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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. Manufacturer Storage with Direct Shipping
Retailer
Customers
Product Flow
Information Flow

13. 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

14. Direct shipping with Milk runs
Suppliers
Retailers
Suppliers
Manufacturers

15. 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

16. Shipping via Distribution centerDC
Retail stores
suppliers

17. 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

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

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

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

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

22. 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

23. 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

24. 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