distribution networks design

Presented by:
Shaghayegh Parhizi
Zeinab Bagherpour
 Distribution (5)
Distribution definition : Distribution means , making
product available in the markets. In the other
words , distribution means to reach the
appropriate product to the appropriate place , in
the appropriate time.
The two general aspects of product availability :
¾ Preparing product for sailing to the end customer
¾ Making product available via taking possession of
it by the end customer
 Distribution (5)

¾ Distribution channel definition : It is a way that

product and its ownership rights flow through it.
Distribution channels are mostly chains of different
organizations that except the main distributor and the
end customer are nominated “wholesalers”.
¾ Activities in a distribution channel :
1. Activities are related to changing ownership
2. Activities are related to physical supply of product
3. Lateral activities
 Distribution (5)

physical distribution : formal management of physical

distribution is analyzing , programming and controlling a
level of product availability that is proportional with
demands of the market area and resources of the firm.

The important points in distribution decisions :

1.Product inventory 2. Facilities 3. Relationships
4. Transportation 5. The size of unit load
Distribution (5)

¾ The difference between physical distribution

& transportation
Factors influencing distribution network
design (3)
„ Response time
„ Product variety
„ Product availability
„ Customer experience
„ Order visibility
„ Return ability
Literature review (4)
Literature review (4)
 Tow key dicisions

¾ Will product be delivered to the customer

location or picked up from a preordained
site ?

¾ Will product flow through an intermediary?

Design options for a distribution network
(3)
„ 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 pick up
„ Retail storage with customer pick up
Manufacturer storage with direct shipping
(3)

manufacturer

retailer

customers

Product flow
Information flow
 Performance characteristics of Manufacturer
storage with direct shipping (3)
Cost factor Performance
Inventory ¾Lower cost because of aggregation .
Benefits of aggregation are highest for
low-demand , high value items.
¾Benefits are very large if product
customization can be postpone at the
manufacturer
Transportation higher transportation cost because of
increased distance and disaggregate
shipping
Performance characteristics of Manufacturer
storage with direct shipping (3)

Cost factor Performance

Facilities & ¾Lower facility cost because of
handling aggregation . 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
& retailer
 Performance characteristics of Manufacturer
storage with direct shipping (3)

Service factor Performance

Response time ¾High response time of between 1 to 2
weeks because of increased distance
and two stages for order processing.
¾ Response time may vary by product ,
thus complicating receiving .
Product variety ¾Easy to provide a very high level of
variety
 Performance characteristics of Manufacturer
storage with direct shipping (3)
Service factor Performance
Product ¾Easy to provide a high level of Product
availability availability because of aggregation at
manufacturer .

Customer ¾Good in terms of home delivery but can

experience suffer if order from several
manufacturers is sent as partial
shipments
Performance characteristics of Manufacturer
storage with direct shipping (3)

Service factor Performance

Order visibility ¾More difficult but also more
important from a customer service
perspective

Returnability ¾Expensive & difficult to implement

Manufacturer storage with direct shipping
and in-transit merge (3)

Factories

Retailer In – Transit merge by carrier

Customer

Product flow
Information flow
 Performance characteristics of in-transit
merge (3)
Cost factor Performance
Inventory ¾Similar to drop-shipping
Transportation ¾Somewhat lower transportation cost
than drop-shipping

Facilities & ¾Handling cost higher than drop-

handling shipping at carrier
¾Receiving cost lower at customer

Information ¾Investment is somewhat higher than for

drop-shipping
Performance characteristics of in-transit merge
(3)

Service factor Performance

Response time ¾Similar to drop-shipping may be
marginally higher
Product variety ¾Similar to drop-shipping

Product ¾Similar to drop-shipping

availability
Performance characteristics of in-transit
merge (3)
Service factor Performance
Customer ¾Better than drop-shipping because a
experience single delivery has to be received.

Order visibility ¾Similar to drop-shipping

Returnability Similar to drop-shipping

Distributor storage with package carrier delivery
(3)

Factories

Warehouse storage by
distribution / retailer

Customer

Product flow
Information flow
 Performance characteristics of Distributor
storage with package carrier delivery (3)
Cost factor Performance
Inventory ¾Higher than manufacturer storage .
Difference is not large for faster moving
items
Transportation ¾Lower than manufacturer storage .
Reduction is higher for faster moving
Facilities & ¾Somewhat higher than manufacturer
handling storage . The difference can be large for
slow- moving items .
Information ¾Simplerinfrastructure compare to
manufacturer storage .
Performance characteristics of Distributor
storage with package carrier delivery (3)

Service factor Performance

Response time ¾Faster than manufacturer storage

Product variety ¾Lower than manufacturer storage

Product ¾Higher cost to provide the seem level

availability of availability as manufacturer storage
Performance characteristics of Distributor
storage with package carrier delivery (3)

Service factor Performance

Customer ¾Better than manufacturer storage
experience with drop-shipping.

