LOGISTICS & SUPPLY
CHAIN MANAGEMENT
Part 3
Designing Distribution Networks
CORRADO CERRUTI
Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011
Capitolo I. Il concetto di strategia
The Role of Distribution
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
 Distribution directly affects cost and the customer
experience and therefore drives profitability
 Choice of distribution network can achieve supply chain
objectives from low cost to high responsiveness
 Ex: P&G has chosen to distribute directly to large
supermarket chains while obligating smaller players to buy
P&G products from distributors (double distribution
channel).
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Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011
Capitolo I. Il concetto di strategia
Factors Influencing
Distribution Network Design
 Distribution network performance evaluated along
two dimensions at the highest level:


Customer needs that are met
Cost of meeting customer needs
 Distribution network design options must therefore
be compared according to their impact on customer
service and the cost to provide this level of service
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Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011
Capitolo I. Il concetto di strategia
Factors Influencing
Distribution Network Design
Elements of customer service influenced by network
structure:
1.






Response time (amount of time it takes for a customer to receive
an order)
Product variety (number of different products/configurations
offered by the distribution network)
Product availability (probability of having a product in stock)
Customer experience (how easy is the placing and receiving of
an order)
Order visibility (ability of customer to track their orders along
the pipeline)
Returnability (the ease with which a customer can return
unsatisfactory merchandising)
4
Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011
Capitolo I. Il concetto di strategia
Factors Influencing
Distribution Network Design
2. Supply chain costs affected by network structure:

Inventories

Transportation

Facilities and handling

Information
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Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011
Capitolo I. Il concetto di strategia
Service and Number of Facilities
Number of
Facilities
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.
Response
Time
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Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011
Capitolo I. Il concetto di strategia
Inventory Costs and Number
of Facilities
Inventory
Costs
Inventory costs increase
as we increase the
number of facilities.
To decrease inventory
costs,
firms
try
to
consolidate and limit the
number of facilities in
their supply network.
Ex: with fewer facilities,
Amazon is able to turn its
inventory about 12 times
at year.
Number of facilities
7
Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011
Capitolo I. Il concetto di strategia
Transportation Costs and
Number of Facilities
Transportation
Costs
Increasing the number of
warehouses locations, decreases
the average outbound distance to
the end customer and makes
outbound
transportation
distance a smaller fraction of the
total distance traveled by the
product. Thus, as long as
inbound
transportation
economies
of
scale
are
maintained, Total Transportation
costs decrease as we increase the
number of facilities.
Number of facilities
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Variation in Logistics Costs and Response Time with Number of Facilities
Response
Time
Each firm should have at least the number of facilities
that minimize total logistics costs and provide the
desired response time.
The responsiveness improves as we increase the
number of facilities. A supply chain should always
operate above the lowest cost point. Operating
beyond that point makes sense if the revenue
generated from better responsiveness exceeds the
cost of better responsiveness.
Total Logistics Costs
Number of Facilities
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Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011
Capitolo I. Il concetto di strategia
Design Options for a
Distribution Network
 Managers must make two key decisions when designing a
distribution network:
o
o
Will product be delivered to the customer location or picked up
from a preordained site?
Will product flow through an intermediary (or intermediate
location)?
 Distinct distribution network designs may be used:
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 or Distributor Storage with Customer Pickup
6)
Retail Storage with Customer Pickup
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Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011
Capitolo I. Il concetto di strategia
1. Manufacturer Storage with
Direct Shipping
Manufacturer
Retailer
Customers
Product is shipped directly from the manufacturer to end customer, bypassing the
retailer (who takes the order and initiates the delivery request). This option is
also referred as DROP-SHIPPING. The retailer carries no inventories.
Information flows from the customer, via the retailer, to the manufacturer (ex.
on-line retailers use this option, such as eBags)
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Performance characteristics of
Drop-Shipping (1)
Cost factor
Performance
Inventory
Lower costs because of aggregation. Benefits of
aggregation are highest fro low-demand, high-value
items. Benefits are very large if product
customization can be posponed at the manufacturer
Transportation
Higher transportation costs because of increased
distance and disaggregate shipping
Facilities
handling
Lower facility costs because of aggregation. Some
saving on handling costs if manufacturer can
manage small shipments or ship from production
line
and
Information
Significant investment in information infrastructure
to integrate manufacturer and retailer
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Performance characteristics of
Drop-Shipping (2)
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 very 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 manufaturers 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
13
Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011
Capitolo I. Il concetto di strategia
2. Manufacturer Storage with Direct
Shipping and In-Transit Merge Network
Factories
In-Transit Merge
by Carrier
Retailer
Customers
This option combines pieces of the order coming from different locations so that
the customer gests a single delivery (it has been used by direct sellers such as
Dell). When a customer orders a Dell PC along with a Sony monitor, the package
carrier picks up the pc from the Dell factory and the monitor from Sony factory. It
then merges the two together at a HUB before making a single delivery to the
customer.
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Performance characteristics of
In-Transit merge (1)
Cost factor
Performance
Inventory
Lower costs because of aggregation. Benefits of
aggregation are highest fro low-demand, high-value
items. Benefits are very large if product
customization can be posponed at the manufacturer
Transportation
Somewhat lower transportation costs than dropshipping
Facilities
handling
Handling costs higher than drop-shipping at
carrier; receiving costs lower at customer
and
Information
Investment is somewhat higher than for dropshipping
(very
sophisticated
information
infrastructure)
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Performance characteristics of
In-Transit merge (2)
Service factor
Performance
Response time
Similar to drop-shipping; may be marginally higher
Product variety
Similar to drop-shipping: easy to provide a very high level of
variety
Product
availability
Similar to drop-shipping: easy to provide a high level of
product availability because of aggregation at manufacturer
Customer
experience
Better than drop-shipping because only a single delivery has
to be received
Time to market
Similar to drop-shipping: fast, with the product available as
soon as the first unit is produced
Order visibility
Similar to drop-shipping: more difficult but also more
important from a customer service perspective
Returnability
Similar to
implement
drop-shipping:
16
expensive
and
difficult
to
Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011
Capitolo I. Il concetto di strategia
3. Distributor Storage with
Carrier Delivery
Factories
Warehouse Storage by
Distributor/Retailer
Customers
Under this option, inventory is not held by manufacturers at the factories but is
held by distributors/retailers in intermediate warehouses, and package carriers
are used to transport products from the intermediate location to the final
customer (ex. Amazon). Distributor storage required a higher level of inventory as
the distributor/retailer warehouse generally aggregates demand uncertanty at a
lower level than the manufacturer that is able to aggregate demand across all
distributors/retailers.
Performance characteristics of
Distributor Storage with Carrier Delivery(1)
Cost factor
Performance
Inventory
Higher than manufacturer storage. Difference is not
large for faster-moving items (high demand)
Transportation
Lower than manufacturer storage because an
economic mode of transportation (truckloads) can
be employed fro inbound shipments to the
warehouse which is closer to the customer.
Reduction is highest for faster-moving items
Facilities
handling
Somewhat higher than manufacturer storage
because of a loss of aggregation. The difference can
be large for very slow-moving items
and
Information
Simpler infrastructure compared to manufacturer
storage
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Performance characteristics of
Distributor Storage with Carrier Delivery (2)
Service factor
Performance
Response time
Faster than manufacturer storage because distributor warehouses
are on average closer to customers and the entire order is
aggregated before being shipped
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 because of the need to stock
another stage in the supply chain
Order visibility
Easier than manufacturer storage because there is a single
shipment from the warehouse to the customer and only one stage
of the sc is involved directly in filling the customer order
Returnability
Easier than manufacturer storage (all returns can be processed at
the warehouse itself
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Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011
Capitolo I. Il concetto di strategia
4. Distributor Storage with
Last Mile Delivery
Factories
Distributor/Retailer
Warehouse
Customers
This option refers to the distributor/retailer delivering the product to the
customer’s home instead of using a package carrier (very common in the grocery
industry). Unlike package carrier delivery, last-mile delivery requires the
distributor warehouse to be much closer to the customer. Given the limited
radius that can be served with last-mile delivery, more warehouses are required
compared to the case when package delivery is used.
Performance characteristics of
Distributor Storage with Last Mile Delivery (1)
Cost factor
Performance
Inventory
Higher than distributor storage with package carrier
delivery because of a lower level of aggregation
Transportation
Very high cost given minimal scale economies.
Higher than any other distribution option
Facilities
handling
Facility costs high given the large number of
facilities required
and
Information
Simpler infrastructure compared to manufacturer
storage. It requires the additional capability of
scheduling delivery
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Performance characteristics of
Distributor Storage with Last Mile Delivery (2)
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 (more comfortable for the
customer to have them delivered home)
Time to market
Slightly higher than distributor storage with package carrier
delivery (the new product need to penetrate deeper the supply
chain before it is available to the customers)
Order visibility
It is less of an issue given the deliveries are made within 24 hours.
Order-tracking feature does become important to handle
exceptions in case of incomplete or undelivered orders
Returnability
Easier to implement than other options (the distributor
warehouse is close to the customer)
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Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011
Capitolo I. Il concetto di strategia
5. Manufacturer or Distributor Storage
with Customer Pickup
Factories
DCs
Retailer
Pickup Sites
Customers
Inventory is stored at the manufacturer or distributor warehouse but customers place
their orders online or on the phone and then travel to designated pickup points to
collect their merchandise. Orders are shipped from the storage site to the pickup
points as needed.
Performance characteristics of Manufacturer or
Distributor Storage with Customer Pickup (1)
Cost factor
Performance
Inventory
They can be kept low with either manufacturer or
distributor storage to exploit aggregation
Transportation
Lower costs than the use of package carriers because
significant aggregation is possible when delivering orders to
a pickup site (inbound transportation)
Facilities
handling
and Facility costs can be very high if new facilities have to be
Information
built. Costs are lower if existing facilities are used
Significant investment in infrastructure are required to
provide visibility of the order until the customer picks it up
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Performance characteristics of Manufacturer or
Distributor Storage with Customer Pickup (2)
Service factor
Performance
Response time
Same-day delivery possible for items stored locally at pickup
site
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. In areas with high density of population, loss of
convenience may be small (customers are close to the pickup
point)
Time to market
Similar to other manufacturer or distributor storage options
Order visibility
Difficult but essential. It require integration of several stages
in the supply chain.
Returnability
Somewhat easier given that pickup location can handle
returns
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Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011
Capitolo I. Il concetto di strategia
6. Retail Storage with Customer Pickup
 The most traditional: inventory is stored locally at retail




