A supply channel is composed of three structures. At one end of the channel is the manufacturer. The manufacturer focuses on the development and production of products and originates the distribution process. The terminal point in the channel is the retailer who sells goods and services directly to the customer for their personal, non-business use. In between the two lies a process called distribution, which is more difficult to define. One involved in the distribution process is labeled a "distributor." The APICS Dictionary describes a distributor as "a business that does not manufacture its own products but purchases and resells these products. Such a business usually maintains a finished goods inventory." The proliferation of alternative distribution forms, such as warehouse clubs, catalog sales, marketing channel specialists, and mail order, have blurred functional distinctions and increased the difficulty of defining both the distribution process and the term distributor.
One ultimately could maintain that distributors include all enterprises that sell products to retailers and other merchants—and/or to industrial, institutional, and commercial users—but do not sell in significant amounts to the ultimate customer. According to this definition, most companies that are involved with the disbursement of raw materials and finished products belong, in one sense or another, to the distribution industry. By adopting this definition, distribution is expanded to cover nearly every form of materials management and physical distribution activity performed by channel constituents, except for the processes of manufacturing and retailing.
Distribution involves a number of activities centered around a physical flow of goods and information. At one time the term distribution applied only to the outbound side of supply chain management, but it now includes both inbound and outbound. Management of the inbound flow involves these elements:
Management of the outbound flow involves these elements:
Distribution channels are formed to solve three critical distribution problems: functional performance, reduced complexity, and specialization.
The central focus of distribution is to increase the efficiency of time, place, and delivery utility. When demand and product availability are immediate, the producer can perform the exchange and delivery functions itself. However, as the number of producers grows and the geographical dispersion of the customer base expands, the need for both internal and external intermediaries who can facilitate the flow of products, services, and information via a distribution process increases.
Distribution management also can decrease overall channel complexity through sorting and assistance in routinization. Sorting is the group of activities associated with transforming products acquired from manufacturers into the assortments and quantities demanded in the marketplace. Routinization refers to the policies and procedures providing common goals, channel arrangements, expectations, and mechanisms to facilitate efficient transactions. David F. Ross describes sorting as including four primary functions:
As the supply chain grows more complex, costs and inefficiencies multiply in the channel. In response, some channels add or contain partners that specialize in one or more of the elements of distribution, such as exchange or warehousing. Specialization then improves the channel by increasing the velocity of goods and value-added services and reducing costs associated with selling, transportation, carrying inventory, warehousing, order processing, and credit.
There are a number of critical functions performed by the channel distributor. Ross describes these functions as:
Following are the separate elements contained within the three critical functions of distribution:
The need for more detailed distribution planning led to the emergence of distribution requirements planning (DRP) during the 1970s. DRP is a widely used and potentially powerful technique for helping outbound logistics systems manage and minimize inbound inventories. This concept extended the time-phase order point found in material requirements planning (MRP) logic to the management of channel inventory. By the 1980s DRP had become a standard approach for planning and controlling distribution logistics activities and had evolved into distribution resource planning. The concept now embraces all business functions in the supply channel, not just inventory and logistics, and is termed DRP II.
DRP is usually used with an MRP system, although most DRP models are more comprehensive than stand-alone MRP models and can schedule transportation. The underlying rationale for DRP is to more accurately fore-cast demand and then use that information to develop delivery schedules. This way, distribution firms can minimize inbound inventory by using MRP in conjunction with other schedules.
One of the key elements of DRP is the DRP table, which includes the following elements:
The concept of DRP very closely mimics the logic of MRP. As with MRP, gross requirements consist of actual customer orders, forecasted demand, or some combination of both; scheduled receipts are the goods the distributor expects to receive from orders that already have been released, while goods that already are received and entered into inventory constitute the on-hand inventory balance. Subtracting scheduled receipts and on-hand inventory from gross requirements yields net requirements. Based upon the distributor's lot-sizing policy and receiving behavior, planned order receipts are generated. Firms may order only what they need for the next planning period or for a designated time period. Known as economic order quantity (EOQ), this involves a lot size based on a costing model. Alternatively, firms may be limited to multiples of a lot size simply because the supplying firm packages or palletizes their goods in standard quantities. Also, some distributors may require some
R. Anthony Inman
Coyle, John J., Edward J. Bardi, and C. John Langley, Jr. The Management of Business Logistics: A Supply Chain Perspective. 7th ed. Mason, OH: South-Western/Thomson Learning, 2003.
Ross, David Frederick. Distribution Planning and Control: Managing in the Era of Supply Chain Management. 2nd ed. Boston: Kluwer Academic Publishers, 2004.