
geographically and within the workflow. This helps users visualize the movement of inventory in real
time.
Cloud-Based System
The proliferation of cloud-based distribution software enables users to access solutions anytime and
anywhere. This is especially helpful in the distribution industry where employees may need to look at
data not just when they’re seated at their desks, but also when they’re working hands-on in a
distribution center. This option enables flexibility and accessibility.
2.1.5 Common Distribution Software Features

Distribution software contains many different features to aid in the distribution process. Here’s a quick
overview of some of the commonly included features in these programs.
Sales Order Management
Sales order management functionality often includes the ability to input orders and then transmit them
to manufacturing so that items can be produced to meet customer needs. Some programs enable this
process to occur automatically and can receive customer information from different touch points.
CRM
CRM tools can assist users in looking at customer information in real time to see historical purchasing
information, products that are currently being waited on and payment method. This can improve
the customer experience along with keeping distributors knowledgeable of varied customer
expectations.
Inventory Management
Inventory management features include the ability for employees to look at capacity, shortages and on-
hand stock. This assists with planning and review of demand processes. Some distribution programs
can use inventory information and demand planning to automatically reorder materials needed to meet
anticipated needs.
E-Commerce
E-commerce features assist companies in developing an online shopping platform to manage and
coordinate sales with customers. These tools often contain support for web analytics so that
organizations can track the products that clients are most interested in along with other relevant data
points.
Logistics Management
These features enable transportation management and route planning. This may include selecting
which items should be shipped together for the most efficient shipping process along with helping
delivery drivers optimize their driving hours.
2.2 ROLE OF DISTRIBUTION IN SUPPLY CHAIN

Distribution refers to the steps taken to move and store a product from the supplierstage to a customer
stage in the supply chain.
Supplier Manufacturer Distributor Retailer Customer
Distribution occurs between every pair of stages in the supply chain. Raw materials and
components are moved from suppliers to manufacturers, whereas finished products are moved
from the manufacturer to the end consumer.
 Distribution is a key driver of the overall profitability of a firm because it affects both the
supply chain cost and the customer value directly.
 Choice of distribution network can achieve supply chain objective from low cost to high
responsiveness.
Examples:
1. Wal-Mart and Seven-Eleven Japan, have built the success of their entire business around
outstanding distribution design and operation.
2. Dell distributed its PCs directly to end consumers, whereas companies such as HP distributed
through resellers.
3. Proctor & Gamble (P&G) has chosen to distribute directly to large supermarket chains while
obligating smaller players to buy P&G products from distributors.
The process of designing a distribution network has two broad phases.
 In the first phase, the broad structure of the supply chain network is visualized. This stage
includes decisions such as whether the product will be sold directly or go through an
intermediary.
 The second phase then takes the broad structure and converts it into specific locations
and their capability, capacity, and demand allocation.
The appropriate choice of distribution network grows the supply chain surplus by satisfying
customer needs at the lowest possible cost.
2.3 FACTORS INFLUENCING DISTRIBUTION NETWORK DESIGN

Performance of a distribution network should be evaluated along two dimensions:
1. Customer needs that are met (Service Factor)
2. Cost of meeting customer needs (Cost Factor)
Meeting the customer’s demands on time affect the revenues of the company at large, which along
with the costs together affect the overall profitability of the network and the company as a whole.
There are various components that affect both customer service and the distribution network at
large.
1. Service Factors: The measures that are influenced by the structure of thedistribution network
are as follows
 Response time is the amount of time it takes for a customer to receive anorder.
 Product variety is the number of different products/configurations that are offered by
the distribution network.
 Product availability is the probability of having a product in stock when a customer
order arrives.
 Customer experience includes the ease with which customers can place and receive
orders as well as the extent to which this experience is customized.
 Time to market is the time it takes to bring a new product to the market.
 Order visibility is the ability of customers to track their orders from placement to
delivery.
 Returnability is the ease with which a customer can return unsatisfactorymerchandise
and the ability of the network to handle such returns.
Customer do not always expects the highest level of performance along all these
dimensions. Eg. Amazon Customers Vs Barnes & Noble Store.
 Trade off: Faster response time for high levels of variety.
2. Cost Factors: Changing the distribution network design affects the following supply chain
costs on
 Inventories
 Transportation
 Facilities and handling
 information
2.3.1 Relationship between desired response time and required number of Facilities
Firms that target customers who can tolerate a long response time require only a fewlocations that
may be far from the customer. These companies can focus on increasing the capacity of each
location. In contrast, firms that target customers who value short response times need to locate
facilities close to them. These firms must have many facilities, each with a low capacity. Thus, a
decrease in the response time customers desire increases the number of facilities required in the
network.
Fig 2.3.1 Relationship between desired response time and required number of Facilities
2.3.2 Relationship between No. of Facilities and Inventory Cost

To decrease inventory costs, firms try to consolidate and limit the number of facilities in their
supply chain network. For example, with fewer facilities, Amazon is able to turn its inventory
about 12 times a year, whereas Borders, with about 400 facilities, achieves only about two turns
per year.
Fig 2.3.2 Relationship between No. of Facilities and Inventory Cost
2.3.3 Relationship between No. of Facilities and transportation cost