Order visibility ¾Easier than manufacturer storage .

Returnability ¾Easier than manufacturer storage .

Distributor storage with last mile delivery (3)

Factories

distribution / retailer warehouse

Product flow Customer

Information flow
 Distributor storage with last mile delivery
(3)
Cost factor Performance
Inventory ¾Higher than distributor with package
carrier delivery.
Transportation ¾Very high cost given minimal scale
economies . Higher than any other
distribution option .
Facilities & ¾Facility costs higher than manufacturer
handling storage or distribution storage with
package carrier delivery , but lower than
a chain of retail stores .
Information ¾Similar to distributor with package
carrier delivery
Distributor storage with last mile delivery
(3)
Service factor Performance
Response time ¾Very quick. Same day to next day
delivery
Product variety ¾Somewhat less than distributor
storage with package carrier delivery
but larger than retail stores

Product ¾More expensive to provide

availability availability than any other option
except retail stores
Distributor storage with last mile delivery
(3)
Service factor Performance

Customer ¾Very good particularly for bulky

experience items

Order ¾Less of and issue and easier to

traceability implement than manufacturer storage
or distributor storage with package
carrier delivery
Returnability ¾Easier to implement than other
options. Harder and more expensive
than a retail network
 Manufacturer/ Distributor storage with
customer pick up (3)

Factories

Retailer Cross Dock DC

Pick up site

Customer

Customer flow Product flow Information flow

 Manufacturer/ Distributor storage with
customer pick up (3)
Cost factor Performance
Inventory ¾Can match any other option depending on
the location of inventory
Transportation ¾Lower than the use of package carrier ,
specially if using delivery network
Facilities & ¾Facility costs can be very high if a new
handling facilities have to built
¾Costs are lower if existing facilities are
used
¾The increase in handling cost at the pick
up site can be significant
Information ¾significant investment infrastructure
required
Manufacturer/ Distributor storage with
customer pick up (3)
Service factor Performance

Response time ¾Similarto package carrier delivery

with manufacturer or distributor
storage. Same day delivery possible
for items stored locally at pick up site
Product variety ¾Similar to other manufacturer or
distributor storage options

Product ¾Similar to other manufacturer or

availability distributor storage options
Manufacturer/ Distributor storage with
customer pick up (3)
Service factor Performance

Customer ¾Lower than other options because of

experience the lack of home delivery
¾In areas with high density of population
loss of convenience may be small
Order visibility ¾Difficult but essential

Returnability ¾Somewhat easier given that pick up

location can handle returns .
Retail storage with customer pick up (3)
Cost factor Performance
Inventory ¾Higher than all other options

Transportation ¾Lower than all other options

Facilities & ¾Higher than all other options

handling ¾The increase in handling cost at the
pick up site can be significant for online
and phone orders
Information ¾some investment in infrastructure
required for online and phone orders
 Retail storage with customer pick up
(3)
Service factor Performance
Response time ¾Very quick. Same day pick up
possible for items stored locally at
pick up site
Product variety ¾Lower than all other options

Product ¾More expensive to provide than all

availability other options
 Retail storage with customer pick up
(3)
Service factor Performance
Customer ¾Related to whether shopping is viewed
experience positive or negative experience by
Customer
Order ¾Trivial for in-store orders difficult , but
traceability essential , for online and phone orders

Returnability ¾Easier than other options given that

pick up location can handle returns
Selecting a distribution network design (3)
Retailer Man.. Man Dis.. Dis.. Man..
storage Storage Storage ( Storage Storage Storage
(customer (direct in – (package (last mile (pick up)
pick up) shipping) transit carrier delivery)
merge ) Delivery)

Res Time 1 4 4 3 2 4
Pro var 4 1 1 2 3 1
Pro avail 4 1 1 2 3 1
Cust exp 5 4 3 2 1 5
Ord visi 1 5 4 3 2 6
Return 1 5 5 4 3 2
Invent 4 1 1 2 3 1
Transpo 1 4 3 2 5 1
Faci&ha 6 1 2 3 4 5
info 1 4 4 3 2 5
CASE 1: A dynamic distribution model
for combat logistics (2)

Traditional combat service support.

CASE 1: A dynamic distribution model
for combat logistics (2)

Combat service support for OMFTS.

