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Chapter 4
Dates
Type Book notes
Topic Property
Factors affecting distribution network design in the
supply chain
Distribution refers to the steps taken to move and store product from the supplier stage to a customer stage in the supply chain. It occurs in every pair of stage of the supply chain
Distribution drives profitability⇒ it affects the SC cost and customer value.
Designing a distribution network involves two phases:
- Design the broad structure
- Convert the broad structure into specific locations and their capability
At the highest level of performance→ distribution networks should be evaluated along two dimensions:
Value provided to the customer Cost of meeting customer needs
Meeting customer needs increase revenues and therefore affect the SC profitability.
Some measures are affected by the distribution network:
Response time Product varietry
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Product availability Customer experience Time to market Order visibility Returnability
Customers do not always want the highest level of performance amon these measures⇒ it depends on the distribution network
Distribution network also affects Supply Chain costs:
Inventory Transportation’ Facilities Information
Relationship between Costs and Number of facilities
As the number of facilities increase the inventory cost increases. To decrease these costs a firm may need to limit the number of facilities in their supply chain network.
Transportation cost are divide into:
Design options for a distribution network
When take this decision managers must mke two key questions;
- Will the product be delivered at home or picked up?
- Will the product flow through an intermediary?
Based on the strategy and on the answer to these two qustions managers can decide between 6 different designs:
- 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/Distributor storage with customer pickup
- Retail storage with customer pickup
Manufacturer storage with direct shipping
In this design the retailer takes the order however inventory is kept at the manufacturer. This design is also known as drop-shipping. In most cases it is used for slow-moving items to customers.
The biggest advantage is the ability to centralize inventories at the manufacturer⇒ aggregate demand across all retailers. This result in an higher product availability. The major benefits are for items with high-value, low and unpredictable demand.
Drop-shipping offers the possibility to postpone customization after the customer has placed the order this can further decrease inventories by aggregation.
Facilities cost are lower for supply chain as the inventory is centrralized, furthermore the handling cost can be decreased if the manufacturer can directly ship from the production line.
Information structure requires an high level of investment as a good information structure is essential to provide informations (availability,…) to the customers.
Response time tend to be long in drop-shipping as the shipping distances from the manufacturer are usually long.
Manufacturer also allows an high level of product variety ⇒ every product can be made available at the manufacturer
This design provides a good experience in terms of home delivery, however it lacks if there is one order with multiple products from different manufacturers. Indeed the customer may receive multiple deliveries for one order.
The order visibility is essential to provide a good customer experience however it can be expensive ti implement as well as the order returnability.
This type of design has the greatest benefits for product with high value whose demand is dissicult to forecast, particularly if customization can be postponed. Overall supply chain facility and handling cost are somewhat higher than with drop-shipping.
A sophisticated information infrustructure is needed to allow in-transit merge. operations must be coordinated and therefore the investment needed is higher than drop-shipping.
Product availability and variety are somewhat the same as drop-shipping however customer experience is better as only a single order is received.
Visibility and order returnability are still difficult and quite expensive to implement.
Distributor storage with Carrier delivery
Under this option inventory is not held at manufacturers, but at retailer/distributors in intermediate warehouses and package carriers are used to transport products from the intermediate location to the final customer.
Compared to the two previosu designs the inventory cost are higher, due to loss of aggregation. This design indeed make sense for product with an higher and more predicatble demand. Companies like Amazon uses this design combined with drop- shipping.
Transportation costs are somewhat lower as the trasnportation can be done with fully loaded truck to the distributor warehouse, which is closer to the customer. This design also allows product to be bundled in a single shipment, further reducing transportation costs.
Facility costs are higher because of loss of aggregation and therefore this design is not suitable for slow-moving items.
The information infrustructure required is less complex than manufacturer storage⇒ the warehouse acts as a buffer and therefore there’s no need of coordination between the customer and the manufacturer.
Response time is better because the warehouses are closer to the customer, order visibility becomes better and easier as well as returnability of the product.
If the quantity ordered is large last-mile delivery is still cheaper than customer picking- up their product, this is good for bulky items or large quantities (example: car companies,…).
The facility cost are lower than the carrier design but still higher than the manufacturer storage. The information infrustructure is very similar to the previous design, howevr it can be more complicated in terms of scheduling the deliveries.
Response time are faster, but product variety is usually lower than carrier delivery. This has also an impact on product availability. Higher costs are required to provide the same availabilities of the previous designs.
Order visibility is not an issue as the delivery happens within 24 hours, and the returnability is easy to implement.
Manufacturer or Distributor storage with Customer Pickup
Inventory is stored at the manufacturer or at the warehouse, but customers after ordering online need to travel to pick-up points to collect their order.
Inventory costs can be kept low, exploiting aggregation at the manufaturer or distributor.
Local storage increases inventory costs because of a lack of aggregation. On the other hand transportation cost is much lower than with other solutions because inexpensive modes of transportation can be used to replenish products at the retail store.
Facility costs are high as a large number of facilities is needed, but a minimal inormation investment is needed. The response time is immediate, because of the local storage.
It is very expensive to offer the same product availability and variety as other ditribution networ because of the limited inevntory.. Order visibility is not an issue for retail stores, however is it is very important if the order si placed online.
Returnability can be handle locally at the retail stores, and therefore is easy and less expensive.
Selecting a distribution Network Design
A network designers needs to consider product characteristics as well as network requirements when deciding on the appropriate delivery network. Most companies are best served by a combination of delivery networks. The combination used depends on product characteristics and the strategic position that the firm is targeting.
