Chapter 1

Designing Distribution Networks

 Learning Objectives

• Identify the key factors to be considered when designing a

distribution network

• Discuss the strengths and weaknesses of various distribution

options

• Understand how online sales have affected the design of

distribution networks in different industries
 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
 Factors Influencing
Distribution Network Design

• Distribution network performance is evaluated along two

dimensions
Customer needs that are met
Cost of meeting customer needs

• Evaluate the impact on customer service and cost for different

distribution network options

• Profitability of the delivery network determined by revenue from

met customer needs and network costs
 Factors Influencing
Distribution Network Design

• Elements of customer service influenced by network structure:

Response time
Product variety
Product availability
Customer experience
Order visibility
Returnability
 Factors Influencing
Distribution Network Design

• Supply chain costs affected by network structure:

Inventories
Transportation
Facilities and handling
Information
Desired Response Time and Number of
Facilities

Figure-1
Inventory Costs and Number of Facilities

Figure-2
 Transportation Costs and
Number of Facilities

Figure-3
Facility Costs and Number of Facilities

Figure-4
Logistics Cost, Response Time, and
Number of Facilities

Figure-5
 Design Options for a
Distribution Network

• Distribution network choices from the manufacturer to the end

consumer

• Two key decisions

Will product be delivered to the customer location or picked up
from a prearranged site?
Will product flow through an intermediary (or intermediate
location)?
 Design Options for a
Distribution Network

• One of six designs may be used

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

Figure-6
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.
handling Some saving on handling costs if manufacturer
can manage small shipments or ship from
production line.
Information Significant investment in information
infrastructure to integrate manufacturer and
retailer.
Table-1
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 Good in terms of home delivery but can suffer if order
experience 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.
Table-1
Returnability Expensive and difficult to implement.
 In-Transit Merge Network

Figure-7
 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-2
 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-2
 Distributor Storage with
Carrier Delivery

Figure-8
 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-3
 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-
experience shipping.
Time to market Higher than manufacturer storage.
Order visibility Easier than manufacturer storage.
Returnability Easier than manufacturer storage.

Table-3
 Distributor Storage with
Last Mile Delivery

Figure-9
 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
 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
Manufacturer or Distributor Storage with
Customer Pickup

Figure-10
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-5
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 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 handle returns.

Table-5
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-6
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
experience positive or negative experience by customer.
Time to market Highest among distribution options.
Order visibility Trivial for in-store orders. Difficult, but essential,
for online and phone orders.
Returnability Easier than other options because retail store can
provide a substitute.
Table-6
Comparative Performance of Delivery Network
Designs

Table-7
Delivery Networks for Different Product/
Customer Characteristics

Table-8