SUPPLY CHAIN

MANAGEMENT
LECTURE 4

Designing the Distribution

Network in a Supply Chain
 OUTLINE

 The Role of Distribution in the Supply Chain

 Factors Influencing Distribution Network Design
 Design Options for a Distribution Network
 The Value of Distributors in the Supply Chain
 Distribution Networks in Practice
 Summary of Learning Objectives

04-Feb-23 Dr. Surya Prakash, Supply Chain Expert 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

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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
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VARIOUS DESIGNS

P&G delivers directly to large

supermarket chain whiles small players
buy from distributors
Texas instruments earlier sold directly
to customers while now 98% of its
customers through distributors, while
serving the remaining 2% of customers
with 70% of volume directly
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 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
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RELATIONSHIP BETWEEN RESPONSE
TIME & NUMBER OF FACILITIES
Number of
•Amazon, takes a week to deliver a book but uses
Facilities only 6 locations to store these books

Response Time
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 Amazon turns inventory 12 times a year

Inventory
Costs

Number of facilities

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 TRANSPORTATION COSTS AND
NUMBER OF FACILITIES
Transportation Inbound Transportation costs are lesser as compared
to outbound transportation cost as inbound lot sizes
Costs are typically larger

Cost of small inbound lot sizes

dominates from here

Number of facilities

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FACILITY COSTS AND NUMBER
OF FACILITIES
Facility
Costs

Number of facilities

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 Total Costs Related to Number of Facilities

Total Costs
Total Costs

Facilities
Inventory
Transportation

Number of Facilities
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DESIGN OPTIONS FOR A DISTRIBUTION
NETWORK

1. Manufacturer Storage with Direct Shipping

2. Manufacturer Storage with Direct Shipping and In-
Transit Merge
3. Distributor Storage with Carrier Delivery
4. Distributor Storage with Last Mile Delivery
5. Manufacturer or Distributor Storage with Consumer
Pickup
6. Retail Storage with Consumer Pickup

Selecting a Distribution Network Design

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 MANUFACTURER STORAGE WITH
DIRECT SHIPPING
Drop Shipping Model

Manufacturer

Retailer

Customers

Only information flows via retailer Product Flow

E.g: Online retailers such as eBags,
& Nordstrom.com Information Flow

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FEATURES
Manufacturer Storage with Direct Shipping

 Ability to centralize inventory at manufacturer

 High level of production availability
 Low levels of inventory
 Key issue is ownership structure of the inventory
as inventory allocation to retailer removes the
advantage of aggregation
 Benefits are highest for high valued items with
unpredictable low demand
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PERFORMANCE CHARACTERISTICS
(COST)

Cost Factor Performance

Inventory Lower costs because of aggregation. Even large if
product customization can be postponed at the
manuf.
Transportation Higher because of inc. distance & disaggregate
shipping

Facilities & Lower facility cost & savings on handling cost

handling

Information Significant investment required in information

infrastructure
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 PERFORMANCE CHARACTERISTICS (SERVICE)

Service Factor Performance

Response Time Long because of increased dist.

Product variety High

Product availability High

Customer Good for home delivery but can suffer if order from several
Experience manuf. is sent as partial shipment
Time to market Fast
Order Visibility Difficult

Returnability Expensive & difficult to maintain

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 MANUFACTURER STORAGE WITH IN-TRANSIT
MERGE NETWORK
Combining of pieces of order coming from different locations to make a single delivery
to customer
Factories

Retailer In-Transit Merge by

Carrier

Customers

Used by direct sellers

like Dell Product Flow
Information Flow

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FEATURES

 Aggregate inventories & postpone customization is a significant advantage

 Transportation costs are low as compared to pure drop shipping
 High coordination required
 High facility cost in comparison to drop shipping
 Best suited to low to medium demand, high value items with unpredictable
demand
 Increase in no. of manufacturers increases the complexity of coordination
 Dell & Sony team is successful because product variety is high but few
sourcing locations with relatively large total demand from each location