Transportation costs are of two types. These costs are called inbound transportation costs and
Outbound Transportation costs. Inbound transportation costs are those costs that are incurred
while bringing the material into the company facility. On the other hand, outbound transportation
costs are those that are incurred while sending the products outside the facility. It is observed that
the inbound transportation costs are lesser than the outbound transportation ones because these
include bringing of raw material that is in bulk, therefore the per unit transportation costs
tend to decrease. On the other hand, the outbound transportation costs are higher because products
may need to be transported in smaller lots to different locations and the cost per unit tends to be
higher than the inbound transportation costs.
Fig 2.3.3 Relationship between No. of Facilities and Transportation Cost
2.3.4 Relationship between No. of Facilities and Facility cost

Facilities cost is nothing but the cost that is incurred in setting up a facility. Facility costs decrease
as the number of facilities is reduced. Because a consolidation of facilities allows a firm to exploit
economies of scale.
Fig 2.3.4 Relationship between No. of Facilities and Facility Cost
2.3.5 Relationship between No. of Facilities Response Time and Logistics Cost
Total Logistics Cost = Inventory Costs + Transportation Costs + Facility Costs. response time
more effectively, then it may increase the number of facilities, which would also lead to an
increase in the total logistics costs after the minimum point.
It is important to note that companies would like to exercise such increase in the number of
facilities only if they are confident that the increase in revenues because of better responsiveness is
more than the increase in the costs due to the additional facilities.
Fig 2.3.5 Relationship between No. of Facilities Response Time and Logistics Cost
2.4 DESIGN OPTIONS FOR DISTRIBUTION NETWORK
Distribution network choices from the manufacturer to the end consumer. Two key decisions used for
designing a distribution network are
a. Will product be delivered to the customer location or picked up from apreordained site?
b. Will product flow through an intermediary (or) intermediate location?
Based on the choices for the two decisions, there are six classification of distribution network designs as
follows.
1. Manufacturer storage with direct shipping
2. Manufacturer storage with direct shipping and in-transit merge
3. Distributor storage with package carrier delivery
4. Distributor storage with last-mile delivery
5. Manufacturer/distributor storage with costumer pickup
6. Retail storage with customer pickup
2.4.1 Manufacturer Storage with Direct Shipping: product is shipped directly from the
manufacturer to the end customer, bypassing the retailer (who takes the order and initiates the
delivery request). This option is also referred to as drop shipping.
Example: Dell, the manufacturer sells directly to the customer.
Advantage: Ability to centralize inventories at the manufacturer.

Performance Characteristics of Manufacturer Storage with Direct ShippingNetwork
Cost Factor Performance
Inventory Lower costs because of aggregation. The biggest advantage of drop-
shipping is the ability to centralize inventories at themanufacturer who
can aggregate demand across all retailers that it supplies.
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
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 Easy to provide a high level of product availability because of
availability aggregation at manufacturer
Customer Good in terms of home delivery but can suffer if order from several
experience 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
2.4.2 Manufacturer storage with direct shipping and in-transit merge:

It combines pieces of the order coming from different locations manufacturers, so that the
customer gets a single delivery.
In-transit merge design has been used by Dell and can be used by companies implementing
drop-shipping. When a customer orders a PC from Dell along with aSony monitor, the package
carrier picks up the PC from the Dell factory and the monitor from the Sony factory; it then
merges the two at a hub before making a single delivery to the customer.
Performance Characteristics of Manufacturer storage with direct shipping and in-

transit merge
Inventory Similar to drop-shipping.
Transportation Somewhat lower transportation costs than drop-shipping.
Facilities and Handling costs higher than drop-shipping at carrier;
handling receiving costs lower at customer.
Information Investment is somewhat higher than for drop-shipping
Response time Similar to drop-shipping; may be marginally higher
Product variety Similar to drop-shipping
Product Similar to drop-shipping
availability
Customer Better than drop-shipping because only a single delivery has to be
experience received.
Time to market Similar to drop-shipping
Order visibility Similar to drop-shipping
Returnability Similar to drop-shipping
2.4.3 Distributor storage with package carrier delivery: Under this option, inventory is not
held by manufacturers at the factories but is held by distributors / retailers in intermediate
warehouses and package carriers are used to transport products from the intermediate location
to the final customer. Amazon.com as well as industrial distributors like W.W. Grainger and
McMaster-Carr have used this approach combined with drop-shipping from a manufacturer (or
distributor).
Performance Characteristics of Distributor storage with package carrierdelivery

