Designing Distribution Networks and
Applications to E-Business
Fall, 2014
Supply Chain Management:
Strategy, Planning, and Operation
Chapter 4
Byung-Hyun Ha
Contents
 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
1
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
 Affecting the cost and the customer experience, and therefore
driving profitability
• Efficiency vs. responsiveness
 Different choice for similar distribution
 Examples
• Wal-Mart, Seven-Eleven Japan, Webvan
• Dell, Gateway, Apple
• Proctor & Gamble
 Terms
 SKU, truckload (TL), less-than-truckload (LTL), package-load
 Inventory turnover, fast-moving, slow-moving
2
Factors Influencing Network Design
 Dimensions for evaluating network performance
 Customer needs that are met
 Cost of meeting customer needs
 Tradeoff
 customer service vs. cost to provide this level of service
 Customer service influenced by network structure
 Response time
 Product variety
 Product availability
 Customer experience
 Order visibility
 Returnability
3
Factors Influencing Network Design
 Relationship to the number of facilities
Required
Number of
Facilities
Transportation
Costs
Number of facilities
Response Time
Inventory
Costs
Facility
Costs
Number of facilities
Number of facilities
4
Factors Influencing Network Design
 Inventory costs and number of facilities
Response Time
Total Logistics Costs
Number of Facilities
5
Design Options for Distribution Network
 Two key decisions
 Delivered or customer pickup?
 Intermediate locations or not?
 Classification







Retail storage with customer pickup
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
and others
6
Design Options for Distribution Network
 Retail (manufacturer) storage with customer pickup
Suppliers/distributers
Retailers (manufacturers)
Customers
7
Design Options for Distribution Network
 Manufacturer storage with direct shipping
Manufacturer
Retailer
Customers
Product Flow
Information Flow
8
Design Options for Distribution Network
 Manufacturer storage with direct shipping (cont’d)
 Characteristics
• Slow-moving items
• Mixed with other type of networks for fast-moving items
• Aggregation
• Ownership structure of inventory at manufacturers
• Postponement and customization
• Build-to-order
• Usually employing package carriers
 Performance
• Inventory, transportation, facilities and handling, information
• Response time, product variety, product availability, customer
experience, time to market, order visibility, returnability
 Best for low-demand and high-value items, customers who are
willing to wait for delivery and accept several partial shipment
9
Design Options for Distribution Network
 Manufacturer storage with direct shipping and in-transit
merge
Factories
Retailer
In-Transit Merge by
Carrier
Customers
Product Flow
Information Flow
10
Design Options for Distribution Network
 Manufacturer storage with direct shipping and in-transit
merge (cont’d)
 e.g., Dell + Sony
 Using package carrier
 Very sophisticated information infrastructure
11
Design Options for Distribution Network
 Distributor storage with carrier delivery
Factories
Warehouse Storage by
Distributor/Retailer
Customers
Product Flow
Information Flow
12
Design Options for Distribution Network
 Distributor storage with carrier delivery (cont’d)
 e.g., Amazon
 Slow-moving items in factories, fast-moving items in warehouse
13
Design Options for Distribution Network
 Distributor storage with last mile delivery
Factories
Distributor/Retailer
Warehouse
Customers
Product Flow
Information Flow
14
Design Options for Distribution Network
 Distributor storage with last mile delivery (cont’d)
 e.g., Webvan, Peapod, Albertson, automotive spare parts
industry
 More warehouses are required (need to be close to customers)
 Higher transportation cost
• Package carriers can aggregate delivery across retailer.
• Less expensive in large, dense cities
• Best if large quantity purchasing
 Processing cost
• Much higher because all customer participation is eliminated
• Higher labor cost
 Information handling
• Scheduling
15
Design Options for Distribution Network
 Manufacturer or distributor storage with customer pickup
Factories
Retailer
Cross Dock DC
Pickup Sites
Customers
Customer Flow
Product Flow
Information Flow
16
Design Options for Distribution Network
 Selecting a distribution network design
Manufacturer
storage with
in-transit
merge
Manufacturer
storage with
customer
pickup
Retail storage
with customer
pickup
Manufacturer
storage with
direct shipping
Response time
1
4
4
3
2
4
Product variety
4
1
1
2
3
1
Product
availability
4
1
1
2
3
1
1 to 5
4
3
2
1
5
Customer
experience
4
1
1
2
3
1
Order visibility
1
5
4
3
2
6
Returnability
1
5
5
4
3
2
Inventory
4
1
1
2
3
1
Transportation
1
4
3
2
5
1
Facility and
handling
6
1
2
3
4
5
Information
1
4
4
3
2
5
Time to market
* 1: strongest, 6: weakest (relatively)
Distributor
storage with
carrier delivery
Distributor
storage with
last-mile
delivery
17
Design Options for Distribution Network
 Selecting a distribution network design
Manufacturer
storage with
in-transit
merge
Manufacturer
storage with
customer
pickup
Retail storage
with customer
pickup
Manufacturer
storage with
direct shipping
+2
2
1
0
+1
1
+1
1
0
+1
0
0
Low-demand
product
1
+1
0
+1
1
+1
Very-lowdemand product
2
+2
+1
0
-2
+1
Many product
sources
+1
1
1
+2
+1
0
High product
value
1
+2
+1
+1
0
+2
2
1
+1
2
0
+1
0
+2
+2
+2
+2
1
High-demand
product
Medium-demand
product
Quick desired
+2
2
response
High product
+2
1
variety
Low customer
+1
2
effort
* +2: very suitable, 2: very unsuitable (relatively)
Distributor
storage with
carrier delivery
Distributor
storage with
last-mile
delivery
18
E-business and Distribution Network
 E-business  online sales
 Impact of e-business on customer service




Response time
Product variety
Product availability
Customer experience
• Personalized buying experience






Time to market
Order visibility
Returnability
Direct sales to customers
Flexible pricing, product portfolio, and promotions
Efficient funds transfer
19
E-business and Distribution Network
 Impact of e-business on cost




Inventory
Facilities
Transportation
Information
 Cases
 Dell
 Amazon
 Peapod
20
Distribution Networks in Practice
 Ownership structure of distribution network
 As big an impact as the type of distribution network
• e.g., a 3PL who pursuits its own profit
 Long-term consequences of choice of network type
 e.g., car dealers
 Exclusive distribution strategy or not
 Customer preference on network type
 Product price, commoditization, criticality
 Integration of Internet and existing physical network
21