Designing Distribution Networks

so in this chapter we cover various designs for distribution networks and we also look at applications to online sales whereas you know distribution plays a very important role in any supply chain so distribution involves steps taken to move and store a product from the supplier stage to the customer stage in a supply chain so one stage is when we have raw material and components that move from supplier to manufacturer and the other stage is when the finished product goes from manufacturer to customer so it may be direct or it may be wire distributors retailers warehouses and so on so let's look at what are the factors that are involved in designing a distribution network so these factors can be classified into two major categories one is customer service and second one related to supply chain cost so under customer service we have seven factors that are listed here starting with response time so response time is how much time it takes from placing an order for a product or item till customer receives it product variety involves different types or different makes of a product for example if I want to buy a TV from say Best Buy and if Best Buy stores only one type of TV so that may be very negative for customer service product availability has direct impact on customer service so if we go looking for a product and it is not available obviously that will be negative while finding a product or placing an order for the product or receiving the product that has been ordered so that experience comes under customer experience time to market is if for any new product is launched how quickly it can be brought to market for example if a company has a website then that product may be available through the website almost immediately other visibility is once I place an order for the product and till it gets delivered if I am able to find out where in the supply chain that product is whether it has been shipped whether it has arrived in the city where I live and what is the estimated time it will come to my house so all those things relate to order visibility return ability is how easy or difficult it is to return a product for example if I buy something from a nearby Walmart store and if there is any problem with the product I can go back immediately and return the product but if I purchase something through website return ability may not be that easy now coming to a supply chain cost if a business need to keep inventory of these products at various retail stores obviously the cost will go up but if products are sent directly from the manufacturer to the customer so amount of inventory to be kept may be lower transportation could be inbound or outbound usually inbound transportation is less expensive because fully loaded trucks can be used but outbound the transportation could be expensive because sometimes these items have to be sent or transported to individual customers and their homes so if a product is sold through various retail outlets so in that case facilities and handling costs may be high whereas if a product is sold directly from the manufacturer plant without any need for any other facility like warehouse or distribution center so in those cases the facility and handling cost could be low so nowadays many of the businesses they maintain like online websites and information regarding the product and other details are available from there so that adds to the cost but also it helps to make the product available almost immediately to the customers to find out features and other things related to any new product if you look at first picture here when the number of facilities is high the amount of response time obviously will be low so for example Walmart has outlets in so many different cities they have more number of facilities and that's how they are able to maintain low response time on the other hand if number of facilities is low then response time is likely to be high so for example Amazon maintains a very few warehouses and if anything has to be shipped it has to be shipped from one of those warehouses which are not available in every city so that's why amount of time it takes for those product to arrive at a customer could be slightly higher if you look at transportation cost versus number of facilities when number of facilities is low transportation cost is likely to be high because then those items have to be transported from a longer distance on the other hand when number of facilities are high then transportation cost is likely to be lower next one is inventory cost versus number of facilities when number of facilities is low inventory cost also is generally low because inventory has to be maintained at low number of facilities but if a business has more number of facilities in the supply chain so that will result in higher inventory cost because at each facility they have to maintain some amount of inventory facility cost versus number of facilities so when number of facilities is low obviously facility costs will be lower and when number of facilities is high obviously facility cost will be higher too so now let's look at logistics cost so logistic cost involves inventory transportation and facilities and handling cost you can see that initially when number of facilities increase total logistics cost comes down and it reaches a low value and then at some point it starts to increase so initially when number of facilities is increasing inventory costs may go up slightly but transportation cost comes down but when number of facilities increases beyond certain point the total logistic cost starts to rise again because the facilities cost and inventory costs will be much higher on the other hand when the number of facilities increase response time continues to go down so when designing a distribution network there are two key decisions that need to be made first one is whether the products or items will be delivered or they will be picked up by the customers and second is whether or not there will be some intermediate location so depending on answers to these two there may be six different distribution network designs that might be used so first one here is manufacturer storage with direct shipping so items are shipped