DISTRIBUTION

IN SUPPLY CHAIN

DISTRIBUTION
IN SUPPLY CHAIN
Learning Objectives
Completion of this lecture helps you to understand:
● Overview of distribution and its roles in supply chain
● Types of distribution networks and their members
● Key factors in designing a distribution network
● Omni-channel distribution and retail

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1. Overview about distribution

● Logistics = Supply and Materials management + Distribution

= Physical and information flow and storage from raw material to the
final distribution of the finished products

Logistics

Supply and material Distribution:

management - Storage and flow from manufacturers to
- Storage and flow into and through the customers
the production process - Reverse logistics

2. Role of distribution in SC
● Distribution is a key driver of the overall profitability because it
directly affects both the SC cost and the customer value
● In apparel industry: Distribution cost = 35% of the revenue
● 7-eleven, Walmart success: High availability level of common
products at a very low cost
● Dell, Gateway changed the distribution channel to improve their
SC performance
● Business case of effective distribution network design
Pepsico: Optimise Distribution centers with Omniverse
https://www.youtube.com/watch?v=MXJIEB6CVtE

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 3. Distribution channels and distribution network

● A distribution channel comprises a set of institutions which perform

all of the activities utilized to move a products from production to
consumption
● Channel members add value to a product by performing certain
channel activities: marketing, Packaging, Financing, Storage,
Delivery, Merchandising, Personal selling
● Intermediaries provide value to producers as they are expertise in
displaying, merchandising, and providing convenient shopping
locations and hours for customers.
=> Adding value through distribution = logistics

3.1. Decisions on distribution channel

- A distribution channel is a chain of businesses or intermediaries

through which a good or service passes until it reaches the final buyer
or the end consumer. Distribution channels can
include wholesalers, retailers, distributors, agents, brokers and even
the Internet (E-commerce)
Business Case: Lazada case of E-commerce distribution in Indonesia:
https://www.youtube.com/watch?v=8a39HnSs6y8
- 3 Dimensions of channel design
+ Types of distribution network: Direct – via intermediaries?
+ Types of intermediaries involved
+ Distribution Intensity: Exclusive, Selective, Intensive distribution 6
3.2. Decision on types of distribution network
2 dimensions of a distribution network:

Value provide to the customers: Cost of meeting customer needs

- Time: Response time, time to - Inventory
market - Transportation
- Product: variety + availability - Facilities and handling
- Order visibility - Information
- Customer experience
- Returnability

Relationship between number of facilities and other factors

Inventory costs

Facility costs

Response time

Transportation cost

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Variation in logistics costs and response time with number of
facilities
Response time

Total logistics costs

Number of facilities

The distribution network

Two key high-level distribution decisions that a manager must
make are:
- Whether the product will be picked up: on-site or delivered
to the customer.
- Whether or not the product will flow through an
intermediary.

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Case study
Food Freeze plc (FF) is a UK based frozen food manufacturer/packer and has a
major share of the European frozen food market dealing with all major and minor
retailers and wholesalers.
Whilst new product development is an important part of its business, it is
relatively stabilized with around a constant of 500 SKU’s at any one time.
I has 03 factories based in the East Anglia/Lincolnshire agricultural producing
areas with another factory based in the Northwest in a former re-development
area.
● Distribution: The following flows of goods and materials are involved:
- Raw materials (such as packaging and ingredients) into the factories
- Finished goods from the factories to customers (either as full trailer pallet
loads or as single pallets of one SKU).
- FF deliver to customers on average 120,000 pallets per month but as a
result of seasonality, the range is from a low of 90,000 to a high of 180,000
pallets per month.
● Problems: Delivering direct from different factories to the same major
retailers forced an examination of the physical distribution network.
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3.3. Major types of basic distribution network

designs
● Type of distribution network
- Manufacturer storage with direct shipping
- Manufacturer storage with direct shipping and in-transit merge
- Distributor storage with carrier delivery
- Distributor storage with last-mile delivery
- Manufacturer/distributor storage with customer pickup
- Retail storage with customer pickup
● Each of these types of distribution network designs have different
impacts on logistics service and cost factors.

