What Is a Distribution Network?

In a supply chain, a distribution network is an interconnected group of storage facilities and transportation systems that receive inventories of goods and then deliver them to customers. It is an intermediate point to get products from the manufacturer to the end customer, either directly or through a retail network. A fast and reliable distribution network is essential in today's instant gratification society of consumers.

Key Takeaways

  • In a supply chain, a distribution network is an interconnected group of storage facilities and transportation systems that receive inventories of goods and then deliver them to customers.
  • It is an intermediate point to get products from the manufacturer to the end customer, either directly or through a retail network.
  • A fast and reliable distribution network is essential in today's instant gratification society of consumers.
  • Location to the customer and infrastructure quality are two of the most important aspects of a distribution network.
  • There are many types of distribution networks, such as a hub-and-spoke or decentralized, that work best for different types of products.

Understanding a Distribution Network

Developing an efficient distribution network is one of the most critical aspects of the success of a company. It is a component of strategic planning that allows a company's products to reach customers quickly and efficiently while at the same time keeping costs low for the company so that they may realize larger profit margins.

The supply chain for goods can involve a far-reaching distribution network depending on the product and where the end customers are located. A manufacturer may have a distribution network to serve wholesalers, who in turn have their own network to ship to distribution networks operated by retailers, who at the last link of the supply chain would sell the goods in their retail stores.

Alternatively, a simplified supply chain could involve a manufacturer shipping finished products to its distribution network and then directly to end consumers.

Location (proximity to the customer) and infrastructure quality are two important attributes of a distribution network. Additionally, the storage, handling, and transportation functions at a distribution site are set up to suit the particular needs of the company to serve its customer base in a geographic area. There can be a high level of sophistication at a single site—and by extension, the entire distribution network—to optimally process order flow of finished goods, whether a handful of large items such as farm tractors or thousands of SKUs for a retail chain.

For the entire distribution network, a company must plan out needs for equipment, workers, information technology systems, and transportation fleets. The company must determine whether a hub-and-spoke distribution network is right for its business or a decentralized network.

Distribution networks come at the post-manufacturing part of a supply chain, the flow of goods and services, and include all stages that deliver final products into the hands of consumers.

Real World Examples

Establishing an effective distribution network requires a studied approach because it is increasingly considered a critical asset in this new age of e-commerce. Walmart (WMT), for example, with 190 distribution facilities as of 2020, is allocating more capital to build out additional fulfillment centers for its distribution network as it evolves with the competitive demands of the market.

As of July 2020, Walmart's distribution network, including its retail stores, is 924 million square feet. It is so large, that in comparison, the island of Manhattan is 661 million square feet. For even more efficiency, Walmart divides its distribution network into specific categories. For example, it has regional distribution centers, food distribution centers, fashion distribution centers, and more. This ensures that each distribution center is focused on one product area and is therefore perfectly designed to meet the needs of delivering that product quickly and at the lowest cost.

Amazon (AMZN) has also increased its distribution network, building out enormous robotically-controlled warehouses across the world and operating its own freight trucking fleets and cargo planes. Amazon has even discussed using autonomous drones to deliver goods to customers, which would be an innovation in the distribution of goods.

Amazon is a massive global retailer and, therefore, its distribution network spans many countries. As of July 2020, Amazon has 1,215 distribution facilities in 21 countries. Amazon primarily breaks its distribution network down into prime hubs, fulfillment centers, inbounds and outbound sortation centers, and delivery stations.