Designing Distribution Networks and Application to Online Sales

Supply Chain Management: Strategy, Planning, and Operation

Seventh Edition

Chapter 4

Designing Distribution Networks and Applications to Omni-Channel Retailing

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1

Learning Objectives

4.1 Identify the key factors to be considered when designing a distribution network.

4.2 Discuss the strengths and weaknesses of various distribution options.

4.3 Describe how omni-channel retail may be structured to be both cost effective and responsive to customer needs.

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Distribution Network Design 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

Drives profitability by directly affecting supply chain cost and the customer value

Choice of distribution network can achieve supply chain objectives from low cost to high responsiveness

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Factors Affecting Distribution Network Design (1 of 3)

Distribution network performance evaluated along two dimensions

Value provided to the customer

Cost of meeting customer needs

Evaluate the impact on customer service and cost for different distribution network options

Profitability of the delivery network determined by revenue from met customer needs and network costs

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Factors Affecting Distribution Network Design (2 of 3)

Elements of customer service influenced by network structure:

Response time

Product variety

Product availability

Customer experience

Time to market

Order visibility

Returnability

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Factors Affecting Distribution Network Design (3 of 3)

Supply chain costs affected by network structure:

Inventories

Transportation

Facilities

Information

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Desired Response Time and Number of Facilities

Figure 4-1 Relationship Between Desired Response Time and Number of Facilities

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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.

7

Inventory Costs and Number of Facilities

Figure 4-2 Relationship Between Number of Facilities and Inventory Costs

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Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities.

8

Transportation Costs and Number of Facilities

Figure 4-3 Relationship Between Number of Facilities and Transportation Cost

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Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities.

9

Facility Costs and Number of Facilities

Figure 4-4 Relationship Between Number of Facilities and Facility Costs

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Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities.

10

Logistics Cost, Response Time, and Number of Facilities

Figure 4-5 Variation in Logistics Cost and Response Time with Number of Facilities

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Summary of Learning Objective 1

A manager must consider the customer needs to be met and the cost of meeting these needs when designing the distribution network. Some key customer needs to be considered include response time, product variety/availability, convenience, order visibility, and returnability. Important costs that managers must consider include inventory, transportation, facilities and handling, and information. Increasing the number of facilities decreases the response time and transportation cost but increases inventory and facility cost.

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Design Options for a Distribution Network (1 of 2)

Distribution network choices from the manufacturer to the end consumer

Two key decisions

Will product be delivered to the customer location or picked up from a prearranged site?

Will product flow through an intermediary (or intermediate location)?

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Design Options for a Distribution Network (2 of 2)

One of six designs may be used

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

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Figure 4-6 Manufacturer Storage with Direct Shipping

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Manufacturer Storage with Direct Shipping Network (1 of 2)

Table 4-1 Performance Characteristics of Manufacturer Storage with Direct Shipping Network

Cost Factor Performance
Inventory Lower costs because of aggregation. Benefits of aggregation are highest for low-demand, high-value items. Benefits are large if product customization can be postponed at the manufacturer.
Transportation Higher transportation costs because of increased distance and disaggregate shipping.
Facilities and handling Lower facility costs because of aggregation. Some saving on handling costs if manufacturer can manage small shipments or ship from production line.
Information Significant investment in information infrastructure to integrate manufacturer and retailer.
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Manufacturer Storage with Direct Shipping Network (2 of 2)

Table 4-1 [Continued]

Service Factor Performance
Response time Long response time of one to two weeks because of increased distance and two stages for order processing. Response time may vary by product, thus complicating receiving.
Product variety Easy to provide a high level of variety.
Product availability Easy to provide a high level of product availability because of aggregation at manufacturer.
Customer experience Good in terms of home delivery but can suffer if order from several manufacturers is sent as partial shipments.
Time to market Fast, with the product available as soon as the first unit is produced.
Order visibility More difficult but also more important from a customer service perspective.
Returnability Expensive and difficult to implement.
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Figure 4-7 In-Transit Merge Network

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In-Transit Merge (1 of 2)

Table 4-2 Performance Characteristics of In-Transit Merge

Cost Factor Performance
Inventory Similar to drop-shipping.
Transportation Somewhat lower transportation costs than drop-shipping.
Facilities and handling Handling costs higher than drop-shipping at carrier; receiving costs lower at customer.
Information Investment is somewhat higher than for drop-shipping.
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In-Transit Merge (2 of 2)

Table 4-2 [Continued]

Service Factor Performance
Response time Similar to drop-shipping; may be marginally higher.
Product variety Similar to drop-shipping.
Product availability Similar to drop-shipping.
Customer experience Better than drop-shipping because only a single delivery is received.
Time to market Similar to drop-shipping.
Order visibility Similar to drop-shipping.
Returnability Similar to drop-shipping.
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Figure 4-8 Distributor Storage with Carrier Delivery