stores.
Customers walk into the retail store or place an order
online and pick it up at the retail store
The main advantage of this option is that it can lower
delivery costs and provide a faster response than other
networks
The major disadvantage is the increased inventory and
facility costs
Such a network is best suited for fast-moving items or
items for which customers value rapid response
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Performance characteristics of Retail
Storage with Customer Pickup (1)
Cost factor
Performance
Inventory
Higher than all other options. Lack of aggregation
increases inventory costs. For fast-moving items there is
a marginal increase in inventory even in this case
Transportation
Lower than all other options because less expensive
modes of transportation can be used to replenish product
at the retail store
Facilities
handling
and Higher than other options because many local facilities
Information
are needed. The increase in handling cost at the pickup
site can be significant for online and phone orders
Some investment in infrastructure required for online
and phone orders
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Performance characteristics of Retail
Storage with Customer Pickup (2)
Service factor
Performance
Response time
Same-day (immediate) pickup possible for items stored locally
at pickup site
Product variety
Lower than all other options because it is more expensive
Product
availability
More expensive to be provided
Customer
experience
Related to whether shopping is viewed as a positive or
negative experience by customer
Time to market
Longer than the other options because the new product has to
penetrate through the entire supply chain before it is available
to customer
Order visibility
Trivial for in-store orders. Difficult, but essential, for online
and phone orders
Returnability
Very easy given that pickup location can handle returns
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Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011
Capitolo I. Il concetto di strategia
E-Business and the Distribution Network
It is important to
understand what drove
the succesfull
introduction of
e-business in some
networks and not
others, and how these
networks are likely to
evolve….
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Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011
Capitolo I. Il concetto di strategia
Impact of E-Business on Customer Service - 1
 Response time: e-business without a physical retail outlet
takes longer to fulfill the customer request than a retail store.
However, there is no delay (shipping time) for products that can
be downloaded
 Product variety: e-business finds it easier to offer a larger
selection of products than a traditional retail store because the
physical space is not a constraint
 Inventory: e-business increases the speed with which
information on customer demand is disseminated throughout
the sc. This improves the accuracy of forecasting and rationalizes
the inventory decisions.
 Customer experience: it benefits from more access (out of
regular business hours), customization and convenience.
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Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011
Capitolo I. Il concetto di strategia
Impact of E-Business on Customer Service - 2
 Time to market: introduction of new products is much quicker. A
new product can be made available as soon as the first unit is
ready to be produced
 Returnability: it is harder with online orders, which typically
arrive from a centralized location. The proportion of returns is
also likely to be much higher because customer are unable to
touch and feel product before their purchase
 Direct sales to customers: this enhances revenues of
manufacturer by bypassing intermediaries (thereby collecting
the intermediary’s incremental revenue)
 Flexible Pricing, Product Portfolio, and Promotions: an ebusiness can easily alter prices. This maximizes revenues by
setting prices based on current inventories and demand.
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Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011
Capitolo I. Il concetto di strategia
Impact of E-Business on Cost
 Inventory: an e-business can lower inventory levels and
inventory cost by improving supply chain coordination and
creating a better match between supply and demand
 Facilities: an e-business can reduce network facility costs by
centralizing operations, thereby decreasing the number of
facilities required
 Transportation: if the products can be downloaded, the costs
and time for delivery can be reduced. Otherwise, aggregate
inventories may result in higher outbound transportation costs
per unit
 Information: visibility, share planning and forecasting can be
improved using Internet and Information Technology
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