CHAPTER 5: NETWORK DESIGN IN THE SUPPLY
CHAIN
Supply Chain Management — Quick Revision Notes
1. NETWORK DESIGN DECISIONS
Network design determines the physical structure of a supply chain — where facilities are, what they do, how
much capacity they have, and which markets they serve. There are four key types of decisions:
Decision Type What It Means
Facility Role What does each facility do? Is it a manufacturing plant, a distribution
centre, a cross-docking hub, or a returns centre? Defines the function
of every node in the network.
Facility Location Where should each facility be physically placed? Location determines
transportation costs, access to markets, labour availability, and
tax/tariff implications.
Capacity Allocation How much capacity should each facility have? Too much = wasted
fixed cost. Too little = unmet demand and lost sales.
Market and Supply Which facilities serve which customers? Which suppliers feed which
Allocation plants? This determines the flow of goods through the entire network.
💡 All four decisions are deeply interrelated — changing one forces you to reconsider all the others.
Network design is a long-term strategic choice with lasting consequences.
2. FACTORS INFLUENCING NETWORK DESIGN DECISIONS
Seven categories of factors must be evaluated when designing a supply chain network. Each can significantly
change which network configuration is optimal:
Factor Category What to Consider & Why It Matters
Strategic The network must support the company's overall competitive strategy
— whether that is cost leadership, responsiveness, or flexibility.
Strategy drives all other design choices.
Technological Production technology characteristics (cost structure, economies of
scale, flexibility) affect how many facilities are needed and how large
they should be.
Macroeconomic Exchange rates, inflation, interest rates, and trade conditions affect the
cost of operating in different countries or regions.
Political Government stability, trade policies, import/export regulations, and tax
incentives vary by country and can make certain locations much more
or less attractive.
Infrastructure Quality of roads, ports, airports, and utilities determines whether a
location can actually support efficient supply chain operations.
Factor Category What to Consider & Why It Matters
Competitive Where competitors locate their facilities affects where you should
locate yours — to either share infrastructure benefits or to differentiate
access to customers.
Logistics and Facility Costs Transportation, warehousing, inventory carrying costs, and facility
construction/operating costs must all be balanced — they often pull in
opposite directions.
3. SERVICE LEVEL AND NUMBER OF FACILITIES
The number of facilities in a network directly affects how quickly customers can be served. This relationship is not
linear — it follows a diminishing returns pattern with a key trade-off built in.
Scenario Effect on Response Time
Too few facilities (e.g. 1 Response time is HIGH — customers are far away, deliveries take
central warehouse) long. The supply chain is efficient in cost but slow in service.
Adding more facilities Response time DECREASES sharply at first — facilities move closer to
customers, significantly cutting delivery distance and time.
Too many facilities Response time stops improving (diminishing returns) — once a facility
is close enough to every customer, adding more doesn't help. Costs
keep rising but service stays flat.
Optimal point The 'sweet spot' where response time is sufficiently low without over-
investing in unnecessary facilities.
💡 Key Insight: More facilities = faster service, but only up to a point. Beyond the optimal number, you
pay more without gaining any meaningful service improvement.
4. COSTS AND NUMBER OF FACILITIES
Adding more facilities changes three major cost components in different directions, creating a total cost curve with
a minimum point — the optimal number of facilities.
Cost Component Direction as Facilities Increase
Transportation Cost DECREASES ↓ — facilities get closer to customers, reducing outbound
delivery distance and cost per unit shipped.
Facility (Fixed) Cost INCREASES ↑ — each additional facility adds fixed costs: rent, utilities,
staff, equipment. More facilities = higher total fixed cost.
Inventory Cost INCREASES ↑ — with more facilities, inventory is split across many
locations. Each location needs its own safety stock. Pooling benefits
are lost.
Total Cost U-SHAPED CURVE — falls at first (transport savings dominate),
reaches a minimum, then rises (inventory + facility costs dominate).
The minimum point = optimal number of facilities.
• Transportation cost: falls as number of facilities rises (closer to customers)
• Inventory cost: rises as number of facilities rises (safety stock duplicated everywhere)
• Facility cost: rises as number of facilities rises (more fixed costs)
• Total cost: U-shaped — there is an optimal number of facilities that minimises total cost
• The goal of network design is to find this minimum total cost point
5. FRAMEWORK FOR NETWORK DESIGN DECISIONS ★ EXAM FOCUS
FRAMEWORK — Network Design Decision
Phases
← LEFT INPUTS PHASE (Decision) RIGHT INPUTS →
PHASE I — Supply Global Competition
→ Competitive Strategy
←
→ Internal Constraints (capital, growth, existing Chain Strategy
Tariffs and Tax
network) ▼ Incentives ←
Regional Demand
PHASE II — Regional (size, growth, local
→ Production Technologies (cost, scale, flexibility) specs) ←
Facility Configuration
→ Competitive Environment Political, Exchange
▼ Rate & Demand
Risk ←
PHASE III — Desirable
Sites Available
→ Production Methods (skill needs, response time)
Infrastructure ←
▼
Logistics Costs
PHASE IV — Location (transport,
→ Factor Costs (labor, materials, site-specific)
Choices inventory,
coordination) ←
Phase What Happens & Key Question Answered
Phase I — Supply Chain Define the overall supply chain strategy aligned with the competitive
Strategy strategy. Decide the broad role of the supply chain — cost focus,
responsiveness focus, or flexibility. Key question: What should our
supply chain be designed to do?
Phase II — Regional Facility Determine which regions of the world or country need facilities, and
Configuration how many. Analyse regional demand, production technologies,
competitive environment, and political/macro risks. Key question: In
which regions should we have facilities, and how many?
Phase III — Desirable Sites Within the chosen regions, identify the best candidate sites based on
available infrastructure, production methods, and skill availability. Key
question: Which specific locations within those regions are viable?
Phase IV — Location Evaluate the shortlisted sites in detail using factor costs (labour,
Choices materials), logistics costs (transport, inventory, coordination), and
select the final locations. Key question: Which exact sites do we
choose, and how do we configure capacity?
• Phase I sets strategy — what the supply chain must achieve (e.g. low cost vs. fast response)
• Phase II sets regional scope — which parts of the world need facilities
• Phase III narrows to viable sites — infrastructure and production feasibility
• Phase IV makes the final call — detailed cost analysis picks exact locations