Explain how the design of the distribution network affects the cost of the four supply chain drivers

Question

What will be an ideal response?

Answer 1

Answer: As the number of facilities in a supply chain increases, the inventory and resulting inventory costs also increase. To decrease inventory costs, firms try to consolidate and limit the number of facilities in their supply chain network.

Outbound transportation costs per unit tend to be higher than inbound costs because inbound lot sizes are typically larger. Increasing the number of warehouse locations decreases the average outbound distance to a customer and makes outbound transportation distance a smaller fraction of total distance traveled by the product. Thus, as long as inbound transportation economies of scale are maintained, increasing the number of facilities decreases total transportation cost. Facility costs decrease as the number of facilities is reduced, because a consolidation of facilities allows a firm to exploit economies of scale. As the number of facilities increases, total logistics costs first decrease and then increase. Each firm should have at least the number of facilities that minimize total logistics costs.

As a firm wants to further reduce the response time to its customers, it may have to increase the number of facilities beyond the point that minimizes logistics costs. A firm should add facilities beyond the cost-minimizing point only if managers are confident that the increase in revenues because of better responsiveness is greater than the increase in costs because of the additional facilities. In general, no distribution network will outperform others along all dimensions. Thus, it is important to ensure that the strengths of the distribution network fit with the strategic position of the firm.