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 difference can be
handling large for very slow-moving items.
Information Simpler infrastructure compared to manufacturer storage
Response time Faster than manufacturer storage
Product variety Lower than manufacturer storage
Product Higher cost to provide the same level of availability as
availability 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
2.4.4 Distributor storage with last mile delivery: By ‘last mile delivery’ we mean that the
distributor or retailer provides delivery of the demanded product up to the customer’s place.
This delivery is made without using a carrier. It is very important to note that companies
opting for the distributor storage with last mile delivery design option have their warehouses
placed very close to the customer.
Example: Webvan, Peapod, and Albertsons have used last-mile delivery in the grocery
industry.
Performance Characteristics of Distributor storage with last mile delivery
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 storage or distributor storage
handling with package carrier delivery, but lower than a chainof retail stores.
Information Similar to distributor storage with package carrier delivery

Response time Very quick. Same day to next-day delivery
Product variety Somewhat less than distributor storage with package carrierdelivery
but larger than retail stores
Product More expensive to provide availability than any other option except
availability retail stores..
Customer Very good, particularly for bulky items.
experience
Time to market Slightly higher than distributor storage with package carrierdelivery
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
2.4.5 Manufacturer/ Distributor storage with customer pick-up: Inventory is stored at the
manufacturer or distributor warehouse, but customers place their orders online or on the phone
and then travel to designated pickup points to collect their merchandise. Orders are shipped from
the storage site to the pickup points as needed.
Examples include 7dream.com and Otoriyose-bin, operated by Seven-Eleven Japan, which allow
customers to pick up online orders at a designated store. A business-to- business (B2B) example
is W.W. Grainger, whose customers can pick up their orders at one of the W.W.Grainger retail
outlets.
Performance Characteristics of Manufacturer/ Distributor storage with customer

pick-up

Inventory Can match any other option, depending on the location ofinventory
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 to be built. Costs are
handling lower if existing facilities are used. The increase inhandling cost at the
pickup site can be significant..
Information Significant investment in infrastructure required
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 Similar to other manufacturer or distributor storage options
availability
Customer Lower than other options because of the lack of home delivery.
experience 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 handlereturns
2.4.6 Retail storage with customer pick-up: Under the retail storage option, the inventory is
stored at the retail outlets. Desirous customers may come to these retail outlets anytime and
purchase the desired products. They may also apply online or call up any of the company’s hot
line numbers to place their orders and then pick itup from a retail store.
Example: A B2B example is W.W. Grainger. Customers can order online, by phone, or in
person and pick up their order at one of W.W. Grainger’s retail outlets. Albertsons keeps its
inventory at the pickup location itself. W.W. Grainger stores some items atthe pickup locations,
whereas others may come from a central location.
Performance Characteristics of Retail storage with customer pick-up
Inventory Higher than all other options
Transportation Lower than all other options.
Facilities and Higher than other options. The increase in handling cost at the pickup
handling site can be significant for online and phone orders.
Information Some investment in infrastructure required for online and phone
orders
Response time Same-day (immediate) pickup possible for items stored locally at
pickup site.
Product variety Lower than all other options
Product More expensive to provide than all other options
availability
Customer Related to whether shopping is viewed as a positive or negative
experience experience by customer
Time to market Highest among distribution options
Order visibility Trivial for in-store orders. Difficult, but essential, for onlineand phone
orders.
Returnability Easier than other options because retail store can provide asubstitute.
2.5 ONLINE SALES AND DISTRIBUTION NETWORK

Supply Chain consists of all the parties, vendors, manufacturers, suppliers involved directly or
indirectly in fulfilling all the customer needs and changing demands. The flow of materials,
products, money, information not only between the manufacturer and suppliers but also with
transport, logistics, warehouses and retailers in the entire value chain. Walmart can be taken as best
example for effective and efficient supply chain network in fulfilling the customer needs. The
coordination between supplier, manufacturer, distributor, wholesaler, retailer and customer is the
key for driving the business. The ultimate objective of the supply chain is to maximize the profits
and create visibility in the entire network by reducing the inventory.
The entrance of online and E commerce sales across the global and especially in India big players
like Amazon, Ebay, Flipkart, Snapdeal etc... Have transformed the businesses and taken them to
new level. They are pumping funds through huge Investments by HNI’s and people having deep
pockets. The customer service as become vital in all the aspects of business right from the order
fulfilment process to delivery, returns management. Customer is the key to all the businesses.
Retaining the customer is crucial during unpredictable gaps between demand and supply. We must
also look at factors influencing sales and ability to offer flexible pricing that help firms to sell their
products online both on inventory and procured from various third party vendors in the market
place.
E-commerce distribution network

This type of channel is being used both for B2B and B2C activities and has quickly changed the
marketing landscape for businesses where goods can be sold to their customers without any need
for face to face personal interaction. By using e-commerce distribution channels, both businesses
and customers can benefit.
E-commerce / Online distribution networks make products available when, where, and in which
quantities the customer wants. They are also responsible for:
 Logistics and Physical Distribution
 Facilitation - channels might provide pre-sale and post-purchase services like financing,
maintenance, channel coordination, and more
 Creating Efficiencies
 Sharing Risks: - they also share the risk with the manufacturers and do everything possible
to sell the product
 Marketing - also called marketing channels because many marketing strategies are executed
Advantages
Response time to customers
Product variety
Product availability
Customer experience
Faster time to market
Order visibility
Returnability
Direct sales to customers
Flexible pricing, product portfolio, and promotions
Efficient funds transfer
2.6 DISTRIBUTION STRATEGY