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Distributor Storage with Carrier Delivery (1 of 2)

Table 4-3 Performance Characteristics of Distributor Storage with Carrier Delivery

Cost Factor Performance
Inventory Higher than manufacturer storage. Difference is not large for faster-moving items but can be large for very slow-moving items.
Transportation Lower than manufacturer storage. Reduction is highest for faster-moving items.
Facilities and handling Somewhat higher than manufacturer storage. The difference can be large for very-slow-moving items.
Information Simpler infrastructure compared to manufacturer storage.
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Distributor Storage with Carrier Delivery (2 of 2)

Table 4-3 [Continued]

Service Factor Performance
Response time Faster than manufacturer storage.
Product variety Lower than manufacturer storage.
Product availability Higher cost to provide the same level of availability as manufacturer storage.
Customer experience Better than manufacturer storage with drop-shipping.
Time to market Higher than manufacturer storage.
Order visibility Easier than manufacturer storage.
Returnability Easier than manufacturer storage.
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Figure 4-9 Distributor Storage with Last Mile Delivery

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Distributor Storage with Last Mile Delivery (1 of 2)

Table 4-4 Performance Characteristics of Distributor Storage with Last-Mile Delivery

Cost Factor Performance
Inventory Higher than distributor storage with package carrier delivery.
Transportation Very high cost given minimal scale economies. Higher than any other distribution option.
Facilities and handling Facility costs higher than manufacturer storage or distributor storage with package carrier delivery, but lower than a chain of retail stores.
Information Similar to distributor storage with package carrier delivery.
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Distributor Storage with Last Mile Delivery (2 of 2)

Table 4-4 [Continued]

Service Factor Performance
Response time Very quick. Same day to next-day delivery.
Product variety Somewhat less than distributor storage with package carrier delivery but larger than retail stores.
Product availability More expensive to provide availability than any other option except retail stores.
Customer experience Very good, particularly for bulky items.
Time to market Slightly longer than distributor storage with package carrier delivery.
Order visibility Less of an issue and easier to implement than manufacturer storage or distributor storage with package carrier delivery.
Returnability Easier to implement than other previous options. Harder and more expensive than a retail network.
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Figure 4-10 Manufacturer or Distributor Storage with Customer Pickup

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Manufacturer or Distributor Storage with Customer Pickup (1 of 2)

Table 4-5 Performance Characteristics of Network with Customer Pickup Sites

Cost Factor Performance
Inventory Can match any other option, depending on the location of inventory.
Transportation Lower than the use of package carriers, especially if using an existing delivery network.
Facilities and handling Facility costs can be high if new facilities have to be built. Costs are lower if existing facilities are used. The increase in handling cost at the pickup site can be significant.
Information Significant investment in infrastructure required.
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Manufacturer or Distributor Storage with Customer Pickup (2 of 2)

Table 4-5 [Continued]

Service Factor Performance
Response time Similar to package carrier delivery with manufacturer or distributor storage. Same-day pickup is possible for items stored at regional DC.
Product variety Similar to other manufacturer or distributor storage options.
Product availability Similar to other manufacturer or distributor storage options.
Customer experience Lower than other options because of the lack of home delivery. Experience is sensitive to capability of pickup location.
Time to market Similar to manufacturer or distributor storage options.
Order visibility Difficult but essential.
Returnability Somewhat easier, given that pickup location can handle returns.
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Figure 4-11 Retail Storage with Customer Pickup

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Retail Storage with Customer Pickup (1 of 2)

Table 4-6 Performance Characteristics of Retail Storage with Customer Pickup Sites

Cost Factor Performance
Inventory Higher than all other options.
Transportation Lower than all other options.
Facilities and handling Higher than other options. The increase in handling cost at the pickup site can be significant for online and phone orders.
Information Some investment in infrastructure required for online and phone orders.
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Retail Storage with Customer Pickup (2 of 2)

Table 4-6 [Continued]

Service Factor Performance
Response time Same-day (immediate) pickup possible for items stored locally at pickup site.
Product variety Lower than all other options.
Product availability More expensive to provide than all other options.
Customer experience Related to whether shopping is viewed as a positive or negative experience by customer.
Time to market Highest among distribution options.
Order visibility Trivial for in-store orders. Difficult, but essential, for online and phone orders.
Returnability Easier than other options because retail store can provide a substitute.
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Comparative Performance of Delivery Network Designs (1 of 3)

Table 4-7 Comparative Performance Rank of Delivery Network Designs

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