Factors Influencing Distribution Network Design

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. There are companies that follow direct marketing to provide customer specific needs. Whereas, there are others which own outlets where customers can see the product physically and can buy the product without waiting for shipment. There are different distribution models. A wide range of distribution choices needs to be evaluated. One will choose only the one which serves the company and its customers better. There are instances when different modes are used for different type of products of the same provider. It takes several days for the customer to receive the product in the latter case. One needs to ensure if these network choices are justified and appropriate. The channel of distribution has to be decided keeping in mind the cost and time factors.

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: Response time is the total time between when a customer places an order and receives delivery.
• Product variety: Product variety is the number of different products / configurations that a customer desires from the distribution network.
• Product availability: Availability is the probability of having a product in stock when a customer order arrives.
• Customer experience: Customer experience includes the ease with which the customer can place and receive their order.
• Order visibility: Order visibility is the ability of the customer to track their order from placement to delivery.
• Returnability: Returnability is the ease with which a customer can return unsatisfactory merchandise and the ability of the network to handle such returns.

In other words, this can be said that the customer always want the highest level of performance in all the above parameters. Practically, this might not always be the case. Customers ordering a Dell laptop are willing to wait longer for their customized product than against any other option of buying whichever model is available in store. Customers have a better choice in the latter case.

Firms that target customers who can tolerate a large response time require few locations that may be far from the customer and can focus on increasing the capacity of each location. On the other hand, firms that target customers who value short response times need to locate close to them. These firms must have many facilities, with each location having a low capacity. Thus, a decrease in the response time of customers’ desire increases the number of facilities required in the network.