1. Chapter 4 Designing the Distribution Network in a Supply Chain
Supply Chain Management
Chapter 4 Designing the Distribution Network in a Supply Chain

2. 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
Distribution directly affects cost and the customer experience and therefore drives profitability
Choice of distribution network can achieve supply chain objectives from low cost to high responsiveness
Examples: Wal-Mart, Dell, Proctor & Gamble, Grainger

3. Factors Influencing Distribution Network Design
Distribution network performance evaluated along two dimensions at the highest level:
Customer needs that are met
Cost of meeting customer needs
Distribution network design options must therefore be compared according to their impact on customer service and the cost to provide this level of service

4. Factors Influencing Distribution Network Design
Elements of customer service influenced by network structure:
Response time
Product variety
Product availability
Customer experience
Order visibility
Returnability
Supply chain costs affected by network structure:
Inventories
Transportation
Facilities and handling
Information

5. The Cost-Response Time FrontierHi
Local FG
Mix
Regional FG
Local WIP
Cost
Central FG
Central WIP
Central Raw Material and Custom production
Notes: As the customer is willing to tolerate longer lead times, the pull phase of the supply chain increases. The supply chain design must try and exploit this increase by centralizing assets to the extent possible.
Local finished goods: Borders (Immediate response)
Mix: W.W. Grainger (same day to next day response)
Regional: McMaster Carr (next day response)
Local WIP: PC assembler in India
Central FG/WIP: Dell
Central Raw Material and custom production: furniture manufacture (Amish in particular)
Custom production with raw material at suppliers
Low
Low Hi
Response Time

6. Service and Number of Facilities (Fig. 4.1)
Notes: Increasing the number of facilities moves them closer to the end consumer. This reduces the response time. As Amazon has built warehouses, the average time from the warehouse to the end consumer has decreased. McMaster-Carr provides 1-2 day coverage of most of the U.S from 6 facilities. W.W. Grainger is able to increase coverage to same day delivery using about 370 facilities.
Response Time

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

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

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

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

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

12. Inventory Costs and Number of Facilities (Fig. 4.2)
Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities.
Number of facilities

13. Transportation Costs and Number of Facilities (Fig. 4.3)
Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities.
Number of facilities

14. Facility Costs and Number of Facilities (Fig. 4.4)
Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities.
Number of facilities

15. Total Costs Related to Number of Facilities
Inventory
Notes: Total costs decrease and then increase as we increase the number of facilities. The responsiveness improves as we increase the number of facilities. A supply chain should always operate above the lowest cost point. Operating beyond that point makes sense if the revenue generated from better responsiveness exceeds the cost of better responsiveness.
Transportation
Number of Facilities

16. Variation in Logistics Costs and Response Time with Number of Facilities (Fig. 4.5)
Total Logistics Costs
Notes: Total costs decrease and then increase as we increase the number of facilities. The responsiveness improves as we increase the number of facilities. A supply chain should always operate above the lowest cost point. Operating beyond that point makes sense if the revenue generated from better responsiveness exceeds the cost of better responsiveness.
Number of Facilities

17. Cost Buildup as a Function of Facilities
Total Costs
Percent Service Level Within Promised Time
Cost of Operations
Facilities
Inventory
Notes:
Transportation
Labor
Number of Facilities
5-17

18. Design Options for a Distribution Network
Manufacturer Storage with Direct Shipping
Manufacturer Storage with Direct Shipping and In-Transit Merge
Distributor Storage with Carrier Delivery
Distributor Storage with Last Mile Delivery
Manufacturer or Distributor Storage with Consumer Pickup
Retail Storage with Consumer Pickup
Selecting a Distribution Network Design

19. Manufacturer Storage with Direct Shipping
Retailer
Customers
Information Flow
Product Flow
Aggregation of inventories, Opportunity to postpone customization, Keep inventories at the component level, Low facility costs, Easy to provide variety and availability
High transportation costs, Long response times, High investment in information systems

20. In-Transit Merge Network
Factories
In-Transit Merge by Carrier
Retailer
Customers
Product Flow
Information Flow

21. Distributor Storage with Carrier Delivery
Factories
Warehouse Storage by Distributor/Retailer
Customers
Product Flow
Information Flow

22. Distributor Storage with Last Mile Delivery
Factories
Distributor/Retailer Warehouse
Customers
Product Flow
Information Flow

23. Manufacturer or Distributor Storage with Customer Pickup
Factories
Cross Dock DC
Retailer
Pickup Sites
Customers
Customer Flow
Product Flow
Information Flow

24. Comparative Performance of Delivery Network Designs (Table 4.7)
Retail Storage with Customer Pickup
Manufacturer Storage with Direct Shipping
Manufacturer Storage with In-Transit Merge
Distributor Storage with Package Carrier Delivery
Distributor storage with last mile delivery
Manufacturer storage with pickup
Response Time 1 4 4 3 2 4
Product Variety 4 1 1 2 3 1
Product Availability 2 3 4 1 1 1
Customer Experience 5 5 4 3 2 1 5
Order Visibility 1 4 3 2 6
Identify the best and worst network along various dimensions.
Response time: (B) retail stores (W) Manufacturer storage with direct ship
Product variety: (W) retail stores (B) Manufacturer storage with direct ship
Product availability: (W) retail store (B) Manufacturer storage
Inventory: (W) retail store (B) manufacturer storage
Transportation: (B) retail store (W) last mile delivery
Facility: (W) retail store (B) manufacturer storage
Handling: (W) Distributor storage with last mile delivery (B)
Information: Retail stores may be less complex; manufacturer storage with pickup may be very complex
Returnability 1 5 5 4 3 2
Inventory 4 1 1 2 3 1
Transportation 1 4 3 2 5 1
Facility & Handling 6 1 2 3 4 5
Information 1 4 4 3 2 5

25. Linking Product Characteristics and Customer Preferences to Network Design
Low customer effort
High product variety
Quick desired response
High product value
Many product sources
Very low demand product
Low demand product
Medium demand product
High demand product
Manufacturer storage with pickup
Distributor storage with last mile delivery
Distributor Storage with Package Carrier Delivery
Manufacturer Storage with In-Transit Merge
Manufacturer Storage with Direct Shipping
Retail Storage with Customer Pickup +2 -2 -1 +1 -1 +1 -1 +1 -1 +1 +1 -1 +1 -2 +2 +1 -2 +1 +1 -1 -1 +2 +1
When designing the delivery network we should account for product and market characteristics.
High demand products will have transportation cost play a significant role. Use network with good transportation cost (retail stores)
Very low demand products will have inventory play a significant role. Use network with low inventory costs (direct shipping)
Many product sources: transportation + information plays a role. Distributor storage with package carrier
Few product sources but high customization: manufacturer storage with merge in transit
High product variety: inventory cost will be significant. Use distributor storage
Low customer effort: Distributor storage with package carrier delivery or last mile delivery depending upon desired response time -1 +2 +1 +1 -2 +2 -2 -2 -1 +1 -2 -1 +2 +1 +2 -2 +1 +2 +2 +2 -1

26. E-Business and the Distribution Network
Impact of E-Business on Customer Service
Impact of E-Business on Cost
Using E-Business: Dell, Amazon, Peapod, Grainger

27. Distribution Networks in Practice
The ownership structure of the distribution network can have as big as an impact as the type of distribution network
The choice of a distribution network has very long-term consequences
Consider whether an exclusive distribution strategy is advantageous
Product, price, commoditization, and criticality have an impact on the type of distribution system preferred by customers