Network Design in the
Supply Chain
THE ROLE OF NETWORK DESIGN IN THE SUPPLY CHAIN
•The goal of supply chain network design is to create a cost-effective and efficient
supply chain that can meet the company’s demand while minimizing costs and
improving customer satisfaction.
•Supply chain network design decisions include the assignment of facility role;
location of manufacturing-, storage-,or transportation-related facilities; and the
allocation of capacity and markets to each facility.
Strategic Factors
•Electronic manufacturing service providers such as Foxconn and
Flextronics have been successful in providing low-cost electronics
assembly by locating their factories in low-cost countries such as China. In
contrast, firms that focus on responsiveness tend to locate facilities closer
to the market and may select a high-cost location if this choice allows the
firm to react quickly to changing market needs.
• Zara, the Spanish apparel manufacturer, has a large fraction of its
production capacity in Portugal and Spain despite the higher cost there.
The local capacity allows the company to respond quickly to changing
fashion trends in Europe. This responsiveness has allowed Zara to become
one of the fastest growing apparel retailers in the world.
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. Companies must consider inventory, transportation, and
facility costs when designing their supply chain networks.
•For example, with few facilities, Amazon has lower inventory and
facility costs than Barnes & Noble, which has hundreds of stores.
Barnes & Noble, however, has lower transportation costs.
Logistics and Facility Costs
•Total logistics costs are the sum of the inventory, transportation, and
facility costs.
•The facilities in a supply chain network should at least equal the
number that minimizes total logistics cost.
•A firm may increase the number of facilities beyond this point to
improve the response time to its customers. This decision is justified
if the revenue increase from improved response outweighs the
increased cost from additional facilities.
Supply chain network design implies finding optimal
locations for new facilities (distribution centers,
warehouses, and production sites), defining the flows
between them, and balancing costs.
The objective of network design
•A manager’s goal when locating facilities and allocating capacity should be to
maximize the overall profitability of the resulting supply chain network while
providing customers with the appropriate responsiveness.
•Managers use network design models in two situations. First, these models are
used to decide on locations where facilities will be established and the capacity to
be assigned to each facility.
• Location of supply sources and markets
• Location of potential facility sites
Demand forecast by market
• Facility, labor, and material costs by site
• Transportation costs between each pair of sites
• Inventory costs by site and as a function of quantity
• Sale price of product in different regions
• Taxes and tariffs
• Desired response time and other service factors
SunOil Example
As an example, consider SunOil, a manufacturer of petrochemical
products with worldwide sales. The vice president of supply chain is
considering several options to meet demand. One possibility is to set
up a facility in each region.
Network optimization models are useful for managers considering
regional [Link] first step is to collect the data in a form
that can be used for a quantitative model. For SunOil, the vice
president of supply chain decides to view the worldwide demand in
terms of five regions—North America, South America, Europe,
Africa, and Asia. The data collected are shown in table
Inputs
n: number of potential plant locations/capacity (each level of capacity will count as a separate location)
m : number of markets or demand points
Dj : annual demand from market j
Kic: potential capacity of plant I in capacity c
fi : annualized fixed cost of keeping plant i open
cij : cost of producing and shipping one unit from plant i to market j (cost includes production, inventory,
transportation, and tariffs)
Decision Variables
yic : 1 if plant i is open in capacity c, 0 otherwise
xij : quantity shipped from plant i to market j
LOCATING PLANTS AND WAREHOUSES SIMULTANEOUSLY
We consider a supply chain in which suppliers send material to
factories that supply warehouses that supply markets .