Read the summary and the most important questions on Article 4: Designing the distribution network in a supply chain

• 3 Design options for a distribution network

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• 3.1 Manufacturer storage with direct shipping

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• What are the characteristics of manufacturer storage with direct shipping (drop shipping)?

  • All inventories are stored at the manufacturer.
  • Information flows from the customer, via the retailer, to the manufacturer, while product is shipped directly from the manufacturer to customers
    

• 3.2 Manufacturer storage with direct shipping and in-transit merge

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• What are the disadvantages of distribution network design manufacturer storage with direct shipping and in - transit merge?

  • The party performing the in-transit merge has higher facility costs because of the merge capability required. Receiving costs at the customer are lower because a single delivery is received. Overall supply chain facility and handling costs are somewhat higher than drop shipping.
  • A very sophisticated information infrastructure is needed to allow the in-transit merge. The investment in information infrastructure will be higher than for drop shipping.
    

• When is manufacturer storage with direct shipping and in - transit merge best suited?

   Given its performance characteristics, manufacturer storage with in transit merge is best suited for low to medium demand, high value items where the retailer is sourcing from a limited number of manufacturers. Compared to drop shipping, in-transit merge requires a higher volume from each manufacturer to be effective. If there are too many sources, intransit merge can be very difficult to coordinate and implement. In-transit merge is best implemented if there are no more than four or five sourcing locations and each customer order has products from multiple locations.

• 3.3 Distributor storage with package carrier delivery.

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• What are the characteristics of distributor storage with carrier delivery?

  Under this option, inventory is not held by manufacturers at the factories but is held by distributors/retailers in intermediate warehouses and package carriers are used to transport products from the intermediate location to the final customer.

• When is distributor storage with carrier delivery best suited?

  Distributor storage with carrier delivery is well suited for medium to fast moving items. Distributor storage also makes sense when customers want delivery faster than offered by manufacturer storage but do not need it immediately. Distributor storage can handle somewhat lower variety than manufacturer storage but can handle a much higher level of variety than a chain of retail stores.

• 3.4 Distributor storage with last mile delivery

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• What are the advantages of distribution network design "distributor storage with last mile delivery"?

  • Response times are faster than the use of package carriers. 
  • Product variety is generally lower than distributor storage with carrier delivery
  • The customer experience is very good using this option, particularly for bulky, hard to carry items.
  • Of all the options discussed, returnability is best with last mile delivery because trucks making deliveries can also pick up returns from customers.
    

• When is distributor storage with last mile delivery best suited?

  Last mile delivery may be justifiable if customer orders are large enough and customers are willing to pay for this service.

• 3.5 Manufacturer/distributor storage with costumer pickup.

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• What are the characteristics of manufacturer or distributor storage with consumer pickup?

  In this approach, inventory is stored at the manufacturer or distributor warehouse but customers place their orders online or on the phone and then come to designate pickup points to collect their orders.

• What are the advantages of manufacturer or distributor storage with consumer pickup?

  • The main advantage of a network with consumer pickup sites is that it can lower delivery cost, thus expanding the set of products sold as well as customers served online.
    
  • Inventory costs using this approach can be kept low with either manufacturer or distributor storage to exploit aggregation. 
  • Transportation cost is lower than any solution using package carriers because significant aggregation is possible when delivering orders to a pickup site.
  • For customers, returning a product will be easy because they have a physical location to bring it to. Overall, returnability is fairly good using this option.
    

• When is manufacturer or distributor storage with consumer pickup best suited?

  Such a network is likely to be most effective if existing locations such as convenience or grocery stores are used as pickup sites because such a network improves the economies from existing infrastructure. Unfortunately, such sites are typically designed to allow the customer to do the picking and will need to develop the capability of picking a customer specific order.