Chapter 4

Designing supply chain Network

Role of Distribution in Supply Chain:

- Distribution includes the various activities the company undertakes to make the product

accessible and available to target customers.

- It includes marketing channels/intermediaries (wholesalers, retailer, agent) & physical

distribution (warehousing, transportation, inventory management).

- Channels make the product available to the customers.

- Physical distribution makes the product accessible to the channel members and customers.

- Physical distribution physically moves the product from the manufacturer to customers.

- The major activities are order processing, warehousing, material handling, inventory

management and transportation.

- Distribution refers to the steps taken to move and store a product from supplier stage to customer

stage in the supply chain.

- Distribution occurs between every pair of stage in the supply chain.

- Raw materials and other components are moved from supplier to manufacture, whereas finished

products are moved from manufacturer to ultimate customer through various distribution

channels such as wholesaler, retailer, distributor, agents.

- Distribution is the key driver of the overall profitability of a firm because it affects both the

supply chain cost and customer value directly (i.e. cost- efficiency as well as responsiveness.

- The process of designing a distribution network has two broad phases.

- In the first phase, broad structure of the supply chain network is delivered (visualized).

- This stage includes decision such as whether the product will be sold directly (i.e. personal

selling, ecommerce, sky-shop) or go through market phase (i.e. through distribution channel)

thentakes the broad structure n=and convert it into specific location and their capability.
Role/Objective of distribution Decision Channel

1. Flow of product:Distribution makes smooth flow of product from manufacturer to channel

members and customers. Similarly, it also ensures smooth supply of raw material and other

logistic supports to manufacturer.

2. Availability of product: Distribution design makes variety of product available to customers.

3. Accessibility of product and services: Distribution make product accessible to customers trough

physical distribution. It ensures right product at right time at right quantity.

4. Efficiency: Distribution design/ structure ensures marketing efficiency. It facilitates assortment

of good it reduces the number of transactions between supplier and manufacturer as well as

manufacturer and customer. Marketing cost decrease by proper storage, order processing and

handling of goods.

5. Facilitates efficiency and responsiveness.

6. Increase profit through cost reduction.

7. Customer satisfaction.

Method of Distribution

A. Direct method distribution: It consist of manufacturer and final customers. There are no

middle-man to provide assistance between manufacturer and customer, refers zero level channel

such on-line ecommerce.

B. Indirect method of distribution: It includes one or more intermediaries between the

manufacturer and customers such as agent, wholesaler, distributor, retailers etc.

Factors Influencing/Affecting Distribution on Network Design

The performance design should be evaluated on the basis of following aspects (dimensions)4
 i. Customers need that are met (responsiveness)

ii. Cost of meeting customer need.

Therefore, a frim (organization) must evaluate the impact on customer service and cost on it as it

compares different distribution network options, the customers needs that are met influence the company

revenue along with cost decide the profitability of the delivery networks. The customer value is influence

by various factors which ultimately affects network design. The following aspect should be considered

while designing distribution network.

1. Customer need that are met (responsiveness)

2. Cost of meeting customers need.

Factors that affects customers needs that are met

i. Response time: It is the amount of time taken by distribution network for a customer to receive an

order.

ii. Product variety: Product variety refers range pf product and services available to customers. It is

the number of different products that are offered by the distribution network.

iii. Product availability: Product availability is the probability of having a product in stock when a

customer order arrives.

iv. Customer experience: Customer experience includes the ease with which customer can place and

realization of order and the extent to which the experience is customized. It is the level of

satisfaction (value) received by the customer in order to satisfy his/her needs, wants, desires.

v. Order visibility: It is the ability of customers to track their order from placement to delivery.

vi. Time to Market: it is the time taken by the distribution network to bring a new product to the

market.

vii. Returnability: Returnability is the ease (extent) with which a customer can return unsatisfactory

purchase (product) and the ability of the network to handle such returns.
Cost of meeting Customer Needs

The changes/modification in network design affects the following supply chain cost, they are:

a) Transportation and transportation cost

b) Inventory and inventory management cost

c) Facilities and handling

d) Information and information cost

Framework for network Design Decision/ Choices (option) of network configuration

- Distribution network is structuring of nodes and flow through links.

- Nodes are facilities which can be manufacturing units, distribution centers or warehouse and

flow of movement of goods between two points (nodes) in order to reach the customers

ultimately.

- A distribution network maps (determine) both physical flow and informational flow.

The objectives of a distribution network would be that the customers’ needs should be met and the cost

should match a given service level. The design option for network would be as follows:

i. Direct Shipping:

a. Manufacturer to customers site

b. Suppler to customer site

ii. Through intermediaries:

a. Manufacturer to customer in-transit

b. Delivery responsibility with currier

c. Delivery responsibility with intermediaries

iii. Customer

a. From distribution center

b. From retailer
- Each of the above options should be evaluated on the basis of cost and service factors.

