Jimmy Alyea, MBA: Distribution Networks

Wednesday, February 1, 2012

E-Business Distribution Networks

How Amazon has used its distribution system in e-business, and general features of e-business distribution networks

by Jimmy Alyea

Distribution systems have been used in e-business to improve customer service in terms of access, customization, and convenience and to lower costs in supply chains. For example, Amazon.com has lower inventory and facility costs due to their use of e-business for sales rather than bricks-and-mortar retail stores, but their transportation costs are high because they must ship books to customers. Shipping costs are a big portion of their book costs. However, inventory costs are low compared to retail stores because Amazon.com is able to aggregate inventory in a few geographical locations. They keep mainly medium- to high-demand books in their own warehouses and purchase low-demand books from a distributor when a customer orders. This reduces inventory costs considerably, but their facility costs are growing since business is increasing and they have had to add warehouses.

In the customer-service area, customer experience is very positive in terms of access, customization, and convenience. Customers, however, must be willing to wait for delivery of books they have ordered unless products can be downloaded. Benefits to customers also include better order visibility and quicker access to new products.

Basic features of an e-business distribution network include low facility and inventory costs but high transportation costs. An e-business can carry a wide variety of products, but response times are longer than those at retail stores, excluding products that can be downloaded. In terms of product availability, e-businesses communicate customer demand information throughout the supply chain faster, so their forecasts are much more accurate. Also, they can launch new products faster by shipping directly to the customer instead of having to first stock retail shelves. Overall, the customer experience is very personal due to access, customization, and convenience of online shopping.

About Jimmy Alyea:

Jimmy Alyea lives in Houston, Texas, and holds two Bachelor of Business Administration degrees (Supply Chain Management and Marketing) and a Master of Business Administration degree. Follow Jimmy Alyea (James L. Alyea) on LinkedIn, Twitter, or Blog.

Example of how a manufacturer would sell and distribute widgets to Wal-Mart

An example of how a manufacturer would sell and distribute widgets to Wal-Mart stores nationwide

by Jimmy Alyea

As a manufacturer of widgets, a fast-moving, low-value consumer goods product, sold mainly to Wal-Mart stores nationwide, I would utilize a distribution network incorporating manufacturer storage with customer pickup. To facilitate compatibility with Wal-Mart’s focus on customer needs and strategy of reducing costs through efficient supply chain management practices, widgets from our three geographically- disbursed factories would be stored at our warehouse/distribution centers located within acceptable driving distance of selected Wal-Mart distribution centers (DCs). With Wal-Mart’s approximately 150 distribution centers centrally located within its network of stores, our storage facilities could be located to serve more than one Wal-Mart distribution center. Additionally, sufficient storage could be provided at our three manufacturing plants to accommodate direct pickup by trucks from Wal-Mart distribution centers located nearby.

The significant increase in processing and new facilities costs incurred because of the number of distribution centers we would require in order to be located close to selected Wal-Mart DCs would have to be weighed against the increase in revenues received because of better responsiveness. The capacity of each of our facilities would be determined by the number of Wal-Mart DCs served: the more facilities, the lower the inventory required at each facility. Accordingly, the more facilities, the more coordination and investment required in information systems. With global giant Wal-Mart as our number-one customer, the most effective distribution network for our widget company would be one of manufacturer storage with customer pickup, even though facilities most likely would have to be added beyond the total logistics cost-minimizing point.

About Jimmy Alyea: