Designing the Distribution Network in a Supply Chain Supply Chain Management Designing the Distribution Network in a Supply Chain

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

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

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

Service and Number of Facilities (Fig. 4.1) Notes: Increasing the number of facilities moves them closer to the end consumer. This reduces the response time. As Amazon has built warehouses, the average time from the warehouse to the end consumer has decreased. McMaster-Carr provides 1-2 day coverage of most of the U.S from 6 facilities. W.W. Grainger is able to increase coverage to same day delivery using about 370 facilities. Response Time

Inventory Costs and Number of Facilities (Fig. 4.2) Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities. Number of facilities

Transportation Costs and Number of Facilities (Fig. 4.3) Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities. Number of facilities

Facility Costs and Number of Facilities (Fig. 4.4) Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities. Number of facilities

Total Costs Related to Number of Facilities Inventory Notes: Total costs decrease and then increase as we increase the number of facilities. The responsiveness improves as we increase the number of facilities. A supply chain should always operate above the lowest cost point. Operating beyond that point makes sense if the revenue generated from better responsiveness exceeds the cost of better responsiveness. Transportation Number of Facilities

Variation in Logistics Costs and Response Time with Number of Facilities (Fig. 4.5) Total Logistics Costs Notes: Total costs decrease and then increase as we increase the number of facilities. The responsiveness improves as we increase the number of facilities. A supply chain should always operate above the lowest cost point. Operating beyond that point makes sense if the revenue generated from better responsiveness exceeds the cost of better responsiveness. Number of Facilities

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

Manufacturer Storage with Direct Shipping Retailer Customers Product Flow Information Flow

Features of Direct supply network All shipments come directly from suppliers to retail or customers (Dell, Amazon.com) Needs to decide on the quantity and mode Elimination of intermediate warehouse Simplicity of operation and coordination It is justified when the customer requirement is very large or the retailer is large enough With small retail stores, this system is very costly One have to decide the size of shipment with an objective of tradeoff between cost and inventory

Direct shipping with Milk runs Suppliers Retailers Suppliers Manufacturers

Features of Direct shipping with milk runs Single supplier to multiple retailers or from multiple suppliers to single customer. Routing of the milk run have to be decided It lowers transportation cost Example TVS to Toyota Soft drink distribution Single supplier to multiple plants Multiple plants to single plant No intermediate warehouses

Shipping via Distribution center DC Retail stores suppliers

Features of Shipments with DC To store inventory Serve as transfer location Suppliers are located far from customers Economy of scale for inbound transportation DC may be operated by C&F agents Customers may be comfortable with this arrangment

In-Transit Merge Network- Cross docking Factories In-Transit Merge by Carrier Retailer Customers Product Flow Information Flow

Features of cross docking Appropriate for predictable, large volumes It act as transshipment point Decrease in inventory It needs huge investment in IT

Distributor Storage with Last Mile Delivery (With milk run) Factories Distributor/Stockist Warehouse Customers Product Flow Information Flow

Shipping with DC and Milk run FMCG distribution High demand stable products are distributed in India Fragmented retailing requires this type of distribution

Tailored network Combination of above methods High volume products to high volume retail outlets may be shipped directly Low volume products to low volume retail outlets are consolidated to and from the DC Complexity is very high

Pro and Cons of Different transportation networks Pros Cons Direct shipping No warehouse, simple coordination High inventories, High receiving cost Direct shipping with milk run Lower transportation cost, lower inventories Increased complexity, routing problem Shipments with DC Lower inbound transportation Increased inventory cost, increase handling costs DC with cross-docking Very low inventory, low transportation cost More complexity in terms of information Shipping via DC using Milk Run Lower outbound cost for small lots More complexity Tailored network Meets need of each segment Higher coordination

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