A distribution strategy is a method of disseminating goods or services to end-users. Implementing
the most efficient distribution method for your business is key to obtaining revenue and retaining
customer loyalty.
2.6.1 Types of Distribution Strategies
As mentioned above, the two main types of distribution strategies are direct and indirect.
Direct Distribution
Direct distribution is a strategy where manufacturers directly sell and send products to consumers.
There are a few different ways to implement this method. Some organizations may opt to take a
more modern approach and use an e-commerce website where users can make a purchase online.
This is an effective option for companies with a client base that’s moderately knowledgeable about
technology, requests a specific solution to meet needs or is devoted to a particular brand.
Another direct distribution method is through catalogues or phone orders. This option may target an
older customer base or users in specific industries that are attuned to placing orders this way.
One important factor to consider when implementing a direct distribution strategy is the amount of
investment required. For example, manufacturers will need to add warehouses, vehicles and
delivery staff to their portfolio to effectively distribute goods on their own.
Indirect Distribution
The term “middleman” often gets a bad reputation, but in the case of distribution, these
organizations can be helpful in getting goods to consumers. Indirect distribution strategies involve
intermediaries that assist in the logistics and placement of products so that they reach customers
swiftly and in an optimal location based on consumer habits and preferences.
We will discuss the different types of intermediaries and their specific benefits later in this article,
but business needs, targeted clients and type of product are typically behind the reasoning for using
this strategy. Low commitment or routine purchases are often something that customers grab
absentmindedly in a department store without any specific brand loyalty. A tube of toothpaste is a
good example of a routine purchase. For these types of products, an indirect distribution method
that places a large number of items in multiple retail locations may be a company’s best bet.
Intensive Distribution
Products are put into as many retail locations as possible with the intensive distribution strategy. For
example, gum is a product that typically uses this strategy. You can find gum at gas stations,
grocery stores, in vending machines and at retail locations like Target. This method hinges on
making a large number of goods available in multiple locations. These items don’t typically
necessitate an involved purchase decision where the customer does research before making a
purchase. Rather, these items are routine purchases that involve very minimal effort to sell.
Exclusive Distribution
When manufacturers opt for exclusive distribution, they make a deal with a retailer to sell a product
through that specific storefront only. Businesses may also sell goods directly through their own
branded stores, which is another example of exclusive distribution. For example, customers can’t
buy a Lamborghini at any location — they need to go to a Lamborghini dealership to purchase new
luxury vehicles.
An example of an exclusive distribution deal where a manufacturer and a retailer teamed up is the
previous agreement that Apple had with AT&T in distributing iPhones. This agreement caused
people to forgo their phone plans with other companies so they could get their hands on this
exclusive product. This distribution strategy works especially well for highly coveted, exclusive
items.
Selective Distribution
Selective distribution is a middle-ground option between intensive and exclusive distribution. With
this strategy, products are distributed in more than one location, but not as many as with an
intensive distribution strategy. For example, clothing from different brands may be offered
selectively. A brand like Gucci may choose to distribute its items to its own stores in addition to a
few selected department stores rather than placing its products in a range of locations such as
Walmart or Target. This can help craft an implicit high-end brand message while also increasing the
opportunity for shoppers to purchase one of its products.
2.6.2 Right Distribution Strategy

