Designing
distribution
networks
Contents
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The role of distribution in the supply chain
Factors influencing distribution network
Design options for a distribution network
E-business and the distribution network
Network design
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The role of distribution
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Distribution refers to the steps taken to move and
store a product from the supplier stage to a customer
stage in the supply chain.
Distribution is a key driver of the overall profitability
of a firm because it affects both the supply chain cost
and the customer experience.
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Distribution-related costs make up about 10.5% of the US
economy and about 20% of the cost of manufacturing.
Companies in the same industry often select very
different distribution networks.
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To achieve different objectives: low cost -> high responsiveness.
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Companies in the same industry often
select different distribution networks
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Dell distributes its PCs directly to end consumers,
whereas HP distributes through resellers.
In 2001, Gateway closed several stores because of their
poor financial performance. Gateway chose to sell no
products at the stores. All PCs were shipped directly from
the factory to the customer.
Apple Computer, in contrast, has opened many retail
stores where computers are sold.
Questions: how can we evaluate this wide range of
distribution choices? Which ones serve the companies
and their customers better?
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Contents
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The role of distribution in the supply chain
Factors influencing distribution network
Design options for a distribution network
E-business and the distribution network
Network design
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Customer service
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Response time
Product variety
Product availability
Customer experience
Time to market
Order visibility
Returnability
No distribution network will outperform others along all
dimensions.
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Number of facilities and desired
response time
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Changing the distribution network
design affects the following costs:
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Inventories
Transportation
Facilities and handling
Information
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Number of facilities and inventory
costs
Chapter 4 • Designing Distribution Networks and Applications t
Inventory
Costs
Number of Facilities
FIGURE 4-2
Relationship Between Number of Facilities and Inventory Costs
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portation cost, as shown in Figure 4-3. If the number of facilities is increased to a p
inbound lot sizes are also very small and result in a significant loss of economies
inbound transportation, increasing the number of facilities increases total transpor
as shown in Figure 4-3.
Number of facilities and
transportation cost
Transportation
Cost
Number of Facilities
FIGURE 4-3 Relat
Between Number o
and Transportation
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Number of facilities and facility costs
esigning Distribution Networks and Applications to Online Sales
Facility Costs
Number of Facilities
FIGURE 4-4 Relationship Between Number of Facilities and Facility Costs
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Industry benchmarks:
number of warehouses
Pharmaceuticals
Avg.
# of
WH
Food Companies
3
- High margin product
- Service not important (or
easy to ship express)
- Inventory expensive
relative to transportation
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Chemicals
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- Low margin product
- Service very important
- Outbound transportation
expensive relative to inbound
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logistics costs (and improve response time). If a firm wants to reduce the re
customers further, it may have to increase the number of facilities beyo
minimizes logistics costs. A firm should add facilities beyond the cost-mini
if managers are confident that the increase in revenues because of better respon
than the increase in costs because of the additional facilities.
Variation in logistics cost and
response time
Response Time
Total Logistics Cost
Number of Facilities
FIGURE 4-5
Logistics Cost
with Number
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Case study: BuyPC.com
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BuyPC.com is a company that sells computers via the
Internet.
The warehouses are replenished from factories in Asia
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BuyPC.com stresses next day delivery of its computers.
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The product arrives to the U.S. via Los Angeles
BuyPC.com has opted to provide this service with many distribution
points, and this results in a significant inventory investment.
BuyPC.com ships via UPS, so customers outside the 1day ground zone must be shipped via air.
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BuyPC.com Case Study:
Current Network
Inbound: $ 851,000
Outbound: $ 2,930,000
Inv Cost: $13,291,000
WH Fixed: $ 1,875,000
Total:
$18,947,000
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Inventory reduction and warehouses
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BuyPC.com faced heavy variability in consumer
demand
Each DC had to carry sufficient safety stock
q Warehouse to warehouse transfers were discouraged because of
the extra liability in shipping computers
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Studies within BuyPC.com indicated that reducing
the warehouses would reduce the inventory
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The Risk Pooling Effect
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Cost trade-off
Cost ($ million)
Cost Trade-Off for BuyPC.com
$20
$18
$16
$14
$12
$10
$8
$6
$4
$2
$0
Total Cost
Inventory
Transportation
Fixed Cost
0
5
10
15
Number of DC's
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Optimal network
Inbound: $ 783,000
Outbound: $ 5,900,000
Inv Cost: $ 7,679,000
WH Fixed: $ 625,000
Total:
$14,987,000
$4 Million Savings
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Solution results
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Warehouses picked and sizes
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Harrisburg 26,000 sq. feet
Atlanta 15,000 sq. feet
Chicago 18,000 sq. feet
Dallas 13,000 sq. feet
LA 23,000 sq. feet
By reducing the number of warehouses, BuyPC.com
could reduce their overall logistics network costs
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The reduction in inventory costs more than outweighed the
increase in next-day air shipments
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Discussion
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Consider a firm such as Dell, with very few
production facilities worldwide. List the pros and
cons of this approach and why it may or may not be
suitable for the computer industry.
