1. Chapter 4 Designing Distribution Networks and Applications to E-Business

2. Outline The Role of Distribution in the Supply Chain
Factors Influencing Distribution Network Design
Design Options for a Distribution Network
E-Business and the Distribution Network
Distribution Networks in Practice
Summary of Learning Objectives

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
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

4. 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

5. 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

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. 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

8. 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

9. 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

10. 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

11. 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 Customer Pickup
Retail Storage with Customer Pickup
Selecting a Distribution Network Design

12. Manufacturer Storage with Direct Shipping (Fig. 4.6)
Retailer
Customers
Product Flow
Information Flow

13. In-Transit Merge Network (Fig. 4.7)
Factories
In-Transit Merge by Carrier
Retailer
Customers
Product Flow
Information Flow

14. Distributor Storage with Carrier Delivery (Fig. 4.8)
Factories
Warehouse Storage by Distributor/Retailer
Customers
Product Flow
Information Flow

15. Distributor Storage with Last Mile Delivery (Fig. 4.9)
Factories
Distributor/Retailer Warehouse
Customers
Product Flow
Information Flow

16. Manufacturer or Distributor Storage with Customer Pickup (Fig. 4.10)
Factories
Cross Dock DC
Retailer
Pickup Sites
Customers
Customer Flow
Product Flow
Information Flow

17. 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

18. Performance of Delivery Networks for Different Product/Customer Characteristics (Table 4-8)
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

19. TRADITIONAL INDIAN DISTRIBUTION CHANNELS
What characteristics of the traditional Indian agricultural produce distribution channels militate against delivering simultaneous benefits to the farmer and the consumer?
What Supply Chain Best Practices do you see as being relevant to the Indian agricultural produce distribution system?
Organised retailing underway in India is likely to impact the traditional distribution channels and transform the same radically. What major changes do you visualize taking place in the Agricultural Produce Distribution System in India and how do you see the existing channels responding to the same?

20. 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

21. Impact of E-Business on Customer Service
Response time
Product variety
Product Availability
Customer experience
Time to market
Order Visibility
Returnability
Direct Sales to Customers
Flexible Pricing, Product Portfolio, and Promotions
Efficient Funds Transfer

22. Impact of E-Business on Cost
Inventory
Facilities
Transportation
Information

23. 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

24. Summary of Learning Objectives
What are the key factors to be considered when designing the distribution network?
What are the strengths and weaknesses of various distribution options?
How has E-Business affected the design of distribution networks in different industries?
What roles do distributors play in the supply chain?