Problem definition (2)
Indices & Sets :
i; j : nodes or locations (i = 0 is the sea base)
k : commodities
t : time periods
I : set of all nodes
Is : set of supply nodes
Ic : set of combat nodes
Isl : set of land-based supply nodes
Icl :set of land-based combat nodes
Il : set of land-based nodes
Ib : set of beach nodes accessible by watercraft
Ii : set of inland (not beach) nodes
K : set of commodities
T : set of time periods
Problem definition (2)
Data
ws : weight of a support unit
wc : weight of a combat unit
sij : distance from node i to node j bit maximum total
inventory that can be held at node i in period t
Djkt : demand for commodity k at node j in period t
N : maximum number of support units
La : available air lift in a period (in lb mile)
Ls : available ship-shore lift in a period (in lb mile)
Tijt : indicates movement of a combat unit from i to j in
period t
M : a large number
Problem definition (2)

Decision variables :
Xijt : equals 1 if a unit moves from node i to
node j in period t, and 0 otherwise
Iikt : inventory of commodity k held at node i
in period t
Yijkt : quantity of commodity k shipped from
node i to j in period t
Problem formulation (2)

Min ∑∑∑
i∈ I 1 k ∈ K t ∈ T
I ikt + w s ∑ ∑ ∑
i ∈ IS 1 j ∈ I s 1 t ∈ T
X ijt

Iijk + ∑YJIKT − ∑Yijkt − Dikt = Iik,t +1 ∀i ∈Ic1, k,t

j∈I j∈I

Iijk + ∑YJIKT − ∑Yijkt = Iik,t +1 ∀i ∈ Is1, k,t

j∈Is j∈I
Problem formulation (2)

∑X −∑X
j∈Is
jit
j∈Is
ij,t+1 =0 ∀i∈Is1,t,

∑Y
k∈K
ijkt −M (Xiit + Xijt) ≤ 0 ∀i ∈Is, j ∈Is,t,

∑∑Y
j∈Ic k∈K
ijkt − MXiit ≤ 0 ∀i ∈Is1,t,
Problem formulation (2)

∑I
k∈K
ikt −M ∑X
j∈ I s 1
ijt ≤0 ∀ i ∈ I s1 , t ,

∑Y
j∈ I 1
ijk , t + 1 − I ikt ≤ 0 ∀ i ∈ I s 1, k , t

∑ ∑Y
j∈ I i k ∈ K
ojkt S o j + Wc ∑ ∑ Tijt S ij ≤ La
j ∈ I 1 i∈ I 1
∀t ,
 Problem formulation (2)

∑ ∑Y
j ∈I b k ∈K
S + WCToj1Soj + ∑ ∑ Yojk1Soj + Wc ∑ Ti j1So j ≤ LA + Ls
ojk 1 oj
j ∈I 1 k ∈K i∈ I 1

∑
k∈K
I ikt − b it ≤ 0 ∀ i ∈ I c1 ,

Y i jkt , I ikt ≥ 0 ∀ i, j, k , t
CASE 2:Designing logistics networks in divergent
process industries:
methodology and its application to the lumber industry (1)
The proposed approach involves five steps:
1. The definition of the product-markets, sourcing context
and planning horizon.
2. The definition of product families and the elaboration of the
manufacturing-storage activities process graph.
3. The definition of potential network resources (facilities
location, layouts, technologies and capacity options) and of
technology dependent recipes for production activities.
4. The definition of the revenues and costs associated to the
network design and activity decisions.
5. The optimal mapping of the process graph onto the
potential network resources.
CASE 2:Designing logistics networks in divergent
process industries:
methodology and its application to the lumber industry (1)

markets :
¾ the spot market
¾ large retailers
¾industrial customers
Source:
¾ Producers have little control over their supply of raw
material.
CASE 2:Designing logistics networks in divergent
process industries:
methodology and its application to the lumber industry (1)
CASE 2:Designing logistics networks in divergent
process industries:
methodology and its application to the lumber industry (1)

Model
¾ Modeling the supply market
¾ Modeling production-distribution facility layouts
and capacity options
¾ Modeling flows and inventories
¾ Objective function
CASE 2:Designing logistics networks in divergent
process industries:
methodology and its application to the lumber industry (1)

MAXIMIZATION
∑e
o∈O
Oo [(1 − Zo ) M +
o −M ] −
o
subject to
„ Supply market constraints (1). Facility layout, space and
exclusive options constraints (5), (6) and (7).
„ Seasonal capacity option usage constraints (8).
„ Production activities flow equilibrium constraints (9) and (10).
„ Storage activities inventory accounting constraints (11) and
(12).
„ Production and storage capacity constraints (14), (15) and (16).
„ Sales market constraints (17) and (18).
„ Facilities total cost and revenue definitions (19),(20) and (21).
CASE 2:Designing logistics networks in divergent
process industries:
methodology and its application to the lumber industry (1)
 References
1.Designing logistics networks in divergent process industries:A
methodology and its application to the lumber industry; Didier
Vila, Alain Martel, Robert Beauregarda;(Int. J. Production
Economics 102 (2006) 358–378)

2.A dynamic distribution model for combat logistics,Kevin R.

Gue,Computers & Operations Research 30 (2003) 367–381

3.Supply chain management,Stratrgy,

Planning,Operation;SUNIL CHOPRA, PETER MEINDL

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