Tuesday, February 11, 2014

Designing the Distribution Network

Distribution refers to the steps taken to move and store a product from the supplier stage to a customer 
stage in the supply chain.There are many decisions to be made while designing an appropriate distribution network. For example, how many facilities should I have and how far they should be located from customers. There should be a right balance between meeting customer needs (as it generates revenue) and total logistics costs that includes inventory, transportation, and facility costs.

While designing a distribution network, following factors that measure customer service should be considered :
• Response time 
• Product variety 
• Product availability 
• Customer experience 
• Order visibility 
• Returnability

Response Time - If you are running a business where response time is crucial for customer satisfaction, it is better to have many facilities located near customer locations. For example, Borders provides its customers with books on the same day but requires about 400 stores to achieve this goal for most of the United States. Amazon, on the other hand, takes about a week to deliver a book to its customers, but only uses about 5 locations to store its books. In case of Amazon, customers are willing to wait as they get the choice to select from a wide variety of products.

But, there is downside to increased number of facilities -- the costs increase too.
Managers have to increase facilities only till the point where increase in revenues because of better responsiveness is greater than the increase in costs because of the additional facilities.

Product variety - If you have a huge product variety where different products are manufactured at different locations, shipping products from manufacturing locations to customer locations is most appropriate. For example, W.W. Grainger is able to offer hundreds of thousands of slow moving items from  
 9 thousands of manufacturers using drop shipping. This would be impossible if each product had to be 
stored by Grainger. However, if the diverse products are shipped from same location, you could use the normal approach of having several facilities near customer location.

Product availability - Product availability is important to customers but it also involves cost in the form of inventory to keep high availability. So it is desirable to aggregate demand at the manufacturing site rather than storing products at inventories located near customer location. This lowers the inventory and hence the cost. The benefits from centralization are highest for high value, low volume items with unpredictable demand. The decision of Nordstrom to drop-ship low volume shoes satisfies these criteria. Similarly, bags sold by eBags tend to have high value and low relatively volume per sku. The inventory benefits of aggregation are small for items with predictable demand and low value. Thus, drop shipping would not offer a significant inventory advantage to an online grocer selling a staple item like detergent.

Customer experience - Shipping directly from manufacturing industry provides a good customer experience in the form of delivery to the customer location. The experience, however, suffers when a single order containing products from several manufacturers is delivered in partial shipments.

Order visibility - Order tracking becomes difficult when both manufacturing and retails are involved because it requires complete integration of information systems at both the retailer as well as the manufacturer. However, for direct sellers such as Dell, order visibility is simpler to provide.

Returnability - Returnability is the ease with which a customer can return a damaged product. However it involves cost too. Returnability is worst when a damaged good has to be returned to the manufacturing site from where it was originally shipped. So, direct pick up from customer location by the delivery vehicle or return at the retail store are the most suitable approaches.

On the basis of above discussion, can you design a supply chain  network for a manufacturing industry where response time and returnability are major components of customer service?

Reference - http://www.kellogg.northwestern.edu/faculty/chopra/htm/research/deliverynetwork.pdf

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