SUPPLY CHAIN

MANAGEMENT

Designing Distribution Networks

and applications to E-business

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Design Options for a Distribution Network

Manufacturer Storage with Direct Shipping

Manufacturer Storage with Direct Shipping and
In-Transit Merge
Distributor Storage with Carrier Delivery
Distributor Storage with Last Mile Delivery
Manufacturer or Distributor Storage with
Consumer Pickup
Retail Storage with Consumer Pickup
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Manufacturer Storage with Direct Shipping
Manufacturer

Retailer

Customers

Product Flow
Information Flow

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 In-Transit Merge Network
Factories

Retailer In-Transit Merge by

Carrier

Customers

Product Flow
Information Flow
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Distributor Storage with Carrier Delivery
Factories

Warehouse Storage by
Distributor/Retailer

Customers
Product Flow
Information Flow

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Distributor Storage with Last Mile Delivery
Factories

Distributor/Retailer
Warehouse

Customers
Product Flow
Information Flow

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 Manufacturer or Distributor Storage
with Customer Pickup
Factories

Retailer Cross Dock DC

Pickup Sites

Customers
Customer Flow
Product Flow
Information Flow

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 Comparative Performance of Delivery Network Designs
A ranking of 1 indicates the best performance along a given dimensions and
as the relative performance worsens , the ranking gets higher.
Retail Storage Distributor Distributor Manufacturer
Manufacturer Manufacturer
with Storage with storage with storage with
Storage with Storage with In-
Customer Package Carrier last mile pickup
Direct Shipping Transit Merge
Pickup Delivery delivery

Response Time 1 4 4 3 2 4

Product Variety
4 1 1 2 3 1
Product Availability 2 3
4 1 1 1
Customer 5 4 3 2 1 5
Experience
Order Visibility 1 5 4 3 2 6

Returnability 1 5 5 4 3 2

Inventory 4 1 1 2 3 1

Transportation 1 4 3 2 5 1

Facility & Handling 6 1 2 3 4 5

Information 1 4 4 3 2 5
Linking Product Characteristics and Customer Preferences to Network Design
+2: Very suitable; +1: Somewhat suitable; 0: Neutral; -1: Somewhat
unsuitable; -2: Very unsuitable
Retail Manufacturer Manufacturer Distributor Storage Distributor storage Manufacturer
Storage with Storage with Storage with with Package with last mile storage with
Customer Direct Shipping In-Transit Carrier Delivery delivery pickup
Pickup Merge

High demand product

+2 -2 -1 0 +1 -1
Medium demand product
+1 -1 0 +1 0 0
Low demand product
-1 +1 0 +1 -1 +1
Very low demand product
-2 +2 +1 0 -2 +1
Many product sources
+1 -1 -1 +2 +1 0
High product value
-1 +2 +1 +1 0 -2
Quick desired response
+2 -2 -2 -1 +1 -2
High product variety
-1 +2 0 +1 0 +2
Low customer effort
-2 +1 +2 +2 +2 -1
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 The Value of Distributors
in the Supply Chain

Distributing Consumer Goods in India

Distributing MRO Products
Distributing Electronic Components

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 Distributing Consumer Goods in India
FMCG products are sold through large number
of retail shops.

TC is quite significant component of total cost.

Most Indian distributors keep variety of products.

It lowers ITC, OTC, improve RT and

convenience improved.

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 Distributing MRO Products
MRO products: needed in Emergency
What are the attributes?
Distributor reduces ITC, OTC, Safety inventory and
RT.
It can carry the emergency inventory that would
otherwise have to be held at each customer. This
aggregation reduces the total safety inventory along the
SC.
Important for slow moving items where value of
aggregation is quite high.
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Distributing Electronic Components
Few major component manufacturers: Intel, Texas
Instruments and Motorola.
Produce components for large number OEMs.
For distribution to small OEMs, the presence of electronic
component distributors can improve the supply chain
performance in many ways:
Reduction of inbound TC because of FTL.
Reduction of outbound TC because of consolidation.
Reduction of inventory costs due to aggregation.
More stable order from distributors to manufacturers
Response time less
Offers one-stop shopping products from several manufacturers

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E-Business and Distribution Network

To understand why some networks successful

due to introduction of E-business but not all.

How to build a scorecard to know the impact of

e-business.