directly from the manufacturer there is nothing in between second one is manufacturer storage with direct shipping and in transit merch third one is the distribution storage so there is a distribution storage between manufacturers and customers and this is with carrier delivery so something like UPS or FedEx they will deliver the product fourth one is distributed storage with last mile delivery so for this last mile there may be some third party logistics companies that might be used fifth one manufacture distributed storage with customer pickup so sometimes customer may place an order and once that order is received at a certain location then the customer can go and pick up that item and the last one is retail storage with customer pickup so let's look at each one of these six distribution network designs one-by-one so first one is manufacturer storage with direct shipping so you have several manufacturers which make the product and store those products at the location and retailer does not store anything they only collect the orders from customers this information about the product that the customer needs flows from customer to the retailer and then that information is passed on to the manufacturers and once those the products are ready so they might be ready or manufacture may have to produce them in either case once it is ready it is directly shipped from the manufacturer to individual customers so this process is also called drop shipping so what happens with such a design is if you look at inventory inventory costs are likely to be lower because they are kept at manufacturers end and there is no intermediate warehouse or distribution center where these inventory items need to be kept so inventory costs obviously goes down transportation cost is likely to increase because from the manufacturer those items our products need to be transported to individual customers facilities and handling costs will be lower because you don't need many retail stores or many warehouses or distribution centers so the manufacturing facility itself is being used to keep the product or to keep the inventory so this is low information cost is likely to be higher because there has to be a good coordination between retailer and manufacturer and finally customer now let's look at service factors so if we look at response time response time is longer because a customer has to place an order to the retailer and then retailer provides that information to the manufacturer so if that product or item is not already available in the inventory then the manufacturer has to produce it so response times usually will be higher with this kind of design so with this network design it is easy to provide high amount of product variety so for example when the customer contacts the retailer maybe through a website or any other process customers can be given a lot of product variety because the retailer's are in touch with so many different manufacturers product availability also is likely to be higher because of aggregation all the inventory is kept by manufacturers and from that inventory product can be made available quickly so customer experience may depend on certain factors because customers receive home deliveries so that's a plus point but if customers have placed an order to the retailer and where products from different manufacturers are involved which results in receiving like partial orders from time to time that may be a slight negative for this kind of design time to market will be high because as soon as a manufacturer can produce a product it becomes available so in that sense time to market that is going to be good all their visibility could be a challenge because so many manufacturers are involved but some investment in information technology may be needed but still because of coordination of retailer with various manufacturers it could be challenging similarly return ability is also bit difficult so it's not that customers can walk into a store with their product and return it they may have to contact the manufacturer and then go through some procedures and processes before they can return their products so this could be a good design for those kind of products or items which are slow-moving and which are also of high value and also where customers are willing to wait to get their deliveries next Network design is manufacturer storage with direct shipping and intranet merge so what you see here is we have these customers and then retail is which get the information about what products are needed by the customers and then they pass on that information to factories or manufacturers and then those products are sent via in transit merged by courier instead of directly shipping them to the customer as we have seen in the previous type of design so one example of this type of design is where a customer orders a computer from Dell and then they also want a monitor to go with that computer and that monitor is by Sony so when a customer places this order with the retailer and that information is passed on to the factories so this computer and monitor may come from different factories and then they are merged at in traffic merge and then these two go together to the customer so if you look at the inventory cost so it is going to be similar to the previous design where inventories are kept mainly at manufacturing facilities or factories transportation cost is likely to be somewhat lower because of the merge so if there was no intranet merge then computer would have arrived separately to a customer from one of the factories and monitor would have arrived maybe in a different shipment to the customer so that would have increased the cost but with the merge the cost comes down because once it is merged then customer receives entire order as one facilities and handling cost is likely to go up slightly because of this extra step of in transit merge similarly costs related to information is going to be slightly higher because this extra information needs to be shared or coordinated at the point where in transit merge takes place looking at the service factors in this design response time will be similar to the previous one product variety and product availability both are going to be similar to