The Role of Distribution in the Supply Chain

Distribution refers to the steps taken to move and store a product from the supplier stage to a customer stage in the supply chain. Distribution occurs between every pair of stages in the supply chain. Raw materials and components are moved from suppliers to manufacturers, whereas finished products are moved from the manufacturer to the end consumer. Distribution is a key driver of the overall profitability of a firm because it affects both the supply chain cost and the customer value directly. In the apparel retail industry, for example, distribution affects about 35 percent of the revenue (including its influence on markdowns and lost sales). In India, the outbound distribution cost of cement is about 30 percent of the cost of producing and selling it.

It would be no exaggeration to state that two of the world’s most profitable companies, Walmart and Seven-Eleven Japan, have built the success of their entire business around outstand­ing distribution design and operation. In the case of Walmart, distribution allows the company to provide high availability levels of relatively common products at a very low cost. In the case of Seven-Eleven Japan, effective distribution provides a very high level of customer responsiveness at a reasonable cost.

The process of designing a distribution network has two broad phases. In the first phase, the broad structure of the supply chain network is visualized. This phase decides the number of stages in the supply chain and the role of each stage. The second phase then takes the broad structure and converts it into specific locations and their capability, capacity, and demand alloca­tion. This chapter focuses on issues that affect the design of the broad distribution network. Chapters 5 and 6 focus on the second phase, which starts with the broad network and results in a specific supply chain network.

The appropriate distribution network can be used to achieve a variety of supply chain objectives ranging from low cost to high responsiveness. As a result, companies in the same industry often select different distribution networks. Next, we discuss industry examples that highlight the variety of distribution network choices and the issues that arise when selecting among these options.

Until 2007, Dell distributed its PCs directly to end consumers, whereas companies such as HP distributed through resellers. Dell customers waited several days to get a PC, whereas customers could walk away with an HP computer from a reseller. Starting in June 2007, Dell also started selling its PCs through retailers such as Walmart. In the late 1990s, Gateway opened Gateway Country stores, wherein customers could examine the products and have salespeople help them configure a PC that suited their needs. Gateway, however, chose to sell no products at the stores; all PCs were shipped directly from the factory to the customer. By April 2004, Gateway had closed all its stores because of their poor financial performance. Apple Computer, in contrast, has opened many retail stores that sell comput­ers. These companies have chosen different distribution models. How can we evaluate this wide range of distribution choices? Which ones serve the companies and their customers better?

P&G has chosen to distribute directly to large supermarket chains while obligating smaller players to buy P&G products from distributors. Products move directly from P&G to the larger chains but move through an additional stage when going to smaller supermarkets. Texas Instruments, which once used only direct sales, now sells about 30 percent of its vol­ume to 98 percent of its customers through distributors, while serving the remaining 2 per­cent of customers with 70 percent of the volume directly (Raman and Rao, 1997). What value do these distributors provide? When should a distribution network include an additional stage, such as a distributor? Distributors play a much more significant role for consumer goods distribution in a country such as India compared with the United States. Why might this be the case?

W.W. Grainger stocks about 300,000 SKUs that can be sent to customers within a day of order placement. The remaining slower-moving products are not stocked but instead are shipped directly from the manufacturer when a customer places an order. It takes several days for the customer to receive the product in such cases. Are these distribution choices appropriate? How can they be justified?

As the preceding examples illustrate, firms can make many choices when designing their distribution networks. An inappropriate network can have a significant negative effect on the profitability of the firm, as is evident in the failure of companies such as Blockbuster and Webvan. The appropriate choice of distribution network grows the supply chain surplus by satisfying cus­tomer needs at the lowest possible cost.

In the next section, we identify performance measures that must be considered when designing the distribution network.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.