What it means
Think of a distribution network as the shape of a business drawn on a map. Factories or suppliers feed a set of storage points, those points feed customers, and the number, size and location of the storage points define the network.
Almost every question about delivery speed and cost traces back to that shape. Networks are usually described by how many tiers they contain.
A single national centre serving all customers is the simplest and cheapest to run; adding regional centres shortens the final journey to the customer but multiplies fixed costs and splits stock across more locations. Some businesses add a third tier of small local depots purely to support same-day delivery in dense cities.
The economics behind the choice are consistent. Adding a location raises fixed costs and increases total stock, because each site needs its own safety buffer, but it lowers transport cost by cutting the distance to customers.
Cost per unit therefore falls as sites are added, reaches a minimum, and then rises again, so the goal is to find where that minimum sits. Resilience has become a bigger part of the calculation.
A network with one enormous centre is efficient until a fire, a flood or a strike closes it, and businesses increasingly accept a slightly higher steady-state cost in exchange for a second site that can absorb the load. That is a deliberate insurance decision rather than an inefficiency.
Networks also need reviewing as demand shifts. A layout designed around a customer base concentrated in one region becomes expensive once online sales spread demand nationally, and the warning sign is usually a rising share of long-distance, part-full deliveries.
Reviewing the shape every few years is far cheaper than discovering the mismatch through eroding margins.
In practice
Real-world examples.
Example
An online pet supplies retailer runs one national warehouse and offers three day delivery. When a competitor launches next-day service, it opens a second site 200 miles away, accepting higher fixed cost to match the service promise.
Example
A drinks wholesaler serving pubs and restaurants operates eight small depots because deliveries are frequent, small and time-sensitive. Consolidating into two large sites would cut rent but would make daily morning delivery rounds impossible.
Example
A car parts group redesigns its network after acquiring a competitor, closing three overlapping depots and reassigning their territories. Annual property and staff costs fall by $1,900,000 while average delivery time is unchanged.
Formula
Calculation
Total network cost = Fixed facility costs + (Handling cost per unit x Units) + (Transport cost per unit x Units)
A distributor ships 1,000,000 units a year through three regional centres. Each centre costs $600,000 a year to run in rent, rates and core staff. Handling costs $1.80 per unit and outbound transport averages $3.00 per unit.
Fixed costs = 3 x $600,000 = $1,800,000
Handling = $1.80 x 1,000,000 = $1,800,000
Transport = $3.00 x 1,000,000 = $3,000,000
Total network cost = $1,800,000 + $1,800,000 + $3,000,000 = $6,600,000, which is $6.60 per unit
The team proposes a fourth centre. Fixed costs would rise to 4 x $600,000 = $2,400,000, handling would stay at $1,800,000, and shorter delivery distances would cut transport to $2.55 per unit, or $2,550,000. The new total is $2,400,000 + $1,800,000 + $2,550,000 = $6,750,000, or $6.75 per unit. The transport saving of $450,000 does not cover the $600,000 of extra fixed cost, so on cost grounds alone the fourth centre makes the network $150,000 a year worse, and it would only be justified by the service improvement it delivers.Case study
Seen in the real world.
Fenwater Supplies is an invented company used here as an illustrative example of network redesign. It distributed plumbing components from five depots inherited through a series of acquisitions, none of which had ever been reviewed as a group, and two of them sat within forty miles of each other serving overlapping areas.
A modelling exercise tested networks of three, four and five sites against the current customer map. Four sites produced the lowest total cost at roughly $8,900,000 a year against the existing $10,100,000, while three sites were cheaper still on paper but pushed 18% of customers outside the next-day delivery zone the sales team had promised.
Fenwater chose the four-site option, closing one depot and relocating another sixty miles north to sit closer to a region that had grown substantially. In this illustrative scenario the change saved about $1,200,000 a year and improved average delivery times slightly, a reminder that cost and service do not always pull in opposite directions when the starting layout is genuinely poor.
Watch out
Common mistakes.
- Designing the network around where the business happens to own buildings rather than around where customers actually are today.
- Counting only rent and transport when comparing options, and ignoring the extra safety stock and working capital that every additional location requires.
- Assuming more sites always mean better service, when poor stock allocation across many sites can produce more out-of-stock orders than a single well-stocked centre.
Questions
People also ask.
How often should a distribution network be reviewed?
Most businesses look at it every three to five years, or sooner after an acquisition, a large channel shift or a significant change in where customers are located.
What is a hub and spoke network?
It is a design where goods flow into one or more large hubs and then out to smaller spokes for final delivery, which concentrates sorting work and keeps long-distance vehicles full.
Does e-commerce change the network design?
Considerably, because parcels go to thousands of individual addresses instead of pallets to a few stores, which shifts cost towards final-mile delivery and favours sites near population centres.
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