Chopra and Meindl 6e - Supply Chain Management

Chapter 4: Designing Distribution Networks

Learning Objectives

1. Identify the key factors to consider when designing a distribution network.
2. Introduce various distribution networks.
3. Discuss the strengths and weaknesses of various distribution networks.

Role of Distribution in the Supply Chain

• Distribution involves steps to move and store a product from the supplier to the customer.
• Drives profitability by affecting supply chain cost and customer value.
• Choice of distribution network can range from low cost to high responsiveness.
• Distribution costs can account for 20-50% of total costs in different industries.

Supply Chain Examples

• Dell distributed directly to consumers until 2007; HP uses resellers.
• Gateway had stores for browsing but closed them due to poor performance.
• Apple has retail stores for direct sales.
• P&G distributes directly to large chains but uses distributors for smaller players.
• Texas Instruments serves most customers through distributors; a small portion directly.
• W.W. Grainger combines stocked and direct-from-manufacturer shipping.
• Poor network choices can negatively impact profitability (e.g., Blockbuster, Webvan).

Factors Influencing Distribution Network Design

Distribution Network Performance

• Evaluated on value provided to the customer and cost of meeting customer needs.
• Elements: response time, product variety, product availability, customer experience, time to market, order visibility, returnability.

Supply Chain Costs Affected by Network Structure

• Inventories, Transportation, Facilities and Handling, Information.

Desired Response Time and Number of Facilities

• Barnes & Noble uses hundreds of stores for same-day book availability.
• Amazon uses about 40 locations, with a longer delivery time.

Logistics Cost, Response Time, and Number of Facilities

• Total logistics costs initially decrease then increase with more facilities.
• Increasing facilities may reduce response time but increase costs.

Design Options for a Distribution Network

Key Decisions

1. Delivery to customer location vs. customer pickup.
2. Product flow through intermediary vs. direct.

Distribution Network Designs

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

Detailed Analysis of Distribution Network Options

Manufacturer Storage with Direct Shipping

• Lower inventory costs due to aggregation.
• Higher transportation costs.
• Long response time.
• High product variety and availability.
• Good for high-value, low-demand products.

In-Transit Merge Network

• Combines deliveries for a single shipment.
• Lower transportation costs than drop-shipping.
• Better customer experience.

Distributor Storage with Carrier Delivery

• Inventory held at intermediate warehouses.
• Faster response time than manufacturer storage.
• Lower transportation costs.
• Higher facility costs.

Distributor Storage with Last Mile Delivery

• Direct delivery to customer homes.
• Very high transportation costs.
• Quick response time.

Manufacturer/Distributor Storage with Customer Pickup

• Lower delivery costs.
• Increased handling costs at pickup site.

Retail Storage with Customer Pickup

• High facility and inventory costs.
• Immediate pickup possible.

Comparative Performance of Delivery Network Designs

• Retail store with customer pickup offers best response time.
• Manufacturer storage with direct shipping excels in product variety and availability.

Conclusion

• Key factors in the design of distribution networks.
• Analysis of various design options and their impact on cost and service.