the previous network design that we have seen customer experience is going to be better than the previous one because the customer will not receive like partial orders but they get the entire order in one order and time to market order visibility and retain ability is going to be similar to the previous design distributor storage with carrier delivery so here we have warehouse storage which is provided by the distributor or the retailer so for any product or item customers interact with the distributor or retailer and the distributor or the retailer they interact directly with factories so one good example of this type of for distribution network design is Amazon so generally Amazon keeps slow too fast moving items in their warehouse and very slow moving items are kept even further upstream so in this design if you look at the inventory carrying cost so this is likely to increase because apart from some inventories that are kept at all the factories now inventory has to be maintained at these warehouses so compared to inventory that are kept by manufacturing in this case transportation cost is lower and it is especially lower for fast moving items facilities and handling cost obviously increases because now we have this extra warehouse in between so information related cost is likely to be lower because the system needed is less complex so customers directly deal only with this distributor or retailers like Amazon so customers do not have to really interact with factories there directly so looking at the service factors response time compared to the first design is obviously lower so time between order placed and order received so that gap reduces because most of the time amazon can ship that item or product from the inventory itself product variety is going to be lower than the manufacturing storage because there is only so much of variety that can be kept at warehouse looking at the product availability so if you compare this to manufacturing storage so obviously in this design the same level of product availability will come at a higher cost customer experience is expected to be slightly better because now customers have to deal only with the retailer like Amazon and they don't have to really deal with illusion factory's time to market this is going to be higher compared to manufacturing storage order visibility is going to be obviously better so customers can track whatever items Amazon has shipped return ability is going to be easier again compared to manufacturing storage next one is distributed storage with last mile delivery so items are stored at a distributor or retailer warehouse and from there they are delivered to the customer the final or last mile delivery obviously is arranged by the retailer or the distributor last mile delivery here means that the package is not delivered by the package carrier but the distributor or retailer makes arrangement to deliver product to customers home so for example I may go to Best Buy website I want to purchase a a big size TV let's say 65 inch TV and if I do not have a transportation to carry at home in my truck or car the retailer is likely to arrange for that delivery if you look at inventory carrying cost so in this design inventory carrying cost is higher than obviously manufacturing storage because these inventories are need to be maintained at distributors and retailers rear houses but inventory carrying cost if you compare with the retail stores so that is going to be lower transportation cost is going to be higher compared to situations where deliveries are made by package carriers because they can aggregate the products across various factories or manufacturers but in this case the distributor or the retailer need to make the last mile delivery so obviously that increases the cost if they make use of like some third party logistics companies they may be able to still keep the cost lower facilities and handling cost is going to be obviously more than a manufacturing storage but it will be less than retail stores cost associated with information is going to be similar to the previous design that we looked at if you look at service factors response time could be quite quick sometimes deliveries could be made within a day or two if the products are available nearby product variety is likely to be larger compared to retail stores product availability also is going to be better compared to retail stores customer experience is going to be good especially for like big and bulky items that the customer is not able to carry home on their own so they'll be happy if the delivery is made at home so time to market with this design is going to be slightly height order visibility obviously will be better compared to manufacturing storage so return ability will be easier compared to earlier designs that we have seen but retain ability will be difficult if you compare that with retail outlets manufacturer or distributor storage with customer pickup so there are many businesses which allow customers to place an order online and then they are provided a place where they can pick up their orders so there are various pickup sites that are being used so if you look at inventory related cost so this is not going to be very different from other designs but the biggest advantage come in terms of for lower transportation cost because customers are willing to pick those orders from a location so these businesses need not make arrangements to send those products to individual homes so transportation cost is a big plus now a facility and handling cost depends if the facilities already exist then there won't be any additional cost but if the facilities do not exist nearby where customers can pick up their orders so in that case those facilities have to be built and that will obviously be expensive information related costs are likely to be quite high because this kind of infrastructure is definitely needed to coordinate things between customers pickup sites factories retailers and so on so looking at the service factor response time is going to be similar to the previous ones that we have seen product variety also is likely to be similar to what we have seen earlier same thing for product availability customer experience is going to be lower if you compare it with the situations where customers receive home delivery so obviously now customers have to go to the pickup sites so in that sense customer experience is going to be lower time to market will be similar to the previous one other visibility so this is obviously important for the customer return ability is going to be easier because if customers need to return anything they can easily go to the pickup site last one is retail storage with customer pickup sawdust or items are stored at a retail store and customers can place an order and then pick up those items from these retail stores so if you look at inventory cost so inventory carrying cost is going to be higher compared to all other options because now you need to have these retail stores at more and more locations which are closer and closer to the customers transportation cost is going to be lower because all these stores are much closer to customers so in that sense it will be lower facilities and handling cost obviously will be much higher for example Walmart or Best Buy or Target so they have to open their stores in almost all cities they have to have significant investment in those facilities cost related to information so nowadays if you look at any business even if they have lot of retail stores so some investment in infrastructure is definitely needed so that customers if they want to place an order or shop through website so all those things should be available so because retail stores are much closer to customers so sometimes you could have same-day pickup if for that product or item is already available at the store product variety is going to be lower compared to all other options and product availability so this is going to be more expensive if you compare this with any other distribution network design so these products need to be available at every retail store and that sometimes could be difficult sometimes customers may face they just talk out and those items are either sold out or they are not available customer experience obviously depends whether customers are more comfortable doing online shopping or they like to shop at a store time to market this is going to be highest if you compare with any other distribution network design so any new product it takes time for that product to reach each and every store order visibility obviously if somebody is shopping in the store so those items are already there but for orders that are placed online that could be challenging and the last item return ability so this is the easiest one because customers have access to these retail stores they can go any time if they find the product has any issues if you compare all networks across the cost factors and service factors so this is what we will get so in this matrix 1 corresponds to strongest performance so one is good and six is bad so that the weakest performance so for example if you look at the response time so retail storage with customer pickup so first design has the strongest performance because it is almost immediate whereas manufacturer storage with direct shipping so the rating is 4 because it is not immediate but since it has to be shipped from the manufacture storage and depending on where the manufacturer is located and where the customer is located it might take one day two day or even more days but if you look at product variety then obviously manufacturer storage with direct shipping performs much better compared to retail storage with customer pickup product availability also at manufacture storage is the best because of aggregation and product availability at retail storage may be challenging customer experience is best when customers receive home delivery and it is not so great in manufacturer storage with pickup so time to market for manufacture storage with direct shipping has excellent performance whereas its retail storage with customer pickup is bit challenging on the other hand order visibility works better with first design here retail storage with customer pickup but with manufacturer storage with direct shipping the rating given is 5 because there are so many manufacturers and coordination among customer retailer and the manufacturer so that could be challenging and because of that order visibility may not be very easy return ability obviously is best with the retail storage with customer pickup so customer has access to those tools and if they have any problem they can just go to those posts and return the product but it's not that easy with manufacturer storage inventory levels will be performing best the cost will be the least with the manufacturer storage but with the retail storage and customer pickup it is going to be comparatively difficult or more expensive transportation cost for the businesses will be quite low if customers pick up items but if a manufacturer has to ship them obviously that will result in higher cost with more and more retail stores facilities and handling cost will be much higher if we compare that with manufacturing storage where there are no warehouses or distribution centers retail storage with customer pickup so in terms of information related cost performance is very strong and manufacturing storage with direct shipping so that is not as strong so in this matrix plus two means very suitable and zero is neutral and negative two means very unsuitable so first design obviously is a very well suited for high demand products but it will not be a good design for very low demand products because if there are products for which demand is low then retail stores if they have to carry that inventory they have to carry it for a very long time and that will cost more and more money similarly if quick response is desired then this first design is obviously very very suitable but if low customer effort is needed then this design is not that suitable if you look at second one which is manufacturer storage with direct shipping so this is not that well-suited for high demand products so for high demand products obviously retail stores closer to the customer that's much better but this type of design is very much suited for very low demand product and also very high value products but if a quick response is the desired then