What types of distribution networks are typically best suited for commodity?
In a supply chain, a distribution network is an interconnected group of storage facilities and transportation systems that receive inventories of goods and then deliver them to customers. It is an intermediate point to get products from the manufacturer to the end customer, either directly or through a retail network. A fast and reliable distribution network is essential in today's instant gratification society of consumers.
Understanding a Distribution Network
Developing an efficient distribution network is one of the most critical aspects of the success of a company. It is a component of strategic planning that allows a company's products to reach customers quickly and efficiently while at the same time keeping costs low for the company so that they may realize larger profit margins.
The supply chain for goods can involve a far-reaching distribution network depending on the product and where the end customers are located. A manufacturer may have a distribution network to serve wholesalers, who in turn have their own network to ship to distribution networks operated by retailers, who at the last link of the supply chain would sell the goods in their retail stores.
Alternatively, a simplified supply chain could involve a manufacturer shipping finished products to its distribution network and then directly to end consumers.
Location (proximity to the customer) and infrastructure quality are two important attributes of a distribution network. Additionally, the storage, handling, and transportation functions at a distribution site are set up to suit the particular needs of the company to serve its customer base in a geographic area. There can be a high level of sophistication at a single site—and by extension, the entire distribution network—to optimally process order flow of finished goods, whether a handful of large items such as farm tractors or thousands of SKUs for a retail chain.
For the entire distribution network, a company must plan out needs for equipment, workers, information technology systems, and transportation fleets. The company must determine whether a hub-and-spoke distribution network is right for its business or a decentralized network.
Distribution networks come at the post-manufacturing part of a supply chain, the flow of goods and services, and include all stages that deliver final products into the hands of consumers.
Real World Examples
Establishing an effective distribution network requires a studied approach because it is increasingly considered a critical asset in this new age of e-commerce. Walmart (WMT), for example, with 190 distribution facilities as of 2020, is allocating more capital to build out additional fulfillment centers for its distribution network as it evolves with the competitive demands of the market.
As of July 2020, Walmart's distribution network, including its retail stores, is 924 million square feet. It is so large, that in comparison, the island of Manhattan is 661 million square feet. For even more efficiency, Walmart divides its distribution network into specific categories. For example, it has regional distribution centers, food distribution centers, fashion distribution centers, and more. This ensures that each distribution center is focused on one product area and is therefore perfectly designed to meet the needs of delivering that product quickly and at the lowest cost.
Amazon (AMZN) has also increased its distribution network, building out enormous robotically-controlled warehouses across the world and operating its own freight trucking fleets and cargo planes. Amazon has even discussed using autonomous drones to deliver goods to customers, which would be an innovation in the distribution of goods.
Amazon is a massive global retailer and, therefore, its distribution network spans many countries. As of July 2020, Amazon has 1,215 distribution facilities in 21 countries. Amazon primarily breaks its distribution network down into prime hubs, fulfillment centers, inbounds and outbound sortation centers, and delivery stations.
Distribution logistics is the combination of physical facilities and activities which connect the sources of the product (production plants) to customers, while also coordinating the underlying information flow.
Basically, distribution logistics consists of five large components:
In this article, we will analyse the various types of distribution network.
The distribution network
“The distribution network is the set of warehouses, of different types and kinds, which operate in an organised, integrated manner to constitute the bone structure of the logistics system that gets the products handled (or manufactured) by the company to customers”.
In the past, a warehouse used to be considered as just a container. Nowadays, in the integrated approach to the logistics chain, warehouses are viewed as fundamental hubs in the logistics network, with functions defined by their specific location within the network.
In general, warehouses have four main operating functions:
In terms of specific functions, there are three different types of warehouses:
The plant warehouse is, basically, a container to which a production plant’s output is temporarily transferred. A plant warehouse is required because either the company produces on the basis of forecasts (for stock), and therefore needs to store the goods produced pending receipt of orders from customers, and/or the company needs to group together a certain quantity of product in order to fill the entire capacity of a means of transport (and thus optimise its use).
