Now, the first question that comes to mind is What is distribution. it is defined as a step wise procedure of moving products from the suppliers to the end customer. For every stage in a supply chain whether suppliers, manufacturers or customers there is distribution occurring from the previous stage. Raw materials are moved from suppliers to the manufacturers and finished goods are moved from the manufacturers to the customers. Distribution affects the supply chain cost and the experience the customer has. In India, the distribution cost of cement constitutes about 30 % of the cost to produce and sell it.
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Choosing an appropriate distribution network can be helpful in achieving various supply chain objectives ranging from high responsiveness to low cost. As in the case of 7-eleven Japan and Wal-Mart respectively. Different companies use a different distribution network according to their need and may even face some issues due to that. For example Dell until 2007 distributed computers directly to its customers and hence took several days to deliver it to the customers. From June 2007 they started selling computers through retailers such as Wal-Mart. Hence it is necessary to choose an appropriate distribution network to satisfy customers at the minimum cost possible.
FACTORS INFLUENCING DISTRIBUTION NETWORK DESIGN
There are two main dimensions based on which the performance of a distribution network is evaluated:-
Customer needs that are met.
Cost of meeting customer needs
The customer needs that are met have an influence on the company’s revenues, which along with cost decide the profitability of the delivery network. The customer service components that are mainly influenced by the structure of the distribution network are:
Response time: it is the time taken for a customer order to reach the customer.
Product variety: it is the number of different products or configurations that are offered to the customer.
Product availability: it is the probability of having a product in inventory when any customer order arrives.
Customer experience: the convenience for the customer to place and receive an order as well as the extent to which this experience is customized.
Time to market: it is the amount of time needed for the launch of a new product into the market.
Order visibility: it is the ability of a customer to track his/her order from placement to delivery.
Return ability: it is the ease with which any customer can return a product if unsatisfied.
Firms like Amazon target customers that can wait longer for their order or can tolerate a long response time, these firms require only a few locations that may be far from the customers. They can focus on improving the capacity of each location. Whereas firms that target customers who value short response times need to have many facilities that too located near the customers. Thus we can conclude that a decrease in the response time results in higher number of facilities (appendix 1).
Following are the costs affected by changing the distribution network design:
Inventories
Transportation
Facilities and handling
Information
As the number of facilities increase in a supply chain, the inventory cost also increases so firms try to try to limit and consolidate the number of facilities in their supply chain network (appendix2). For example, Amazon is able to turn its inventory 12 times a year because of fewer facilities, whereas Borders with about 400 facilities turns its inventory 2 times only.
Inbound transportation costs are the costs incurred in bringing material into a facility and outbound transportation cost is the one incurred in sending material out of a facility. Inbound lot sizes are larger hence inbound cost per unit is lower than outbound costs. Increasing the number of warehouse locations makes the outbound transportation distance a smaller fraction of the total distance travelled thus increasing the number of facilities decreases the transportation cost as long as the inbound economies of scale are maintained (appendix 3). If the number of facilities is increased to a point that the inbound lot sizes are very small and result in a significant loss of economies of scale, then increasing the facilities increases the transportation cost (appendix 3).
The consolidation of facilities allows a firm to exploit economies of scale hence facility costs decrease as the number of facilities is reduced (appendix 4).
As the number of facilities increases, total logistics costs (inventory costs + transportation costs + facility costs) first decrease and then increase (appendix 5). Hence any firm should have at least the number of facilities that minimize total logistics costs.
In general no distribution network outperforms the others along all dimensions. Hence it is important to see to it that the strengths of the distribution network fit with the firm’s strategic position.
DESIGN OPTIONS FOR A DISTRIBUTION NETWORK
There are two key decisions that the managers should consider in order to design a distribution network:
Will the product be picked up from a predetermined site or has to be delivered to the customer location?
Will the product be flowing through an intermediary?
Based on the answers to these questions and also the company’s industry, any one of the following distribution network designs may be used:
Manufacturer storage with direct shipping
Manufacturer storage with direct shipping and in-transit merge
Distributor storage with package carrier delivery
Distributor storage with last-mile delivery
Manufacturer/distributor storage with customer pickup
Retail storage with customer pick up
Manufacturer Storage with Direct Shipping
In this, the product is directly delivered to the customer from the manufacturer, the customer order is taken by the retailer and information flows from the customer via the retailer to the manufacturer. The retailer doesn’t need to keep any inventory. It is also known as drop-shipping. For example, eBags or Nordstrom.com uses such a network design (appendix 6).
