Distribution network – essence
In the history of economic logistics, the two main reasons for the development of distribution are generally cited as the rapid increase in the number of product ranges serving practically the same purposes or fulfilling the same functions, and so-called mixed sales, i.e., the sale of the same product ranges no longer just in specialized stores, but everywhere where it was not prohibited by law. Currently, in addition to the mentioned factors, distribution costs and customer service standards play a huge role, prompting companies to develop distribution networks.
The essence of distribution, which is one of the instruments of marketing influence on the market, consists of overcoming spatial, temporal, quantitative, assortment, and informational barriers separating producers from their final buyers. The task of distribution is to deliver to final buyers the products they desire to the places where they want to purchase them, at the time that suits them, on agreed terms, and at a price they accept. In distribution, there are always at least two entities between which the exchange of products takes place. If distribution is created by a group of cooperating enterprises carrying out deliveries from a supplier to many recipients, we then speak of a distribution network. In terms of subjects, a distribution network means a set of interdependent organizations/companies participating in the process of delivering products and services to the buyer. Generally, two types of distribution networks can be distinguished:
- direct (own) of the producer – these are channels in which the producer conducts distribution activities without the participation of specialized intermediaries
- indirect, when intermediary links (separating the producer from the customer) are used in the process of delivering a product from the sphere of production to the sphere of consumption.
Another division of distribution networks (depending on the degree of centralization of multi-level structures) is the distinction into two distribution models:
- decentralized, where standard products are mass-produced and then distributed using warehouses/distribution centers and intermediaries – maintaining stocks – to final recipients
- centralized, where all customers are served from a single point maintaining stocks – a central distribution center.
In some cases, instead of classic distribution centers, transshipment terminals (cross-docking) can be used in distribution networks, which eliminate the maintenance of product ranges in the form of stocks. It is also worth mentioning hybrid networks, which combine various combinations of the previously mentioned networks, adapted to specific needs.
In such cases, a combination of cross-docking, direct full-truckload and less-than-truckload deliveries, and the use of parcel delivery companies and courier firms can be applied. The art of designing a good distribution solution lies in choosing the right option for a specific case. It is important that the product flowing through a given distribution network not only has the highest quality but is also delivered in the shortest time to the final recipient. Therefore, companies look for a balance point between meeting their customers’ expectations and the costs they incur to achieve set goals, such as increasing timeliness, speed, and flexibility of deliveries. The best instrument to achieve these goals is a correct/optimal distribution network structure, that is: central warehouse, distribution centers, their locations and size, employees, and the warehouse and transport technology used. Each of the mentioned components of the distribution network structure generates additional costs, which the company, in turn, wants to minimize. Thus, the question arises: how to best serve the customer while incurring the lowest possible cost? In such a case, a company should adjust the structure of its distribution network so that it meets the required level of customer service and generates the lowest possible distribution costs, i.e., infrastructure, transport, warehousing, inventory, and personnel costs.
Decisions regarding changes to the distribution network structure have strategic importance with long-term consequences. If a company decides on one solution, it must stick with it for years. You cannot simply pack up and move an entire warehouse (or at least not in a time frame measured in months).
The main reason for investing in a project related to improving the distribution network structure is the reduction of distribution costs. A few years ago, distribution network costs were considered to be warehousing and transport costs. Currently, companies use the category of total distribution cost.
The article comes from the magazine “Logistyka” 1/2010.