Supply Chain Management: Strategy,

Planning, and Operation

Chapter 4
Designing Distribution
Networks and Applications
to Omni-Channel Retailing
Learning Objectives

4.1 Identify the key factors to be considered when

designing a distribution network.
4.2 Discuss the strengths and weaknesses of
various distribution options.
4.3 Describe how omni-channel retail may be
structured to be both cost effective and responsive
to customer needs.
Distribution Network Design in the Supply
Chain
• Distribution – the steps taken to move and store
a product from the supplier stage to the customer
stage in a supply chain
• Drives profitability by directly affecting supply
chain cost and the customer value
• Choice of distribution network can achieve supply
chain objectives from low cost to high
responsiveness
The Objective of a Supply Chain (1 of 3)
• Maximize net value generated
Supply Chain Surplus = Customer Value − Supply
Chain Cost
Flows in a Supply Chain

Figure 1-2 The Three Flows in a Supply Chain

Framework for Supply Chain Decisions (1 of
2)

Figure 3-1 Supply Chain Decision-Making Frame work

Factors Affecting Distribution Network
Design (1 of 3)
• Distribution network performance evaluated along
two dimensions
1. Value provided to the customer
2. Cost of meeting customer needs
• Evaluate the impact on customer service and cost
for different distribution network options
• Profitability of the delivery network determined by
revenue from met customer needs and network
costs
Factors Affecting Distribution Network
Design (2 of 3)
• Elements of customer service influenced by
network structure:
– Response time
– Product variety
– Product availability
– Customer experience
– Time to market
– Order visibility
– Returnability
Factors Affecting Distribution Network
Design (3 of 3)
• Supply chain costs affected by network structure:
– Inventories
– Transportation
– Facilities
– Information
Desired Response Time and Number of
Facilities

Figure 4-1 Relationship Between Desired Response Time and Number

of Facilities
Inventory Costs and Number of Facilities

Figure 4-2 Relationship Between Number of Facilities and Inventory

Costs
Transportation Costs and Number of
Facilities

Figure 4-3 Relationship Between Number of Facilities and

Transportation Cost
Facility Costs and Number of Facilities

Figure 4-4 Relationship Between Number of Facilities and Facility

Costs
Logistics Cost, Response Time, and
Number of Facilities

Figure 4-5 Variation in Logistics Cost and Response Time with Number
of Facilities
Summary of Learning Objective 1

A manager must consider the customer needs to be

met and the cost of meeting these needs when
designing the distribution network. Some key
customer needs to be considered include response
time, product variety/availability, convenience,
order visibility, and returnability. Important costs
that managers must consider include inventory,
transportation, facilities and handling, and
information. Increasing the number of facilities
decreases the response time and transportation
cost but increases inventory and facility cost.
Design Options for a Distribution Network (1 of 2)

• Distribution network choices from the

manufacturer to the end consumer
• Two key decisions
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)?
Design Options for a Distribution Network (2 of 2)

• One of six designs may be used

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

Cross Dock-Slide 30
Omni Channel- Slide 38
Figure 4-6 Manufacturer Storage with
Direct Shipping
Manufacturer Storage with Direct
Shipping Network (1 of 2)
Table 4-1 Performance Characteristics of Manufacturer Storage with
Direct Shipping Network
Cost Factor Performance
Inventory Lower costs because of aggregation. Benefits of
aggregation are highest for low-demand, high-value
items. Benefits are large if product customization can be
postponed at the manufacturer.
Transportation Higher transportation costs because of increased
distance and disaggregate shipping.
Facilities and Lower facility costs because of aggregation. Some
handling saving on handling costs if manufacturer can manage
small shipments or ship from production line.
Information Significant investment in information infrastructure to
integrate manufacturer and retailer.
Manufacturer Storage with Direct
Shipping Network (2 of 2)
Table 4-1 [Continued]
Service Factor Performance
Response time Long response time of one to two weeks because of increased
distance and two stages for order processing. Response time
may vary by product, thus complicating receiving.
Product variety Easy to provide a high level of variety.
Product availability Easy to provide a high level of product availability because of
aggregation at manufacturer.
Customer experience Good in terms of home delivery but can suffer if order from
several manufacturers is sent as partial shipments.
Time to market Fast, with the product available as soon as the first unit is
produced.
Order visibility More difficult but also more important from a customer service
perspective.
Returnability Expensive and difficult to implement.
Figure 4-7 In-Transit Merge Network
In-Transit Merge (1 of 2)

Table 4-2 Performance Characteristics of In-Transit Merge

Cost Factor Performance

Inventory Similar to drop-shipping.
Transportation Somewhat lower transportation costs than drop-
shipping.
Facilities and handling Handling costs higher than drop-shipping at carrier;
receiving costs lower at customer.
Information Investment is somewhat higher than for drop-shipping.
In-Transit Merge (2 of 2)
Table 4-2 [Continued]

Service Factor Performance

Response time Similar to drop-shipping; may be marginally higher.
Product variety Similar to drop-shipping.
Product availability Similar to drop-shipping.
Customer Better than drop-shipping because only a single
experience delivery is received.
Time to market Similar to drop-shipping.
Order visibility Similar to drop-shipping.
Returnability Similar to drop-shipping.
Figure 4-8 Distributor Storage with Carrier
Delivery
Distributor Storage with Carrier
Delivery (1 of 2)
Table 4-3 Performance Characteristics of Distributor Storage with
Carrier Delivery

Cost Factor Performance

Inventory Higher than manufacturer storage. Difference is
not large for faster-moving items but can be large
for very slow-moving items.
Transportation Lower than manufacturer storage. Reduction is
highest for faster-moving items.
Facilities and Somewhat higher than manufacturer storage.
handling The difference can be large for very-slow-moving
items.
Information Simpler infrastructure compared to manufacturer
storage.
Distributor Storage with Carrier
Delivery (2 of 2)
Table 4-3 [Continued]

Service Factor Performance

Response time Faster than manufacturer storage.
Product variety Lower than manufacturer storage.
Product availability Higher cost to provide the same level of availability as
manufacturer storage.
Customer Better than manufacturer storage with drop-shipping.
experience
Time to market Higher than manufacturer storage.
Order visibility Easier than manufacturer storage.
Returnability Easier than manufacturer storage.
Figure 4-9 Distributor Storage with Last
Mile Delivery
Distributor Storage with Last Mile
Delivery (1 of 2)
Table 4-4 Performance Characteristics of Distributor Storage with Last-
Mile Delivery

Cost Factor Performance

Inventory Higher than distributor storage with package carrier
delivery.
Transportation Very high cost given minimal scale economies. Higher
than any other distribution option.
Facilities and handling Facility costs higher than manufacturer storage or
distributor storage with package carrier delivery, but
lower than a chain of retail stores.
Information Similar to distributor storage with package carrier
delivery.
Distributor Storage with Last Mile
Delivery (2 of 2)
Table 4-4 [Continued]

Service Factor Performance

Response time Very quick. Same day to next-day delivery.
Product variety Somewhat less than distributor storage with package carrier
delivery but larger than retail stores.
Product availability More expensive to provide availability than any other option
except retail stores.
Customer experience Very good, particularly for bulky items.
Time to market Slightly longer than distributor storage with package carrier
delivery.
Order visibility Less of an issue and easier to implement than manufacturer
storage or distributor storage with package carrier delivery.
Returnability Easier to implement than other previous options. Harder and
more expensive than a retail network.
Figure 4-10 Manufacturer or Distributor
Storage with Customer Pickup
Manufacturer or Distributor Storage with
Customer Pickup (1 of 2)
Table 4-5 Performance Characteristics of Network with Customer
Pickup Sites

Cost Factor Performance

Inventory Can match any other option, depending on the location
of inventory.
Transportation Lower than the use of package carriers, especially if
using an existing delivery network.
Facilities and handling Facility costs can be high if new facilities have to be
built. Costs are lower if existing facilities are used. The
increase in handling cost at the pickup site can be
significant.
Information Significant investment in infrastructure required.
Manufacturer or Distributor Storage with
Customer Pickup (2 of 2)
Table 4-5 [Continued]
Service Factor Performance
Response time Similar to package carrier delivery with manufacturer or
distributor storage. Same-day pickup is possible for items
stored at regional DC.
Product variety Similar to other manufacturer or distributor storage options.
Product availability Similar to other manufacturer or distributor storage options.
Customer Lower than other options because of the lack of home
experience delivery. Experience is sensitive to capability of pickup
location.
Time to market Similar to manufacturer or distributor storage options.
Order visibility Difficult but essential.
Returnability Somewhat easier, given that pickup location can handle
returns.
Figure 4-11 Retail Storage with Customer
Pickup
Retail Storage with Customer Pickup (1 of 2)
Table 4-6 Performance Characteristics of Retail Storage with Customer
Pickup Sites

Cost Factor Performance

Inventory Higher than all other options.
Transportation Lower than all other options.
Facilities and handling Higher than other options. The increase in handling
cost at the pickup site can be significant for online and
phone orders.
Information Some investment in infrastructure required for online
and phone orders.
Retail Storage with Customer Pickup (2 of 2)
Table 4-6 [Continued]

Service Factor Performance

Response time Same-day (immediate) pickup possible for items
stored locally at pickup site.
Product variety Lower than all other options.
Product availability More expensive to provide than all other options.
Customer Related to whether shopping is viewed as a positive or
experience negative experience by customer.
Time to market Highest among distribution options.
Order visibility Trivial for in-store orders. Difficult, but essential, for
online and phone orders.
Returnability Easier than other options because retail store can
provide a substitute.
Summary of Learning Objective 2

Distribution networks that ship directly to the

customer are better suited for a large variety of
high-value products that have low and uncertain
demand. These networks incur lower facility costs
and carry low levels of inventory but incur high
transportation cost and provide a slow response
time. Distribution networks that carry local
inventory are suitable for products with high
demand, especially if transportation is a large
fraction of total cost. These networks incur higher
facility and inventory cost but lower transportation
cost and provide a faster response time.
Online Sales and Omni-Channel Retailing
• Omni-channel retailing
– The use of multiple channels to interact with
customers and fulfill their orders
– Three flows
 Information
 Products
 Funds
Figure 4-12 Alternatives in Omni-Channel
Retailing
Alternatives in Omni-Channel
Retailing (1 of 3)
• Traditional Retail
– Face-to-face interaction
– Customer leaves with product
– Many facilities close to customers
– High level of inventory
– Low transportation costs
Alternatives in Omni-Channel
Retailing (2 of 3)
• Showrooms
– Face-to-face interaction
– Product ordered for later pickup
– Low level of inventory
– Smaller facilities
– More transportation and information
infrastructure than traditional retail
Alternatives in Omni-Channel
Retailing (3 of 3)
• Online Information + Home Delivery
– Aggregation of inventories
– Few locations
– High transportation costs
• Online Information + Pickup
– Reduces outbound transportation costs
– Customer must travel to pickup location
Performance of Channels (1 of 3)
• Response time to customers
– Picking up physical products faster than other
channels
– Online channel may be fastest for information
goods
• Product variety
– Easier to offer larger selection remotely
• Product availability
– Aggregating inventory improves product
availability
Performance of Channels (2 of 3)
• Customer experience
– Channels have complementarity strengths
• Faster time to market
– Online/showrooms are quicker than retailing
• Order Visibility
– Critical for showrooms or online
– Automatic in retail
Performance of Channels (3 of 3)
• Returnability
– Easier with physical locations
– Proportion of returns likely to be higher when
information exchange is remote
• Direct Sales to Customers
– Manufacturers can use remote information
exchange for direct access to customers
• Efficient Funds Transfer
– Internet and smartphones
Performance of Channels in Terms of
Cost (1 of 2)
• Inventory
– Lower inventory levels if customers will wait
– Postpone variety until after the customer order
is received
• Facilities
– Costs related to the physical facilities in a
network
– Costs associated with the operations in these
facilities
Performance of Channels in Terms of
Cost (2 of 2)
• Transportation
– Lower cost of “transporting” information goods
in digital form
– For nondigital, aggregating inventories
increases outbound transportation
• Information
– Investment higher for channels that provide
information remotely
Relative Costs for Omni-Channel
Alternatives
Table 4-9 Relative Costs for Omni-Channel Alternatives

Blank Traditional Showrooms Online Online

Retail + Home Information + Information +
Delivery Home Pickup
Delivery
Inventory High Low - Low Low - Medium
Medium
Facilities High Medium Low Low - Medium
Transportation Low High High Medium
by retailer
Transportation High High Low Medium
by customer
Information Low High High High
Framework for Omni-Channel
Retailing (1 of 4)
• Product characteristics and customer needs
influence choice of channel
• Product dimensions
– Demand uncertainty
– Value
– Information complexity
• Customer dimensions
– Willingness to pay
 Price conscious/service conscious
Framework for Omni-Channel
Retailing (2 of 4)
Table 4-10 Product Demand Uncertainty and Omni-Channel Retailing

Blank Predictable Demand Unpredictable Demand Product

Product
Traditional Retail Compete on price Compete on service for high
information complexity products
Showrooms Not suitable Compete on price and variety
for high information complexity
products
Online Information + Compete on service Compete on price and variety
Home Delivery
Online Information + Compete on ability to More competitive on price than
Pickup provide service at a lower home delivery option
price
Framework for Omni-Channel
Retailing (3 of 4)
Table 4-11 Product Value and Omni-Channel Retailing

Blank Low Value Product High Value Product

Traditional Retail Compete on price for Compete on service for products

predictable demand with uncertain demand and high
products information complexity
Showrooms Compete on high variety at Compete on price for
reasonable price for high customizable, high information
information complexity complexity products
Products
Online Information + Compete on service Compete on price and variety
Home Delivery
Online Information + Compete on ability to More competitive on price than
Pickup provide service at a home delivery option
lower price
Framework for Omni-Channel
Retailing (4 of 4)
Table 4-12 Product Information Complexity and Omni-Channel
Retailing

Blank Low Information Complexity High Information Complexity

Product Product
Traditional Compete on price for Compete on service for uncertain
Retail predictable demand products demand products
Showrooms Not suitable Compete on price for uncertain
demand products
Online Compete on price for uncertain Compete on service in terms
Information + demand products of variety and availability for
Home Delivery uncertain demand products
Online Compete on price for uncertain A slightly cheaper option to
Information + demand products compete on service in terms
Pickup of variety and availability for
uncertain demand products
Summary of Learning Objective 3
Omni-channel retailing has the potential to combine the
complementary strengths of physical stores and the
online channel. Physical stores are good at letting
customers experience high information complexity
products in person. They are also cost effective at selling
products with predictable demand. The online channel,
in contrast, is cost effective at selling products with
unpredictable demand but cannot let customers
experience high information complexity products. An
effective portfolio results if brick-and-mortar stores sell
predictable demand items, serve as showrooms for high
information complexity items with unpredictable
demand, and serve as pickup locations for the online
channel, while the online channel delivers unpredictable
demand items to the customer.