Designing A Distribution Network Commerce Essay

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The role of distribution in the Supply Chain. Meindl defines Distribution as being "the steps taken to move and store a product from the supplier/manufacturing stage to a customer stage within the supply chain" (Meindl, 2010, p86). He comments on how distribution occurs between every set of stages in the supply chain and how raw materials are moved from suppliers to manufacturers, whilst finished goods are moved from manufacturing to the end customer. Distribution is considered to be a key factor/driver of overall profitability of a company because not only does it affect supply chain costs but it also affects the end customer directly. (Meindl, 2010, p86)

Whilst Meindl describes distribution within the supply chain as the movement of the product from a to b, Christopher M (2003) discusses how the role of distribution has moved away from the conventional view of distribution as being "solely concerned with transport and warehousing". He suggests that the key to successful distribution today is the model of demand management. Demand management is regarded as "the process of anticipating and fulfilling orders against defined customer service goals" (Christopher, 2003, p27). In order to optimize the process of demand management, it is essential that a firm has a well-integrated ICT (Information Communication Technology) system in place, as information is vital to its success. Information from the marketplace, from customers regarding usage/consumption, production schedules and inventory statuses are all accounted for.

Although this can be overcome by successful forecasting accuracy, Christopher explains that "while forecasting accuracy is always to be sought", it is in fact very rarely achieved. Instead the aim should be for a firm to reduce its dependency on forecasting, by improved information demand and also by implementing systems that enable quick response or agility towards demand. (Christopher, 2003, p27)

Quick response logistics has become top priority for many organisations, as it enables them not only to achieve cost reduction but also allows them to provide service enhancement. The idea of 'quick response logistics' is based upon a replenishment model within demand management. When simplified, as goods are consumed, the usage information is transmitted to the supplier/vendor, and this instantly triggers a response. This may result in faster, smaller consignment deliveries and although it may cost the supplier more, the benefits are visible through reduced inventory in the pipeline and whilst improved service in terms of responsiveness.

Zylstra K shares similar thoughts with Christopher, as he recognizes how the traditional approach to improving distribution and reducing its costs revolve around "technology-enabled optimization and automation" (Zylstra, 2006, p34). These cost strategies are visible in within the total cost of distribution. Warehouse management systems (WMS), Transport management systems (TMS), route planning, automated storage and retrieval systems (AS/RS) and wireless data collection to name but a few. Automation may significantly reduce warehouse labour and overall distribution costs, but may be beyond the reach of many companies due to the significant capital investment required and its implication to fixed costs. (Zylstra, 2006, p34)

The task of implementing an effective distribution system in a modern firm is often linked with reducing operational costs. As customers drive down prices and increase service requirements, there is tremendous pressure on all parts of the business to "Do more with less" (Zylstra, 2006, p34). With that in mind, there have been various surveys made regarding the relative costs of distribution in industry, and according to Christopher (1990); their findings seem to suggest that on average, distribution costs represent about 15% of sales turnover for a typical company. He also comments on how averages can be misleading in some cases, as results vary depending on the nature of the business/industry (Christopher, 1990, p6).

If a company can clearly identify the specific sources of total distribution costs, they may benefit by making it easier to identify potential 'trade-offs'. "A trade-off occurs where an increased cost in one area is more than matched by a cost reduction in another area" (Christopher, 1990, p8). For example if a distribution system has 5 regional depots with high warehousing and stockholding costs is compared with a system of 2/3 depots, the savings on haulage and reduction of stock-outs could possibly outweigh the extra costs involved in the 5 depot system. For benefits of such trade-offs to be achieved, it is necessary for managers to think in terms of total systems rather than of narrow functional areas.

Whilst total distribution cost can primarily be the focus for firms, it is also important for a firm to develop a framework that allows them to achieve such operational excellence, in terms adapting a distribution network that is suited to their strategic goals. Christopher (2003) explains how todays customer is increasingly seeking added value and how logistics management can provide that value is to do with the 'Three R's'.




(Christopher, 2003, p28-30)


With the current economic climate, it is especially apparent how customers across most markets and commercial environments are seeking to reduce their inventory holdings. For example Just In Time (JIT) practices can be found in many industries ranging from car manufacturing to retailing. Such practices mean that it is essential that suppliers can guarantee complete order fulfilment whilst delivering goods at agreed times. With such an emphasis on reducing inventory whilst adding value, a prime objective of any logistics/distribution strategy must be reliability.


Zylstra K (2006) and Christopher (2003) both emphasised the importance of 'quick response' in today's marketplace, and again this is very closely linked with the customer's demand for reliability. Essentially this means the agility of a firm, and its ability to respond in ever-shorter lead times with the greatest possible flexibility must be integrated in such strategies. Companies must focus on developing a logistics strategy that allows them to ship smaller quantities, more rapidly, direct to the point of consumption.


