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

3.1.3 Network Structure for Decentralized Distribution, and Design Options for Retail Networks

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. For decentralized distribution, explain: portfolio for designing retail networks retail networks.


If a decentralized distribution network design is chosen (Sector D4 in Figure 3.1.2.1), the next thing to be done is to define its structure.

The distribution network structure defines the planned channels of distribution of goods. Figure 3.1.3.1 shows an example.

Fig. 3.1.3.1        Decentralized distribution-decision variables in the design of the distribution network structure. (Following [Stic04].)

The distribution network thus comprises, first of all, the number of structure levels or echelons, e.g., a multi-echelon structure with four levels: 1. central ware­house, 2. regional distribution center, 3. wholesaler or distributor, and 4. retailer. Secondly, it comprises the number of ware­houses per echelon, thirdly the geographic location of each warehouse, and fourthly the delivery area of each warehouse. The result is a geographically ramified distribution network. At every echelon, by a process called break-bulk, (full) truckloads of homogeneous items can be divided into smaller, more appropriate quantities for use ([APIC16]). For transparency of on-hand balances and transportation inventories throughout the entire network, an information system is required. Today, distances are determined more and more automatically, using distance tables or geographic informa­tion systems (GIS), for which in many countries commercial software is available.

The lower the customer’s tolerance in terms of lead time, the greater the number of decentralized warehouses and the smaller the delivery area for each warehouse. Points of sale (POS) must be located at convenient locations close to customers. Therefore, the crucial point in the selection of new locations of a retail network is the prediction of the number of potential customers.

With respect to the design of retail networks, in the first approach it is possib­le to distinguish POS with a smaller volume of goods available on-site, i.e., at the POS, from those with a larger volume. “Volume” may relate to the number of different items, and/or the quantity per item. For this approach, important features for designing retail networks are the following:

  • Available time for shopping, and simultaneously, capacity of an available means of transport of the customer: For private consumers (B2C), a car has a high capacity. On foot or by bicycle, the capacity of transport is, in contrast, low. If time is limited, or the car is unavailable at the appropriate time, then the purchase option is restricted to a local outlet and limited size and weight. For commercial purchasers (B2B) — depending on the transaction — a lorry offers high capacity. A small car can then only be used to purchase items of limited size and limited weight.
  • Demand variety: as defined in 3.1.2.
  • The required geographical catchment area) for the product range on offer: This characteristic assesses the size of the catchment area in which a “sufficient” number of customers are based, for whom the offered product range represents a good fit in terms of product quality and price. This assessment is carried out in consideration of purchasing power, time available, and the choice of means of transport. “Sufficient” means that the frequency of purchases multiplied by the average value of each sale corresponds to a minimum sale value per time unit that is required in order to make the operation of the POS a profitable venture.

In dependency of these three features, the portfolio in Figure 3.1.3.2 shows the design options for retail networks with rather smaller or larger volume of goods available on site.

Sector R1 describes the situation with normally no point of sale, since the required geogra­phical catchment area is too large to make it profitable to maintain a POS. Thus, the intended design option of the distribution concept (i.e., Sector D4 in Figure 3.1.2.1) is not realistic and must therefore be abandoned. This, in turn, can entail modifications of the distribution network structure. The customer, if not ceded to a competitor, must place an order that is fulfilled directly from production or delivered from a distribution center, and shipped to a pickup site (e.g., general delivery or poste restante). See the sectors above or to the left in the portfolio in Figure 3.1.2.1. This is the case for most commercial (B2B) purchases.

The opposite sector R4 describes the shopping mall of large stores. On these expensive sales floors, an extended product range can be offered. This increases the number of customers, so that this higher-value product range moves sufficiently quickly and the volatility of demand remains low. This is the design of the big super­markets for private consumers, for example, or of cash-and-carry wholesale, for commercial purchases. For the shopping experience, competition by different shops is desired. If such centers have a thematic range of products (e.g., clothes, or furnishings), they try to host as many competitive shops as possible. As automobiles are necessary anyway due to the amount or size of goods to be transported, these shopping malls are outside residential neighbor­hoods at convenient locations easily reached by car.

Fig. 3.1.3.2        Decentralized distribution: portfolio for designing retail networks.

