04
Designing
Distribution
Networks
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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
Copyright ©2020 Bangladesh Institute of Supply Chain Management 4-2
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
• Choice of distribution network can achieve
supply chain objectives from low cost/efficient
to high responsiveness.
Copyright ©2020 Bangladesh Institute of Supply Chain Management 4-3
Factors Influencing
Distribution Network Design
• Distribution network performance evaluated
along two dimensions at the highest level:
Customers’ needs that are met
Cost of meeting customer needs
Page-92.
Factors Influencing
Distribution Network Design
• Elements of customer service influenced by network structure:
– Response time (fast/slow)
– Product variety (many/few options)
– Product availability (many/few)
– Customer experience (Good/Bad)
– Order visibility (online tracking)
– Return ability (3-7 days)
• Supply chain costs affected by network structure:
– Inventories (More stock – High/Low cost)
– Transportation (Long Distance -- High/low cost)
– Facilities and handling (More – High/Low cost)
– Information (Automated software -- High/Low cost)
Page-93/94.
Response time and Number of Facilities (Fig. 4.1)
Many
(More facilities)
Number of
Facilities
Few
(Few facilities)
Low High
(Fast Response Time (Slow
Delivery) Delivery)
Inventory Costs and Number of Facilities (Fig. 4.2)
High
Inventory
Costs
Low
Few Number of facilities Many
Transportation costs
Inbound transportation costs: cost of bringing
the material into a facility
Outbound transportation costs: cost of sending
material out of a facility
▪As distribution centers increases, average outbound
distance decreases, thus the fraction of outbound
transportation cost decreases.
Transportation Costs and
Number of Facilities (Fig. 4.3)
High
Transportation
Costs
Low
Few Number of facilities More
Facility Costs and Number
of Facilities (Fig. 4.4)
High
Facility
Costs
Low
Few More
Number of facilities
Logistics Costs and Response Time with Number of
Facilities (Fig. 4.5)
Response Time
Total Logistics Costs
Number of Facilities
4-11 Page-96.
Design Options
for a
Distribution Network
• Distribution network choices from the
manufacturer to the end consumer.
• Two key decisions:
1. Will the product be delivered to the customer
location or picked up from a prearranged site?
2. Will the product flow through an intermediary (or
intermediate location)?
Copyright ©2020 Bangladesh Institute of Supply Chain Management 4-12
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
Page-96/97.
1. Manufacturer Storage with Direct Shipping
(Fig. 4.6)
Manufacturer
Retailer
Customers
Product Flow
Information Flow
Page-97-99.
4-14
Performance Characteristics:
Drop Shipping
Inventory Lower due to aggregation. Benefit is larger if low demand,
high value items
Cost Transportation Higher due to increased distances and partial shipping
Factor
Facilities and Lower fixed costs. Higher handling costs if direct shipment
handling from production line.
Information Higher (Software/IT)
Response time High response time, worse if there is partial shipment
Product variety Easy to provide high level of variety (+)
Product availability Higher (+)
Service Customer Good
factor experience
Order visibility Very important for customer (Tracking due to long distance)
Returnability Expensive and difficult.
2. In-Transit Merge Network
(Fig. 4.7)
Factories
Retailer
Customers
Product Flow
Information Flow
4-16 Page-100-101.
Performance Characteristics:
In-Transit Merge Network
Inventory Similar to drop shipping
Cost Transportation Somewhat lower than drop shipping
Factor Facilities and Higher handling costs than drop shipping; lower
handling receiving costs at customer
Information Higher than drop shipping
Response time Similar to or higher than drop shipping
Product variety Similar to drop shipping
Product availability Similar to drop shipping
Service
factor Customer experience Better due to single delivery
Order visibility Similar to drop shipping (or somewhat more
difficult)
Returnability Similar to drop shipping
3. Distributor Storage with
Carrier Delivery (Fig. 4.8)
Factories
Warehouse Storage by
Distributor/Retailer
Customers
Product Flow
Information Flow
4-18 Page-102-103.
Performance Characteristics:
Distributor Storage with carrier Delivery
Inventory Higher than manufacturer storage. Difference is not large
for fast moving items.
Cost Transportation Lower than manufacturer storage. Reduction is highest
Factor for fast moving items.
Facilities and Somewhat higher than manufacturer storage
handling
Information Simpler structure compared to manufacturer storage.
Response time Faster than manufacturer storage.
Product variety Lower than manufacturer storage.
Product availability Lower than manufacturer storage. Extra investment is
Service needed forlarger availability
factor
Customer experience Better than manufacturer storage with drop shipping.
Order visibility Easier than manufacturer storage.
Returnability Easier than manufacturer storage.
4. Distributor Storage with
Last-Mile Delivery (Fig. 4.9)
Factories
Distributor/Retailer
Warehouse
Customers
Product Flow
Page-104-105. Information Flow
4-20
Performance Characteristics:
Distributor Storage with Last Mile Deliver
Inventory Higher than distributer storage with package delivery.
Cost Transportation Higher than any other distribution option. Maybe somewhat
Factor cheaper in large and dense cities
Facilities and Higher than all options but lower than chain of retail stores.
handling
Information Similar to distributor storage with package carrier delivery.
Response time Very quick, in 1 day.
Product variety Somewhat less than distributor storage but larger than retail.
Product availability Lower than other options except retail stores. Extra
Service investment is needed for larger availability
factor Customer experience Very good
Order visibility Easier than manufacturer storage or distributor with carrier
delivery.
Returnability Easier than other options, more expensive and difficult than
retail network.
5. Manufacturer or Distributor Storage
with Customer Pickup (Fig. 4.10)
Factories
Retailer
Customers
Customer Flow
Page-106-107. Product Flow
4-22
Information Flow
Performance Characteristics:
Manufacturer or Distributor Storage
with Customer Pickup
Inventory Depending on location of the inventory
Cost Transportation Lower than the use of package carriers
Factor
Facilities and Can be very high if new facilities have to be built.
handling
Information High investment is required
Response time Similar to packae carrier delivery with manufacturer or
distributor storage.
Product variety Similar to other manufacturer or distributor storage
options.
Service Product availability Similar to other manufacturer or distributor storage
factor options.
Customer experience Lower than other options due to absence of home delivery.
Order visibility Essentially required but difficult
Returnability Easy if pickup points can handle returns.
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