SUPPLY CHAIN MANAGEMENT

BMEE310L
MODULE 3 — FINALS STUDY GUIDE

Distribution Systems and Networks

Topics: Role of Distribution • Network Design Options • E-Business Impact • Facility Location
Models

1. Role of Distribution in the Supply Chain

Definition: The steps taken to move and store a product from the supplier stage to the customer stage
in a supply chain.

Key Points
• Distribution directly affects cost and customer experience, thereby driving profitability.
• The choice of distribution network can achieve SC objectives from low cost to high
responsiveness.

Classic Examples (Remember These for Exams!)

Company Distribution Strategy Key Benefit
Walmart High availability of common products at very Cost efficiency
low cost
Seven-Eleven Japan Very high responsiveness at a reasonable Customer responsiveness
cost
Dell (pre-2007) Direct-to-consumer shipping Customization, but slow (days)
Dell (post-2007) Added retail channel (e.g., Walmart) Wider reach, faster pickup

2. Factors Influencing Distribution Network Design

Two High-Level Dimensions

• Customer needs that are met
• Cost of meeting customer needs
Customer Service Elements (Network Structure Affects These)
Service Factor Description
Response Time How quickly the customer receives the product
Product Variety Range of products available
Product Availability Probability that product is in stock
Customer Experience Quality of the buying/receiving experience
Order Visibility Customer ability to track orders
Returnability Ease of returning products

Supply Chain Costs Affected by Network Structure

• Inventories
• Transportation
• Facilities and Handling
• Information

⚡ Exam Tip: Trade-offs with Number of Facilities

MORE facilities = lower response time, lower transportation cost, but HIGHER inventory and facility
costs. FEWER facilities = higher response time, lower inventory costs, lower facility costs, but
HIGHER transportation costs. Total logistics cost has a U-shape minimum with respect to number of
facilities.

3. Six Distribution Network Design Options

Two key decisions determine the network type:
• Will product be delivered to the customer or picked up from a pre-arranged site?
• Will product flow through an intermediary or intermediate location?

Option 1: Manufacturer Storage with Direct Shipping (Drop-Shipping)

Cost Performance
Cost Factor Performance
Inventory LOWER – benefits of aggregation; best for low-demand, high-value items
Transportation HIGHER – increased distance and disaggregate shipping
Facilities & Handling LOWER – aggregation; savings if manufacturer manages small shipments
Information HIGH investment – need to integrate manufacturer and retailer

Service Performance
Service Factor Performance
 Response Time LONG (1–2 weeks) – increased distance, two stages of order processing
Product Variety HIGH – easy to offer large variety
Product Availability HIGH – aggregation at manufacturer
Customer Experience GOOD for home delivery; can suffer if partial shipments from multiple
manufacturers
Time to Market FAST – available as soon as first unit is produced
Order Visibility DIFFICULT but important
Returnability EXPENSIVE and difficult

Option 2: In-Transit Merge (Manufacturer Storage + In-Transit Merge)

Similar to drop-shipping but carrier merges multiple manufacturer shipments before final delivery to
customer.
Factor Performance vs. Drop-Shipping
Inventory Similar
Transportation Somewhat LOWER
Facilities & Handling Higher at carrier; lower receiving cost at customer
Customer Experience BETTER – single delivery instead of multiple partial shipments
All others Similar to drop-shipping

Option 3: Distributor Storage with Carrier Delivery

Distributor/retailer holds inventory; ships via package carrier to end customer.
Factor Performance
Inventory HIGHER than manufacturer storage (especially for slow-moving items)
Transportation LOWER than manufacturer storage (best for fast-moving items)
Facilities & Handling Somewhat higher than manufacturer storage
Information SIMPLER than manufacturer storage
Response Time FASTER than manufacturer storage
Product Variety LOWER than manufacturer storage
Order Visibility EASIER than manufacturer storage
Returnability EASIER than manufacturer storage

