Suppy Chain

Choosing the Right Distribution Model (I)

There are several logistical methods of supplying product to the market. They rely on different extent of use of 3rd parties.

Posted: Nov 2010

Logistic function spans the supply from the company to the customer. The product goes through warehouse and distribution system, until it reaches the customer. Company can deliver the product directly, but very often it chooses other types of distribution. The company can use 3rd parties to cover the part of supply chain. There are several different types of distribution of product. The sustainable competitive advantage should be built on the most suitable distribution model for the company.

These models differ in extent of using of 3rd parties. The models are different and have advantages and disadvantages. The choice of models depends on strategy, market, geography, finance policy and other factors. There is no ideal solution in choosing the distribution model.

Direct Distribution – The Company owns all parts of the processes. 
Advantage: Order control, higher service quality, shorter delivery lead time, process control
Disadvantages: Higher fixed and variable costs

Contractor 1 – The Company own most of the processes, delivery is on 3rd parties
Advantage: Order Control, Simplified internal process, reduced headcount
Disadvantage: Lower level of control over 3rd party, service of 3rd party

Contractor 2 – The Company transfers the warehousing and delivery, in some cases cash collection
Advantage – Outsourcing is simplifying internal processes, reduced headcount, reduced fixed / variable cost
Disadvantage: Lower level of control over 3rd party, service of 3rd party

Distributor – The Company transfers the most of the processes to Distributor
Advantage – Process simplicity, reduced headcount, low distribution costs
Disadvantage: High discounts paid to distributor, Low control over portfolio performance, service level of 3rd party, dependence on 3rd party.

The function allocation of models can vary between the company and 3rd party. Every model has application in specific situation. The judgment and choice of the model should be based on current market parameters and financial analysis. The models can be combined differently for different regions.

Choice of the model should be based on detailed analysis that will take all important parameter into account in supply chain management.