Supply Chain Management: (Unit - 3)

Supply Chain Management
(Unit – 3)
IMBA – 4th Year (VII – Sem.)
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Distribution Network
In a supply chain, a distribution network is an interconnected group of storage facilities

and transportation systems that receive inventories of goods and then deliver them to customers.
It is an intermediate point to get products from the manufacturer to the end customer, either directly
or through a retail network.
Supply chain distribution refers to your methodology for getting products to consumers.
With a formal distribution plan that's implemented rigorously, you reduce cycle times for product
deliveries.
Four Channels of Distribution:

There are four main channels of distribution in the supply chain. Each distribution channel may
work well for one type of business but falter for another.
1. Direct sales: Direct sales involve direct distribution from manufacturer to customer. Direct
sales is best for products that have a mid-price point. The products should be affordable
enough to have broad appeal. Direct sales also require that products sold have an extended
shelf-life.
2. Brokerage: Brokers work as a go-between for manufacturers and retailers. For instance,
food manufacturers may hire a broker to sell their products to grocery stores. Brokers don't
ship the products directly but handle the sale contracts.
3. Wholesale: Wholesalers purchase products in bulk from the manufacturer to sell at a

higher price point through resales. As a reseller, wholesale companies take on more of the
risk if products don’t sell since buyers purchase directly from them.
4. Dual distribution: For dual distribution, a company may use several strategies to get their
products to customers. For instance, the company may decide to offer both direct sales and
wholesale. Franchises are one business model that frequently use more than one type of
distribution channel.
Distribution Network Design
Distribution network designs specify the locations of warehouses and how much product
is allocated to each facility. The design of its distribution network, therefore, determines the total
cost of delivering products to meet customer demand while maintaining the appropriate service
levels.
Factors Influencing Distribution Network Design

At the highest level, performance of a distribution network should be evaluated along two
dimensions:
1. Customer needs that are met

2. Cost of meeting customer needs
The customer needs that are met influence the company's revenues, which along with cost decide
the profitability of the delivery network while customer service consists of many components, we
will focus on those measures that are influenced by the structure of the distribution network. These
include:
• Response time
• Product variety
• Product availability
• Customer experience
• Order visibility
• Returnability
Response time is the time between when a customer places an order and receives delivery.
Product variety is the number of different products / configurations that a customer desires from
the distribution network. Availability is the probability of having a product in stock when a
customer order arrives. Customer experience includes the ease with which the customer can place
and receive their order. Order visibility is the ability of the customer to track their order from
placement to delivery. Returnability is the ease with which a customer can return unsatisfactory
merchandise and the ability of the network to handle such returns.
It may seem at first that a customer always wants the highest level of performance along
all these dimensions. In practice, however, this is not always the case. Customers ordering a book
at Amazon.com are willing to wait longer than those that drive to a nearby Borders store to get the
same book. On the other hand, customers can find a far larger variety of books at Amazon
compared to the Borders store. 4 Firms that target customers who can tolerate a large response
time require few locations that may be far from the customer and can focus on increasing the
capacity of each location. On the other hand, firms that target customers who value short response
times need to locate close to them. These firms must have many facilities, with each location
having a low capacity. Thus, a decrease in the response time customers desire increases the number
of facilities required in the network, Borders provides its customers with books on the same day
but requires about 400 stores to achieve this goal for most of the United States. Amazon, on the
other hand, takes about a week to deliver a book to its customers, but only uses about 5 locations
to store its books.
Designing the Distribution Network in a Supply Chain
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
Factors Influencing Distribution Network Design

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)?

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Supply Chain Management

In a supply chain, a distribution network is an interconnected group of storage facilities

Four Channels of Distribution:

3. Wholesale: Wholesalers purchase products in bulk from the manufacturer to sell at a

Distribution Network Design

Factors Influencing Distribution Network Design

1. Customer needs that are met

Designing the Distribution Network in a Supply Chain

1. Manufacturer storage with direct shipping

Factors Influencing Distribution Network Design

There are two key decisions when designing a distribution network:

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