Option 4: Distributor Storage with Last Mile Delivery

Distributor delivers directly to customers (no package carrier).
Factor Performance
Inventory HIGHER than distributor storage with carrier
Transportation VERY HIGH – minimal scale economies; highest of all options
Facilities & Handling Higher than manufacturer or distributor+carrier; lower than retail
Response Time VERY QUICK – same day to next day
 Product Variety Somewhat less than distributor+carrier; larger than retail
Customer Experience VERY GOOD, especially for bulky items
Returnability Harder/more expensive than retail network

Option 5: Manufacturer or Distributor Storage with Customer Pickup

Product stored at manufacturer or distributor; customer picks up at a designated pickup site (e.g.,
cross-dock DC).
Factor Performance
Inventory Can match any other option depending on inventory location
Transportation LOWER – especially using existing delivery network
Facilities & Handling High if new facilities built; lower with existing facilities
Information Significant investment required
Response Time Similar to carrier delivery; same-day if stored locally at site
Customer Experience LOWER – no home delivery; sensitive to pickup location quality
Order Visibility Difficult but essential
Returnability Somewhat easier – pickup location can handle returns

Option 6: Retail Storage with Customer Pickup (Traditional Retail)

Factor Performance
Inventory HIGHEST of all options
Transportation LOWEST of all options
Facilities & Handling HIGHER than other options
Response Time Immediate / same-day pickup
Product Variety LOWEST of all options
Product Availability Most EXPENSIVE to provide
Time to Market HIGHEST among distribution options
Returnability EASIEST – retail store can provide a substitute

⚡ Quick Comparison Memory Aid

Inventory: Retail > Distributor-LastMile > Distributor-Carrier > Manufacturer | Transportation: Retail <
Pickup < Distributor-Carrier < Manufacturer | Response: LastMile (same-day) < Retail (immediate) <
Distributor < Manufacturer (1-2 wks)
4. Impact of E-Business / Online Sales on Distribution

Impact on Customer Service

Factor E-Business Impact Notes
Response Time Negative for physical Takes longer than retail; no delay for digital goods
goods
Product Variety Positive Easier to offer larger selection
Product Availability Positive Aggregated inventory + better demand info
Customer Experience Positive Better access, customization, convenience
Time to Market Positive (Faster) Product goes live quickly
Order Visibility Positive Easier real-time tracking
Returnability Negative Higher proportion of returns; harder to manage
Direct Sales Positive Social media enables direct customer pitch
Flexible Pricing Positive Dynamic pricing and promotions
Funds Transfer Positive Efficient digital payments

Impact on Cost
Cost Area Impact Details
Inventory Positive (Lower) Lower levels if customers wait; postpone variety until
order received
Facilities Positive (Lower) Fewer facilities; reduced operational costs
Transportation Mixed Lower for digital goods; higher outbound for aggregated
physical inventory
Information Negative (Higher) Need to share demand/forecasting data + build
infrastructure

Case Studies: Companies Using E-Business

Dell – Computer Hardware
• Customer service: Delay in fulfilling requests (negative for physical products)
• Cost: Reduced inventory, lower facility costs, higher transportation, incremental info costs
• Strategy: Hybrid model – online + retail channels; more effective as hardware becomes
commodity

Amazon – Books
• Internet did not shorten supply chains but increased selection and convenience
• Cost: Reduced inventory, lower facility costs, higher transportation, higher info costs
• Strategy: More efficient than traditional bookstores; pressures both ends of retail

Peapod – Online Groceries

• Sells convenience and time savings; less variety; personalized experience
 • Cost: Reduced inventory, HIGHER facility costs (picking operations), significantly higher
transportation
• Strategy: Best as a complement to existing grocery chains’ strengths

Netflix – Movie Rental

• Selection + recommendation engine; streaming via multiple devices
• Customers received DVDs within 24 hours; streaming reduces transportation costs over time
• Cost: Reduced inventory, lower facility costs, higher transportation (decreasing with streaming)
5. Factors Influencing Supply Chain Network Design Decisions