Selecting the correct distribution strategy depends on factors such as the type of item you are
creating, your customer base, warehouse capabilities and logistics support. Now let’s go in depth on
each of these factors:
Item Type
Depending on the type of purchase decision that customers make when deciding to buy a produced
item, the recommended distribution method may be different. There are three types of purchase
decisions: routine, limited and extensive. A routine purchase is something that customers spend
relatively little time selecting and is generally low priced, such as hand soap or paper towels. With
these items, an extensive distribution strategy might work best as customers aren’t necessarily
devoted to specific brands and expect products to be accessible at various locations. For these
products, a high number of available items can lead to higher sales.
Limited purchase decisions are a sort of middle-ground between routine and extensive purchases.
These items are generally moderately priced and more time may be spent selecting an item than
with a routine purchase. Some examples of limited purchase products are clothing and small
appliances like toasters. Customers put some thought into the purchase of these items due to price
and usability, but not as much effort as they would with an extensive purchase item like a house or
car. A selective or intensive distribution strategy may be suitable for these items.
The final type of purchase decision is extensive. This includes big-ticket items such as houses, cars
and college educations. Generally, as the cost of an item goes up, the intensity of the purchase
decision increases as well. An exclusive distribution strategy could work well for these items
because it adds to the customer belief that an item should be more expensive. It may also be more
lucrative to have fewer of these costly products available due to the high production price of each
item.
Customer Base
We already touched on how targeted customer demographics can inform distribution strategy.
However, to get more detailed about which distribution strategies most effectively apply to different
customers, we need to drill down to some of the ways companies use indirect and direct
distribution.
Some of the methods of direct distribution include e-commerce, direct mail and manufacturer-run
storefronts. You might remember the days where corporations sent catalogs of their items directly
to customers, and you had to call the company to place an order. Nowadays, distribution through
direct mail is less common due to technological advances, but some companies that have a user
base that is used to purchasing goods in this manner may continue to opt for this distribution
method.
E-commerce is a distribution channel that is rapidly increasing in popularity. A Shopify
report predicts that global e-commerce sales will reach $4.8 trillion by 2021. This distribution
channel has a relatively low barrier to entry for companies, and many consumers are familiar with
web-based technology, making it a win-win. This method also eases the process of purchasing a
product because consumers don’t have to leave their houses to buy items; they just need an internet
connection and their credit card information.
Storefronts are closing all over the country, yet some businesses continue to distribute in this
manner. One of the benefits of this distribution channel is that customers can easily purchase related
goods because items are curated in a brick-and-mortar location. Additionally, consumers can look at
and feel products in person, which is especially beneficial when the price of a good and the intensity
of a purchase decision increases.
Warehouse Capabilities and Logistics
Whether your company uses a direct or indirect distribution strategy depends on whether you are
willing or able to invest in aspects such as a transportation fleet, shipping personnel and a
warehouse for storing goods. This isn’t something that a manufacturer should enter into blindly —
acquiring these necessary factors involves a considerable upfront investment.
Your business will need to weigh the pros and cons of conducting your own distribution versus
using an intermediary when deciding on a distribution method.
2.7 NETWORK DESIGN IN SUPPLY CHAIN
Supply chain Network Design can be explained as the strategic planning of the supply chain in
order to measure the cost and the time required to bring the goods and services from manufacturers
and suppliers to the market. This ensures the optimum usage of resources available with the
organisations. The designing of this network could help in bringing the finished goods from the
raw-material-stage to the ready-to- consume stage in a more efficient way. Supply chain network
design as a whole is the planning and implementation of supply chain operations in the most
optimum way for long term benefits.
Network design is defined as a working model that delineates the overall framework of a supply
chain to assess the time and costs required to bring goods to the market. This model helps a
business spot inefficiencies and potential risks in the supply chain.
Supply Chain Network in Simple and basic Terms Involves determining following process
design:
Procurement
 Where are your suppliers
 How will you procure raw materials and components
Manufacturing
 Where will you locate the factories for manufacturing/assembly
 Manufacturing Methodology
Finished Good
 Where will you hold inventories, Number of Warehouses, Location of warehouses
etc.
 How will you distribute to markets - Transportation and Distribution logistics
All above decisions are influenced and driven by Key Driver which is the Customer Fulfilment.
Designing Supply Chain Network involves determining and defining following Elements:
 Market Structure
 Demand Plotting or Estimation
 Market Segment
 Procurement Cost
 Product /Conversion Costs
 Logistics Costs including Inventory holding costs
 Over heads
 Cost of Sales
2.7.1 Selecting a Network Design Options

When deciding on the appropriate delivery network, A network designer needs to consider the
following points,
 product characteristics
 Network requirements
An excellent example of a hybrid network is that of W.W. Grainger, which combines all the
aforementioned options in its distribution network. The network, however, is tailored to match the
characteristics of the product and the needs of the customer. Fast-moving and emergency items are
stocked locally, and customers can either pick them up or have them shipped, depending on the
urgency.
Slower moving items are stocked at a national DC and shipped to the customer within a day or
two. Very slow-moving items are typically drop-shipped from the manufacturer and carry a
longer lead time. Another hybrid network is used by Amazon, which stocks fast-moving items at
most of its warehouses, slower moving items at fewer warehouses, and very slow-moving items
may be drop-shipped fromdistributors or publishers.
Following table shall tell us which type of network design is best suited for a particular
product.
Fig 2.7.1 Comparative performance of delivery network design
2.8 ROLE OF NETWORK DESIGN IN A SUPPLY CHAIN
Supply chain network design decisions include the assignment of facility role, location of
manufacturing, storage, or transportation-related facilities, and the allocation of capacity and
markets to each facility.
Supply chain network design decisions are classified as follows.
1. Facility role: What role should each facility play? What processes are performed at each
facility?
Decisions concerning the role of each facility are significant because they determine the amount
of flexibility the supply chain has in changing the way itmeets demand.
2. Facility location: Where should facilities be located?
Facility location decisions have a long-term impact on a supply chain's performance because it is
very expensive to shut down a facility or move it to a different location.
3. Capacity allocation: How much capacity should be allocated to each facility?
Capacity allocation has a significant impact on the supply chain’s performance. This is because
capacity of any facility can be altered easily ascompared to the location of the facility. However,
even these decisions need to be made correctly, as proper allocation of capacity to a facility
helps to maintain or reduce costs and thereby optimum utilization of the facility can be
achieved. But, ifmore capacity is allocated to a facility or even less capacity is allocated, then it
becomes difficult for a company to satisfy the demand of the customers that are closer or
further from the facility.
4. Market and supply allocation: What markets should each facility serve? Which supply
sources should feed each facility?
The allocation of the various supply sources and also the allocation of particular markets for a
particular facility has a significant impact on the supply chain performance. This in turn it
affects the production and transportation costs and also the inventory that a supply chain must
serve in order tosatisfy the customer demand.
Thus, this decision must be reviewed from time to time so that the allocation of capacity,
markets and supply sources can be altered as and when the demand arises.
The whole supply chain configuration can be altered on the basis of the decisions made on the
supply chain network design. These decisions also help to prepare restrictions within which the
inventories, transportation and most importantly, information can be utilized to increase or
decrease the supply chain responsiveness and the supply chain costs.
These decisions can help a company figure out which facility performs better, is cheaper for
them or is more responsive to its customers and how these facilities willwork for the future.
2.9 INFLUENCING FACTORS
Key factors that affect the supply chain network modelling are:
 Government Policies of the Country where plants are to be located.
 Political climate
 Local culture, availability of skilled / unskilled human resources, industrial relations
environment, infrastructural support, energy availability etc.
 Taxation policies, Incentives, Subsidies etc across proposed plant location as well as tax
structures in different market locations.
 Technology infrastructure status.
 Foreign investment policy, Foreign Exchange and repatriation Policy and regulations.
 Strategic factors
 Technological factors
 Infrastructure factor
 Macroeconomic factor
 Competitor factor
 Customer response and lead time
 Logistics and facility cost
2.10 FRAMEWORK FOR NETWORK DESIGN DECISIONS IN THE SUPPLY CHAIN

