What are the key factors to be considered when designing the distribution network

This article describes designing the distribution network in a supply chain. Many factors influencing the choice of distribution network are described. We then introduce different choices of distribution networks.

Identifying the appropriate strategy that are best suited for a variety of customer and product characteristics is crucial to the success or failure of supply chain mission.

Distribution is a key driver of the overall profitability of a firm because it directly impacts both the supply chain costs and the customer experience. Good distribution can be used to achieve a variety of supply chain objectives ranging from low cost to high responsiveness. As a result, companies in the same industry often select very different distribution networks. Dell distributes its PCs directly to end consumers, while companies like Hewlett Packard (HP) and Compaq distribute through resellers. Dell customers wait several days to get a PC while customers can walk away with an HP or Compaq PC from a reseller.

Factors to Consider in Distribution Network Design

At the highest level, performance of a distribution network should be evaluated along two dimensions:

1. Customer needs

2. Cost of meeting customer needs

The customer needs that are met influence the company's revenues, which along with cost decide the profitability of the delivery network.

While customer service consists of many components, we will focus on those measures that are influenced by the structure of the distribution network. These include:

• Lead time

• Product variety

• Product availability

• Customer experience

• Order visibility

• Returnability

It may seem at first that a customer always wants the highest level of performance along all these dimensions. In practice, however, this is not always the case.

Firms that target customers who can tolerate a large response time require few locations that may be far from the customer and can focus on increasing the capacity of each location. On the other hand, firms that target customers who value short response times need to locate close to them. These firms must have many facilities, with each location having a low capacity. Thus, a decrease in the response time customers desire increases the number of facilities required in the network.

Changing the distribution network design affects the following supply chain costs:

• Inventories

• Transportation

• Facilities and handling

• Information

As the number of facilities in a supply chain increases, the inventory and resulting inventory costs also increase, with fewer facilities you will be able to turn its inventory better, and As long as inbound transportation economies of scale are maintained, increasing the number of facilities decreases total transportation cost. If the number of facilities is increased to a point where there is a significant loss of economies of scale in inbound transportation, increasing the number of facilities increases total transportation cost.

Total logistics costs are the sum of inventory, transportation, and facility costs for a supply chain network. As the number of facilities is increased, total logistics costs first decrease and then increase.

Each firm should have at least the number of facilities that minimize total logistics costs.

As a firm wants to further reduce the response time to its customers, it may have to increase the number of facilities beyond the point that minimizes logistics costs. A firm should add facilities beyond the cost minimizing point only if managers are confident that the increase in revenues because of better responsiveness is greater than the increase in costs because of the additional facilities.

Design Options for a Distribution Network

When considering distribution between any other pair of stages, such as supplier to manufacturer, many of the same options still apply. There are two key decisions when designing a distribution network:

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

2. Will product flow through an intermediary (or intermediate location)?

Based on the choices for the two decisions, there are a lot of distinct distribution network designs such as:

-        Traditional Multi-Tiered Distribution

-        Mixing Centers / Hubs

-        Distributors

-        Direct to Store Delivery

-        Drop Ship to Customer

Selecting a Distribution Network Design

A network designer needs to consider product characteristics as well as network requirements when deciding on the appropriate delivery network. The various networks considered earlier have different strengths and weaknesses, the various delivery networks are ranked relative to each other along different performance dimensions. A ranking of 1 indicates the best performance along a given dimension and the relative performance worsens, as the ranking gets higher.

I rather prefer to use a whole supply chain network design model based on operations research technique that is widely used called mixed integer linear programming (MILP) which is a quantitative technique has it’s roots back to Word War II which was used by the military to reduce the total logistics costs. In abroad sense this technique is used to minimize total cost subject to meeting some constraints like: demand at various locations, capacity of each node, transshipment intermediaries, minimum or maximum number of facilities, service levels ... etc.

Here is MILP formulation with enforced service metrics:

There are some other techniques like: Center of gravity, Weber, ... etc. But these techniques operates on a continuous location Euclidean space assuming linearity, it looks at every spot as a possible candidate, and it ignores other costs as well. So it is better for us to use MILPs to ensure optimal realistic solutions.

A given supply chain can have multiple distribution channels based on the expected demand, supply constraint, desired level of service, and the overall operating cost.

Hazem Hamza

#Think_Supply_Chain

Sources:

APICS: Certified in Logistics, Transportation, and Distribution

MITx, MM Series

Sunil Chopra, Kellogg school of management, researches.

Supply Chain Management: Strategy, Planning, and Operations, Sunil Chopra

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