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The biggest advantage may be the ability to centralize the inventories at the manufacturer level. Thus the supply chain can provide high availability of product with low inventories. An issue regarding drop-shipping may be the ownership structure of the inventory at the manufacturer level. There is little advantage of aggregations if certain portions are allocated to each retailer, benefit can only be achieved if the inventory is allocated on an as-needed basis. The benefits of centralization are only for high value products with low demand and not for items like grocery or staple items such as soaps. Using drop-shipping for slow-moving products can result in increase of inventory turns by factor of 6.
Drop-shipping provides the manufacturer an option to delay customization after the customer order is placed. For example, Dell who keeps common components as inventory and reduces the total amount of inventory.
The transportation costs for drop-shipping increases as the outbound distance per unit is high to the end customers. Supply chains can save on the fixed cost of facilities and eliminates the need of warehousing in the supply chain. There can be savings on handling cost as well by using drop-shipping. The evaluation of the handling cost however should be done carefully because manufacturer has to transfer full cases into the factory and single units out of the factory. The response times are generally longer in drop-shipping.
Another issue is that the response times may not be equal for every manufacturer hence for a order with products from many different sources, the customer will receive many partial shipments over time. Drop-shipping provides a good customer experience. In order to satisfy the customer, order visibility is very important but it becomes difficult in drop-shipping as it needs complete integration of information infrastructure at both the retailer and the manufacturer level.
Manufacturer Storage with Direct shipping and In-Transit Merge
In this the issue of drop-shipping that the customer may receive order in several partial shipments is eliminated as it combines the order from different manufacturing locations so that the customer receives a single delivery. It can be used by direct suppliers like Dell and even firms using drop-shipping (appendix 7).
It’s similar to drop-shipping in its benefits such as ability to aggregate inventories and also delay product customization. As in drop-shipping it is best suited for high value products whose demand is unpredictable.
The transportation cost is lower in this case. For example if the order needs to be picked up from three different manufacturers, then the transportation cost would be less as only a single delivery to the customer is required instead of three different deliveries. Facility and processing costs are similar to drop-shipping for the retailer and the manufacturer. But the in-transit facility cost is higher due to the merge in between. The need for sophisticated information infrastructure is similar to that in drop-shipping and also response times, product variety, availability, time to market and return ability.
Distributor Storage with Carrier Delivery
In this, the inventories are kept with the retailers/distributors in warehouses, and package carriers are used to transfer products to the end customer. For example Amazon uses this approach combined with drop-shipping from a manufacturer (appendix 8).
The distributor warehouse aggregates demand uncertainty at a lower level than the manufacturer, hence the distributor storage requires a higher level of inventory as compared to manufacture storage. They store only medium to fast moving products at their warehouses, with slowly moving are stored farther upstream.
As compared to manufacturer storage, the transportation costs for distributor storage is lower because an economic mode of transportation can be used for inbound shipments to the warehouses. Unlike the storage at the manufacturer level, where multiple shipments needs to be delivered for a single customer order. The facility costs for distributor storage is higher than that for manufacturer storage. The processing and handling costs are comparable to manufacturer storage unless the product is shipped directly by factory to the customer from the production line.
The distributor storage uses less complex information systems as needed with manufacturer storage. It also serves as a buffer in between the customer and the manufacturer, decreasing the need for proper coordination between the two. Real time visibility is needed between the warehouse and the customer. The visibility between the distributor warehouse and manufacturer can be achieved at a cheaper rate than that between customer and manufacturer.
The response time is better for manufacturer storage than for distributor storage. This is because the warehouses for distributor storage are usually near to the consumers and the entire order is aggregated at the warehouse before being shipped. For example, Amazon takes three to seven working days to deliver a product through ground transportation but takes only a day to process it. Ease for the customer is high as only a single shipment reaches the customer instead of several partial shipments. Due to the need to stock another stage, the time to market is higher in the case of distributor storage as compared to manufacturer storage. Order visibility is a lot more easier in distributor storage as only a single shipment is transferred from the warehouse to the end customer and only a single stage is involved in the supply chain. In distributor storage return ability is better as all the returned products can be processed at the warehouse itself. Also that the customer needs to return only a single product if unsatisfied.
It is best suited for medium to fast moving products. It also makes sense when the customer doesn’t want the product immediately but faster than manufacturer storage.
Distribution Storage with Last Mile Delivery
Last mile delivery is the one in which the retailer/distributor directly delivers the product ordered by the customer to the customer’s door step rather than using a package carrier to deliver the product.
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