CHAPTER 4: DESIGNING DISTRIBUTION
NETWORKS & E-BUSINESS
Supply Chain Management — Quick Revision Notes
1. THE ROLE OF DISTRIBUTION IN THE SUPPLY CHAIN
Distribution covers all the steps taken to move and store a product from the supplier stage to the customer stage
in a supply chain. It is not just delivery — it includes storage, handling, and every step in between.
Why Distribution Matters Detail
Directly affects cost Every distribution decision — how many warehouses, which transport
mode, how much to store — changes the total cost structure of the
supply chain.
Directly affects customer Response time, product availability, and ease of returns all depend on
experience how the distribution network is designed. Poor distribution = dissatisfied
customers.
Drives profitability Since distribution affects both cost and revenue (through customer
satisfaction), it has a direct impact on the company's bottom line.
Enables strategic choice The right distribution network can achieve low cost OR high
responsiveness — but rarely both. Companies like Walmart (low cost)
and Dell (direct, responsive) use distribution as a strategic weapon.
2. FACTORS INFLUENCING DISTRIBUTION NETWORK DESIGN
All distribution network options must be evaluated along two key dimensions. Every design choice involves a
trade-off between these two:
DIMENSION 1 DIMENSION 2
Customer Needs That Are Met Cost of Meeting Customer Needs
What level of service does the network deliver? What does it cost the company to deliver that
Speed, availability, variety, convenience? service level? Inventory, transport, facilities?
💡 Core Trade-off: Higher service levels almost always cost more. The goal is to find the distribution
design that delivers the required service at the lowest possible cost.
3. SERVICE AND COST ELEMENTS AFFECTED BY NETWORK STRUCTURE
The network design affects six customer service elements and four cost elements simultaneously. Changing the
network design shifts all of these together:
Customer Service Elements Supply Chain Cost Elements
• Response Time — how quickly does the • Inventories — how much stock must be held,
customer receive their order? and where?
• Product Variety — how many different products • Transportation — how much does it cost to
Customer Service Elements Supply Chain Cost Elements
can be offered? move goods to customers?
• Product Availability — is the item in stock when • Facilities & Handling — how many
the customer wants it? warehouses/DCs are needed, and what do they
• Customer Experience — how easy and cost?
pleasant is the buying/receiving process? • Information — what IT systems are needed to
• Order Visibility — can customers track their manage order flow and visibility?
order in real time?
• Returnability — how easy is it for customers to
return unwanted items?
⚠ Key Rule: More facilities = better response time and availability (service ↑) BUT higher inventory
and facility costs (cost ↑). Fewer facilities = lower cost but slower service.
4. DESIGN OPTIONS FOR A DISTRIBUTION NETWORK ★ EXAM FOCUS
There are 6 distribution network designs. Each places storage, handling, and transportation differently. You need
to know how each works and its strengths and weaknesses.
Option 1: Manufacturer Storage with Direct Shipping
📦 How it works: Products are stored at the manufacturer's facility. When a customer places an order,
the manufacturer ships directly to the customer — bypassing any retailer or distributor warehouse.
Also called 'drop-shipping'.
✔ Advantages / Best When ✘ Disadvantages / Watch Out For
• Very low inventory cost — stock held only at • Slow response time — long distances from
manufacturer (centralised) manufacturer to customer
• High product variety and availability — the full • High transportation cost per unit — every order
catalogue is always accessible shipped individually, no consolidation
• Eliminates the need for retailer/distributor • Poor customer experience for multi-item orders
warehouses — each item may arrive separately from different
manufacturers
• Best for: slow-moving, high-value, or highly • Returnability is very difficult — customer must
customised products (e.g. luxury items, custom send back to the manufacturer
PCs)
• Low demand products benefit greatly — no • Poor order visibility — hard to track across
excess stock sitting in stores multiple manufacturer systems
Option 2: Manufacturer Storage with Direct Shipping and In-Transit Merge
📦 How it works: Similar to Option 1, but a carrier consolidates shipments from multiple manufacturers
into a single delivery for the customer. The merge happens during transit — the customer receives
one combined package, not multiple separate ones.
