NETWORK DESIGN IN THE SUPPLY CHAIN 108
5.1 The Role of Network Design in the Supply Chain
. 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
1. Facility role: What role should each facility play? What processes are performed
at each facility?
2. Facility location: Where should facilities be located?
3. Capacity allocation: How much capacity should be allocated to each facility?
4. Market and supply allocation
5.2 Factors Influencing Network Design Decisions
In this section we examine a wide variety of factors that influence network design
decisions in supply chains.
Strategic Factors
A firm’s competitive strategy has a significant impact on network design decisions
within the supply chain.
Technological Factors
Characteristics of available production technologies have a significant impact on
network design decisions.
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.
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.
FREIGHT AND FUEL COSTS
Fluctuations in freight and fuel costs have a significant impact on the profits of any
global supply chain.
Political Factors
The political stability of the country under consideration plays a significant role in
location choice.
Infrastructure Factors
The availability of good infrastructure is an important prerequisite to locating a
facility in a given area.
Competitive Factors
Companies must consider competitors’ strategy, size, and location when designing
their supply chain networks.
POSITIVE EXTERNALITIES BETWEEN FIRMS
Positive externalities occur when the collocation of multiple firms benefits all of
them.
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.
Customer Response Time and Local Presence
Firms that target customers who value a short response time must locate close to
them.
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.
5.3 FRAMEWORK FOR 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.
Phase I: Define a Supply Chain Strategy/Design
The objective of the first phase of network design is to define a firm’s broad supply
chain design.
Phase II: Define the Regional Facility Configuration
The objective of the second phase of network design is to identify regions where
facilities will be located, their potential roles, and their approximate capacity.
Phase III: Select a Set of Desirable Potential Sites
The objective of Phase III is to select a set of desirable potential sites within each
region where facilities are to be located.
Phase IV: Location Choices
The objective of Phase IV is to select a precise location and capacity allocation for
each facility.
5.4 MODELS FOR FACILITY LOCATION AND CAPACITY ALLOCATION
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.
Phase II: Network Optimization Models
During Phase II of the network design framework (see Figure 5-2), a manager
considers regional demand, tariffs, economies of scale, and aggregate factor costs
to decide the regions where facilities are to be located.
Phase III: Gravity Location Models
During Phase III (see Figure 5-2), a manager identifies potential locations in each
region where the company has decided to locate a plant.
Phase IV: Network Optimization Models
During Phase IV (see Figure 5-2), a manager decides on the location and capacity
allocation for each facility.
5.5 MAKING NETWORK DESIGN DECISIONS IN PRACTICE
Managers should keep the following issues in mind when making network design
decisions for a supply chain.
5.6 SUMMARY OF LEARNING OBJECTIVES
1. Understand the role of network design in a supply chain.
2. Identify factors influencing supply chain network design decisions.
