Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

3.1.2 Centralized Distribution Versus Decentralized Distribution

Intended learning outcomes: Differentiate between centralized distribution and decentralized distribution. Present features such as demand variety, need for efficient returns, and degree of customer involvement in picking up.

In a first approach and in analogy to production networks, it is possible to distinguish two fundamental types of distribution networks for delivery of a customer’s order.

In centralized distribution a customer order for a given product is fulfilled directly from the production plant or from one or a few of the manu­facturer’s central warehouses.
In decentralized distribution, the given product is stored in several decentralized warehouses or with (often independent) distributors, from where the customer order is fulfilled.

The advantages of centralized distribution, from a central ware­house or the manufacturing plant to the customer, are obvious: a bigger selection of products (which, in part, can also be made per customer order, that is, “assem­ble-to-order,” “make-to-order,” or even “engineer-to-order”), a gre­ater availability, and lower total costs for inventories, plants, and handling.

The advantages of decentralized distribution are also easy to see: shorter delivery lead times and a more efficient possibility for product returns (e.g., at the retailer’s site). Besides this, transport costs are somewhat lower: first, the decentralized warehouse, which is located nearer to the customer, can be served at lower cost, e.g., using large transport units and (full) truck­loads ((F)TL); second, a customer order comprising multiple articles can be bundled into a single delivery at the decentralized warehouse. Finally, order tracking is only needed between the decentralized warehouse and the customer; if the order is raised directly in the store, tracking may even prove unnecessary. Combined with the necessary exchange of information between the manufacturer and the decentralized warehouses, the total cost for information systems is generally lower than the costs of real-time order tracking between the manufacturer and customer.

The following features for designing distribution networks have proved to be important:

  • Demand volatility, as defined in Section 3.1.1
  • Demand variety: High demand variety means that customers demand many different products. For these products the demand volatility is mostly high as well.
  • Value density, as defined in Section 3.1.1
  • Customer tolerance time, as defined in Section 1.1.6. In global distribution, delivery lead time also includes the time for customs procedures, which can disadvantage centralized distribution.

These features are highly correlated: In general, centralized distribu­tion is advantageous for products with high value density, high demand variety and volatility, and for high customer tolerance time. If the values are the opposite, decentralized delivery will be advantageous.

Two further features for the design of distribution networks, which are not correlated with the above features, however, are:

  • Need for efficient returns via the same network: Is it important that the customer be able to return goods efficiently through the same distribution network and that the network be able to handle these returns efficiently (keyword: reverse logistics)?
  • Degree of customer involvement in picking up: To what extent are customers willing and able to picking up the product themselves?

For cases where the need for an efficient product-returns process using the same distribution network is key, and for customers both willing and able to pick up the product them­selves, various designs of decentralized distribution are advantageous.

As in the case of production networks, the two groups of features often stand in opposition to one another. There are examples of this:

  • The distribution of many rather cheap items, like heavy or bulky items (e.g., bevera­ges), fresh produce (e.g., flowers), express delivery items (e.g., medicaments) or fast moving items to the point of use in companies (e.g., C items like screws, nuts, bolts, etc.): low value density (in favor of decentralized distribution), however, rather low degree of customer involvement in picking up (in favor of centralized distribution)
  • The distribution of vehicles or on-line orders: high demand variety or demand volatility (in favor of centralized distribution), however, some degree of customer involvement in picking up, as long as the pickup site is close enough (in favor of decentralized distribution)

Again a firm must make a strategic decision, which at times differs for each product family. In addition, if a company delivers to different customer segments, it will at the same time have to use different routes or channels for distribution. The channels or distribution centers need not necessarily be owned by the manufacturer. An additional required channel usual­ly entails extra costs. In addition, existing channels may change over time. For example, postal services may expand the offering of their mail rooms to become local shops, while shopping points may also offer a reduced set of services traditionally provided by a postal service.

Continuation in next subsection (3.1.2b).

Course section 3.1: Subsections and their intended learning outcomes

  • 3.1.2b Design Options for Global Distribution Networks

    Intended learning outcomes: Explain design options for global distribution networks. Describe some company cases.

  • 3.1.3 Network Structure for Decentralized Distribution

    Intended learning outcomes: Disclose the distribution network structure and describe decision variables in its design. Present features such as available time for shopping, and simultaneously, capacity of an available means of transport of the customer, as well as the required geographical catchment area.

  • 3.1.3b Design Options for Retail Networks

    Intended learning outcomes: For decentralized distribution, explain the portfolio for designing retail networks retail networks.

  • 3.1.4 Centralized Service Versus Decentralized Service

    Intended learning outcomes: Differentiate between centralized service and decentralized service. Present features such as the mobility cost ratio of the service, the degree of customer involvement in bringing and picking up the service object, as well as the need for repeated transfer of the service object.