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

3.1.2b Design Options for Global Distribution Networks

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

Continuation from previous subsection (3.1.2)

Based on an idea in [Chop03], the portfolio in Figure shows, in addition to the two classical designs (centralized or decentralized distribution), two possible mixed designs. The four possible designs lie in four sectors in a two-dimensional space, spanned by the dimensions that correspond to the two (conflicting) groups of features.

Fig.        Features of and design options for distribution networks.

Sector D1 describes centralized storage near the producer or — in the case of make-to-order — delivery directly from production, with direct shipping to the customer or his unloading point. This design option is advantageous for products with high value density and high demand volatility. With this characteristic, customers are mostly willing to tolerate some time to delivery due to the generally long transport routes. This design makes possible a large selection of products, high fill rate and relatively low costs for inventory, installation, and handling. However, transport costs are rather high, as are costs for possible returns, and there are high costs for information systems for transmitting orders from the point of sale and for order tracking during shipments. This is the classic design for distribution of investment goods (such as machines), as well as for drop shipping (i.e., direct delivery from the manufacturer to the customer of the order entering party, e.g., a wholesaler, or a spare-parts or online retailer. Here, the order entering party can avoid its carrying cost but must factor in the cost of integrating its information system with that of the manufacturer and is also unable to monitor the quality of the delivered product).

The opposite sector D4 describes decentralized storage at a retailer with customer pickup. This design option is suitable if customers are able and willing to pick up the desired products, as well as products from different manu­fac­turers. It generally offers a great amount of flexibility in terms of time for this. Beforehand, customers must also do the order pick-up themselves. This design option is transparent and requires rather simple information systems for tracking orders and delivery, and it also allows returns of products or packaging material. However, as stressed in the figure, it requires an adequate retail network. Here see Section 3.1.3, particularly Figure and the respective examples.

The intermediate sector D2 describes decentralized storage in the distribu­tion center of a wholesaler or retailer with shipping to the customer or his unloading point. This is the most convenient design option for customers. But it requires rather low demand volatility as well as the customer’s pre­sence at the unloading point. Other­wise, it entails high transport costs, also owing to irregular delivery tours. The problem of optimum routing and scheduling often occurs anyway, especially with respect to efficiency for last mile deliveryor same day delivery. Using lockboxes for unloading, similar to post office boxes, the customers‘ presence may not be necessary in every case. Storage by the wholesaler copes with smaller stock levels than a corresponding retailer network, but generally does not permit same day delivery. Where the unloading point is set up to handle returns, these can also be processed by this system (e.g., the return of emp­ty bottles on a milk run). However, normally returns must take place via a different network (e.g., via the postal service’s network). This solution is suitable for the delivery of heavy articles such as beverages, of fresh produce such as flowers, of express-delivery items such as medicines, or of fast moving items, e.g., the distribution of ranges of C item goods (screws, nuts, bolts, etc.) to the point of use in firms. In the latter case, stocks may be managed by the customer (vendor-owned inventories, VOI).

The intermediate sector D3 describes delivery directly from production, or centralized storage in the distribution center of the wholesaler, with shipping to the pickup site. This design option can be selected if customers are willing and able to pick up the goods and thus profit from considerably lower transport costs. Examples include the shipping of vehicles or online orders (click and collect). But this places higher demands on the accompa­nying information systems than in the case of shipping to the customer. If the pickup site entails high costs, this solution will, in addi­tion, tend not to be cost effective. For this reason, pickup sites should be able to be combi­ned with existing distribution centers for other products or service centers (e.g., a car showroom or a supermarket chain such as Coop or 7eleven). In this case, they are also suitable for product returns or return of packaging material. Storage in the distribution center of the wholesaler reduces deli­very lead times. But it also either reduces product selection and availability or increases inventory costs. The costs anyhow increase for installation and handling owing to the costs of the distribution center. Distribution centers, including those located directly in the factory, may also act as a pickup site. An example of this is the pickup of cars from the plant.

Company Cases: When characteristic features change, it is appropriate to consi­der changing the distribution network design. In the example of Holcim mentioned in Section 3.1.1, not only a more centralized pro­duction network design but also a more centralized distribution network design became possible. Still, decentralized storage for basic demand of common products at various so-called “terminals” is part of Holcim’s distribution concept in the US Midwest (i.e., Sector D4 or D2 in Figure, right down to the Gulf of Mexico. However, for products with volati­le demand, Holcim rather uses concepts with more centra­li­zed storage (Sector D3, where the “terminals” serve as pickup sites, or even Sector D1).

At Hilti, decentralized storage in the distribution center of the wholesaler or retailer (i.e. sector D2) and subsequent delivery to the production site is executed in order to offer short delivery lead times to the customer (“last mile”). Although the inventories and respective current assets are high, the availability of the products is more important in order to satisfy the customers’ demand as fast as possible.

Further Correlations That Should Be Considered for an Integrated Determination of the Design Options: The four design options cannot be selected without giving consideration to the design of the production network. For production destined for the global market (sectors P1 and P3 in Figure, all four design options for the global distribution network come into question. In the case of decentralized storage, there is a need for a distribution network structure, possibly with multiple structure levels or echelons (see Section 3.1.3). For production destined for the local market (sectors P2 and P4 in Figure, only the design options in the sectors D2 and D4 in Figure come into question from a global perspective, i.e., decentralized storage. From a local perspective, it is naturally possible to view storage in close proximity to a (local) manu­facturer as “central.” In such a case, all four design options can come into question, albeit only for the local distribution network.

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.