Distribution channel decision is one of the most important decisions in supply chain management (SCM) because it has direct effects on other marketing decisions. In this paper, from the standpoint of integration and coordination of the supply chain, an optimization model for bi level distribution network design in which demand allocation is considered is put forward. Demand for products are allocated to branch plants by their respective production capacity and demands of customer zones, productions are are p lanned to reduce the to tal co st of p roduct ion2dist ribu t ion system. To speed up the solution of the problem , a solution method that hybridizes heuristic algorithm with conventional branch and bound method is presented. According to the problem ’s characteristics, a heuristic algorithm is used to find a near optimal solution, then the near optimal solution is used as the upper bound in branch and bound to find optimal solution. At the end of this paper, a numerical example is given.