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PERFORMANCE (COST)

Cost Factor Performance

Inventory Similar to drop shipping

Transportation Slightly less than drop shipping

Facilities & Higher than drop shipping

handling
Information Investment is slightly higher than drop
shipping

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 Performance Characteristics (Service)
Service Factor Performance

Response Time Long because of increased dist. ( marginally

higher than drop shipping)
Product variety High

Product availability High

Customer Experience Better than drop shipping as single delivery is

received
Time to market Fast

Order Visibility Difficult

Returnability Expensive & difficult to maintain

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 DISTRIBUTOR STORAGE WITH
CARRIER DELIVERY
Inventory is held by retailers or distributors in intermediate warehouses & package
carriers are used for transportation of goods

Factories

Warehouse Storage by
Distributor/Retailer

Customers

Amazon.com, WW Grainger and

Mc-Master Carr use it along with Product Flow
Drop Shipping model Information Flow
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FEATURES

 Higher inventory
 Suitable for products with higher demand
 Amazon stores medium & fast moving products at
their warehouse
 Less transp. cost for FM goods as compared to
manuf. storage
 Less complex information infrastructure as
distributor acts as buffer b/w manuf. & customer

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 Performance (Cost)
Cost Factor Performance

Inventory Higher than manuf. storage.

Difference not larger for FM goods
Transportation Lower than manuf. storage.
Reduction is highest for FM goods
Facilities & Higher than manuf. storage
handling
Information Simpler infrastructure compared to
manuf. storage

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 Performance Characteristics (Service)
Service Factor Performance

Response Time Faster than manuf. storage

Product variety Lower than manuf. storage

Product Higher cost to provide the same level of availability as

availability manuf. storage
Customer Better than manuf. storage with drop shipping
Experience
Time to market Higher than manuf. storage

Order Visibility Easier than manuf. storage

Returnability Easier than manuf. storage

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DISTRIBUTOR STORAGE WITH LAST MILE DELIVERY
Distributor/Retailer delivers at door step instead of package carrier

Factories

Distributor/Retailer
Warehouse

Customers
Grocery & milk delivery
Product Flow
Information Flow

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 Performance (Cost)
Cost Factor Performance

Inventory Higher than distributor storage

with package delivery
Transportation High cost given minimal scale of
economies. Higher than any other
option
Facilities & Higher than manuf./distributor
handling storage with package delivery but
less than chain of retail stores
Information Similar to distributor storage with
package delivery
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 Performance Characteristics (Service)
Service Factor Performance

Response Time Very quick (same or next day)

Product variety Lower than package delivery but larger than retail stores

Product More expensive to provide availability than any other

availability except retail stores
Customer Very good, particularly for bulky items
Experience
Time to market slightly higher than distributor storage with package
delivery
Order Visibility Easier than with package delivery

Returnability Easier to implement but harder than retail network

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MANUFACTURER OR DISTRIBUTOR STORAGE
WITH CUSTOMER PICKUP
Factories

Retailer Cross Dock DC

Pickup Sites

Customers

7-eleven Customer Flow

Product Flow
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Information Flow
 Performance (Cost)
Cost Factor Performance

Inventory Can match any other design

depending on location of inventory
Transportation Lower than package delivery,
especially if using an existing
network
Facilities & High if new facilities have to be
handling build
Information Significant investment

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 Performance Characteristics (Service)
Service Factor Performance

Response Time Similar to package delivery

Product variety Similar to manuf. or dist. Storage options

Product Similar to manuf. or dist. Storage options

availability
Customer Lower than any other because of lack of home delivery
Experience
Time to market Similar to mauf. Storage options

Order Visibility Difficult but essential

Returnability Somewhat easier given that pickup location can handle

returns
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LOCAL STORAGE AT CONSUMER
PICKUP SITES