this is not going to be a good design so this is also very suitable for high product variety manufacturers storage with intranet merge so this design is not so well suited for quick desired response but very well suited for low customer effort package carrier delivery so this is very well suited when there are many product sources and also when low customer effort is desired so last mile delivery so this is a very negative or unsuitable for very low demand products and this is more suited for low customer effort manufacturer storage here with pickup so this is a very well suited for high value products but very unsuitable when quick response it decide when choosing Network that suits a particular business generally businesses do not go for a single type of distribution network but they go for a combination if you look at a company like Apple the customer can shop online on their website or they can go to Apple Store businesses do employ a combination of approaches so nowadays the online sales have become very important for most of the businesses so let's look at customer service factors for response time if you are downloading a software or electronic or digital book or music or movie so response time is almost instantaneous one can do this almost immediately but for other products it could take some time maybe sometimes a single day or several days if you go to amazon.com you can see that a lot of variety is available so business which is selling online for them it is much easier to provide product variety on their websites product availability this could be a big plus point for online retailers like Amazon so they are able to aggregate demand at few locations compared to businesses that sell through retail stores in online sales businesses can provide lot of things that may not be available otherwise so for example on amazon.com if you are looking for a product you get a lot of information about the product but you also get information about what other products customers have found interesting and also you can get customer reviews you can write a review yourself and so on because of internet time to market again is a big plus because any product that is launched can be immediately brought to online platforms with all the information that customer may find interesting order visibility so nowadays because of again internet and technology it has become very easy to track orders direct sales so again internet allows various manufacturers to reach their potential customers and many times businesses use social media platforms like Facebook or Twitter and advertise their products directly to the customers flexible pricing portfolio and promotions so this is again easier with on mainsails efficient phone transfer so nowadays the one can buy things on the internet using credit cards things can be purchased on the smartphone itself there are so many ways payments can be made much easily so inventory costs for online sales are generally lower because products can be aggregated at various warehouses and that will bring down the inventory carrying cost facility cost also is lower with online sales transportation cost it depends on what product or service is being provided if for the product is a software or the digital product then transportation costs obviously will be very very low but if it is something like TV or a computer so that has to be shipped in transportation costs for those items will be higher so in online sales again information is a big plus because most of the information can be shared across the supply chain very quickly and at a very low cost so that so let's look at these factors for Dell and in this core card we look at like two different types of products one is customized servers and the second one is standard laptops that dil sells so across these the factors the rating of plus 2 means it's very positive zero means neutral and negative 2 means it's very negative so when customers place an order online for a customized server response time is obviously somewhat negative because they are not expected to receive them almost immediately but then you'll see there are many very positive factors like product variety customer experience is very positive because customers can go on the website and explore different ways they can customize those servers so that's a very positive thing time to market again is plus 2 direct sales is positive but if you look at cause so inventory and facility cost so again these cost will be much lower but transportation cost will be somewhat negative because they have to be shipped to the customer on the other hand if you look at standard laptops selling standard laptops online is clearly not a very good idea you don't see many positives like there's only one plus 2 which is efficient one transfer so you are able to pay using a credit card or you can pay on your computer or through mobile that's the only major positive thing so let's quickly add these points separately for customer service so for customized service we get plus 13 points whereas for standard laptops the total score is just positive 5 so huge difference when it comes to customer service and in terms of cost we have plus 4 here for customized service and the total is zero for standard laptops so this makes sense like selling a standard laptops through website may not be a very great idea it will be much better if it is sold through retail outlets or at places like Best Buy or Walmart or Target so that will be much better for something which is more standard so for Dell looking at these are two examples a tailored supply chain network would suggest that we should go for a hybrid model so in this hybrid model they should sell customizable servers online and they should sell standard laptops why are retail outlets so the benefits will be most significant as Hardware becomes more of a commodity take advantage of the strengths of both online sales and traditional retail and distribution channels the company like Dell can benefit by going for a hybrid approach so let's look at Amazon and compare of physical books versus ebooks so if you look at physical books for customer service related factors the total score comes to +5 whereas for ebooks it comes to +10 so Amazon