Supply chain network design is the process of building and modelling a supply chain to better
understand the costs and time associated with bringing goods to market with the resources and
locations available.
The goal when designing a supply chain network is to maximize the firm’s profits while satisfying
customer needs in terms of demand and responsiveness.
When designing a supply chain network, we want to minimize the organization’s cost, while
satisfying the customers’ needs in terms of demand and responsiveness.
1. Phase I: Define a supply Chain strategy/Design

The objective of the first phase of network design is to define a firm’s broad supply chain design.
This includes determining the stages in the supply chain and whether each supply chain function
will be performed in-house or outsourced
Phase I starts with a clear definition of the firm’s competitive strategy as the set of customer needs
that the supply chain aims to satisfy. The supply chain strategy then specifies what capabilities the
supply chain network must have to support the competitive strategy (see Chapter 2). Next,
managers must forecast the likely evolution of global competition and whether competitors in each
market will be local or global players. Managers must also identify constraints on available capital
and whether growth will be accomplished by acquiring existing facilities, building new facilities, or
partnering.
Based on the competitive strategy of the firm, its resulting supply chain strategy, an analysis of the
competition, any economies of scale or scope, and any constraints, managers must determine the
broad supply chain design for the firm.
2. Phase II: Define the Regional Facility Configuration
he objective of the second phase of network design is to identify regions where facilities will be
located, their potential roles, and their approximate capacity.
An analysis of Phase II starts with a forecast of the demand by country or region. Such a forecast
must include a measure of the size of the demand and a determination of the homogeneity or
variability of customer requirements across different regions. Homogeneous requirements favor
large consolidated facilities, whereas requirements that vary across countries favor flexible facilities
or smaller, localized, dedicated facilities.
The next step is for managers to identify whether economies of scale or scope can play a significant
role in reducing costs, given available production technologies. If economies of scale or scope are
significant, it may be better to have a few facilities serving many markets. For example,
semiconductor manufacturers such as Advanced Micro Devices have few plants for their global
markets, given the economies of scale in production. If economies of scale or scope are not
significant, it may be better for each market to have its own facility.
Next, managers must identify demand risk, exchange-rate risk, and political risk associated with
regional markets. They must also identify regional tariffs, any requirements for local production, tax
incentives, and any export or import restrictions for each market. The goal is to design a network
that maximizes after-tax profits.
Managers must identify competitors in each region and make a case for whether a facility needs to
be located close to or far from a competitor’s facility. The desired response time for each market
and logistics costs at an aggregate level in each region must also be identified.
Based on all this information, managers identify the regional facility configuration for the supply
chain network using network design models discussed in the next section. The regional
configuration defines regions where facilities will be set up, the approximate number of facilities in
the network, and whether a facility will produce all products for a given market or a few products
for all markets in the network.
3. Phase III: Select a Set of Desirable Potential Sites
The objective of Phase III is to select a set of desirable potential sites within each region where
facilities are to be located. Sites should be selected based on an analysis of infrastructure avail-
ability to support the desired production methodologies. Hard infrastructure requirements include
the availability of suppliers, transportation services, communication, utilities, and warehousing
facilities. Soft infrastructure requirements include the availability of a skilled workforce, workforce
turnover, and the community receptivity to business and industry.
4. Phase IV: Location Choices
The objective of Phase IV is to select, from among the potential sites, a precise location and
capacity allocation for each facility. The network is designed to maximize total profits, taking into
account the expected margin and demand in each market, various logistics and facility costs, and
the taxes and tariffs at each location.
In the next section, we discuss methodologies for making facility location and capacity allocation
decisions during Phases II through IV.
2.11 IMPACT OF UNCERTAINTY ON NETWORK DESIGN