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Manuf acturer storage with direct shipping
● The customer places an order with the retailer, who passes the information along to
the manufacturer. The manufacturer ships the product directly to the customer (drop
shipping)
● Inventory is centralized at the manufacturer warehouses with high level of availability and
low cost;
● Outbound transportation distance is large, thus transportation cost is high
● Requires a good information infrastructure between the retailers and the manufacturer,
such that the retailer can provide product availability information to the customer.
● Response times tends to be long when drop-shipping is used.

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Manuf acturer storage with direct shipping & in-transit merge

● In-transit merge combines pieces of the order coming from different locations so that the
customer gets a single delivery.
● There are ability to aggregate inventories and postpone product customization.
● Transportation costs decrease thank to in transit merge
● Requires sophisticated information infrastructure and an increase in coordination
to allow in-transit merge;
● Response times, product variety, availability, and time to market are similar to drop-
shipping.

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Distributor storage with carrier delivery
● Inventory is held at distributors/retailers in intermediate warehouses closed to the
customer.
● Package carriers transport products from the warehouse to the customer.
● Transportation costs are lower because of economic mode of transportation
(e.g. FTL) for inbound shipping to the warehouses
● Facility costs of warehousing are higher because of a loss of aggregation.
● Required less complex information infrastructure.
● Response times are shorter as distributor warehouses are closer to customers.
● This configuration is well suited for slow-to-fast-moving items.

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Distributor storage with last-mile delivery
● The distributor/retailer delivering the product to the customer’s home instead of
using a package carrier.
● Requires a higher level of inventory than the other options (except for retail
stores) because of its lower level of aggregation.
● Among all distribution networks, transportation costs are the highest for last-
mile delivery, especially when delivering to individuals.
● The information infrastructure is similar to that for distributor storage with package
carrier delivery.
● Response times are faster than using package carriers.

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Manufacturer / distributor storage with customer pickup

● Inventory is located at the manufacturer or distributor warehouse;

● Customers place orders with the retailer (e.g. online or on the phone) and then go to
pickup sites to get the product. Orders are shipped from the storage sites to the
pickup sites as needed.
● Inventory costs can be low if aggregation is exploited. However, facility costs are
high, if new pickup sites have to be built.
● A significant information infrastructure is needed to provide visibility of the order until
the customer picks it up

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Retailer storage with customer pickup
● Inventory is stored at retail stores
● Customers walk in, place an order and leave with the goods in hand.
● Inventory and facilities costs are high
● There is inexpensive modes of transport on inbound logistics and no outbound
logistics => Transportation cost is much lower …
● Minimal information infrastructure is needed if customers just walk-in and place
their orders.
● Response times are short.

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Comparative Perf ormance Rank of Delivery Network Designs

Distributor
Manufacturer Manufacturer Distributor Manufacturer/
Retail Storage Storage with
Storage Storage with storage with Distributor Storage
Factors with Customer Package
with Direct In-Transit Last-Mile with Customer
Pickup Carrier
Shipping Merge Delivery Pickup
Delivery
Response time 1 4 4 3 2 4
Product variety 4 1 1 2 3 1
Product 4 1 1 2 3 1
availability
Customer Varies From 1 4 3 2 1 5
experience to 5
Time to market 4 1 1 2 3 1
Order visibility 1 5 4 3 2 6
Returnability 1 5 5 4 3 2
Inventory 4 1 1 2 3 1
Transportation 1 4 3 2 5 1
Facility and 6 1 2 3 4 5
handling
Information 1 4 4 3 2 5 24
Performance of delivery network for different customers and products characteristics
Distributor Manufacturer/
Retail Manufacturer Manufacturer Distributor
Storage with Distributor
Storage with Storage Storage with Storage with
Factors Package Storage with
Customer with Direct In-Transit Last-Mile
Carrier Customer
Pickup Shipping Merge Delivery
Delivery Pickup
High-demand
+2 -2 -1 0 +1 -1
product
Medium-demand
+1 -1 0 +1 0 0
product
Low-demand
-1 +1 0 +1 -1 +1
product
Very-low-demand
-2 +2 +1 0 -2 +1
product

