Chapter 4 – Designing Distribution Networks and

Applications to Online Sales

4.1 The Role of Distribution in the Supply Chain

Distribution refers to the series of steps undertaken to move and store a product from the supplier
stage to the customer stage in the supply chain. It involves the physical movement of raw materials,
components, and finished goods as well as information flow for tracking, coordination, and
planning.

Importance of Distribution:
• Direct Impact on Supply Chain Cost: Distribution affects transportation, warehousing, and
inventory costs.
• Direct Impact on Customer Value: It determines product availability, response time, and service
level.
• Driver of Profitability: A well-designed distribution system can significantly improve supply chain
surplus.

Examples:
Wal-Mart uses distribution to provide high product availability at low cost.
Seven-Eleven Japan uses distribution to achieve very high responsiveness and frequent
replenishment.

4.2 Factors Influencing Distribution Network Design

Performance is evaluated along two dimensions: 1) Customer Needs Met (revenue), 2) Cost of
Meeting Needs (profit).

Customer Service Measures:

Measure Explanation
Response Time Time taken for customer to receive product
Product Variety Number of options/configurations available
Product Availability Probability that product is in stock
Customer Experience Ease and quality of buying experience
Time to Market Speed with which a new product reaches customers
Order Visibility Ability to track order status
Returnability Ease of returning or exchanging products

4.3 Design Options for a Distribution Network

Design Option Explanation Advantages Disadvantages
Manufacturer Storage with Direct
Manufacturer
Shipping ships directly to customer
Low inventory
without retailer
cost, high
inventory.
product
Highvariety.
transportation cos
Manufacturer Storage with In-Transit
Multiple Merge
shipments combined in transit
Reduced
before
transportation
reaching customer.
cost, Complex
better experience.
coordination,
Distributor Storage with Carrier
Distributor
Delivery holds inventory, carrier Faster
delivers
response,
to customer.
lower transportation
Higher inventory
cost. cost d
 Distributor Storage with Last-Mile
Distributor
Delivery
ships directly to customer
Very
using
responsive,
local delivery.
convenient for
High
customers.
delivery cost per o
Manufacturer/Distributor Storage
Inventory
with Pickup
stored at pick-up sites; customer
Lower last-mile
collects.
cost, convenient
Requires
for customers.
pickup infrast
Retail Storage with CustomerInventory
Pickup held at retail stores. Immediate availability, very responsive.
High inventory & facility

4.4 Online Sales and the Distribution Network

Impact on customer service and cost is summarized in the scorecard below.
Area Impact
Response Time −1 (longer for physical goods)
Product Variety +2 (very high)
Product Availability +1 (better via aggregation)
Customer Experience +2 (24×7, personalization)
Time to Market +2 (faster introduction)
Order Visibility +1 (tracking available)
Returnability −1 (costly reverse logistics)
Direct Sales +2 (manufacturer–customer connection)
Flexible Pricing & Promotions +2 (dynamic control)
Inventory Costs +1 (lower due to centralization)
Facility Costs +1 (fewer facilities needed)
Transportation Costs −1 (higher last-mile cost)
Information Costs −1 (higher IT investment needed)