Uncertainty is a major challenge in network design for supply chain management. It is important to
consider uncertainty in network design because supply chain networks are complex and dynamic,
with many variables that can impact the performance of the network. Uncertainty can come from
many different sources, including demand fluctuations, supply disruptions, changing customer
preferences, and regulatory changes.
2.11.1 Sources of Uncertainty in Network Design
There are many sources of uncertainty in network design that can impact the performance of a
supply chain network. Some of the most common sources of uncertainty include:
Demand fluctuations: Demand fluctuations are a major source of uncertainty in network design.
Changes in customer demand can impact the performance of the network by causing overstocks or
stock outs, which can lead to excess inventory or lost sales.
Supply disruptions: Supply disruptions can also impact the performance of the network by causing
delays or shortages in the supply chain. Disruptions can be caused by natural disasters,
transportation delays, supplier bankruptcies, and other events.
Changing customer preferences: Changing customer preferences can also create uncertainty in
network design. Customers may shift their preferences for products or services, which can impact
demand patterns and inventory levels.
Regulatory changes: Regulatory changes can also create uncertainty in network design. Changes in
regulations can impact the transportation of goods, the location of facilities, and other aspects of
supply chain operations.
2.11.2 Strategies for Managing Uncertainty in Network Design
Managing uncertainty in network design is critical for ensuring that supply chain networks can
perform effectively in dynamic and complex environments. Here are some strategies for managing
uncertainty in network design.
• Scenario analysis: Scenario analysis involves creating different scenarios to evaluate the impact
of
uncertainty on the network. By simulating different scenarios, network designers can identify
potential risks and develop strategies to mitigate those risks.
Redundancy and flexibility: Building redundancy and flexibility into the network can help to
mitigate the impact of uncertainty. For example, having multiple suppliers or distribution centers
can help to ensure that the network can continue to function in the event of a disruption.
• Data analytics: Data analytics can be used to identify patterns and trends in demand, supply, and
other factors that can impact the network. This can help network designers to anticipate potential
risks and develop strategies to mitigate those risks.
• Collaboration: Collaboration with suppliers, customers, and other stakeholders can also help to
manage uncertainty in network design. By working together, stakeholders can share information
and resources to better manage risks and optimize the performance of the network.
• Continuous improvement: Continuous improvement involves monitoring and adjusting the
network over time to ensure that it is performing effectively. By continuously monitoring and
adjusting the network, network designers can identify potential risks and opportunities for
improvement.
To overcome uncertainty in network design for supply chain management, there are several
strategies that can be employed. Here are some of the most effective ways to manage uncertainty:
• Use scenario analysis: Scenario analysis is a powerful tool that can help identify potential risks
and develop strategies to mitigate those risks. By creating different scenarios based on various
factors that can affect the network, designers can evaluate the potential impact of uncertainty and
develop contingency plans.
• Build redundancy and flexibility: Building redundancy and flexibility into the network can help
mitigate the impact of uncertainty. For example, having multiple suppliers or distribution centers
can ensure that the network can continue to function even in the event of a disruption.
• Use data analytics: Data analytics can be used to identify patterns and trends in demand, supply,
and other factors that can impact the network. This can help network designers anticipate potential
risks and develop strategies to mitigate those risks.
• Collaborate with stakeholders: Collaboration with suppliers, customers, and other stakeholders
can help manage uncertainty in network design. By working together, stakeholders can share
information and resources to better manage risks and optimize the performance of the network.
• Use continuous improvement: Continuous improvement involves monitoring and adjusting the
network over time to ensure that it is performing effectively. By continuously monitoring and
adjusting the network, designers can identify potential risks and opportunities for improvement.
• Conduct regular risk assessments: Regular risk assessments can help identify potential risks and
develop contingency plans to mitigate those risks. Risk assessments can be conducted on a regular
basis to ensure that the network is able to adapt to changing circumstances.
• Consider the impact of new technologies: New technologies such as artificial intelligence,
machine learning, and blockchain can help manage uncertainty in network design. These
technologies can be used to improve visibility, reduce lead times, and increase collaboration among
stakeholders.
2.11.3 Steps involved in assessing demand uncertainty and variability

