Introduction to Distribution
In this lesson, you’re expected to learn about:
– the role of distribution in the supply chain
– the basics of distribution networks
– the main factors that influence distribution network design
What is Distribution?
Distribution is related to moving and storing a product from a supplier to a customer and occurs in every pair of stages in the supply chain.
Distribution directly affects a company’s profitability, as it is simultaneously a key driver of customer value and operational cost:
– In the apparel retail industry, distribution impacts roughly 35% of revenue due to its influence on markdowns and lost sales. That happens because if is distribution poor, either there will be too much leftover inventory (which will be probably marked-down at the end of the season) or stock-outs (lost sales).
– In the chemical industry, the distribution costs represent about 10% of the total sales.
Thus, companies often design different distribution networks, even if they are competing in the same industry.
https://www.youtube.com/watch?v=-Fr1Fj8A9UM
– How can the distribution network be helpful when meeting my customers’ needs?
– How can I achieve my distribution goals at the minimum cost?
– Response Time: the amount or time it takes to receive an order.
– Product Variety: the different products/configurations offered by the distribution network.
– Product Availability: the probability of having the product in stock when demanded.
– Customer Experience: the ease with which customers can place and receive orders.
– Time to Market: time it takes to bring a new product to the market.
– Order Visibility: the ability to track and trace orders from placement to delivery.
– Returnability: the ease with which customers can return unwanted items.
– Inventories
– Transportation
– Facilities and handling
As an exercise, let’s simplify our distribution network design decisions to only one: the number of distribution facilities (e.g. stores, distribution centers, warehouses etc.).
The impact of such a decision is multifold. For example:
– More facilities are associated with reduced response times.
– Less facilities are, usually, associated with lower total cost.
In order to build our intuition around the theme, we can analyze the impact of the number of facilities on different revenue and cost components:
– Response time
– Distribution costs (Inventory, Transportation, and Facility costs)
• Firms that target customers who can tolerate a long response time require only a few locations that may be far from the customer. These companies can, thus, focus on increasing the capacity of each location, gaining economies of scale.
• On the other hand, firms that target customers who value short lead times need to locate facilities close to them, in order to be able to have the products right on hand. Therefore, these companies must have many facilities, each with relatively lower capacity (less economies of scale).
• As the number of facilities increase, the inventory level and the resulting inventory costs also increase (we are going to learn why in the upcoming lessons).
• In order to decrease inventory, other things remaining constant, firms need to consolidate inventories (e.g. using distribution centers) and reduce the number of facilities (inventory locations).
– Inbound transportation costs: related to bringing material into a facility.
– Outbound transportation costs: related to sending material out (e.g. to the customer).
• Increasing the number of locations decrease the average outbound distance and makes outbound transportation cheaper.
• On the other hand, more locations make inbound transportation more complex, which might increase the total transportation costs after a certain point.
A higher facility cost is associated with a larger number of facilities. • Facility costs decrease as the number of facilities is reduced.
• This is because a consolidation of facilities allows a firm to exploit economies of scale.
Total Logistics Cost = Inventory Cost + Transportation Cost + Facility Cost
• A firm should add facilities beyond the cost minimizing point only if the financial gains from the additional responsiveness are superior to the increase in total logistics cost due to the greater number of facilities.
