Learning objectives

• Explain how products and service requirements shape distribution channels.
• Compare centralized, decentralized, and hybrid inventory positioning.
• Distinguish stocking facilities from transshipment and cross-docking facilities.
• Analyze transportation, inventory, and customer service trade-offs.

Distribution planning decisions

A distribution network connects production and consumption through transport links and storage facilities. Its design balances service and logistics cost (Onstein et al. 2019).

Figure 1: A series of interrelated distribution planning decisions ensure that the strategy can be executed at a reasonable cost while supporting supply chain demands (Coyle et al. 2020)

Product and distribution requirements

The product characteristics (e.g., value, durability, temperature sensitivity, obsolescence, volume) drive the design of the distribution process.

• Raw materials can often be held in outdoor stockpiles and transferred to the production facility as needed.
• Manufactured goods must be distributed quickly, shielded from the environment, and protected against theft and damage.

Distribution planning also specifies product flows and the capabilities required at each facility (Coyle et al. 2020).

Direct shipment

Direct shipment of goods from the manufacturer to retailer or retailer to consumer.

• Avoids the need to build and operate DCs
• Reduces inventory in the system
• Compresses order cycle time
• Benefits:
  • Customers place FTL orders
  • Product perishability is an issue
• Drawbacks:
  • Expensive to deliver small quantities (reduced transportation efficiency)
  • Limited safety stock available to protect against demand surges.
  • Efficiently fulfilling orders for individual unit quantities may be difficult.

(Coyle et al. 2020)

Distribution through facilities

Movement of goods through distribution facilities to customers.

• Warehousing facilities:
  • can hold goods in anticipation of customer orders.
  • provide a buffer of safety stock to protect against contingencies.
  • handle small quantity orders efficiently from transportation and fulfillment standpoints.
• Cross-docking facilities can provide a high-velocity alternative to direct shipping at lower transportation costs and allow product mixing capabilities.

(Coyle et al. 2020)

Distribution facility roles

The network design should specify what each facility does, as well as where it is located.

Centralized inventory

Product is distributed to customers across the network from a central stocking point (e.g., origin point, intermediate advantageous location in the supply chain).

• Benefits:
  • Greater control over inventory.
  • Reduced demand variability due to risk pooling (higher in-stock availability).
  • Lower inventory carrying costs.
• Drawback:
  • Higher transportation costs (longer distances to customers).
  • Longer delivery lead times.

(Coyle et al. 2020)

Decentralized inventory

Inventory is held in customer-facing locations (regionally, locally).

• Benefits:
  • Helps to reduce customer delivery costs and order cycle time as product can be readily dispatched to meet customer requirements.
  • Works well for high-volume, low-cost products with low demand uncertainty (e.g., laundry detergent, pet food, and cereal).
• Drawbacks:
  • Higher handling costs.
  • Higher risk of product damage and pilferage.
  • Additional expenses of running the facilities.
  • Higher average inventory levels (safety stock must cover demand variation within regions).

(Coyle et al. 2020)

Hybrid inventory positioning

Inventory positioning can differ across products within the same distribution network.

Direct and centralized distribution networks

Direct shipment, a national DC, and a multi-country DC differ in their intermediate facilities and service territory.

A direct flow describes the transport path; inventory positioning specifies where stock is held.

Multi-echelon distribution network

Goods pass through an upstream distribution center and a downstream regional facility. Inventory can be held at more than one level.

Cross-docking configurations

Cross-docking consolidates and sorts flows with little or no storage. A cross-dock may serve customers directly or feed downstream stocking facilities.

Inventory positioning depends on the stocking facilities, not on the presence of a cross-dock.

Shipment consolidation and transportation cost

Intermediate facilities can reduce transportation cost when they enable shipment consolidation.

• Setting up one or several warehouses throughout the journey can reduce transportation costs.
  • Large shipments: full-truckload (FTL) transport from plants to DCs.
  • Smaller shipments: LTL or parcel delivery from DCs to regional customers.

Saturation point: If too many DCs are built, none will require full truckloads of product.

(Coyle et al. 2020)

Transportation alternatives and rates

Parcel, less-than-truckload (LTL), and full-truckload (FTL) services have different rate structures. Shipment size and route determine the least-cost option.

Figure 5: Typical function cost for parcel, LTL, and FTL carriers (Lapierre et al. 2004)

Effect of distribution facilities

Facility count and inventory cost

Adding stocking points generally increases total safety stock and inventory carrying cost (Coyle et al. 2020).

• Regional facilities can serve products with moderate or high demand.
• A central stock can serve slow-moving or high-value products.
• Inventory pooling can reduce the safety stock needed across the network.

Trade-off: inventory savings must be compared with delivery distance and service requirements.

Count stocking points separately from cross-docks and transshipment depots.

Facility proximity and customer service

Locating facilities closer to demand can shorten delivery distances and improve responsiveness.

• Evaluate delivery time and product availability against customer requirements.
• Balance the service improvement against additional facility and inventory costs.
• Assess the whole network: proximity alone does not establish the least-cost design (Coyle et al. 2020).