Supply Chain Management Dr.

Ghulam Rasul Awan

DISTRIBUTION

Distribution refers to the steps taken to move and store a product from the
supplier stage to a customer stage in a supply chain.

Distribution occurs between every pair of stages in the supply chain. Raw
materials and components are moved from suppliers to manufacturers,
whereas finished products are moved from the manufacturer to the end
consumer.

Distribution plays strategic role in a company’s success. It serves as to create

competitive advantage in the industry. Good distribution service may be
leveraged for creating closer relationship with end consumers. In Japan, the
distribution systems are network of relation driven middlemen who are
cooperating between the wholesaler, retailer, manufacturer, importer and
customers. Distribution decisions have significant effect on:

- Product margins and profits.

- Marketing budgets.
- Final retail pricing.
- Sales management practices.
Supply Chain Management Dr. Ghulam Rasul Awan

Distribution Planning
Distribution Planning determines how products will be received from
production plant and then distributed from the distribution centers to end
consumers. It is calculated that what products need to be received at which
location, and at what time. Distribution Planning helps organizations create
their Distribution Requirement Plans (DRPs) and establish distribution lead
times.

Placement of Finished Goods

Placement of Finished Goods means that where the company stores its
finished products. Some companies store their products very near to
manufacturing plants and some store their products outside the plant. There
are two fundamental decisions regarding Placement of Finished Goods:

i. Forward placement.
ii. Backward placement.

Forward placement
In this type of placement the finished products are stored near to the
customer’s place and then sent to the wholesaler or retailers. The distribution
of goods to the customer is very easy because the warehouse is near to
customer’s place.

Backward placement
In this type of placement the finished products are stored very near to the
manufacturing plant and then distributed to the wholesaler or retailers. In
backward placement the warehouse cost remains low.
Supply Chain Management Dr. Ghulam Rasul Awan

Distribution Strategies
Distribution strategies depend upon the type of product being distributed.
There are three common distribution strategies available:

1 - Intensive Distribution strategy

In this strategy the company provides saturation coverage of all the market by
opening many outlets in the geographic regions. The availability of company
goods is very easy. The customers can purchase goods from retail outlets.
This strategy is commonly used to distribute low priced or impulse purchase
products e.g. chocolates, soft drinks.

2 - Extensive Distribution strategy

In this strategy the company selects only one wholesaler or retailer or even
one or two outlets in the specific geographic region. The product is usually
highly priced, and requires the intermediary to place much detail in its selling.
An example of this would be the sale of vehicles through exclusive dealers.

3 - Selective Distribution strategy

In selective distribution strategy the company has a few number of outlets in
which goods are distributed. Selective distribution is common with products
such as computers, televisions household appliances, where consumers are
willing to shop around and where manufacturers want a large geographical
spread. The advantage of this strategy over intensive distribution strategy is
that the producer can focus on limited outlets and provide best training to the
sales persons for customer satisfaction.

Distribution Network
A distribution network is the system a company uses to get products from the
manufacturer to the retailer. A fast and reliable distribution network is
essential to a successful business because customers must be able to get
products and services when they want them.
Supply Chain Management Dr. Ghulam Rasul Awan

Managers must make one of two decisions when designing a distribution

network:

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

prearranged site.

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

Based on the firm’s industry and the answer to above two questions, one of
the six distinct distribution network designs may be used to move products
from factory to customer. These distribution network designs are:

1. Manufacturer storage with direct shipping.

2. Manufacturer storage with direct shipping and in-transit merge.
3. Distributor storage with carrier delivery.
4. Distributor storage with last-mile delivery.
5. Manufacturer/distributor storage with customer pickup.
6. Retail storage with customer pickup.

1 - Manufacturer storage with direct shipping

The manufacturer delivers the product direct from production plant to the
customer, bypassing the wholesaler or retailer (who takes the order and
initiates the delivery request). This type of distribution is also known as
drop-shipping. The retailer carries no inventory. Information flows from the
customer, via the retailer, to the manufacturer, and the product is shipped
directly from the manufacturer to customers.

Some important characteristics of drop-shipping are:

- Inventories are centralized with the manufacturer who can aggregate

demand across all retailers. As a result, supply chain is able to provide a
high level of product availability with lower levels of inventory.

- The benefits from centralization are highest for high-value, low-demand

items with unpredictable demand.
Supply Chain Management Dr. Ghulam Rasul Awan

Manufacturers

Retailers

Customers

Product Flow

Information Flow

Figure 1: Manufacturer storage with direct shipping

- Transportation costs become high because the average outbound distance

to the end consumer is large and package carriers are used to ship the
product. Package carriers have high shipping costs per unit compared to
truckload carriers.

- A good information infrastructure is needed between the retailers and the

manufacturer so that the retailers can provide product availability
information to the customer, even the inventory is located at the
manufacturer.

- Response times may be long in drop-shipping as the order has to be

transmitted from the retailer to the manufacturer and shipping distances
are generally longer from manufacturer’s centralized site.

