Designing Distribution Networks

Designing Distribution Networks

What is Distribution?

Distribution refers to the steps taken to move and store a product from the supplier stage to a customer stage in the supply chain.

Primary & Secondary Distribution:

RM & components distribution takes place from suppliers to manufacturers location - Primary

FG distribution takes place from manufacturer to end customers - SecondaryDistribution - Key Driver to overall profitability Impact of Distribution on Business The supply chain cost &

The customer experience

Distribution cost as % of overall cost - as high as 30% (e.g. in Cement Industry) (of cost of producing and selling a product)

hence the significance of Distribution network design.

Discussion and Examples on Networks and their importance:

Wall Mart and Seven Eleven Distribution Best in class - low cost and high responsiveness - the factors for the huge growth of both these organizations.Dell Vs HP Different distribution strategies for similar product line

Elaborate on different networks for both

P&G Products move directly to large supermarket chains while smaller players need to buy form distributors.

Texas Instruments 30% of its volumes to 98% of customers served through distributors balance 70% of its volumes to 2% customers directly.W. W. Grainger

Stocks 100,000 SKUs for direct delivery to customers while rest of slower moving items are served by manufacturer directly.

Importance of Distributors in market like India Cannot be ignored in country like India while not so in US.Examples in Indian Context:

HP

Castrol

Nivea

CGLFactors influencing Distribution Network Design

Highest levels dimensions:

1. Meeting customer expectations

2. Cost of meeting customer expectations

Customer Service Factors influenced by Distribution Network

Response Time time it takes for customer to receive his/her order Product Variety Number of products/ configurations offered by the distribution network Product Availability Probability of having the product in stock when a customer order is received Customer Experience ease of placing and receiving an order; overall experience of customer Time to Market time it takes to bring a new product to the market Order Visibility track and trace facility Returnability ease with which a customer can return unsatisfactory merchandise and ability of the network to handle such returns.Supply Chain Cost Factors influenced by Distribution Network

Inventory Cost Transportation Cost Facilities and handling Cost Information Cost

Key Relationships in Network DesignRelationship between Desired Response Time and Number of Facilities:

To reduce response time Increase number of facilities and Hence Increase associated costsExample Borders Vs Amazon: Borders provide its books to customers the same day across the US but they need 400 stores to achieve this. In contrast Amazon takes about a week to deliver a book but they use only six locations to store their books.

Relationship between Inventory Cost and Number of Facilities:

Higher number of warehouses lead to higher inventory

Example : Amazon, with 6 facilities, is able to turn its inventory 12 times a year while Borders with 400 facilities achieves only about 2 turn per year.

Threshold Inventory increases by Square root of number of warehouses

Relationship between Transportation Cost and Number of Facilities:To derive this relationship, first understand two components of overall transportation cost

Inbound Cost to DC and Outbound Cost to end customerAs the number of facilities are increased the Outbound Transportation cost keeps coming down and therefore,

over transportation cost also keeps coming down as long as the inbound transportation cost economies are maintained. Beyond a number of facilities, the inbound transportation economies will not exists (inbound will drop below truck loads), thereafter the overall transportation cost starts increasing with number of facilities,

despite of decreasing outbound transportation costRelationship between Facilities Cost and number of Facilities:

Facilities cost increases with the increase and number of facilities and vice versa.

Relationship between Total Logistics Cost and number of Facilities and also of Customer response time with number of facilities:

Total Logistics Cost = Inventory Cost + transportation cost + facility cost

Total logistics cost initially decreases with the increase in number of facilities and thereafter starts increasing.

An organization should have at least the number of facilities which bring their total logistics cost to minimum. This explains why Amazon has at least six facilities rather than having only one facility.

A firm may decide to increase number of facilities beyond the number of facilities at which the total logistics cost is minimum if the firm wants to improve the customer response further. However the firm should be sure that by doing so the increased revenue due to improved customer response would more than compensate for the increased total logistics cost of the firm.Design Options for Distribution NetworkTwo key decision points while selecting appropriate Distribution Network design:

1. Will the product be delivered to the customer location or will the customer pick it up from a preordained site?

2. Will product flow through an intermediary party or intermediary location?

Based on the answer to these two key decision making points, there can be following six types of distribution networks:

Types of Distribution Networks

1. Manufacturer storage with direct shipping2. Manufacturer storage with direct shipping and in-transit merge3. Distributor storage with package carrier delivery4. Distributor storage with last mile delivery5. Manufacturer / distributor storage with customer pick up6. Retail storage with customer pick up

Re to Performance Comparison Excel ScheduleE Business and the Distribution NetworkHow introduction of e business is successful in some networks and not in others

Impact of E Business on Customer Service:

1. Response time to customers

a. For digital products instant delivery

b. For a physical product lead time could be much higher

2. Product Variety

a. Easier to offer large variety

b. Offering the same in retail model calls for much higher inventory

3. Product Availability

a. Since information dissemination of customer demand is faster and accurate, forecasting and hence availability can improve significantly store more of products that are more in demand

b. E business also allows more aggregation of demand

4. Customer Experience

a. Improved experience in terms of access, customization and convenience

b. Convenience of shopping from home

c. Post office offer shopping

d. Accessability to large customer base delimiting geographical boundaries

e. Customization to customer choices

5. Faster Time to Market

a. Product made available as soon as first unit is ready for dispatch

b. In traditional model, once has to fill up the channel before launching

6. Order Visibility

a. Easy possibility

7. Returnability a big challenge

8. Direct sales to customers higher profits

9. Flexible pricing, product portfolio & Promotions

a. Last minute discounts by airlines

10. Efficient Fund Transfers faster collections

IMPACT OF E BUSINES ON COST

1. Inventory

a. Reduction in cost by reducing inventory due to higher aggregation and

b. due to better forecasting resulting from better dissemination of customer demand information

c. due to possibility of delayed customization Dell keeps inventory of parts and of PCs

2. Facilities

a. No. and location of facilities reduction in cost

b. Operating cost at facilities order processing and order fulfillment cost drops

c. Outbound orders fulfillment movement can be averaged out despite of peak orders in weekend and holidays in traditional mode this would call of additional staff in peak time

d. Handling cost could go up in a retail store customer himself may pick material form the shelf

3. Transportation

i. for Digital products completely reducedii. for physical products could go higher

4. Information Cost a. incremental cost not high, b. initial set up cost could be high