Session 15 Chapter 4 Chopra 5thed

Designing Distribution Networks
and Applications to Online Sales
Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.
Chapter 4
Identify the key factors to be considered when designing a

distribution network
Discuss the strengths and weaknesses of various distribution

options
Understand
how
online
sales
have
affected
the
distribution networks in different industries
design
of
Learning Objectives
Distribution: The steps taken to move and store a product from

the supplier stage to the customer stage in a supply chain
Drives profitability by directly affecting supply chain cost and the

customer experience
Choice
of
distribution
network
can
achieve
supply
objectives from low cost to high responsiveness
chain
The Role of Distribution in the Supply

Chain
Distribution
network
performance
is
evaluated
along
two
dimensions
Customer needs that are met
Cost of meeting customer needs
Evaluate the impact on customer service and cost for different

distribution network options
Profitability of the delivery network determined by revenue from

met customer needs and network costs
Factors Influencing
Distribution Network Design
Elements of customer service influenced by network structure:

Response time
Product variety
Product availability
Customer experience
Order visibility
Returnability
Factors Influencing
Supply chain costs affected by network structure:

Inventories
Transportation
Facilities and handling
Information
Factors Influencing
Desired Response Time and Number of

Facilities
Figure 4-1
Inventory Costs and Number of Facilities
Figure 4-2
Transportation Costs and

Number of Facilities
Figure 4-3
Facility Costs and Number of Facilities
Figure 4-4
Logistics Cost, Response Time, and

Number of Facilities
Figure 4-5
Distribution network choices from the manufacturer to the end

consumer
Two key decisions

Will product be delivered to the customer location or picked up
from a prearranged site?
Will product flow through an intermediary (or intermediate
location)?
Design Options for a

Distribution Network
One of six designs may be used

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/distributor storage with customer pickup
Retail storage with customer pickup
Design Options for a

Distribution Network
Manufacturer Storage with

Direct Shipping
Figure 4-6
In-Transit Merge Network
Figure 4-7
Cost Factor
Performance
Inventory
Similar to drop-shipping.
Transportation
Somewhat lower transportation costs than

drop-shipping.
Facilities and
handling
Handling costs higher than drop-shipping at

carrier; receiving costs lower at customer.
Information
Investment is somewhat higher than for

drop-shipping.
Table 4-2
In-Transit Merge
Distributor Storage with

Carrier Delivery
Figure 4-8
Figure 4-9
Distributor Storage with

Last Mile Delivery
Manufacturer or Distributor Storage with

Customer Pickup
Figure 4-10
Comparative Performance of Delivery Network

Designs
Table 4-7
Delivery Networks for Different Product/

Customer Characteristics
Table 4-8
Response time to customers

Physical products take longer to fulfill than retail store
No delay for information goods
Product variety
Easier to offer larger selection
Product availability
Aggregating inventory and better information on customer
preferences improves product availability
Impact of Online Sales on Customer

Service
Customer experience
Improved access, customization, and convenience
Faster time to market
Order visibility
Returnability
Harder with online orders
Proportion of returns likely to be much higher

Service
Direct sales to customers

Social
networking
channels
allow
firms
to
directly
pitch
products and promotion
Flexible pricing, product portfolio, and promotions

Manage revenues from product portfolio more effectively than
traditional channels
Promotion information can be conveyed to customers quickly
and inexpensively
Supply Efficient
funds
transfer
Chain Management:
Strategy, Planning,
and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra

Service
Inventory
Lower inventory levels if customers will wait
Postpone variety until after the customer order is received
Facilities
Costs related to the number and location of facilities in a network
Costs associated with the operations in these facilities
Impact of Online Sales on Cost
Transportation
Lower cost of transporting information goods in digital form
For non digital, aggregating inventories increases outbound
transportation
Information
Share
demand,
planning,
and
forecasting
information
throughout its supply chain

Additional
costs
to
build
and
maintain
the
infrastructure
information
Impact of Online Sales on Cost
Impact of online sales on customer service

Delay in fulfilling customer request
Impact of online sales on cost

Reduced inventory costs
Lower facility costs
Higher total transportation costs
Incremental increase in information costs
Using Online Sales to Sell Computer

Hardware: Dell
A tailored supply chain network

A hybrid model can be very effective
More significant as hardware becomes more of a commodity
Take advantage of the strengths of both online sales and
traditional retail and distribution channels
Using Online Sales to Sell Computer