How a traditional distribution network can get

benefit from E-business,

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 E-Business Transactions
Providing information across the supply chain
Negotiating prices and contracts
Allowing customers to place orders
Allowing customers to track orders
Filling and delivering orders to customers
Receiving payment from customers
Placing orders with suppliers
Paying suppliers
These transactions were previously done
through other channels.
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 The Impact of E-Business on
Supply Chain Performance
Impact of E-Business on Responsiveness
(which primarily affects a companys ability
to grow and protect revenue)

Impact of E-Business on Efficiency (which

primarily affects a companys costs)

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Impact of E-Business on Responsiveness
Offering direct sales to consumers
24-hour access from any location
Wider product portfolio and information aggregation
Personalization/customization
Faster time to market
Flexible pricing, product portfolio, and promotions
Price and service discrimination
Efficient funds transfer
Lower stock-out levels
Convenience/automated processes
Potential revenue disadvantage of e-business (for customers
who require a short response time)

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 Impact of E-Business on Cost
Inventory

Facilities

Transportation

Information
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 The B2C E-Business Scorecard
Area Impact Area Impact
Direct sales Efficient funds
transfer
24-hour access Lower stock-outs

Product portfolio Convenience

Personalization Inventory

Time to market Facilities

Flexible pricing Transportation

Price Information
discrimination
++ Very positive; + Positive; = Neutral; - Negative; -- Very negative
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Applying the E-Business Framework

PC Industry

Book Industry

Grocery Industry

MRO Supplies Industry

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 Revenue Impact of E-Business
on the PC Industry (Dell)
Sells PCs directly to customers and starts assembly after
receiving a customer order.
Revenue disadvantage for customers who do not want to
wait or who need a lot of help setting up a computer.
Revenue advantages:
Offer virtually unlimited different PC configurations
Bring new products to market faster
Fast at providing customized PCs
Price flexibility
Direct selling eliminates distributor and retailer margins
Negative working capital
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 Cost Impact of E-Business on the
PC Industry
Inventory costs geographic aggregation,
postponement, dampening of bullwhip effect.
Facility costs no physical distribution or retail outlets;
customer participation.
Transportation costs higher outbound transportation
costs (PCs are shipped individually).
E-Business impact for Dell
Significantly improved performance
Exploited every advantage provided by the Internet
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 The Impact of E-Business on
Dell Performance
Area Impact Area Impact
Direct sales ++ Efficient funds ++
transfer
24-hour access + Lower stockouts +

Product portfolio ++ Convenience =

Personalization ++ Inventory ++

Time to market ++ Facilities ++

Flexible pricing ++ Transportation -

Price = Information =
discrimination
++ Very positive; + Positive; = Neutral; - Negative; -- Very negative
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 Value of E-Business for a
Traditional PC Manufacturer
Potential value for traditional PC firm.
Use e-business to sell customized PCs that are
hard to forecast.
Sell standard configurations through traditional
channels.
Introduce new models on the Internet.
Allows lower inventory
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Revenue Impact of E-Business on the
Book Industry (Amazon)
Negative:
An additional stage in the supply chain the distributor
(this is more of a cost impact)
Downward price pressure
Does not attract customer who has a short response time
requirement or prefers to examine a book before purchase
Positive:
Offers millions of books
Uses Internet to recommend books
Provides reviews and comments from other customers
Quickly introduces new titles
Allows shopping 24 hours, 7 days/week
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 Cost Impact of E-Business
on the Book Industry
Inventory costs geographic aggregation of
high-volume books; purchases low-volume
books from distributor after customer order.
Facility costs no retail outlets, but higher
order-processing costs.
Transportation costs very high.
E-business impact at Amazon
Mixed, few profits as yet
There are not as many advantages to selling books on the
Internet compared to selling PCs

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 Impact of E-Business on
Amazon. com
Area Impact Area Impact
Direct sales = Efficient funds =
transfer
24-hour access + Lower stockouts +

Product portfolio ++ Convenience =

Personalization + Inventory +

Time to market + Facilities +

Flexible pricing + Transportation --

Price = Information -
discrimination
++ Very positive; + Positive; = Neutral; - Negative; -- Very negative
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 Value of E-Business for a
Traditional Bookstore Chain
Can benefit from setting up complementary
e-business.
Carry high-volume books in stores, sell low-volume
books online to take advantage of aggregation.
Provide access to online business in stores.
Can possibly use technology to print a book on
demand.
Can deliver books sold online to stores and allow
customers to pick them up there.

