April 3, 2015

Designing the Distribution Network in a Supply Chain

Factors Influencing Distribution Network Design

Why do you require a distribution network between manufacturing facility and customer location?

The performance of no distribution network system or a distribution network in place or proposed has to be evaluated on two major dimensions.

1. The customer needs that are being met.
2. Cost of the network or costs incurred in the meeting those needs.

The distribution network can change the satisfaction of the  following customer needs that differ from product to product as well as from  distribution outlet to distribution outlet.

Response time
Product variety
Product availability
Customer experience
Order visibility

When customers demand less response time, the firm needs more outlets close to the customer. When customers are happy with larger response times, the firm can more centralized facilities.

Changing the distribution network design affects the following supply chain costs:

• Inventory cost
• Transportation cost
• Facilities and handling related cost
• Information system cost

As the number of facilities in a supply chain increases, the inventory and resulting inventory costs also increase.  For example, Amazon has fewer facilities and therefore is able to turn its inventory about twelve times a year. Borders has  about 400 facilities and ti achieves only about two
turns per year.

As long as inbound transportation costs to warehouses are kept the same, increasing the
number of facilities decreases total transportation cost. But, if the number of
facilities is increased to a point where there is a significant loss of economies of scale in inbound
transportation (as full truck loads are not employed), increasing the number of facilities increases total transportation cost.

A distribution network with more than one warehouse allows initially to reduce transportation cost relative to a network with a single warehouse. Total logistics costs are the sum of inventory, transportation, and facility costs for a supply chain network. As the number of facilities is increased, total logistics costs first decrease and then increase.  Each firm should have at least the number of facilities that minimize total logistics costs.

As a firm wants to further reduce the response time to its customers, it may have to
increase the number of facilities beyond the point that minimizes logistics costs. A firm should add
facilities beyond the cost- minimizing point only if managers are confident that the increase in
revenues because of better responsiveness is greater than the increase in costs because of the additional facilities.

There are two key decisions when designing a distribution network:
1. Will product be delivered to the customer location or picked up from a preordained site (door delivery or a retail facility delivery)?
2. Will product flow through an intermediary or a distribution channel separate from retailer (or intermediate location)?

Based on the choices for the two decisions, there are six distinct distribution network designs that are
classified as follows:

1. Manufacturer storage with direct shipping
2. Manufacturer storage with direct shipping and in-transit merge (cross docking)
3. Distributor storage with package carrier delivery
4. Distributor storage with last mile delivery
5. Manufacturer / distributor storage with costumer pickup
6. Retail storage with customer pickup

While the book gives above categories  We can Manufacturer, Distributor, Retailer as three entities. Customer pickup or door delivery as two options. If the door delivery options is used the mode of door delivery. Also there is transort between manufacturer and distributor, distributor and retailer and between manufacturer and retailers.

The customer preference for each alternative, resulting demand for the product or products and cost of the distribution arrangement come into the picture to take the distribution system decision.

Only niche companies will end up using a single type of distribution network. Most companies are employ  a combination of different types for different products, different customers and different usage situations. In a company, fast moving and emergency items are stocked locally and customers can either pick them up directly or have them shipped depending upon the urgency. Slower moving items are stocked at a national distribution center from where they are shipped to the customer within a day or two. Very slow moving items are typically drop shipped from the manufacturer and involve a longer lead time. . 

Updated: 3 April 2015,  2.1.2013

Paper by Sunil Chopra - Available on his web page