The concept of single sourcing has been of trend lately, where customers are seeking to reduce their supplier base, allowing them to benefit with improved quality, innovation sharing, reduced costs and integrated scheduling of production and deliveries. The fundamental objective of this idea is to create a buyer/supplier relationship based upon a partnership. A good example of a logistics partnership is the growing use of Vendor Managed Inventory (VMI). This allows the supplier to be responsible for the flow of product into the customers operations. In order for such systems to operate effectively, there must be a mutual understanding of each other's goals and a strong relationship is the key to its success.

The role of Network design in the supply chain

Supply Chain Network design for many firms include, the assignment of facility role, manufacturing location, storage or transport-related facilities, and the allocation of capacity and markets to each facility. A framework must then be established and the various solutions and methodologies must then be discussed. Supply chain network design decisions can be classified as follows.

Facility role: this refers to the part each facility plays, and what processes are performed at each facility.

Facility location: where should the facility be located

Capacity allocation: how much capacity should be allocated to each facility

Market and supply location: this refers to what markets should each facility serve and which supply sources should feed each facility.

Meindl (2010) describes how network design decisions have a significant impact on the overall performance of a firm, as it not only develops the structure of their supply chain, but sets its constraints, which can then be used to increase supply chain responsiveness and reduce overall costs.

1.3 Factors influencing Distribution Network design

The structure of a distribution channel is described by Visser & Van Goor as "the pipeline system through which goods have to flow before being at the right time and in the right place for the customers"(Visser & Van Goor, 2006, 62). It is particularly important for a firm to define the structure of their distribution system/infrastructure, as well as the choice of physical distribution channel and network.

According to (Visser & Van Goor, 2006), the most important factors within the structure of a distribution network are the primary process, location of inventory points and the flow of goods. They also recognize how a distribution network generally consists of a number of consecutive inventory points (i.e. the factory, central distribution centre, and national/international distribution centres), and that it is vital that a distribution network can co-ordinate the different activities along the chain (i.e. sales forecast, inventory and transport).

Meindl, 2010, explains how there are a number of vital factors that must be taken into consideration before a company can effectively and efficiently design a network, for example strategic factors. A company's competitive strategy has a significant impact on network design decisions within the supply chain, firms that focus on cost leadership tend to find the lowest-cost location for their manufacturing operations, not taking into consideration their distance to market. Comparing a company that focuses on responsiveness, their location to market is a key component of their strategy, thus meaning they will have a totally different distribution network design. A good example of this can be seen within the fashion industry, where some firms avail of cheap labour in Asia-Pacific due to low cost, others like Zara the Spanish apparel manufacturer has a large proportion of its production capacity in Portugal and Spain despite the high cost. The local production facilities allow Zara to react quickly to emerging fashion trends in Europe. (Meindl, 2010, p127)

Other factors that must be taken into consideration include: Technological factors, Macroeconomic factors, Tariffs and incentives, Exchange rate and demand tax, Political factors, Infrastructure, Costs and customer response time. The goal when designing a supply chain distribution network is to maximize the organisations profits while satisfying customer needs in terms of demand responsiveness.

What is Lean

Lean is the concept of efficient manufacturing or operations which grew out of the Toyota Production System in the early 20th century. It is based on the philosophy of defining value from the customer's viewpoint, and continually improving the way in which that value is delivered, by eliminating every use of resources that is wasteful, or that does not contribute to the value goal. This continual improvement of processes requires the involvement and empowering of every member of staff at every level (Wilson L, 2010, p7). 

There are many misunderstandings of what Lean is about, based on the idea that it is simply to do with eliminating waste. This is sometimes interpreted as, reducing employees through redundancies. However the successful implementation of Lean is likely to result in more staff being required, due to an increase in the number of orders (Zylstra K, 2006). In other cases it can often be used as a reason for cutting down on expenditure, to achieve cost savings. If this is done without true value increase as the goal, it will certainly be counter-productive. If a firm wishes to start implementing Lean, it is essential first to understand the principles and philosophy behind it (Zylstra K, 2006).

The Goal of Lean

Connor G (2004) comments on how the goal of Lean operations or manufacturing "is to provide the customer with just what they want, just when they need it, with no excess costs". This has to be done by empowering every individual worker to achieve his or her full potential, and so to make the greatest possible contribution. Various tools can be utilized as a help towards these aims.

Five Principles of Lean

Working towards lean manufacturing is based on five main principles:

First of which involves identifying exactly what is meant by the value goal. The essential requirement is that value is defined by the customer's perception, not defined internally by the organization.