1. Demand forecasting
The first step to incorporate demand uncertainty and variability in distribution network design is to
estimate the future demand for each product and location. Demand forecasting is the process of
using historical data, market trends, customer feedback, and other sources of information to predict
the demand patterns and volumes. Demand forecasting can help you to plan your inventory,
transportation, and capacity requirements, as well as to identify potential risks and opportunities.
2. Demand variability analysis
The second step is to analyze the demand variability, which is the degree of deviation from the
average or expected demand. Demand variability can be caused by various factors, such as
seasonality, promotions, product life cycles, customer preferences, and external events. Demand
variability analysis is the process of measuring and evaluating the variability of demand, using
statistical methods such as standard deviation, coefficient of variation, and service level. Demand
variability analysis can help you to determine the appropriate safety stock levels, reorder points, and
replenishment policies.
3. Demand uncertainty modelling
The third step is to model the demand uncertainty, which is the degree of confidence or accuracy of
the demand forecast. Demand uncertainty can be influenced by the quality and availability of data,
the complexity and volatility of the market, and the reliability and frequency of the forecasting
methods. Demand uncertainty modeling is the process of using probabilistic or stochastic models to
represent the range and likelihood of different demand scenarios. Demand uncertainty modeling can
help you to evaluate the trade-offs and sensitivities of different distribution network design
alternatives.
4. Distribution network design optimization

The fourth step is to optimize the distribution network design, which is the configuration and
allocation of facilities, resources, and flows in the network. Distribution network design
optimization is the process of using mathematical or simulation models to find the optimal or near-
optimal solution that minimizes the total cost or maximizes the total profit of the network, subject to
various constraints and objectives. Distribution network design optimization can help you to select
the best locations, capacities, and modes of distribution facilities, as well as to assign the optimal
routes, schedules, and quantities of shipments.
5. Distribution network design evaluation
The fifth step is to evaluate the distribution network design, which is the assessment and
comparison of the performance and outcomes of the network. Distribution network design
evaluation is the process of using quantitative and qualitative measures to monitor and analyze the
efficiency, effectiveness, and robustness of the network, as well as to identify the strengths,
weaknesses, opportunities, and threats. Distribution network design evaluation can help you to
validate and improve the network design, as well as to benchmark and communicate the results.
6. Distribution network design adaptation
The sixth step is to adapt the distribution network design, which is the adjustment and modification
of the network in response to changes in demand uncertainty and variability. Distribution network
design adaptation is the process of using feedback and learning mechanisms to update and revise
the network design, as well as to implement and execute the changes. Distribution network design
adaptation can help you to cope with and exploit the demand uncertainty and variability, as well as
to enhance the agility and resilience of the network.
2.11.4 Decisions under Uncertainty

 Combine strategic planning and financial planning during global network design
 Use multiple metrics to evaluate global supply chain networks
 Use financial analysis as an input to decision making, not as the decision-making process
 Use estimates along with sensitivity analysis

Unit 2 -Supply Chain Network

Uploaded by

Copyright:

Available Formats

Unit 2 -Supply Chain Network

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Unit 2 -Supply Chain Network

Uploaded by

Copyright:

Available Formats

BA 4021 SUPPLY CHAIN MANAGEMENT 1

UNIT II – SUPPLY CHAIN NETWORK

2.1.1 Distribution Network

2.1.2 Distribution Management

2.1.3 Factors That Influence Distribution Management

2.1.4 Technologies that Aid in Distribution

2.1.5 Common Distribution Software Features

2.2 ROLE OF DISTRIBUTION IN SUPPLY CHAIN

Supplier Manufacturer Distributor Retailer Customer

2.3 FACTORS INFLUENCING DISTRIBUTION NETWORK DESIGN

2.3.2 Relationship between No. of Facilities and Inventory Cost

Fig 2.3.2 Relationship between No. of Facilities and Inventory Cost

2.3.3 Relationship between No. of Facilities and transportation cost

Fig 2.3.3 Relationship between No. of Facilities and Transportation Cost

2.3.4 Relationship between No. of Facilities and Facility cost

Fig 2.3.4 Relationship between No. of Facilities and Facility Cost

Advantage: Ability to centralize inventories at the manufacturer.

2.4.2 Manufacturer storage with direct shipping and in-transit merge:

Performance Characteristics of Manufacturer storage with direct shipping and in-

Performance Characteristics of Distributor storage with package carrierdelivery

Information Similar to distributor storage with package carrier delivery

Performance Characteristics of Manufacturer/ Distributor storage with customer

Cost Factor Performance

Time to market Similar to manufacturer storage options

2.5 ONLINE SALES AND DISTRIBUTION NETWORK

E-commerce distribution network

2.6 DISTRIBUTION STRATEGY

2.6.2 Right Distribution Strategy

2.7 NETWORK DESIGN IN SUPPLY CHAIN

2.7.1 Selecting a Network Design Options

Fig 2.7.1 Comparative performance of delivery network design

2.8 ROLE OF NETWORK DESIGN IN A SUPPLY CHAIN

2.9 INFLUENCING FACTORS

2.10 FRAMEWORK FOR NETWORK DESIGN DECISIONS IN THE SUPPLY CHAIN

1. Phase I: Define a supply Chain strategy/Design

2.11 IMPACT OF UNCERTAINTY ON NETWORK DESIGN

2.11.2 Strategies for Managing Uncertainty in Network Design

2.11.3 Steps involved in assessing demand uncertainty and variability

4. Distribution network design optimization

2.11.4 Decisions under Uncertainty

You might also like