is obviously much more effective selling ebooks online in terms of cost we have total of negative 1 for physical books and +3 for e-books online sales of e-books is a big plus obviously for Amazon especially since they came out with Kindle that has popularized ebooks a lot so this scorecard clearly shows that selling ebooks online is a much better approach Amazon with Barnes and Noble so stores like Barnes & Noble would carry so many different books so customer can walk in and buy a book but with Amazon coming into picture a customer is able to buy not so popular books also from Amazon compared to books which are like bestsellers and as far as bestsellers are concerned they are nowadays available at not only book stores like Barnes & Noble but you may be able to find them at Walmart or Target and many other stores so traditional bookstores like Barnes & Nobles in that sense they are now pressured from both ends so one end you have like bestsellers being sold almost everywhere and then on the other hand you have companies like Amazon and Amazon is obviously very very efficient because nowadays customers have accepted digital formats and companies like Apple they make use of iTunes to sell books music movies and you also have Google Play with the similar platform so pea pod is a company that makes home delivery of grocery and they make use of online platform if you add the scores for customer service we see the net score of zero and in fact negative four when it comes to supply chain cost so you can see that as such online sale or for grocery is really very challenging both in terms of customer service and supply chain cost and many businesses have tried this and also they have failed miserably and Peapod maybe is one of the companies that still survives so supermarkets what they can do is they can complement strength of their existing network so supermarkets that already exist they can have online presence and cater to needs of those customers who are willing to pay slightly more price for that kind of service where they place an order and then employees at the store they collect whatever is needed and then either make home delivery or a customer may pick up from the store and that saves some time so depending on what customers would like to do a supermarket may be able to offer array of services at different prices based on amount of work the customer does so for example if it is going to be a home delivery then obviously the cost is going to be higher customer should be ready to pay more whereas if the customer is willing to come and pick up the order that cost could be slightly lower so another company that has been really successful with online sales is Netflix and Netflix is the reason why blockbuster went bankrupt Netflix has been making many changes to the way they offer their services so there was a time when with the same subscription a customer was able to get deliveries of DVDs as well as watch digital content and then at some point they made a decision to separate two things so if you look at physical dvds and if you do the math for customer service the score comes two plus three whereas digital content if you do the math it's about plus seven if you look at the supply chain cost for DVDs the total score comes to zero and it is positive for digital content Netflix uses centralized model to supply wide variety of movies and other vendors like red box so they have installed vending machines customers can go on a website and reserve the movies they want to watch and generally these the vending machines will have maybe the latest movies or children's movies so if you compare a red box strategy with the Netflix so obviously Netflix has a bigger advantage because they are able to make available not only new movies but also old movies and documentaries and many other things why a centralized model and they are also able to provide services like if you like a particular movie so what other movies you may like based on whatever data they collect from customers viewing habits and compile them analyze them to come out with recommendation systems for distribution networks in practice the ownership structure of the distribution network can have as big as an impact as the type of distribution network so within the supply chain network who owns what part obviously plays a very important role for example if the distribution network is not owned by the manufacturer versus if it is owned by the manufacturer those two designs will obviously have different outcomes it is important to have adaptable distribution networks so nowadays we are living in a world where things change and customer habits change their preferences change so if a distribution net work is adaptable and is flexible obviously it is a big plus so businesses which are not able to adapt their distribution networks obviously can face a lot of challenges and we have seen examples of companies like blockbuster who went bankrupt because they did not have adaptable distribution networks another example where company failed to adapt their distribution network is bookstores borders but if you look at Walmart they have been very successful because they had adaptable distribution network so Walmart was able to take advantage of Internet to complement what they have been doing earlier product Fry's commoditization and criticality affect the type of distribution system preferred by customers so if you look at example of Apple so Apple has been very very successful selling their own products through their stores but as the products become commoditized then it becomes very difficult to adopt the same approach so for commoditized products customer go to places which are not manufacturer specific and we may see this more and more with even products like smart phones or computers and the last one is integrate internet with existing physical network so many businesses are doing this very very successfully whether it is Walmart Target Best Buy so nowadays most of the big players they have internet presence also apart from their physical networks

Channel: Dr. Bharatendra Rai

Views: 43,028

Keywords: supply chain, supply chain management

Id: X7VlyPaR9Uc

Length: 50min 0sec (3000 seconds)

Published: Fri Feb 10 2017