Channel Strategy and Design

Distribution refers to the steps taken to move and store a product from the supplier stage to a
customer stage in the supply chain. Distribution is a key driver of the overall profitability of a
firm because it directly impacts both the supply chain cost 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.
Factors Influencing Distribution Network Design
At the highest level performance of a distribution network should be evaluated along two
dimensions!
". Customer needs that are met
#. Cost of meeting customer needs
$he customer needs that are met influence the company%s revenues which along with cost decide
the profitability of the delivery network.
&hile customer service consists of many components we will focus on those measures that are
influenced by the structure of the distribution network. $hese include!
'esponse time
(roduct variety
(roduct availability
Customer experience
)rder visibility
'eturnability
'esponse time is the time between when a customer places an order and receives delivery.
(roduct variety is the number of different products * configurations that a customer desires from
the distribution network. Availability is the probability of having a product in stock when a
customer order arrives. Customer experience includes the ease with which the customer can place
and receive their order. )rder visibility is the ability of the customer to track their order from
placement to delivery. 'eturnability is the ease with which a customer can return unsatisfactory
merchandise and the ability of the network to handle such returns.
+t may seem at first that a customer always wants the highest level of performance along all these
dimensions. +n practice however this is not always the case. Customers ordering a book at
Ama,on.com are willing to wait longer than those that drive to a nearby -orders store to get the
same book. )n the other hand customers can find a far larger variety of books at Ama,on
compared to the -orders store.
.irms that target customers who can tolerate a large response time re/uire few locations that may
be far from the customer and can focus on increasing the capacity of each location. )n the other
hand firms that target customers who value short response times need to locate close to them.
$hese firms must have many facilities with each location having a low capacity. $hus a decrease
in the response time customers desire increases the number of facilities re/uired in the network
as shown in .igure. .or example -orders provides its customers with books on the same day but
re/uires about 011 stores to achieve this goal for most of the 2nited States. Ama,on on the other
hand takes about a week to deliver a book to its customers but only uses about 3 locations to
store its books.
Changing the distribution network design affects the following supply chain costs!
4ocal .G
5ix
'egional .G
4ocal &+(
Central .G
Central &+(
Central 'aw 5aterial and Custom production
Custom production with raw material at suppliers
Cost
'esponse $ime
Hi Low
Low
Hi
+nventories
$ransportation
.acilities and handling
+nformation
As the number of facilities in a supply chain increases the inventory and resulting inventory costs
also increase as shown in .igure. .or example Ama,on with fewer facilities is able to turn its
inventory about twelve times a year while -orders with about 011 facilities achieves only about
two turns per year. As long as inbound transportation economies of scale are maintained
increasing the number of facilities decreases total transportation cost.
+f 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. A distribution network with more than one warehouse allows Ama,on.com to reduce
transportation cost relative to a network with a single warehouse.
Design Options for a Distribution Network
+nventory
Costs
6umber of facilities
&e will discuss distribution network choices in the context of distribution from the manufacturer
to the end consumer. &hen considering distribution between any other pair of stages such as
supplier to manufacturer many of the same options still apply. $here are two key decisions when
designing a distribution network!
". &ill product be delivered to the customer location or picked up from a preordained site7
#. &ill product flow through an intermediary 8or intermediate location97
-ased on the choices for the two decisions there are six distinct distribution network designs that
are classified as follows!
". 5anufacturer storage with direct shipping
#. 5anufacturer storage with direct shipping and in:transit merge
;. Distributor storage with package carrier delivery
0. Distributor storage with last mile delivery
3. 5anufacturer * distributor storage with costumer pickup
<. 'etail storage with customer pickup