High product value -1 +2 +1 +1 0 +2

Quick desired
+2 -2 -2 -1 +1 -2
response

High product variety -1 +2 0 +1 0 +2

Low customer effort -2 +1 +2 +2 +2 -1

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Types of intermediates
Intermediates Characteristics

- Do not require the accumulation of a large number of goods in

warehouses, but have a limited amount of target markets.
Direct sale
- Manufacturers organize after-sales support of goods, which
requires additional resources and investments
Legal entities acting on behalf and at the expense of the principal
Agent
and receiving remuneration for their services.
The intermediaries establishing links between legal entities
Brokers interested in distribution products. Their remuneration is calculated
as a percentage of sales.
Dealers: purchase products and resale at on their own behalf and at
Wholesalers
their own expense.
Distributors: distribute product on behalf of the manufacturer at their
own expense. They don’t own the products and they earn the
Wholesalers/ different of prices
Retailers Commissioners act on their own behalf, but at the expense of the
manufacturer.
- Ownership of the goods goes to the final consumer after payment
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 Distributor vs wholesaler
● Distributors ● Wholesalers
- Work closely to manufactures - The wholesaler gets discounts for buying
- Can provide logistical and storage large quantities of goods from
support for manufacturers distributors/manufactures and resell to
- Act as sales representatives for retailers in bulk quantities for lower price
the producer that actively look out - The wholesalers’ primary goal is to

for orders from various sources in satisfy the needs of the retailers. Thus,
the market, execute the orders they will adjust their products to whatever
and also manage returns the retailers need.
- Distributor is actively involved in - They are not responsible for having the

promoting a company’s products products sold to the customers or

whether the retailers would sell them all.

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Agent vs Broker

● Agent ● Broker
- An agent is an intermediary acting - Brokers are mediators between
on behalf of a principal and the buyer and the seller while
authorized to make agreements assisting in negotiation.
between customers and those - Brokers receive a payment in the
principals form of a commission
- Agents receive a payment in form
of a commission
- Captive agents: Work for the
specific principles
- Independent Agents: Work for
different principles

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Tasks of Intermediaries

● Wholesalers/Distributors: Break down bulk, Buy/receive from

producers and sell/ship small quantities to retailers, Provide
storage facilities, Reduces contact cost between producer and
consumer, take some of the marketing responsibility e.g sales
force, promotions
● Retailers: Hold a variety of products, Offer consumers credit,
Promote and merchandise products, Price the final product, Build
retailer brand in the high street
● Internet: Sell to a geographically disperse market, Able to target
and focus on specific segments, Relatively low set-up costs, Use
of e-commerce technology (for payment, shopping software, etc)
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Distribution Intensity
Number of
Intensity
Objective and products intermediaries/
level
location
- Achieve mass market selling No cap on stores
Intensive - Mass customers or locations
- Convenience, FMCG goods
- Work with selected intermediaries Specific locations
Selective - Target customer and limited
- Some specialty goods number of stores
- Work with single intermediary; Limited outlets
- Target customer and locations
Exclusive - High-end and exclusive brands,
specialty goods, industrial
equipment… 30
4. Omnichannel distribution

● It’s a distribution strategy where retail, wholesale and ecommerce

channels merge together, allowing retailers to offer their products
across multiple integrated channels
● The inventory management system focuses on both physical and
online stores as centralized inventory
● A sophisticated warehouse management system provides real time
inventory visibility and order visibility
● Omni channel distribution provides flexible order placement, pick-
up and delivery options to the customers.
● Example of Omni-channel: Best Buy’s Omnichannel distribution
https://www.youtube.com/watch?v=dXvTywAswXI

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4.1. Alternative in omnichannel retail

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4.2. Customer service perf ormance

● Response time: very quick and convenient for customers can

choose home delivery or pick up (1 – 2 hours delivery)
● Product variety
● Product availability
● Customer experience depends on
+ What customer values more: Time or real shopping experience
+ Products (High value/fashion or FMCG….)
+ Internet infrastructure, apps, ….
● Time to market
● Order visibility
● Returnability

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Product demand uncertainty and omni-channel retailing