The central warehouse is basically a collection and distribution centre, necessary to “concentrate” different products to make them available in a single point. Normally, it receives loads of single products, or single lines, and dispatches loads of multiple products.
Lastly, the function of an outlying warehouse is very similar to that of a central warehouse (collection/distribution centre). However, its main task is to ensure rapid delivery to customers, and it is located close to them to facilitate this.
For further information about distribution and an understanding of how a network generally changes over a business’s lifetime, refer to the following article: The evolution of the distribution network. How is a new one designed?
Now we will take a closer look at the various network types.
Just one central warehouse
This is a simple distribution network consisting of just one large central warehouse, containing the stocks of all the products handled, from which deliveries are made to all the company’s final customers.
In general, this solution:
A distribution centre plus a large number of branches
The second type of distribution network is fairly similar to the first, but differs from it in being more suitable for large commercial businesses which have a quite large number of branches or points of sale with a low storage capacity.
In practice, the distribution network consists of just one large central warehouse, which in this case can also be called a “distribution centre”, containing stocks of all the products purchased from the various suppliers and from which deliveries are made to the various branches or points of sale.
In general, this solution:
It is particularly suitable for wholesalers, the large-scale retail trade and retail purchasing consortia.
A central warehouse and several outlying depots
This configuration is a quite common form of logistics organisation amongst production firms or commercial companies which do not have points of sale selling to the “final” consumer.
In practice, depending on their location and the size/composition of their orders, the company’s customers are served either directly from the central warehouse or from one of the various branches.
In general, this solution:
The solution is particularly suitable for some types of wholesalers, or single-plant production companies, of not especially large size, where the production department is close to the central warehouse.
Plant warehouses, central warehouse and outlying depots
This is a fairly complex configuration, suitable for fairly large manufacturing companies (or corporate groups).
The company’s customers may be served by different options/procedures, depending on their location and order composition/size, using a three-level network structure: plant warehouses, central warehouses and outlying warehouses.
In general, this system:
It is particularly suitable for organisations with several production locations, each producing specific products. Availability of the mix is guaranteed by the central warehouse, while swift delivery is achieved using the nearness to the market of the outlying warehouses.
No warehouses but just transit points
This is a fairly innovative configuration (only introduced a few years ago), which may seem very simple but which actually requires a great deal of organisation.
In practice, all the warehouses (outlying ones in all cases but sometimes the central one as well) are replaced by transit points. Transit points are basically warehouses without (or with only very low) stocks, where inbound goods from suppliers or plants are sent to customers immediately.
In general, the characteristics of this solution are:
In general, this system is adopted by fairly large manufacturing or commercial companies.
The last example of a distribution network we present is actually an anomalous variant of the traditional distribution network, although it is actually now quite widely used, also in Italy.
In practice, the traditional distribution network no longer exists, since all the physical distribution of goods is contracted to an external organisation (logistics firm).
In fact, even when distribution is outsourced, the distribution network still exists, except that it no longer belongs to the company that produces/sells the goods for distribution, so it may be “out of sight”. When establishing a partnership with a logistics firm it is important to find out about the distribution network it is able to provide.
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What types of distribution networks are typically best suited for commodity items?
The most suitable distribution network is RETAIL STORAGE WITH CUSTOMER PICKUP . Commodity items with very short life like milk a combo of manufacturer , distributor and retail works well too . (4)Customer price view varies through the product life-cycle.
What type of network is best suited to highly differentiated products and commodity items?
The networks that are best suited to highly differentiated products are the manufacturer storage with direct shipping and the manufacturer storage with in-transit merge. Both approaches have the ability to aggregate inventories and postpone product customization, which would help support a wider variety of products.
What are types of distribution networks?
There are three types of distribution channels: direct, indirect and hybrid.
What is a good distribution network?
An efficient distribution network allows for wider customer reach because it should ideally enhance the speed at which products reach the end consumer and opens up opportunities to reach other geographic areas.