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1. Kripa Shanker IIT Kanpur 1
DISTRIBUTION NETWORK
in a Supply Chain
Role of Distribution in Supply Chain:
• activities and processes to move and store a product from the supplier
stage to the customer stage
o raw materials and components from supplier to manufacturing
o finished goods from manufacturing to the end customers through distributor
and retailer
• outbound costs are some times 20-40% of cost of manufacturing
• an important factor behind the success of some of successful
organizations

2. Kripa Shanker IIT Kanpur 2
DISTRIBUTION NETWORK
in a Supply Chain
Factors Influencing Distribution Network Design
• Evaluation of performance of distribution network
o Customer needs that are met { customer service → revenue }
o Cost of meeting customer needs {revenue – costs → profitability }
• Customer service influenced by the structure of the distribution
network
Response time
Product variety
Product availability
Customer experience
Order visibility
Returnability
• Distribution network influences the following supply chain costs :
Inventories
Transportation
Facilities and handling
Information

3. Kripa Shanker IIT Kanpur 3
No of facilities
Response
time
No of facilities
Inventory
costs
No of facilities
Transportation
cost
No of facilities
Facility
costs
Total Logistics Costs

4. Kripa Shanker IIT Kanpur 4
DESIGN OPTIONS FOR A DISTRIBUTION NETWORK
Key Questions
• Will product be delivered to the customer location or picked up from a pre-
ordained site ?
• Will product flow through an intermediary (or intermediate location) ?
Six designs
1. Manufacturer storage with direct shipping
2. Manufacturer storage with direct shipping and in-transit merge
3. Distributor storage with package carrier delivery
4. Distributor storage with last mile delivery
5. Manufacturer/distributor storage with customer pickup
6. Retail storage with customer pickup

5. Kripa Shanker IIT Kanpur 5
DESIGN OPTIONS FOR A DISTRIBUTION NETWORK
OPTION 1 : Manufacturer Storage with Direct Shipping
Manufacturer
Retailer
Customers
Product Flow Information Flow

6. Kripa Shanker IIT Kanpur 6
OPTION 1 : Manufacturer Storage with Direct Shipping
Cost Factors PERFORMANCE
Inventory •Lower cost because of aggregation.
•Benefits of aggregation are highest for low-demand, high-value items.
•Benefits are very 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 facilities costs because of increased distance and disaggregate
shipping.
•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.

7. Kripa Shanker IIT Kanpur 7
OPTION 1 : Manufacturer Storage with Direct Shipping
Service
Factors
PERFORMANCE
Response
Time
• High response time because of increased distance and two-stage of order
processing.
• Response time may vary with product, thus complicating receiving.
Product
variety
•Easy to provide a very high level of variety.
Product
availability
•Easy to provide a very 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.
Order visibility •More difficult but also more important from a customer service
perspective.
Returnability •Expensive and difficult to implement.

8. Kripa Shanker IIT Kanpur 8
DESIGN OPTIONS FOR A DISTRIBUTION NETWORK
OPTION 2 : Manufacturer Storage with Direct Shipping and
In-Transit Merge
Factories
In-Transit Merge
by Carrier
Customers
Product Flow Information Flow
Retailer

9. Kripa Shanker IIT Kanpur 9
OPTION 2 : Manufacturer Storage with Direct Shipping
and In-Transit Merge
Cost Factors PERFORMANCE
Inventory (similar to drop-shopping)
•Lower cost because of aggregation.
•Benefits of aggregation are highest for low-demand, high-value items.
•Benefits are very large if product customization can be postponed at the
manufacturer.
Transportation • Somewhat lower transportation costs than drop-shopping.
Facilities and
handling
•Handling costs higher than drop-shopping at carrier; receiving costs
lower at customer.
Information •Investment is somewhat higher than for drop-shopping.

10. Kripa Shanker IIT Kanpur 10
OPTION 2 : Manufacturer Storage with Direct Shipping
and In-Transit Merge
Service
Factors
PERFORMANCE
Response
Time
(similar to drop-shopping)
•High response time because of increased distance and two-stage of order
processing.
• Response time may vary with product, thus complicating receiving.
Product
variety
(similar to drop-shopping)
Easy to provide a very high level of variety.
Product
availability
(similar to drop-shopping)
•Easy to provide a very high level of product availability because of
aggregation at manufacturer.
Customer
experience
•Better than drop-shopping because a single delivery has to be received.
Order visibility (similar to drop-shopping)
•More difficult but also more important from a customer service
perspective.
Returnability (similar to drop-shopping)
Expensive and difficult to implement.