Predictable demand Unpredictable demand

Channel
product products
Compete on service for high
Traditional retail Compete on price information complexity
products
Compete on price and variety
Showroom Not suitable for high information
complexity products
Online information +
Compete on service Compete on price and variety
home delivery
Compete on ability to
Online information + More competitive on price that
provide service at a
pickup home delivery option
lower price
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4.3. Decision on channel
● Traditional retail:
- It is ideally suited for predictable demand products at a low
price (ex: Instant noodles, detergent)
- More price competitive for products that have relatively high
shipping cost compered to their value (volume weight product)
- For unpredictable products (eg fashion apparel)
+ it can best compete if customers are willing to pay a premium
for the in-store service and the ability to try products
+ It can be price competitive if the rate of product return for the
online channel is high

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● Showrooms
- It’s ideally suited to compete on price for products with high
information complexity, unpredictable demand and high value
- Pooled inventory at warehouse decrease logistics cost
● Online information + Home delivery
- It’s ideally suited to compete on price for products with
unpredictable demand and low information complexity
- It’s more price competitive if the shipping cost is low compared
to its value;
- For predictable demand (FMCG, detergent…) it can compete
for customers who value time more than home shipping costs

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 ● Online information + Pickup
- It’s ideally complement to the home delivery channel
because of lower delivery cost;
- It’s more price competitive than home delivery for products
with unpredictable demand and low information complexity
and predictable demand products

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Product value and omni-channel retailing

Channel Low value product High value products

Compete on service for
Compete on price for
product with uncertain
Traditional retail predictable demand
demand and high information
products
complexity products
Compete on high
Compete on price for
variety at reasonable
customizable, high
Showroom price for high
information complexity
information complexity
products
products
Online information +
Compete on service Compete on price and variety
home delivery
Compete on ability to
Online information + More competitive on price that
provide service at a
pickup home delivery option
lower price 40
 Product Information complexity and omni-channel retailing

Low information High information

Channel
complexity products complexity products
Compete on price for
Compete on service for
Traditional retail predictable demand
uncertain demand products
products
Compete on price for uncertain
Showroom Not suitable
demand products
Compete on price for Compete on service in terms of
Online information
uncertain demand variety and availability for
+ home delivery
products uncertain demand products
Slightly cheaper option to
Compete on price for
Online information compete on service in terms of
uncertain demand
+ pickup variety and availability for
products
uncertain demand products 41

The choices of omni channel products

Traditional Online information + Online information +
Products Showroom
retail home delivery pickup
Instant noodles
Cosmetics
The piano/Guitar

Dining table

Groceries, FMCG

Flowers/Plants

Television

Toys

Washing machine

Laptop

Bed sheets

Fashion suites, dress 42

Discussion question
1. What differences in the retail environment may justify the fact that the fast-moving
consumer goods supply chain in India has far more distributors than it has in the US?
2. A specialty chemical company is considering expanding its operations into Brazil,
where five companies dominate the consumption of specialty chemicals. What sort of
distribution network should this company use?
3. A distributor has heard that one of the major manufacturers from which it buys is
considering going direct to the consumer. What can the distributor do about this?
What advantages can it offer the manufacturer that the manufacturer is unlikely to be
able to reproduce?
4. What types of distribution networks are typically best suited for commodity items?
5. What type of network is best suited to highly differentiated products?
6. In the future, do you see the value added by distributors decreasing, increasing, or
staying about the same?
7. Is the online channel likely to be more beneficial in the early part or the mature part
of a product’s life cycle? Why?
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8. Why has the online channel been more successful in the computer hardware
industry compared with the grocery industry? In the future, how valuable is the
online channel likely to be in the computer hardware industry?
9. Consider the sale of home improvement products at Home Depot or a chain of
hardware stores such as True Value. Which can extract the greater benefit from
adding the online channel? Why?
10. Amazon sells books, music, electronics, software, toys, and home improvement
products online. In which product category does going online offer the greatest
advantage compared with a retail store chain? In which product category does
the online channel offer the smallest advantage (or a potential cost disadvantage)
compared with a retail store chain? Why?
11. Why should an online seller such as Amazon build more warehouses as its sales
volume grows?
12. Amazon has opened bookstores and announced the opening of convenience
stores. How can these traditional retail channels allow Amazon to complement its
online channel effectively?
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T hank Y ou

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