✔ Advantages / Best When ✘ Disadvantages / Watch Out For
• Better customer experience than pure direct • Complex to coordinate — requires sophisticated
shipping — one combined delivery IT to synchronise shipments from multiple
sources
• Still maintains low inventory (centralised at • Transportation cost still relatively high — not as
manufacturers) efficient as bulk warehouse delivery
• Reduces number of deliveries to the customer • Slower than having a local distribution centre
compared to Option 1
• Good for multi-component products where parts • Requires strong relationships with carriers to
come from different sources (e.g. Dell PCs — manage in-transit merge operations
screen + computer + keyboard)
Option 3: Distributor Storage with Carrier Delivery
📦 How it works: Inventory is held at intermediate distributor/retailer warehouses (not at the
manufacturer). When a customer orders, the warehouse picks and packs the item and ships it via a
package carrier (e.g. UPS, FedEx). The most common model for online retail.
✔ Advantages / Best When ✘ Disadvantages / Watch Out For
• Faster response time than manufacturer • Higher inventory cost than manufacturer
storage — warehouse is closer to customers storage — stock split across multiple warehouses
• Good customer experience — single shipment, • Loses some variety — not every product can be
easier returns stocked at every warehouse
• Works well for medium-to-fast moving products • Facility cost increases — need to build/lease
warehouse space
• Lower transportation cost than direct shipping • Not ideal for very slow-moving or extremely
— warehouse consolidates orders before high-variety catalogues
shipping
• Best for: moderate-variety, moderate-demand
products — the Amazon/traditional e-commerce
model
Option 4: Distributor Storage with Last Mile Delivery
📦 How it works: Similar to Option 3, but instead of using a package carrier, the distributor delivers
directly to the customer's home using its own vehicles. The distributor handles the 'last mile' of
delivery. Common in grocery and food delivery (e.g. Peapod, same-day grocery services).
✔ Advantages / Best When ✘ Disadvantages / Watch Out For
• Highest responsiveness — can offer same-day • Most expensive delivery option — own delivery
or next-day delivery fleet is very costly to operate
• Best customer experience — white-glove • Requires high local demand density to be
delivery, specific time slots, handling economically viable (works in cities, not rural
fragile/heavy items areas)
• Good for bulky or perishable products that • Higher facility cost — needs many local
package carriers cannot handle well warehouses close to customers
• Customers do not need to be home for a • High inventory cost — must stock locally to
package drop — can schedule delivery enable fast delivery
• Not suitable for low-demand or geographically
dispersed markets
Option 5: Manufacturer or Distributor Storage with Customer Pickup
📦 How it works: Inventory is stored centrally (at manufacturer or a central DC). Customers place
orders online but pick them up from designated pickup locations (stores, lockers, pickup points) rather
than having it delivered. A cross-dock DC routes goods to the right pickup site.
✔ Advantages / Best When ✘ Disadvantages / Watch Out For
• Very low transportation cost — goods move in • Poor customer experience — customers must
bulk to pickup locations, no last-mile home travel to collect, reducing convenience
delivery
• Works for customers who are comfortable • Requires significant coordination to ensure
collecting their own orders goods arrive at the right pickup point on time
• Inventory can be centralised — keeps inventory • Order visibility is critical — customers must
cost low know exactly when and where to collect
• Pickup locations can be existing stores — no • Not suitable for bulky or heavy items that
new infrastructure needed customers cannot easily transport themselves
• Good for high-volume, frequent buyers who • Returns process can still be complex depending
pass by pickup points regularly on setup
Option 6: Retail Storage with Customer Pickup
📦 How it works: The traditional retail model. Inventory is stored at the retail store itself. Customers
visit the store, select products, and take them home immediately. This is the default for brick-and-
mortar retail.
