Earlier, we talked about the two main types of supply chains. Between market responsive and physically efficient supply chains. Throughout this course, we'll cover the tools and techniques to achieve a market responsive or a physically efficient supply chain. One of these tools is the design of distribution networks. In this lesson, we'll use an example of online ordering in Amazon to further elaborate on the trade-offs between the main logistics drivers in supply chains to achieve strategic fit. Distribution is the act of moving inventory from suppliers to end customers. Distribution is one of the key elements in effective logistics management. A good distribution network minimizes the cost of inventory and transport, which means that distribution networks determine how responsive or cost-efficient supply chains will be. Now, let's get back to the example of ordering a book. Remember, I ordered this book from Amazon which was then shipped from a bookstore in the United States to me, the customer in Sydney, Australia. We discussed the logistics drivers of this supply chain briefly. Butt what we haven't talked about yet, and is quite important, is the trade-off between these logistics drivers. Imagine Amazon decided it wanted to decrease the delivery time of local and international orders even further, what options does Amazon have? You can pause this video now and think about some of the changes Amazon could make in it's logistics drivers to achieve this. I'll see you shortly. So, to decrease delivery times on your book order, one obvious answer you probably have in your list is that Amazon could use the fastest transportation modes, and then instead of storing the parcels in distribution centers until they fill a truck to leverage economies of scale, they could just directly dispatch the parcels to the customers. This way, Amazon would decrease the number of its facilities such as distribution centers and warehouses. As you can imagine though, the cost of transport would go up. So you can see that outbound transportation costs have a reverse relationship with the number of facilities. Another option that Amazon has would be to actually increase the number of its local distribution centers and warehouses in Sydney and start storing books and that are currently only available in the US. This way Amazon would increase the number of its facilities, but it would save on international transportation costs of the book for sure. But what happens with this option is that Amazon would be increasing its stock levels of books in its distribution centers in Sydney to fill up those centers. So, although the cost of outbound transport would decrease, the cost of buying and storing inventory would increase. Another cost element that would increase here is the cost of facilities such as buying or renting the distribution centers, utilities costs, staff costs, and equipment needed to run the facilities. If Amazon were to choose this option however, the delivery time would certainly decrease and Amazon would get close to his original goal of decreasing the delivery time. Here, Amazon needs to decide if it is willing to pay for the increased costs of facilities and inventory in exchange for the decreased cost of transportation and decreased response time. This is a typical example of being more physically-efficient or being more market-responsive. As you saw in this example, the broad decisions you make for your supply chains distribution network is informed by your supply chain strategy. You need to consider the cost and benefit trade-offs between the logistics drivers in your supply chain to achieve strategic fit, and then you need to make a detailed plan for the actual design of your network. We'll talk about this in another video. For now, google a supply chain of your choice or choose a supply chain that you're familiar with. Look into their choices of facilities, inventory, and transport. Look at their product or service. See if there is an alignment between their supply chain strategy and their distribution network.