Strategic Factors
• Competitive strategy drives network design
• Responsiveness-focused firms locate closer to markets
• Global complementation strategy: facilities in different countries play different roles

Technological Factors
• Mature technology with scale economies → few high-capacity centralized locations (e.g.,
computer chips)
• Low fixed-cost technology → several local facilities to reduce transportation (e.g., Coca-Cola
bottling)

Macroeconomic Factors
• Tariffs & Tax: Tariffs and tax incentives
◦ Free trade zones
◦ Local content requirements for competitiveness
• Exchange rate and demand risk – overcapacity allows firms to shift supply between markets
• Freight and fuel costs

Political Factors
• Locate in politically stable countries
• GPRI (Global Political Risk Index) used as a guide

Infrastructure Factors
• Availability of sites, labor, transport terminals, utilities, warehousing

Competitive Factors
• Positive externalities → competitors locate close to each other (e.g., stores in a mall)
• Competing on distance: firms maximize market share by locating centrally, splitting the market
• Competing on price: firms locate far apart to minimize price competition

⚡ Market Splitting Formula (Exam Likely!)

If Firm 1 at point ‘a’ and Firm 2 at point ‘1–b’ on a line: d1 = a + (1–b–a)/2 and d2 = (1+b–a)/2 Both
firms maximize market share by locating at a = b = 1/2 (i.e., the center). If competing on price: locate
at far ends (0 and 1) to split market and maximize profits.
6. Framework for Network Design Decisions (4 Phases)
Phase Name Key Activities
Phase I Define SC Number of SC stages; in-house vs. outsource; competitive strategy;
Strategy/Design forecast global competition; capital constraints; broad supply
strategy
Phase Regional Facility Forecast demand by country/region; identify economies of
II Configuration scale/scope; assess demand risk, exchange-rate risk, political risk,
tariffs, local production requirements, tax incentives, export/import
restrictions; identify competitors
Phase Select Desirable Sites Hard infrastructure: suppliers, transport, communication, utilities,
III warehousing Soft infrastructure: skilled workforce availability,
turnover rates, community receptivity
Phase Location Choices Final location selection using optimization models (gravity,
IV capacitated plant location)

7. Models for Facility Location and Capacity Allocation

Goal
Maximize overall profitability while providing customers with appropriate responsiveness. Trade-offs
between profit and cost must be considered.

Key Input Data Required

• Location of supply sources and markets
• Location of potential facility sites
• Demand forecast by market
• Facility, labor, and material costs by site
• Transportation costs between all site pairs
• Inventory costs by site and as a function of quantity
• Sale price by region
• Taxes and tariffs
• Desired response time and service requirements

Model 1: Capacitated Plant Location Model

Parameters
Variable Definition
n Number of potential plant locations/capacity options
m Number of markets or demand points
Dj Annual demand from market j
Ki Potential capacity of plant i
 fi Annualized fixed cost of keeping plant i open
cij Cost of producing + shipping one unit from plant i to market j
yi Binary: 1 if plant i is open, 0 otherwise
xij Quantity shipped from plant i to market j

Objective Function
Minimize: Σ fi·yi + ΣΣ cij·xij
Constraints
• Sum of shipments to each market j = Dj (demand satisfied)
• Sum of shipments from plant i ≤ Ki·yi (capacity respected; plant must be open)
• xij ≥ 0, yi ∈ {0,1}

Model 2: Capacitated Model with Single Sourcing

Each market is supplied by only ONE factory.
Modified Variables
• xij = 1 if market j is supplied by factory i, 0 otherwise (binary)
Objective
Minimize: Σ fi·yi + ΣΣ Dj·cij·xij
Constraints
• Sum over i of xij = 1 (exactly one source per market)
• Sum over j of Dj·xij ≤ Ki·yi (capacity)
• xij, yi ∈ {0,1}

Model 3: Gravity Location Model

Used to find the optimal continuous location for a new facility minimizing total transportation cost.
Key Variables
Variable Definition
(xn, yn) Coordinates of market or supply source n
Fn Cost of shipping one unit one mile between facility and source/market n
Dn Quantity to be shipped between facility and source/market n
(x, y) Location to be selected for the facility
dn Distance: √[(x–xn)² + (y–yn)²]