- Manufacturer storage allows a high level of product variety to be available

to the customer, as every product manufactured by the manufacturer is
available in centralized store.
 Supply Chain Management Dr. Ghulam Rasul Awan

- Return ability in manufacturer storage with direct shipping network is

rather difficult, thus hurting customer satisfaction.

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

In-transit merge combines pieces of the order coming from different locations
so that the customer gets a single delivery. For example, a customer orders a
PC from Dell factory and the monitor from the Sony factory; the package
carrier picks up both items from respective factories; it then merges the two at
a hub before making a single delivery to the customer.

Factories

Retailer In- transit merge by

carrier

Product flow

Information
Flow

flow
Figure 2: Manufacturer storage with direct shipping and
in-transit merge
Supply Chain Management Dr. Ghulam Rasul Awan

Some important characteristics of manufacturer storage with direct shipping

and in-transit merge are:

- An increased coordination is required.

- Merge in transit decreases transportation costs by aggregating the final

delivery.

- Receiving costs at the customer are lower because a single delivery is

received.

- The party performing the in-transit merge has higher facility costs because
of the merge capability required.

- An excellent information infrastructure is needed to allow in-transit

merge. So the investment in information infrastructure is higher.

- Response times may be marginally higher because of the need to perform

merge.

- Problems in handling returns are likely, and the reverse supply chain will
continue to be difficult and expensive to implement.

3 - Distributor storage with carrier delivery

In this type of distribution network, inventory is not held by manufacturer at

the factories but is held by the distributors / retailers in intermediate
warehouses, and package carriers are used to transport products from the
intermediate location to the final customer.
Supply Chain Management Dr. Ghulam Rasul Awan

Factories

Warehouse storage by distributor or

retailer

Customers

Product flow

Information flow

Figure 3: Distributor storage with carrier delivery

Some important characteristics of distributor storage with carrier delivery are:

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

- Distributor usually keeps the higher level of inventory of products with

somewhat higher demand.

- Transportation costs are little lower because an economic mode of

transportation, such as truckloads, can be employed for inbound
shipments to the warehouse, which is closer to customer.
Supply Chain Management Dr. Ghulam Rasul Awan

- The information infrastructure needed with distributor is significantly less

complex than that needed for manufacturer storage.

- Response times under distributor storage is better because distributor

warehouses are closer to customers and entire order is aggregated at the
warehouse before being shipped.

- Customer convenience is high because a single shipment reaches the

customer in response to an order.

- Warehouse storage has to limit the variety of product that can be offered.

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 package carrier. It requires the distributor
warehouse to be much closer to the customer. Home delivery of water cans is
a good example of this type of network. With the limited radius that can be
served with last-mile delivery, more warehouses are required.

Manufacturers

Distributor or retailer storage

Home delivery to the end customer

Product flow

Information flow
Supply Chain Management Dr. Ghulam Rasul Awan

Important characteristics of distributor storage with last-mile delivery are:

- It is relatively more suitable for fast-moving items that are needed quickly.

- It requires higher levels of inventory than the other options because it has
a lower level of aggregation.

- Transportation costs are highest, especially when delivering to

individuals. These high costs may be justifiable for bulky products for
which the customer is willing to pay for home delivery.

- The information infrastructure needed to be less complex and similar to

that for distributor storage with package carrier delivery.

- Response times are faster.

- Of all the options, returnability is best, because trucks making deliveries

can also pick up returns from customers.

5 - Manufacturer or distributor storage with customer pickup

In this approach, inventory is stored at the manufacturer or distributor

warehouses, but customers place their orders online and then travel to
designated pickup points to collect their merchandise. Orders are shipped
from the storage site to the pickup points as needed.

Important characteristics of manufacturer/distributor storage with customer

pickup are :
 Supply Chain Management Dr. Ghulam Rasul Awan

Manufacturers

Retailer

Pickup site

Customers

Product flow

Information flow

Customer flow

Figure 5: Manufacturer or distributor storage with

customer pickup

- Inventory costs using this approach can be kept low.

- Transportation cost is lower than any other network because it allows the
use of truckload or less than truckload carriers to transport orders to
pickup site.
Supply Chain Management Dr. Ghulam Rasul Awan

- A significant information infrastructure is needed to provide visibility of

the order until the customer picks it up.
-
- Good coordination is needed among the manufacturer storage location and
the pickup location.

- Returns can be handled at pickup sites, making it easier for customers.

6 - Retail storage with customer pickup

In this distribution network, inventory is stored locally at the retail stores.

Customers walk into the retail store and pick their items up.

Important characteristics of retail storage with customer pickup are :

- Inventory costs are higher because of keeping inventory of fast to very fast
moving items.

- Transportation cost is much lower than with other options because

inexpensive modes of transport can be used to replenish product at retail
store.

- A minimal information infrastructure is needed.

- Good response times can be achieved with this system because of local
storage.

- Returnability is fairly good as returns can be handled at pickup sites.