Distribution Network

The flow of goods from a producer or supplier to an end consumer

What is a Distribution Network?

A distribution network can be seen as the flow of goods from a producer or supplier to an end consumer. The network consists of storage facilities, warehouses, and transportation systems that support the movement of goods until they reach the end consumer. The process of ensuring the consumer receives the product from the manufacturer is done through direct sales or by following a retail network.

 

Distribution Network

 

Depending on the size of an enterprise or business, distribution networks vary in structure and sizes. Companies like Amazon or Apple are likely to own more sophisticated and complicated distribution networks, transportation, and logistics systems.

When defining the structure of a distribution network, the most crucial factors are the product demands of the end customer, customer experience, product variety and product availability, response time, and finally, product returnability.

 

Summary

  • A distribution network can be seen as the flow of goods from a producer or supplier to an end consumer.
  • The network consists of storage facilities, warehouses, and transportation systems that support the movement of goods until they reach the end consumer.
  • When defining the structure of a distribution network, the most crucial factors are the product demands of the end customer, customer experience, product variety and product availability, response time, and product returnability.

 

Building the Ideal Distribution Network or Model

Distribution networks transform over time as businesses expand and aim to reach more consumers. Therefore, they need to be set up in a way that allows for long-term optimization. In order to determine the ideal and efficient distribution network and supply chain, the satisfaction of customer demand comes into play. Satisfying overall customer demand has to be done at low costs and required service levels. It requires strategic planning and specialized supply chain management and planning.

Distribution networks are built by considering all key service and cost drivers. One of the most important drivers for distribution and supply chain modeling is customer location. Businesses need to identify where their customers are located in order to find a distribution structure that works efficiently, at a cost that is low and will not result in a large impact on the price of the product for the end consumer. The location of the customer allows for logistics planning.

Another key driver is the order quantity and frequency. It is pivotal for a business to know how often consumers purchase a product and the purchase volumes associated with the product. It aids in inventory delivery management.

Transportation costs and the mode of transportation required are also key drivers in building a distribution model. Determining the order frequencies and the location of consumers aid in determining the right type of transport needed and the costs associated with the transportation modes and vehicles required.

Warehousing is also an important driver in designing an efficient distribution network. The business must determine the ideal warehouse locations, size, ease of access, and costs, to ensure that the right selection is made to best suit the distribution needs and ensure overall customer satisfaction.

In cases where the goods are being exported or imported, it is also important for the businesses to identify points of entry. Other key drivers include factory and supplier locations and service level requirements.

 

Benefits of Deciding on a Distribution Network

The two forms of distribution that a manufacturer can decide on are either direct distribution or indirect distribution. Direct distribution is a direct sale from the manufacturer to the end consumer, whereas the indirect distribution involves setting up or linking to an existing distribution network, which normally encompasses warehousing, etc.

The benefits of making use of existing distribution networks or setting one up include (but are not limited to):

 

1. Reduction in costs

Setting a new distribution point could be costly for certain businesses and manufacturers. An existing distribution network provides speed and ease, as well as increasing reach for products (geographically), thereby eliminating the costs and challenges associated with time, human resources, and capital required.

 

2. Greater customer reach

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.

 

Other benefits of setting up a working distribution network include increased customer satisfaction and feedback, faster growth, more efficient marketing, and greater knowledge on customer and product preferences.

 

Additional Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Disintermediation
  • Economics of Production
  • Operations Management
  • Value Chain

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!