 Most traditional
 Inventory stored at retail stores
 W.W Grainger (B2B) & Albertsons –Grocery (B2C)

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 Performance (Cost)
Cost Factor Performance

Inventory Higher than all other options

Transportation Lower than all other options

Facilities & Higher than other options. The

handling increase in handling cost at the
pickup site can be significant for
online & phone orders
Information Some investment in infra.
Required for online & phone
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Dr. Surya Prakash, Supply Chain Expert
 Performance Characteristics (Service)
Service Factor Performance

Response Time Same day (immediate) pickup possible for items stored
locally at pick up site
Product variety Lower than all other options

Product More expensive to provide than all other options

availability
Customer Related to whether shopping is viewed as +ve or –ve
Experience experience
Time to market Highest

Order Visibility Trivial for in store orders. Difficult for online or phone
orders

Returnability Easiest

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 COMPARATIVE PERFORMANCE OF
DELIVERY NETWORK DESIGNS
Retail Manufacturer Manufacturer Distributor Distributor Manufacturer
Storage with Storage with Storage with In- Storage with storage with storage with pickup
Customer Direct Shipping Transit Merge Package last mile
Pickup Carrier Delivery delivery
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 5 4 3 2 1 5
Experience
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 & Handling 6 1 2 3 4 5

Information
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Dr. Surya Prakash, Supply Chain Expert 1= Strong performance…….. 6= Weakest performance
LINKING PRODUCT CHARACTERISTICS AND
CUSTOMER PREFERENCES TO NETWORK DESIGN
Retail Manufacturer Manufacturer Distributor Distributor Manufacturer
Storage Storage with Storage with Storage with storage with last storage with
with Direct In-Transit Package Carrier mile delivery pickup
Customer Shipping Merge Delivery
Pickup
High demand product
+2 -2 -1 0 +1 -1
Medium demand product
+1 -1 0 +1 0 0
Low demand product
-1 +1 0 +1 -1 +1
Very low demand
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
Quick desired response
+2 -2 -2 -1 +1 -2
High product variety
-1 +2 0 +1 0 +2
Low customer effort +2
-2 +1 +2 +2 -1
04-Feb-23 Dr. Surya Prakash, Supply Chain Expert +2= Very suitable 0= neutral -2= Very unsuitable 38
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
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IMPACT OF E-BUSINESS ON CUSTOMER SERVICE

 Response time to customers

 Product Variety
 Customer Service: Access, customization & convenience
 Faster time to market
 Order Visibility
 Returnability
 Direct Sales to Customers
 Flexible pricing, Product Portfolio, & Promotions
 Efficient Funds Transfer
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IMPACT OF E-BUSINESS ON COST

 Inventory- low inventory, aggregation of inventory

far from customer ( high for low demand & high
variability and Vice versa), postponement
 Facilities- cost related to no. & location of facilities
in a network: centralization reduces the facility
cost
- Cost related to operations in facilities: customer
participation reduces not required resources hence
lower op. costs. Exceptionally in network of
customer pickup e-business increases the cost of
operation like in Peapod
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IMPACT OF E-BUSINESS ON COST

 Transportation: reduces for digital products but increases cost

for transportation on outbound side due to aggregation as
compared to inbound transportation
 Information: Increase but benefits can be realized . Some
infrastructure may already be there.

Value of setting up an E-Business may not be same . E.g: Dell & Webvan

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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?
 What roles do distributors play in the supply chain?

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CASE STUDY: FHEL

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 CASE QUESTIONS:

 What are some key success factors for FHEL?

 What do you think of the fact FHEL will face high competition
in near future?
 What do you think of FHEL’s decision to not sell products online?
What do you think of FHEL’s growth into the non-fruit category?
 What advice would you give to FHEL regarding their strategy
and structure?
 Comment on FHEL distribution method, structure and strategy?

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 Thanks !!!!!

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