Designing the Distribution Network in a Supply Chain
Kellogg School of Management, Northwestern University
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This paper describes a framework for designing the distribution network in a supply chain. Various factors influencing the choice of distribution network are described. We then discuss different choices of distribution networks and their relative strengths and weaknesses. The paper concludes by identifying distribution networks that are best suited for a variety of customer and product characteristics.
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.
Dell distributes its PCs directly to end consumers, while companies like Hewlett Packard and Compaq distribute through resellers . Dell customers wait several days to get a PC while customers can walk away with an HP or Compaq PC from a reseller. Gateway opened Gateway Country stores where customers could check out the products and have sales people help them configure a PC that suited their needs. Gateway, however, chose to sell no products at the stores, with all PCs shipped directly 1
from the factory to the customer. In 2001, Gateway closed several of these stores given their poor financial performance. Apple Computers is planning to open retail stores where computers will be sold . These PC companies have chosen three different distribution models. How can we evaluate this wide range of distribution choices? Which ones serve the companies and their customers better?
W.W. Grainger, an MRO distributor, stocks about 100,000 skus that can be sent to customers within a day of the order being placed. The remaining slower moving products are not stocked but shipped directly from the manufacturer when a customer places an order. It takes several days for the customer to receive the product in this case. Are these distribution choices appropriate? How can they be justified? When should a distribution network include an additional stage such as a distributor? Proponents of e-business had predicted the death of intermediaries like distributors. Why were they proved wrong in many industries?
In this paper we provide a framework and identify key dimensions along which to evaluate the performance of any distribution network.
1. Factors Influencing Distribution Network Design
At the highest level, performance of a distribution network should be evaluated along two dimensions: 1. Customer needs that are met
2. Cost of meeting customer needs
The customer needs that are met influence the company's revenues, which along with cost decide the profitability of the delivery network.
While customer service consists of many components, we will focus on those measures that are influenced by the structure of the distribution network. These include: •
Response time is the time between when a customer places an order and receives delivery. Product 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. Order visibility is the ability of the customer...
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