Algorithm (Iterative)
Start with an initial location (x, y) – e.g., center of gravity.
For each source/market n, calculate dn = √[(x–xn)² + (y–yn)²]
Compute new coordinates: x’ = Σ(Dn·Fn·xn/dn) / Σ(Dn·Fn/dn) and y’ = Σ(Dn·Fn·yn/dn) / Σ(Dn·Fn/dn)
If (x’, y’) ≈ (x, y), stop. Otherwise set (x, y) = (x’, y’) and repeat from step 2.
Total Transportation Cost
TC = Σ dn · Dn · Fn (summed over all sources and markets)

Model 4: Network Optimization – Demand Allocation

When factories already exist, find optimal allocation of demand to minimize cost.
Objective
Minimize: ΣΣ cij·xij
Constraints
• Sum over i of xij = Dj for all j (demand satisfied)
• Sum over j of xij = Ki for all i (capacity fully used)

Model 5: Locating Plants and Warehouses Simultaneously

Extends plant location model to include warehouse decisions in the same optimization.
Additional Variables
Variable Definition
t Number of potential warehouse locations
We Potential capacity of warehouse at site e
fe Fixed cost of locating a warehouse at site e
cie Cost of producing/shipping one unit from factory i to warehouse e
cej Cost of shipping one unit from warehouse e to customer j
Ye Binary: 1 if warehouse at site e, 0 otherwise
xej Quantity shipped from warehouse e to market j
xie Quantity shipped from factory i to warehouse e

Objective
Minimize: Σ Fi·yi + Σ fe·ye + ΣΣ chi·xhi + ΣΣ cej·xej

Accounting for Taxes, Tariffs, and Customer Requirements

Objective changes to MAXIMIZE after-tax profit:
Maximize: Σ rj·Σxij – Σ Fi·yi – ΣΣ cij·xij
where rj = revenue per unit from market j.
Constraint: Σ xij ≤ Dj (demand not exceeded; surplus if not profitable)
8. Making Network Design Decisions in Practice
• Do NOT underestimate the life span of facilities – decisions last many years
• Do NOT gloss over cultural implications of location choices
• Do NOT ignore quality-of-life issues for workforce
• Focus on tariffs and tax incentives when locating facilities
• Consider whether exclusive distribution strategy is advantageous
• Product price, commoditization, and criticality affect distribution system preference
• Integrate internet channels with existing physical network rather than replacing it

9. Quick Revision Summary – Key Takeaways

Topic What to Remember
Distribution Definition Steps to move and store product from supplier to customer
Two Evaluation Dimensions Customer needs met + Cost of meeting those needs
6 Service Factors Response Time, Variety, Availability, Experience, Order Visibility,
Returnability
4 Cost Factors Inventory, Transportation, Facilities & Handling, Information
6 Network Options Direct Ship, In-Transit Merge, Distributor+Carrier,
Distributor+LastMile, Pickup, Retail
Highest Inventory Retail Storage (Option 6)
Lowest Inventory Manufacturer Direct Shipping (Option 1)
Fastest Response Distributor with Last Mile (same day) / Retail (immediate)
Slowest Response Manufacturer Direct Shipping (1-2 weeks)
Lowest Transport Cost Retail Storage (Option 6)
Highest Transport Cost Distributor with Last Mile Delivery (Option 4)
4 Design Phases Strategy → Regional Config → Site Selection → Location Choice
Gravity Model Use Continuous facility location; iterate until convergence
Capacitated Model Use Discrete facility location; open/close binary decision
Single Sourcing xij is binary; each market served by exactly one plant
E-Business on Inventory Positive (lower levels, postpone variety)
E-Business on Transportation Negative for physical goods (higher outbound costs)

You’ve got this! Best of luck on your finals 💪

Focus on the 6 distribution options and their trade-offs, the 4-phase framework, and the model
formulas.