Designing distribution systems to support vendor strategies in supply chain management

The interactions among a firm's distribution strategy, market share, and distribution costs are an important consideration in the design of supply chain networks. However, these interactions are largely ignored by existing distribution system design methodologies, which assume demand is constant regardless of the firm's distribution strategy. This paper describes a multidisciplinary framework that considers these interactions in the design of ‘profit maximizing’ distribution networks. The framework employs two major decision support methodologies: (1) binary logit models for estimating market share considering various demand-influencing parameters such as product price and distribution service, and (2) a mixed-integer programming model for finding optimal distribution network designs. We applied the framework to an actual design problem facing a national distributor of industrial chemical products. The test results verify the framework's large-scale capability and the potential benefit of the integrated solution methodology.