Having specified value for each product, the second principle is, again for each product, to identify the value stream - that is the entire process from raw materials to the possession of the customer. Analysis of this flow will almost certainly reveal waste; including components of the process that add no value and can be eliminated - known as process re-engineering.

The third principle is, having eliminated wasteful processes, to create a continuous flow for the product, instead of the traditional way, where processes are grouped in stages based in different departments, with bottlenecks at each stage

The fourth of the five principles is that of Pull, one of the distinctive concepts of Lean manufacturing. When continuous flow is introduced, there is a dramatic reduction in lead times to the customer, and consequently customer demand becomes more stable. This means that demand can pull production, rather than making the products first and pushing them at the customers, trying to persuade them to buy.

The fifth principle is the drive towards perfection through Kaizen, which means continuous improvement in productivity and quality.

(Pascal Dennis, 2002). 

Tools for Implementing Lean

There are a number of specific concepts, which mostly originated in the Toyota production system, and which companies have adapted for their own use, to help in implementing Lean. These are often referred to as the tools of Lean, and contribute towards the process of 'Kaizen' or continuous improvement. One of the best-known is the five-step method known as 5S, because each of the five steps is called by a Japanese word beginning with S.

Each step forms part of creating a visually well-organized workplace. The aim of this tool is not simply to tidy up, but to identify problems, and to eliminate everything that leads to wasted or unnecessary effort. Another well-known tool is known as the 5Whys. The idea is that when a problem is identified, the question is asked as to why the problem occurred, then when the cause is identified, asking in turn why this occurred. This is repeated five times, with the aim of getting to the fundamental cause of the problem. A third tool is known as visual management. This is based on the principle that it should be possible for every worker, whether on the shop floor or the office, to use visual data to manage every stage of the flow at a glance (Zylstra K, 2006).

Another distinctive tool is 'Jidoka', which is sometimes known as 'autonomation', because it is seen as the humanized side of the process of automation. The idea of this is that "automation does not become an end in itself, which rules all other processes, but can be stopped for correction at any stage if somebody notices a problem". A further tool which has been widely adopted in efficient operations is Kanban. This is the process of using a signal to request a part from the upstream, or supply, process that is needed in the downstream, or customer, process, for immediate supply. The idea of this is to create a clear connection between customer and supplier (A.R Van Goor, M.J Ploos van Amstel, 2003, p433). 

The main point of these tools is not that they should be adopted in a mechanical way, with the idea that bringing them into the workplace is an instant way to improve production. They can only be effective if seen as ways to implement the whole process of Lean, and if the underlying philosophy is understood and taken on board. For instance, if 5S is simply introduced as a clean-up exercise, it is not likely to be effective. It has to be seen as a contribution to the whole process of getting people to work more efficiently, and of eliminating anything that obstructs this (Likker k. J, 2004, p27)

Benefits of Lean

For many firms the changeover to lean has not been straight forward , with workers being forced to leave their comfort zones, and to change ways of working to which they may have become accustomed over many years. However, once the process is under way, provided it is done correctly and quickly, it is found that it brings many benefits, as waste is eliminated, costs of production, as well as costs of plant and premises, are substantially reduced, leading to much higher return on investment (ROI).

Along with this should go a significant increase in sales. This results from two main factors. One is that there are far fewer errors in production, leading to better quality products and fewer product recalls. The other is greatly reduced production times, meaning customer orders are fulfilled promptly. Because the customer is defining value at every stage, the company's reputation will greatly increase. Once these benefits begin to come through, worker satisfaction will increase and the whole company becomes happy place. (Wilson L, 2010, p7). 

Lean application in distribution

A.R Van Goor, M.J Ploos van Amstel (2003). European distribution and supply chain logistics. The Netherlands: Wolters-Noordhoff bv.

Christopher,M (1990). The strategy of distribution management. 4th ed. Oxford: Heinemann Professional Publishing ltd.

Conner G (2004). Lean Manufacturing: Certification Workshop Participant Guide. london: Lean Enterprise Training.

Harrison A, Remko van Hoek (2011). Logistics Management Strategy (competing in the Supply Chain). 4th ed. Essex UK: Pearson Education Ltd.

Likker k. J (2004). The Toyota way: 14 management Princples. USA: McGraw Hill Professional.

Meindl, P (2010). Supply Chain Management, strategy, planning and operation. 4th ed. New Jersey: Pearson.

Pascal Dennis (2002). Lean Production Simplified: The Nuts and Bolts of Making Assembly Operations Flow. New York: Productivity Press

Zylstra,K (2006). Lean Distribution. New Jersey: John Wiley & Sons Inc.

Wilson L (2010). How to implement Lean Manufacturing. NYC: McGraw Hill Professional.