Hardware: Dell

Internet has not shortened supply chains
Increased selection, convenience

Higher total transportation costs
Increase in information costs
Using Online Sales to Sell Books: Amazon
A supply chain network for books

Traditional bookstores pressured from both ends
Amazon more efficient
Using Online Sales to Sell Books: Amazon

Sell convenience and the time savings
Offers less variety
Creating a personalized shopping experience and customized
advertising and promotions
Using the Internet to Sell Groceries:

Peapod

Higher facility costs due to picking operation
Significantly higher total transportation costs
Using the Internet to Sell Groceries:

Peapod
Value of online sales to a traditional grocery chain

Complement the strengths of their existing network
Offer an entire array of services at differing prices based on the
amount of work the customer does
Using Internet to Sell Groceries: Peapod

Staggering selection and an excellent recommendation engine
Video streaming through a variety of devices
Customers received their DVDs within 24 hours of being shipped
Using the Internet to Rent Movies: Netflix

Considerably
higher
total
transportation
costs,
streaming will reduce transportation costs

increased
Using the Internet to Rent Movies: Netflix
The ownership structure of the distribution network can have as

big as an impact as the type of distribution network
It is important to have adaptable distribution networks
Product price, commoditization, and criticality affect the type of

distribution system preferred by customers
Integrate the Internet with the existing physical network
Distribution Networks in Practice
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
Distribution Networks in Practice
1.
.
.
.
.
Identify the key factors to be considered when designing a distribution

network.
A manager must consider the customer needs to be met and the cost of
meeting these needs when designing the distribution network.
Some key customer needs to be considered include response time, product
variety/availability, convenience, order visibility, and returnability.
Important costs that managers must consider include inventories,
transportation, facilities and handling, and information.
Increasing the number of facilities decreases the response time and
transportation cost but increases inventory and facility cost.
Summary of Learning Objectives
2. Discuss the strengths and weaknesses of various distribution

options.
Distribution networks that ship directly to the customer are better
suited for a large variety of high-value products that have low
and uncertain demand.
These networks carry low levels of inventory but incur high
transportation cost and provide a slow response time.
Distribution networks that carry local inventory are suitable for
products with high demand, especially if transportation is a large
fraction of total cost.
These networks incur higher inventory cost but lower
transportation cost and provide a faster response time.
3. Understand how online sales have affected the design of distribution networks in
different industries.
The rise of online sales has affected both customer service and costs in supply chains.
Online sales allow a firm to offer greater product variety and improve product
availability by centralizing inventories.
This is especially beneficial for low-volume, high variety products.
The online channel also improves the customer experience.
Selling a product online, however, increases the response time relative to a retail store.
A company selling online reduces facility costs if there is particularly significant for lowvalue products with predictable demand.
Online sales have been most effective for high-value products with uncertain demand,
when customers are willing to wait some time before delivery.
The Internet is particularly effective for products like music, movies, and books that
can be digitized because the two major disadvantages of distributing physical products
online-long response times and high transportation cost disappear.
Identify various SCM decisions made during Distribution

Network Design and determine effectiveness evaluation
criteria for each decision .
Group work for review next

session

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Designing Distribution Networks

and Applications to Online Sales

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Identify the key factors to be considered when designing a

Discuss the strengths and weaknesses of various distribution

distribution networks in different industries

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Distribution: The steps taken to move and store a product from

Drives profitability by directly affecting supply chain cost and the

objectives from low cost to high responsiveness

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

The Role of Distribution in the Supply

Evaluate the impact on customer service and cost for different

Profitability of the delivery network determined by revenue from

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Elements of customer service influenced by network structure:

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Supply chain costs affected by network structure:

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Desired Response Time and Number of

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Inventory Costs and Number of Facilities

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Transportation Costs and

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Facility Costs and Number of Facilities

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Logistics Cost, Response Time, and

Distribution network choices from the manufacturer to the end

Two key decisions

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Design Options for a

One of six designs may be used

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Design Options for a

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Manufacturer Storage with

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

In-Transit Merge Network

Somewhat lower transportation costs than

Handling costs higher than drop-shipping at

Investment is somewhat higher than for

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Distributor Storage with

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Distributor Storage with

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Manufacturer or Distributor Storage with

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Comparative Performance of Delivery Network

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Delivery Networks for Different Product/

Response time to customers

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Impact of Online Sales on Customer

Faster time to market

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Impact of Online Sales on Customer

Direct sales to customers

products and promotion

Flexible pricing, product portfolio, and promotions