11. Kripa Shanker IIT Kanpur 11
DESIGN OPTIONS FOR A DISTRIBUTION NETWORK
OPTION 3 : Distributor Storage with Carrier Delivery
Factories
Warehouse Storage
by
Distributor/Retailer
Customers
Product Flow Information Flow

12. Kripa Shanker IIT Kanpur 12
OPTION 3 : Distributor Storage with Carrier Delivery
Cost Factors PERFORMANCE
Inventory • Higher than manufacturer storage.
• Difference is not large for faster 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 slow moving items.
Information • Investment is somewhat higher than for drop-shopping.
Service Factors 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-shopping.
Order visibility • Easier than manufacturer storage.
Returnability • Easier than manufacturer storage

13. Kripa Shanker IIT Kanpur 13
DESIGN OPTIONS FOR A DISTRIBUTION NETWORK
OPTION 4 : Distributor Storage with Last Mile Delivery
Factories
Distributor/Retailer
Warehouse
Customers
Product Flow Information Flow

14. Kripa Shanker IIT Kanpur 14
OPTION 4 : Distributor Storage with Last Mile Delivery
Cost Factors PERFORMANCE
Inventory • Higher than distributor storage with package carrier delivery.
• Very high cost given minimal scale economies.
• Higher than any other distribution option.
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.
• Lower than a chain of retailers.
Information • Similar to distributor storage with package carrier delivery.

15. Kripa Shanker IIT Kanpur 15
OPTION 4 : Distributor Storage with Last Mile Delivery
Service
Factors
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.
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 options.
• Harder and more expensive than a retail network.

16. Kripa Shanker IIT Kanpur 16
DESIGN OPTIONS FOR A DISTRIBUTION NETWORK
Factories
Cross Dock
Distribution Centre
Pickup Sites
Product Flow Information Flow
Retailer
OPTION 5 : Manufacturer or Distributor Storage with
Customer Pickup
Customers
Customer Flow

17. Kripa Shanker IIT Kanpur 17
Cost Factors PERFORMANCE
Inventory • Can match any 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 can be used.
• Increase in handling cost at the pickup site can be significant.
Information • Significant investment in infrastructure required.
OPTION 5 : Manufacturer or Distributor Storage with
Customer Pickup

18. Kripa Shanker IIT Kanpur 18
Service Factors PERFORMANCE
Response Time • Similar to package carrier delivery with manufacturer or distributor
storage.
• Same day delivery possible for items stored locally at pick up sites.
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.
Order visibility • Difficult but essential.
Returnability • Somewhat easier given that pickup location can handle returns.
OPTION 5 : Manufacturer or Distributor Storage with
Customer Pickup

19. Kripa Shanker IIT Kanpur 19
Cost Factors PERFORMANCE
Inventory • Higher than all other options.
Transportation • Lower than all other options.
Facilities and
handling
• Higher than all other options.
• 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.
OPTION 6 : Retail Storage with Customer Pickup

20. Kripa Shanker IIT Kanpur 20
Service Factors PERFORMANCE
Response Time • Same day (immediate) pickup possible for items stored locally at pick
up sites.
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.
Order visibility • Trivial for in-store orders. Difficult, but essential, for online and phone
orders.
Returnability • Easier than all other options given that pickup location can handle
returns.
OPTION 6 : Retail Storage with Customer Pickup

21. Kripa Shanker IIT Kanpur 21
Product/Customer
Characteristics
Retail
Storage with
Customer
Pickup
Manufacturer
Storage with
Direct
Shipping
Manufacturer
Storage with
In-transit
Merge
Distributor
Storage with
Package
Carrier
Delivery
Distributor
Storage with
Last Mile
Delivery
Manufacturer
Storage with
Pickup
Response Time 1 4 4 3 2 4
Product variety 4 1 1 2 3 1
Product availability 4 1 1 2 3 1
Customer experience 5 4 3 2 1 5
Order visibility 1 5 4 3 2 6
Returnability 1 5 5 4 3 2
Comparative Performance of Delivery Network Design for
Different Product/Customer Characteristics
Inventory 4 1 1 2 3 1
Transportation 1 4 3 2 5 1
Facilities & handling 6 1 2 3 4 5
Information 1 4 4 3 2 5

22. Kripa Shanker IIT Kanpur 22
Service Factors Retail
Storage with
Customer
Pickup
Manufacturer
Storage with
Direct
Shipping
Manufacturer
Storage with
In-transit
Merge
Distributor
Storage with
Package
Carrier
Delivery
Distributor
Storage with
Last Mile
Delivery
Manufacturer
Storage with
Pickup
Response Time 1 4 4 3 2 4
Product variety 4 1 1 2 3 1
Product availability 4 1 1 2 3 1
Customer experience 5 4 3 2 1 5
Order visibility 1 5 4 3 2 6
Returnability 1 5 5 4 3 2
Comparative Performance of Delivery Network Design
Cost Factors
Inventory 4 1 1 2 3 1
Transportation 1 4 3 2 5 1
Facilities & handling 6 1 2 3 4 5
Information 1 4 4 3 2 5

23. Kripa Shanker IIT Kanpur 23
Service Factors Retail
Storage with
Customer
Pickup
Manufacturer
Storage with
Direct
Shipping
Manufacturer
Storage with
In-transit
Merge
Distributor
Storage with
Package
Carrier
Delivery
Distributor
Storage with
Last Mile
Delivery
Manufacturer
Storage with
Pickup
Response Time
Product variety
Product availability
Customer experience
Order visibility
Returnability
Comparative Performance of Delivery Network Design
Cost Factors
Inventory
Transportation
Facilities & handling
Information