✔ Advantages / Best When ✘ Disadvantages / Watch Out For
• Fastest response time — customer gets the • Highest inventory cost — must hold stock at
product immediately, no waiting every retail location to prevent stockouts
• Best returnability — customer can return to the • Lowest product variety — only fast-moving
store easily items can justify being stocked in every store
• Good customer experience for shopping as an • High facility cost — retail space is expensive
activity (browse, touch, compare)
• No shipping cost — customer provides their • Cannot efficiently carry slow-moving or long-tail
own transportation home products
• Works best for: high-demand, low-variety • Not suitable for highly customised or low-
products that customers want immediately demand niche products
• Option 1 (Direct Shipping): Low inventory cost, slow delivery, best for high-value/rare items
• Option 2 (In-Transit Merge): Like Option 1 but combines multi-source shipments — better
experience
• Option 3 (Distributor + Carrier): The standard e-commerce model — balanced cost and speed
• Option 4 (Last Mile): Fastest, most expensive — best for groceries/perishables in dense areas
• Option 5 (Customer Pickup from central): Low transport cost, least convenient for customer
• Option 6 (Retail Pickup): Traditional stores — instant gratification but high inventory cost
5. IMPACT OF E-BUSINESS ON CUSTOMER SERVICE
E-business (selling and managing orders online) fundamentally changes what distribution networks can offer
customers. In most dimensions, e-business improves the customer experience:
Customer Service Element How E-Business Changes It
Response Time Can be slower for physical goods (requires shipping) but near-instant
for digital products. However, e-business enables faster order
processing and real-time inventory checks.
Product Variety Dramatically INCREASES — an online store has no shelf-space limit.
A website can list millions of SKUs that a physical store could never
carry (the 'long tail').
Product Availability IMPROVES — centralised inventory can be pooled across all
customers. Less stockout risk since demand is aggregated from a
wider geographic area.
Customer Experience Mixed — gains in convenience (24/7 ordering, home delivery) but loses
the tactile, browsing experience of a physical store. Returns are more
difficult.
Time to Market FASTER — new products can be listed online immediately. No need to
wait for physical stock to reach every retail location before selling.
Order Visibility IMPROVES significantly — customers can track orders in real time
from dispatch to doorstep. Automated notifications keep customers
informed.
Returnability More DIFFICULT — customers must repackage and ship items back,
which is less convenient than walking into a store. A key weakness of
e-commerce.
Direct Sales to Customers E-business allows manufacturers to bypass intermediaries
(retailers/distributors) and sell directly — increasing margins and
gaining direct customer data.
Flexible Pricing & Prices can be changed instantly online. Dynamic pricing, flash sales,
Promotions and personalised promotions become possible in real time.
Efficient Funds Transfer Payments are processed electronically — faster, cheaper, and more
secure than cash or cheque. Enables global transactions instantly.
6. IMPACT OF E-BUSINESS ON COST
E-business reshapes the cost structure of distribution. Some costs fall dramatically; others increase or shift:
Cost Element How E-Business Changes It
Inventory Cost Can DECREASE — centralising inventory at fewer DCs (rather than
spreading across many stores) reduces total safety stock needed
through demand pooling. However, faster delivery expectations can
push costs back up.
Facilities Cost DECREASES for retail space — no need for expensive high-street
stores. But INCREASES for distribution centres and fulfilment
warehouses, which must now handle individual orders rather than bulk
pallet shipments to stores.
Transportation Cost Often INCREASES — home delivery (last mile) is more expensive per
unit than bulk shipments to stores. Customers ordering small quantities
means less efficient vehicle utilisation.
Information Cost Initially INCREASES — significant IT investment needed (website,
order management systems, tracking, integration). But over time this
Cost Element How E-Business Changes It
enables efficiencies that reduce other costs significantly.
• E-business IMPROVES: product variety, availability, order visibility, time to market, pricing flexibility
• E-business WEAKENS: returnability, customer experience (no touch/feel), response time for
physical goods
• Inventory cost: falls if centralised well; rises if fast delivery is required everywhere
• Transportation cost typically RISES due to expensive last-mile home delivery
• Facilities cost shifts from retail stores → fulfilment warehouses
• Information cost is high upfront but enables long-term operational savings
7. GLOBAL SOURCING LOCATION STRATEGIES
When deciding where to source or manufacture products, companies choose from four main strategies — each
representing a different trade-off between cost, speed, risk, and geopolitics.
