Types of Distribution Networks

Types of Distribution Networks

In this lesson, you’re expected to learn:
– the six major types of distribution networks
– how to choose a distribution network design
Six major types of network design
Two key high-level distribution decisions that a manager must make are: 

– Whether the product will be picked up on-site or delivered to the customer.
– Whether or not the product will flow through an intermediary.

Based on these decisions, six major types of basic distribution network 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

Each of these types of distribution network designs have different impacts on logistics service and cost factors.
Impact on Service & Cost Factors

Different distribution network designs have different impacts on the following cost and service factors:

1) Manufacturer storage with direct shipping

In this configuration, the customer places an order with the retailer, who passes the information along to the manufacturer. The manufacturer ships the product directly to the customer. This is also referred to as “drop shipping”.

Key Points

• The biggest advantage of this design is that it allows centralization of inventories at the manufacturer, who can aggregate demand across all the retailers that it supplies, thus being able to provide high level of product availability with relatively low inventories.

• Although inventory costs are typically low, transportation costs are high, because the average outbound distance to the customer is large.

• This design requires a good information infrastructurebetween the retailers and the manufacture, such that the retailer can provide product availability information to the customer.

• Response times tends to be long when drop-shipping is used.

2) Manufacturer storage with direct shipping and in-transit merge

Unlike pure drop shipping, in-transit merge combines pieces of the order coming from different locations so that the customer gets a single delivery.

Key Points

• Similar to drop shipping, this design offers the advantageous ability to aggregate inventories and postpone product customization.

• This design requires an increase in coordination; however, in-transit merge decreases transportation costs relatively to drop shipping because it aggregates the final delivery.

• A sophisticated information infrastructure is needed to allow in-transit merge.

• Response times, product variety, availability, and time to market are similar to drop-shipping.

3) Distributor storage with carrier delivery

In this design, stocks are not held at the factories, but at distributors / retailers in intermediate warehouses. Package carriers are used to transport products from the warehouse to the customer.

Key Points

• Transportation costs are lower for distributor storage compared to manufacturer storage because an economic mode of transportation (e.g. truckload) can be employed to inbound shipping to the warehouse (which is closer to the customer).

• Compared to manufacturer storage, facility costs of warehousing are higher with distributor storage because of a loss of aggregation.

• The information structure needed is less complex than that needed with manufacturer storage.

• Response times are usually better than under manufacturer storage because distributor warehouses are, on average, closer to customers.

• This configuration is well suited for slow-to-fast-moving items.

4) Distributor storage with last-mile delivery

Last-mile delivery refers to the distributor / retailer delivering the product to the customer’s home instead of using a package carrier.

Key Points

• It usually requires a higher level of inventory than the other options (except for retail stores) because of its lower level of aggregation.

• Among all distribution networks, transportation costs are the highest for last-mile delivery, especially when delivering to individuals.

• The information infrastructure with last-mile delivery is similar to that for distributor storage with package carrier delivery.

• Response times are faster than using package carriers.

5) Manufacturer / distributor storage with customer pickup

In this design, inventory is located at the manufacturer or distributor warehouse, customers place their order with the retailer (e.g. online or on the phone) and then go to pickup sites to get the product. Orders are shipped from the storage sites to the pickup sites as needed.

Key Points

• Inventory costs using this approach can be kept low if aggregation is exploited. However, facility costs are high, if new pickup sites have to be built.

• A significant information infrastructure is needed to provide visibility of the order until the customer picks it up (order visibility is extremely important for customers pickups).

6) Retailer storage with customer pickup

This design is one of the most traditional types of distribution designs: inventory is stored at retail stores, customers walk in, place an order and leave with the goods in hand.

Key Points

• Local storage increases the inventory costs because of lack of aggregation.

• Transportation cost is much lower than with other solutions because inexpensive modes of transport on inbound logistics. Outbound logistics is not needed.

• Facility costs are high because many local facilities are needed.

• Minimal information infrastructure is needed if customers just walk-in and place their orders.

• Good response times can be achieved with this system.

[Optional] Why do you need to model your Supply Chain, Logistics or Distribution Network Design?
Comparative performance of distribution network designs
The various networks considered have different strengths and weaknesses. In the table below, the six networks designs that we discussed are ranked relatively to one another along different service and cost factors.

Enlarged version: http://bit.ly/2pYc9Xu

A network designer must also consider the product characteristics when deciding on the adequate delivery network

Only niche companies end up using a single distribution network. Most companies are better served by a combination of delivery networks.

The combination used depends on the product characteristics and the strategic position that the firm is targeting.

The suitability of the six different delivery designs are shown in the table below:
Enlarged version: http://bit.ly/2pKcXjo
[Optional] What are the Key Issues of Distribution Network Design?
Watch this 5-minute video by Rob O’Byrne to learn more:
Jim Rohn Sứ mệnh khởi nghiệp