Consider a firm such as Ford, with more than 150
facilities worldwide. List the pros and cons of having
many facilities and why it may or may not be suitable
for the automobile industry.
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Discussion
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Dell’s network:
Low facility costs
q Avoid tariffs and demand risk
q Lack of responsiveness
q High shipping costs
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Automobile’s network:
Provide product for the market
q Take advantage of tax incentives
q Risky when the producer is left with expensive excess capacity
q
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Contents
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The role of distribution in the supply chain
Factors influencing distribution network
Design options for a distribution network
E-business and the distribution network
Network design
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Two key decisions
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Will product be delivered to the customer location or
picked up from a preordained site?
Will product flow through an intermediary (or
intermediate location)?
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6 distinct distribution network
designs
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Manufacturer storage with direct shipping
Manufacturer storage with direct shipping and intransit merge
Distributor storage with package carrier delivery
Distributor storage with last-mile delivery
Manufacturer/distributor storage with costumer
pickup
Retail storage with customer pickup
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Manufacturer storage with direct
shipping
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Product is shipped directly from the manufacturer to
the end customer, bypassing the retailer.
The retailer takes the order and initiates the delivery
request.
Examples: ?
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Manufacturer storage with direct
shipping
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Advantages
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The biggest advantage is the ability to centralize
inventories at the manufacturer.
It offers the manufacturer the opportunity to
postpone customization until after a customer has
placed an order.
Supply chains save on the fixed cost of facilities. It
eliminates the need for other warehousing space.
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Weaknesses
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Transportation costs are high because the average
outbound distance to the end consumer is large.
Response times tend to be long.
The handling of returns is more expensive.
For an order containing products from several
sources, the customer will receive multiple partial
shipments over time.
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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 handling
Lower facility costs because of aggregation. 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.
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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 experience
Good in terms of home delivery but can suffer if order 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.
Returnability
Expensive and difficult to implement.
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Manufacturer storage with direct
shipping and in-transit merge
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In-transit merge combines pieces of the order
coming from different locations so that the customer
gets a single delivery.
Example: Dell
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Manufacturer storage with direct
shipping and in-transit merge
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Manufacturer storage with direct
shipping and in-transit merge
Cost Factor
Performance
Inventory
Similar to drop-shipping.
Transportation
Somewhat lower transportation costs than dropshipping.
Facilities and handling
Handling costs higher than drop-shipping at
carrier; receiving costs lower at customer.
Information
Investment is somewhat higher than for dropshipping.
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Manufacturer storage with direct
shipping and 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 experience
Better than drop-shipping because only a single delivery
has to be received.
Time to market
Similar to drop-shipping.
Order visibility
Similar to drop-shipping.
Returnability
Similar to drop-shipping.
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Distributor storage with carrier
delivery
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Inventory is not held by manufacturers at the
factories but is held by distributors/retailers in the
intermediate warehouses, and package carriers are
used to transport product from the intermediate
location to the final customer.
Examples: Amazon
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Distributor storage with carrier
delivery
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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 handling
Somewhat higher than manufacturer storage. The
difference can be large for very slow-moving
items.
Information
Simpler infrastructure compared to manufacturer
storage.
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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 experience
Better than manufacturer storage with drop-shipping.
Time to market
Higher than manufacturer storage.
Order visibility
Easier than manufacturer storage.
Returnability
Easier than manufacturer storage.
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Distributor storage with last-mile
delivery
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Last-mile delivery refers to the distributor/retailer
delivering the product to the customer’s home
instead of using a package carrier.
Examples: ?
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Distributor storage with last-mile
delivery
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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 handling
Facility costs higher than manufacturer 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.
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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 experience
Very good, particularly for bulky items. Slightly higher
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.
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Manufacturer/distributor storage with
customer pickup
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Inventory is stored at the manufacturer or
distributor warehouse but customers place their
orders online or on the phone and then travel to
designated pickup points as needed.
Examples: ?
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Manufacturer/distributor storage with
customer pickup
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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 handling
Facility costs can be high if new facilities have 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.
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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 availability
Similar to other manufacturer or distributor storage
options.
Customer experience
Lower than other options because of the lack of home
delivery. 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.
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Retail Storage with Customer Pickup
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The most traditional type of supply chain.
Inventory is stored locally at retail sores. Customers
walk into the retail store or place an order online or
by phone and pick it up at the retail store.
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Retail Storage with Customer Pickup
Cost Factor
Performance
Inventory
Higher than all other options.