1. OFFSHORING
Definition: Moving production or sourcing to a distant foreign country — primarily to take advantage
of significantly lower labour or production costs.
Key Driver: Cost reduction. Savings from cheap labour/materials outweigh the added costs of long
shipping distances and supply chain complexity.
Trade-offs: Lowest cost ✔ | Longest lead times ✘ | High supply chain risk ✘ | Less quality control
✘
Examples:
• Apple manufactures iPhones in China — labour costs are a fraction of US rates, enabling mass
production at low cost.
• Nike produces most of its footwear in Vietnam and Indonesia — skilled labour at very low wages.
• Many US companies offshore IT services and call centres to India for significant cost savings.
2. NEARSHORING
Definition: Moving production or sourcing to a nearby or neighbouring country — geographically
close to the home market — rather than to a distant low-cost country.
Key Driver: Balance between cost savings and responsiveness. Proximity reduces lead times,
shipping costs, and time zone friction, while still accessing lower-cost labour than at home.
Trade-offs: Faster delivery ✔ | Easier to manage ✔ | Less cultural/language gap ✔ | Higher cost
than far-offshoring ✘
Examples:
• US companies manufacturing in Mexico — close proximity, shared time zones, and USMCA trade
benefits.
• Western European companies sourcing from Poland, Romania, or Türkiye — close enough for quick
deliveries, lower wages than Germany or France.
• UK firms moving call centre operations to South Africa or Eastern Europe instead of India — closer
time zone, easier communication.
3. FRIENDSHORING (also called Ally-shoring)
Definition: Sourcing from or relocating production to politically allied or trusted countries — prioritising
geopolitical safety and supply chain security over pure cost.
Key Driver: Risk reduction. In an era of geopolitical tensions (e.g. US-China trade war), companies
want to avoid relying on suppliers in countries that could impose sanctions, restrict exports, or become
hostile.
Trade-offs: Reduced geopolitical risk ✔ | More stable supply chain ✔ | Often more expensive ✘ |
Limits supplier options ✘
Examples:
• The US CHIPS Act (2022) incentivises semiconductor manufacturing in allied countries (e.g. TSMC
building plants in Arizona, Intel expanding in Europe) to reduce reliance on China.
• EU companies shifting rare earth mineral sourcing from China to Canada, Australia, or Norway —
politically stable allies.
• US defence contractors required to source components only from NATO-allied countries to avoid
security vulnerabilities.
4. RESHORING (also called Onshoring or Backshoring)
Definition: Bringing production and sourcing back to the company's home country after it had
previously been offshored. Essentially the reversal of offshoring.
Key Driver: A combination of factors making domestic production attractive again: rising overseas
wages, supply chain disruptions (e.g. COVID-19), high shipping costs, quality issues, automation
reducing labour cost advantage, and government incentives.
Trade-offs: Full supply chain control ✔ | Faster response to demand ✔ | Reduced geopolitical risk
✔ | Much higher production cost ✘ | Requires rebuilding domestic capacity ✘
Examples:
• Apple announced plans to produce some Mac Pros in the USA, and Intel is building new
semiconductor fabs in Ohio and Arizona — returning manufacturing to American soil.
• Many European companies reshored production of PPE (masks, ventilators) after COVID-19
revealed the danger of relying entirely on Chinese supply chains.
• Dyson moved some R&D and production back to the UK; Walmart committed to sourcing more US-
manufactured goods to reduce import dependency.
Quick Comparison
Strategy Where You Go Main Driver Cost Risk Level
Offshoring Distant foreign country Lowest cost Lowest $$ High (distance,
(e.g. China, India) disruption)
Nearshoring Neighbouring country Cost + speed Medium $$ Medium
(e.g. Mexico for US) balance
Friendshoring Allied/trusted country Geopolitical Medium-High $ Low (political
safety $ risk)
Reshoring Back to home country Control + Highest $$$ Lowest
resilience