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Updated Feb 12, 2024

What Is Supply Chain Distribution?

A small business must understand how supply chain distribution works to be successful.

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Max Freedman, Senior Analyst & Expert on Business Operations
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For a small business to succeed in today’s market, it’s important to understand the complexities of supply chain distribution and its impact on businesses. Whether a startup or a growing enterprise, having an incomplete distribution plan can leave a business with slow delivery times and dissatisfied customers, while a successful plan can increase revenue and drive companies forward in their respective markets.

What is a supply chain distribution?

Supply chain distribution is the way in which businesses get their products to customers. Distribution plans largely depend on the financial and company goals of the business. An organization may choose to sell products directly to its clients, while others use third parties for distribution purposes. To be successful, your supply chain distribution should be formalized through an organized plan.

[Read related article: Supply Chain Finance or Invoice Factoring: Which Is Better for Managing Cash Flow?]

When creating the plan, the expectation is that companies will review the different distribution options open to them and choose the best channel for their customer base and product line. Formal distribution plans reduce the cycle days between when a customer places an order to delivery. Those who have an extensive distribution plan take only two days for order fulfillment. In comparison, those without a distribution plan can take 10 days. Supply chain distribution is used to balance supply and demand. Your distribution plan should be able to handle any type of market change, including supply disruptions and demand increases.

Supply chain distribution best practices 

To understand supply chain management, it’s important to know the differences between supply chain distribution and logistics since each has unique roles.

What is the difference between supply chain distribution and logistics?

In supply chain management, you’ll often see the terms distribution and logistics used interchangeably. In reality, the two terms aren’t quite the same (and neither one quite accounts for the increasing importance of transportation marketing).

Logistics

Logistics describes how products get from their origin point to the location at which customers buy them. It prioritizes efficient paths from warehouses and inventories to points of sale. It involves the following processes:

  • Materials handling
  • Supply and demand planning
  • Information flow
  • Supply chain security
  • Inbound transportation management
  • Outbound transportation management
  • Fleet management
  • Production
  • Network design
  • Order fulfillment
  • Third-party logistics (3PL) management, but only if you outsource your logistics processes

Distribution

Supply chain distribution is logistics in practice. If logistics is the process of figuring out how products will get from the manufacturer to the point of sale, then distribution describes actually getting those products where they’re going.

For example, let’s say your warehouse facility produces 100 units of the item you sell per day and a nearby department store has placed an order of 300 units. Logistics is the process of determining how to get those 300 units to the department store in a timely, cost-efficient fashion. Once you’ve nailed that down, distribution is the act of successfully getting the order to the department store. Distributing your product will involve inventory management, packaging and warehousing.

What are the four channels of distribution?

There are four main channels of distribution in the supply chain. Each distribution channel may work well for one type of business but falter for another.

  1. Direct sales: Direct sales involve direct distribution from manufacturer to customer. Direct sales is best for products that have a middle price point. The products should be affordable enough to have broad appeal. Direct sales also require that products sold have an extended shelf life.
  2. Brokerage: Brokers work as a go-between for manufacturers and retailers. For instance, a food manufacturer may hire a broker to sell its products to grocery stores. Brokers don’t ship the products directly but handle the sale contracts.
  3. Wholesale: Wholesalers purchase products in bulk from the manufacturer to sell at a higher price point through resales. As a reseller, wholesale companies take on more of the risk if products don’t sell since buyers purchase directly from them.
  4. Dual distribution: For dual distribution, a company may use several strategies to get its products to customers. For instance, the company may decide to offer both direct sales and wholesale. A franchise is one business model that frequently uses more than one type of distribution channel.

Although there are four distribution channels, emerging technologies are changing the way products are getting to consumers.

The supply chain and distribution channel is not your daddy’s supply chain and distribution channel.

In fact, today’s distribution chain is facing unprecedented changes that pose challenges and rewards to all participants in the supply and distribution trade.

Partners all along the “traditional” distribution and supply chain channel are being challenged by new entrants into supply and distribution markets across many industries. The waters have been muddied by the internet and the introduction of consumers and end users into supply chain distribution.

Did You Know?Did you know
Successful distribution and supply chain management is characterized by a solid organization featuring a centralized hub supported by a satellite chain distributor. Picture it like the spokes of a wheel connected at the middle – the hub.

The “new” supply chain and distribution channel has several key components, which fall under the supply chain management “umbrella.” These components include:

  1. Distribution: The physical logistics of moving inventory along a chain of distribution
  2. Inventory management: The entities that control how much is moved and where it is stored
  3. Customers: Identifying who the “real” customers are and keeping their loyalty despite all of the changes to the supply chain and distribution channel

Plan the chain of distribution carefully.

Manage your plan from within your chain, not from above. If you use statistics and historical data, you are not getting the whole picture. Talk to your partners and understand their needs using the traditional, one-on-one approach.

Choose your distribution chain players.

Who do you trust to make you successful? The answer should be your distributor partner. Not only is that partner a known commodity, but it can also provide business in the growing global market. Your newest partner could be half a world away, thanks to globalization and the new global economy.

Use supporting distribution chain management software.

Technology has made supply chain management for distributors manageable and reliable. Supply chain management software helps in planning, projecting and implementing the chain of distribution.

Plan and implement a supply chain and distribution program, understanding the role of each player along the distribution channel, including the “new” global community and the changing face of end users.

Research the tools and training needed to have a successful supply chain distribution strategy.

Track supply chain metrics.

Ensure your supply chain management strategy is working effectively by concentrating on key performance indicators (KPIs), including your inventory-to-sales ratio, perfect order rate, supply chain cycle time and warehousing costs. Monitoring these KPIs enables businesses to locate bottlenecks as well as areas of success, ensuring optimal performance that improves customer satisfaction and cash flow.  

TipBottom line
While more rigid in its terms, standing orders are better for short-term forecasting, whereas blanket orders offer better protection against price fluctuations and ensure consistent inventory levels.

Purchase in bulk to reduce costs.

When purchasing inventory, consider buying in volume using either blanket orders (supplies are delivered as needed over a period at one set price and quantity) or standing orders to get cost-saving benefits. A less flexible option, standing orders deliver supplies at predetermined times throughout the year in specific quantities. 

Buying in larger quantities often yields discounts for businesses and lessens the administrative burden as opposed to making smaller, more frequent purchases. 

Sean Peek contributed to this article.

author image
Max Freedman, Senior Analyst & Expert on Business Operations
For almost a decade, Max Freedman has been a trusted advisor for entrepreneurs and business owners, providing practical insights to kickstart and elevate their ventures. With hands-on experience in small business management, he offers authentic perspectives on crucial business areas that run the gamut from marketing strategies to employee health insurance. Freedman's guidance is grounded in the real world and based on his years working in and leading operations for small business workplaces. Whether advising on financial statements, retirement plans or e-commerce tactics, his expertise and genuine passion for empowering business owners make him an invaluable resource in the entrepreneurial landscape.
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