The intermediate sector R2 describes the cluster of points of sale or small stores for comprehensive needs, found in low-population-density areas. It can only be accessed by most potential customers using a car. In this case multiple specialist points of sale exist largely with no overlap of offerings. When considered together, these form an offering that meets the comprehensive needs of the largest possible number of customers who are able to access this cluster of points of sale.

The intermediate sector R3 describes the small shop “around the corner” for specific needs. As compared to larger stores, this solution offers custo­mers more comfort, but comfort that must be paid for with higher transport costs and often higher installation and handling costs. The product range compri­ses basic items for specific needs. Among private consumers, these often comprise purchases of food or items for a specific customer group. For commercial purchases they include frequently used spare parts for renowned vehicle models, for example. In the case of food, this may relate to basic daily needs. These are covered by retailers whose shops can be accessed on foot or by bicycle. For this design option, a minimum number of potential customers with the corresponding purchasing power living or working close by the shop is required. This design option can be chosen in some areas of cities or for locations with a high frequency of visits by specific groups of people (e.g., in schools or sports facilities), for example. Stock costs can be kept at a low level by means of an efficient, normally IT-based replenishment system. An example of this is used by chemists or pharmacies, which hold only one unit of certain medicines in stock, the movement of which is then communicated directly to the distribution center by sensors. A fast logistics system ensures that replenishment can be guaranteed within a few hours.

Company Cases: In the example mentioned in Section 3.1.1 and 3.1.2, customers of Holcim operate quite nearby to its “terminals” (Sector R3 in Figure 3.1.3.2). In the cement industry it is advantageous to cede customers that are far away from such “terminals” (Sector R1) to competing manufacturers.

In some industries, such as food retail, clothing or furniture, big retail chains like Walmart or Swiss-based Migros have points of sale of different sizes and that carry a different range of products. Especially in large conurbations, they use both design options R4 and R3 across one single area, each for a different size of store as well as product range. Such retail chains are aware that many customers have a choice of modes of transport with different ranges or capacity, and can also make a choice depending on available time and personal sentiment.

The aforementioned Hilti company owns its entire distribution network structure. Its market organizations are the wholesalers that own one or seve­ral ware­houses. De facto, the sales representatives on site act as retailers. They are in close contact with potential customers and deliver directly at the construction sites (sector D2 in Figure 3.1.2.1). So there is no need for “Hilti stores” or the partnership with a third-party retail chain. Still, Hilti’s distribution network structure is changing. Actually, a VMI (vendor-managed inventory) concept should result in a more efficient inventory management at the different echelons.



Course section 3.1: Subsections and their intended learning outcomes

  • 3.1 Design Options for Integrated Production, Distribution, Service, and Transportation Networks

    Intended learning outcomes: Explain design options for global production networks, distribution networks, service networks, and transportation networks. Describe the network structure for decentralized distribution, and design options for retail networks. Disclose the integration of the portfolios.

  • 3.1.1 Design Options for Global Production Networks

    Intended learning outcomes: Differentiate between centralized production and decentralized production. Present features such as demand volatility, supply chain vulnerability, economies of scale, demand for consistent process quality, customer proximity, market specificity of products, value density. Explain design options for global production networks. Describe some company cases.

  • 3.1.2 Design Options for Global Distribution Networks

    Intended learning outcomes: Differentiate between centralized distribution and decentralized distribution. Present features such as demand variety, need for efficient returns, degree of customer involvement in picking up. Explain design options for global distribution networks. Describe some company cases.

  • 3.1.3 Network Structure for Decentralized Distribution, and Design Options for Retail Networks

    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. For decentralized distribution, explain: portfolio for designing retail networks retail networks.

  • 3.1.4 Design Options for Global Service Networks

    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. Explain design options for global service networks for services in direct contact with the object. Describe some company cases.

  • 3.1.5 Design Options for Global Transportation Networks

    Intended learning outcomes: Differentiate between direct transport and indirect transport. Present features such as size or weight of the delivery, possibility of using an existing transport network, and need for merged transport. Explain design options for global transportation networks. Describe some company cases.

  • 3.1.6 Integration of the Portfolios of Design Options

    Intended learning outcomes: Describe the interrelation between and integration of the production, transport, distribution and retail network.

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