Transportation
Lower than all other options.
Facilities and handling
Higher than other options. The increase in
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.
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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 experience
Related to whether shopping is viewed as a 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.
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Selecting a distributor network design
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The various networks have different strengths and
weaknesses.
Most companies use a combination of delivery
networks.
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Discussion
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What types of distribution networks are typically
best suited for commodity items?
Customers expect a responsive supply chain
q Retail storage with customer pickup
q Distributor storage with last-mile delivery
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What type of networks are best suited to highly
differentiated products?
Aggregating inventories is important
q Manufacturer storage with direct shipping
q Manufacture storage with in-transit merge
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Contents
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The role of distribution in the supply chain
Factors influencing distribution network
Design options for a distribution network
E-business and the distribution network
Network design
52
Impact of Online Sales on Customer
Service
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Response time to customers
Physical products take longer to fulfill than retail store
q No delay for information goods
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Product variety
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Easier to offer larger selection
Product availability
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Aggregating inventory and better information on customer
preferences improves product availability
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Impact of Online Sales on Customer
Service
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Customer experience
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Improved access, customization, and convenience
Faster time to market
Order Visibility
Returnability
Harder with online orders
q Proportion of returns likely to be much higher
q
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Impact of Online Sales on Customer
Service
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Direct Sales to Customers
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Social networking channels allow firms to directly pitch
products and promotion
Flexible Pricing, Product Portfolio, and
Promotions
Manage revenues from product portfolio more effectively than
traditional channels
q Promotion information can be conveyed to customers quickly
and inexpensively
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Efficient Funds Transfer
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Impact of Online Sales on Cost
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Inventory
Lower inventory levels if customers will wait
q Postpone variety until after the customer order is received
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Facilities
Costs related to the number and location of facilities in a network
q Costs associated with the operations in these facilities
q
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Impact of Online Sales on Cost
q
Transportation
Lower cost of “transporting” information goods in digital form
q For nondigital, aggregating inventories increases outbound
transportation
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q
Information
Share demand, planning, and forecasting information throughout
its supply chain
q Additional costs to build and maintain the information
infrastructure
q
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Using Online Sales to Sell Computer
Hardware: Dell
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Impact of online sales on customer service
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Delay in fulfilling customer request
Impact of online sales on cost
Reduced inventory costs
q Lower facility costs
q Higher total transportation costs
q Incremental increase in information costs
q
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Using Online Sales to Sell Computer
Hardware: Dell
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A tailored supply chain network
A hybrid model can be very effective
q More significant as hardware becomes more of a commodity
q Take advantage of the strengths of both online sales and
traditional retail and distribution channels
q
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Discussion
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Why should an e-business such as Amazon.com build
more warehouses as its sales volume grows?
Trade-off of responsiveness and cost
q A hybrid system
q Carrying items that it knows will sell in its own warehouses and
q Carrying items that have greater demand uncertainty in other
warehouses
q
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Contents
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The role of distribution in the supply chain
Factors influencing distribution network
Design options for a distribution network
E-business and the distribution network
Network design
61
Network Design
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Physical configuration and infrastructure of the
supply chain.
A strategic decision with long-lasting effects on the
firm.
Decisions relating to plant and warehouse location
as well as distribution and sourcing.
Network design decisions have a significant impact
on performance because:
Determine the supply chain configuration
q Set supply chain constraints
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Reevaluation of Infrastructure
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Changes in:
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demand patterns
product mix
production processes
sourcing strategies
cost of running facilities
Mergers and acquisitions may mandate the
integration of different logistics networks.
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A failure case
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1994
1997
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3
Gatorade
Snapple
Snapple
Snapple
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Network Design Decisions
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Facility role
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Facility location
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How much capacity at each facility?
Market and supply allocation
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Where should facilities be located?
Capacity allocation
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What role, what processes?
What markets? Which supply sources?
Objectives:
To maximize the overall profitability of the resulting supply
chain network;
q To provide customers with the appropriate responsiveness
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Framework for network design
decisions
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Factors influencing network design
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Strategic factors
Technological factors
Macroeconomic factors
Political factors
Infrastructure factors
Logistics and facility costs
Competitive factors
Customer response time and local presence
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Competitive factors
– Locating to split the market
• Locate to capture largest market share
d1 = a +
1– b – a
1+ b – a
and d 2 =
2
2
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Customer response time and local
presence
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Grainger uses about 350 facilities all over the US to
provide same-day delivery of maintenance and repair
supplies to many of its customers.
McMaster-Carr, a competitor, targets customers who
are willing to wait for next-day delivery. McMasterCarr has only six facilities throughout the US and is
able to provide next-day delivery to a large number
of customers.
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q
distribution
network
poster
1.
2.
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22
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