Learning Objectives 5.1 Understand the role of network design in a supply chain.

Network design decisions

Supply chain network design decisions are classified as follows:
– Facility role: How many manufacturing plants, production lines, distribution centers, cross-
docking facilities?
What role should each facility play?
What processes are performed at each facility?
– Facility location: Where should facilities be located?
– Capacity allocation: How much capacity at each facility?
– Market and supply allocation: Which products? What markets?
• Network design decisions have a significant impact on performance because they
determine the supply chain configuration and set constraints.
• Decisions concerning the role of each facility are significant
• Main goal is to decrease supply chain cost or to increase responsiveness.

• Facility location decisions have a long-term impact on a supply chain’s performance

because it is expensive to shut down a facility or move it to a different location.
• A good location decision can help a supply chain be responsive while keeping its costs
low.
• Capacity allocation can be altered more easily than location, but capacity decisions do
tend to stay in place for several years.
• Allocating too much capacity to a location results in poor utilization and, as a result, higher
costs.
• The allocation of supply sources and markets to facilities has a significant impact on
performance because it affects total production, inventory, and transportation costs incurred
by the supply chain to satisfy customer demand.
• This decision should be reconsidered on a regular basis so the allocation can be changed
as production and transportation costs, market conditions, or plant capacities change.
• Revisit design decisions after market changes, mergers, or factor cost changes.
Network design decisions include identifying facility locations, capacities, products handled,
and allocating markets to be served by different facilities. These decisions define the
physical constraints within which the network must operate as market conditions change.
Good network design decisions increase profits by supporting the supply chain strategy.
Network design decisions must be revisited as market conditions change or when two
companies merge. For example, as its subscriber base grew, Netflix had 58 DCs by 2010
across the United States to lower transportation cost and improve responsiveness. With the
growth in video streaming and the corresponding drop in DVD rentals, Netflix closed almost
20 DCs by the end of 2013. In contrast, Amazon increased the number of DCs in the United
States from about 20 in 2009 to about 40 in 2013. Changing the number, location, and
demand allocation of DCs with changing demand has been critical to maintaining low cost
and responsiveness at both Netflix and Amazon.
5.2 Identify factors influencing supply chain network design decisions.
Factors Influencing Network Design Decisions
Strategic Factors A firm’s competitive strategy has a significant impact on network design
decisions within the supply chain.
For example, Zara has production facilities in Europe as well as Asia. Its production facilities
in Asia focus on low cost and produce primarily standardized, low-value products that sell in
large amounts. The European facilities focus on being responsive and produce primarily
trendy designs whose demand is unpredictable.
Firms that focus on cost leadership tend to find the lowest cost location for their
manufacturing facilities, even if that means locating far from the markets they serve.
Electronic manufacturing service providers such as Foxconn.
----Competitive Factors
Companies must consider competitors’ strategy, size, and location when designing their
supply chain networks. A fundamental decision firms make is whether to locate their
facilities close to or far from competitors.
– Positive externalities Positive externalities occur when the collocation of multiple firms
benefits all of them. Positive externalities lead to competitors locating close to each other. •
Example- retail stores to increases overall demand, thus benefiting all parties.
Technological Factors: Characteristics of available production technologies have a
significant impact on network design decisions. If production technology displays significant
economies of scale, a few high-capacity locations are most effective.
Political Factors The political stability of the country under consideration plays a significant
role in location choice. Companies prefer to locate facilities in politically stable countries
where the rules of commerce and ownership are well defined. Global Political Risk Index (GPRI)
Infrastructure Factors The availability of good infrastructure is an important prerequisite to
locating a facility in a given area. Poor infrastructure adds to the cost of doing business from
a given location. Key infrastructure elements include availability of sites and labor, proximity
to transportation terminals, rail service, proximity to airports and seaports, highway access,
congestion, and local utilities.
– Locating to split the market When there are no positive externalities, firms locate to be
able to capture the largest possible share of the market When firms do not control price but
compete on distance from the customer, they can maximize market share by locating close
to each other and splitting the market.
Customer Response Time and Local Presence Firms that target customers who value a
short response time must locate close to them. Customers are unlikely to come to a
convenience store if they have to travel a long distance to get there. supermarket chains
tend to have stores that are larger than convenience stores and not as densely distributed.
A coffee shop is likely to attract customers who live or work nearby. No faster mode of
transport can serve as a substitute and be used to attract customers who are far away from
the coffee shop.
Logistics and Facility Costs : Logistics and facility costs incurred within a supply chain
change as the number of facilities, their location, and capacity allocation change.
Total logistics costs are the sum of the inventory, transportation, and facility
costs. For example, when iron ore is processed to make steel, the amount of output is a
small fraction of the amount of ore used. Locating the steel factory close to the supply
source is preferred because it reduces the distance that the large quantity of ore has to
travel.
• Macroeconomic Factors: Macroeconomic factors include taxes, tariffs, exchange rates,
and shipping costs that are not internal to an individual firm.
– Tariffs and tax incentives Tariffs refer to any duties that must be paid when products
and/or equipment are moved across international, state, or city boundaries. Tariffs have a
strong influence on location decisions within a supply chain.
Tax incentives are a reduction in tariffs or taxes that countries, states, and cities often
provide to encourage firms to locate their facilities in specific areas. free trade zones, EZ
– Exchange-rate and demand risk Fluctuations in exchange rates are common and have a
significant impact on the profits of any supply chain serving global markets. Exchange-rate
risks may be handled using financial instruments that limit, or hedge against, the loss due to
fluctuations.
– Freight and Fuel Costs Fluctuations in freight and fuel costs have a significant impact on
the profits of any global supply chain. fluctuations are best dealt with by hedging prices on
commodity markets or signing suitable long-term contracts.
Network design decisions are influenced by non quantifiable factors including str ategic,
competitive, political, and infrastructure. These decisions are also influenced by quantifiable
factors including desired response time and service levels, total logistics costs, and taxes
and tariffs. Network design decisions should be checked for robustness in the face of
fluctuations in demand, costs, and exchange rates.
5.3 Discuss a framework for making network design decisions.
The goal when designing a supply chain network is to maximize the firm’s profits while
satisfying customer needs in terms of demand and responsiveness. Global network design
decisions are made in four phases.
Phase I: Define a Supply Chain Strategy/Design
– Clear definition of the firm’s competitive strategy
– Forecast the likely evolution of global competition
– Identify constraints on available capital
– Determine broad supply strategy
Phase II: Define the Regional Facility Configuration
– Forecast of the demand by country or region
– Identify fixed and variable costs, economies of scale or scope
– Identify regional tariffs, requirements for local production, tax incentives, and export or
import restrictions
– Identify competitors
– Identify demand risk, exchange-rate risk, political risk
Phase III: Select a Set of Desirable Potential Sites
– Hard infrastructure requirements
– Soft infrastructure requirements
Hard infrastructure requirements include the availability of suppliers, transportation services,
communication, utilities, and warehousing facilities.
Soft infrastructure requirements include the availability of a skilled workforce, workforce
turnover, and the community receptivity to business and industry.
Phase IV: Location Choices and Market Allocation
✓is to select, from among the potential sites, a precise location and capacity allocation for
each facility
✓The network is designed to maximize total profits.

✓Taking into account the expected margin and demand in each market, various logistics
and facility costs, and the taxes and tariffs at each location