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 Distribution Networks in Practice
The ownership structure of the distribution network can
have as big as an impact as the type of distribution
network.
The choice of a distribution network has very long-term
consequences.
Consider whether an exclusive distribution strategy is
advantageous.
Product, price, commoditization and criticality have an
impact on the type of distribution system preferred by
customers.
Integrate Internet with the existing physical network.
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 Market Coverage Strategy

Intensive distribution
- Using all available outlets

Exclusive distribution
Using one in a relatively large geographical area

Selective distribution
- Using selected available outlets

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 Supply Chain Management

Network Design in the Supply

Chain

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 Network Design Decisions
Facility role
What role should each facility play?
What processes are performed at each facility?

Facility location
Where should facilities be located?

Capacity allocation
How much capacity should be allocated to each facility?

Market and supply allocation

What markets should each facility serve?
Which supply sources should feed each facility?

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 Factors Influencing
Network Design Decisions
Strategic
Technological
Macroeconomic
Political
Infrastructure
Competitive
Logistics and facility costs

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 Strategic Factors
Firms focusing on cost leadership will tend to find
the lowest-cost location for their manufacturing
facilities, even if that means locating very far from
the markets they serve.

Firms focusing on responsiveness will tend to locate

facilities closer to the market and may select a high-
cost location if this choice allows the firm to react
quickly to changing market needs.

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 Strategic Factors (Cont.)
According to Kasra Fredows, the strategic role of
various facilities in a global supply chain
network are as follows:
1:Offshore facility: Low cost facility for export
production.
2:Source Facility: Low cost for global
production.
3: Server Facility: Regional production facility.
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 Strategic Factors (Cont.)

4: Contributor Facility: Regional production

facility with development skills.
5: Outpost facility: Regional production facility
built to gain local skills.
6: Lead Facility: Facility that leads in
development and process technologies
(It creates new product, processes and
technologies for the entire network)
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 TECHNOLOGICAL FACTORS
If production technology displays significant
economics of scale, few high-capacity locations are the
most effective.
In contrast, if facilities have a lower fixed cost, many
local facilities are preferred because this helps lower
transportation costs.
If production technology is very inflexible and product
requirements vary from one country to another, a firm
has to set up local facilities to serve the market in each
country.
Flexibility of the production technology affects the
degree of consolidation.

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 MACROECONOMIC FACTORS
Macroeconomic factors include taxes,
tariffs, exchange rates and other economic
factors that are not internal to an
individual firm.
It has significant influence on the success
or failure of supply chain networks.
Therefore, firms take these factors into
account when making network design
decisions.
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 TARIFFS AND TAX INCENTIVES
Tariffs refer to any duties that must be paid when
product or equipment are moved across international,
state, or city boundaries.
If a country has a very high tariff, companies either do
not serve the local market or setup manufacturing
plants within the country to save on duties.
High tariffs lead to more production locations within a
supply chain network, with each location having a
lower allocated capacity.
Tax incentives are a reduction in tariffs or taxes that
countries, states, and cities often provide to encourage
firms to locate their facilities in specific areas.
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 EXCHANGE RATE AND DEMAND RISK
Fluctuation in exchange rates has significant
impact on the profits of any supply chain
serving global markets.
An effective way to do this is to build some
over capacity in the network and make the
capacity flexible so that it can be used to supply
different markets.
Companies must also take into account
fluctuations in demand caused by fluctuations
in the economics of different countries.
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 POLITICAL FACTORS

The political stability of the country under

consideration plays a significant role in the
location choice.

Countries with independent and clear legal

systems is always preferred.

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 INFRASTRUCTURE FACTORS
Key infrastructure elements to be
considered during network design include:
Availability of sites,
Labor availability
Proximity to transportation terminals
Rail service, proximity to air ports and sea ports
High way access
Local utilities.

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 COMPETITIVE FACTORS

A fundamental decision firms

make is to whether their facilities
close to their competitors or far
from them.

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 Positive externalities between the
firms

Positive externalities are the instances

where the collocation of the multiple firms
benefits all of them.
It also lead to the competitors locating close
to each other.

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 Locating to Split market
When there are no PEs, firms locate to be able to
capture the largest possible share of the market.
When firms do not control price but compete on the
distance from customer, they can maximize market
share by locating close to each other and splitting the
market.
In case the firms compete on price and incur the
transportation cost to the customer, it may be optimal
for the two firms to locate as far as possible.

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 CUSTOMER RESPONSE TIME
AND LOCAL PRESENCE

A large response time require few

locations and can focus on increasing
the capacity of each location.

A short response times need to locate

close to them.

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LOGISTICS AND FACILITY COSTS
Logistics and facility costs incurred
within a supply chain change as the
number of facilities, their location, and
capacity allocation is changed.
Companies must consider inventory,
transportation and facility costs when
designing their supply chain networks.

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