- Cost factor is more linked to supply chain drivers such as location of facilities, inventory,

transportation and information where as service factor would be response time, visibility,

availability, and post-sales services including return management.

1. Direct Shipping

i. Manufacturer storage with direct shipping:

- In this option, product is shipped directly from the manufacturer to the end customers by passing

the market intermediaries. This option is also referred as drop-shipping.

- The product is shipped directly from the manufacturer to customers.

- The biggest advantage of drop-shipping is the ability to centralize inventories at the manufacturer

which facilitates high level of product availability with lower level of inventories.

ii. Manufacturer storage with direct shipping and in-transit merge:

- In this method, the supply chain combines pieces of order coming from different location so that

thecustomer gets a single delivery.

- For example, when a customer orders a PC from Dell along with Sony factory, it merges the two

hubs before making a single delivery to the customer.

- The response time, product variety, availability and time to market are similar to direct- shipping.

Customer experience is likely to be better than drop-shipping because the customer receives only

one delivery from an order instead of many partial shipments.

- The main advantage of in-transit merge over drop-shipping is lower transportation cost and

improved customer experiences.

iii. Form suppliers to customers:

- In this method, the manufacturer identifies the supplier of certain goods/ components that are to

be shipped indirectly to the customer site where value addition would happen. In such case, here
 is no intermediary involved except for the transportation who is a conduct operator responsible

for movement of goods.

- The advantage is that the intermediary is compulsory eliminated which reduces dwell time, the

customer can directly co-ordinate with the manufacturer and appoint supplier and no margin has

to be set aside for intermediary.

1) Through Intermediary:

- The channel partners known as intermediary play on important role in the distribution

network of a large number of product groups.

- The role and importance of channel partners vary with the requirements of a network

as well as nature of product.

a) Delivery Responsibility with intermediary:

- In this method, a distributer handles direct delivery and the manufacturer

prefers the distributor to deliver directly at customer locations.

- There are many products where last mile delivery by distributor is practiced.

- Example; Consumer electronics for home arrangement, customer purchase

product from dealers and dealer deliver and install the product as per the term

set by the manufacturer. The manufacturer uses ‘call center’ make the call to

customers to ensure that the product was delivered intact and as promised

including warranty. The role of the distributer is critical in attracting and

serving the customer.

b) Delivery Responsibility with carrier:

- In this distribution option, manufacturers engage carriers who would deliver

goods to customers.
 - The product can be sold online and delivered through carrier who aggregates

and brings economies in the delivery.

- These carriers have a network of delivery offices and managing delivery is

their core competency key function.

2) Customer Pickup:

- The distribution network can be configured in such a way that customers pick

up goods in a supply chain network.

- It is important to understand the situation in which such configuration would

work.

- The depending upon the distribution network, customer would pick up goods

from a distribution center or from a retail store.

a. Customer Pick up from distribution center:

- On this design (configuration), dealers and retailers sells goods (products) that

are to be picked up by the customers from the distribution center.

- Normally, a number of consumers of consumer goods are sold in this manner.

- Example; Home furniture, consumer electronics and automobiles, the sales

process is completed when consumer inspects the product on showroom and

books a sale, delivery may be self or by the dealers (distributor)

b. Customer pickup form retail store:

 - On this distribution method (option), goods are sold by retails in the supply

chain network. Customers walk into retail store and pick up a product on

completion of sale which can be seen in everyday life.

- This includes sales of consumer goods such as grocery, pharmaceuticals,

perishable consumer goods, jewelry, clothing, foods, etc.

- The logic behind this structure is that they are all mass demand product that

must be distributed through convenience and specialty retail store that bring in

economies in buying for customers and also ensure availability of various

goods on one location.

Factors Influencing Network Decision Design

1. Strategic factor: strategy of competitors.

2. Technological factor:

- Manual technology: low capital investment, mass production not possible.

- Capital Base technology: Required high level of capital investment,

mechanized computerized and robotized technology, mass production

possible.

3. Macroeconomic factor:

- Includes tariff and taxes economic condition, exchange rate risk, demand risk.

4. Political factors

Factors Influencing/Affecting Network Decision Design

1. Strategic factor:
 - Strategy of the organization, i.e. mission, vision objectives, policies Levels,

types:

a. Corporate level strategy: strategies for entire organization.

b. Business level strategy:

Strategy for different divisions;

- Cost leadership strategy

- differentiation strategy

- focus strategy: small target market

c. Functional level strategy:

- Production strategy.

- Finance strategy

- HR strategy

- marketing strategy

2. Technological factors

3. Macroeconomic factors/ Economic factors:

a. Taxes and tariffs

b. Exchange rate risk and demand risk

c. Freight and fuel cost.

4. Political factors:

a. Political system, political ideology, political stability

b. Infrastructure

c. Competitive factor: competitor and types of competition.

5. Socio-cultural/socio-economic factors.
6. Logistic and facility cost

7. Natural environment forces