Lect 6 Network Design in a Supply Chain

7/26/2019 Lect 6 Network Design in a Supply Chain

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Network Design in the supply chain

Learning Objectives

1. Understand the role of network design in a supplychain

2. dentify the factors in!uencing supply chain network design decisions

". Develop a fra#ework for #aking network designdecisions

Supply chain network design decisions include the location ofmanufacturing, storage or transportation- related facilities andthe allocation of capacity roles to each facility

Supply chain network design decisions are classi ed as follows:

1. $acility role : what role should each facility play? Whatprocesses are performed at each facility?

2. $acility location% where they should e located?

!. &apacity allocation : how much capacity should eallocated to each facility

". 'arket and supply allocation : What markets should eachfacility use

1. $(& L )* +OL,%

• #onsideration must e gi$en to each of the network

design decision as they are all interrelated• %ole played y each facility will determine the degree of&e'i ility the supply chain has in changing the way it meetsdemand.



('ample: )oyota *otors: plants located world-wide in eachmarket it ser$es. (ach plant was capa le only of ser$ing itslocal market

#aused harm to )oyota during the recession of 1++ s lot ofidle capacity that could not e used to ser$e other market thanthe local one. )o counteract this pro lem, )oyota has addednow more &e'i ility to each plant to e a le to ser$e marketsthan the local one

2. $(& L )* LO&() ON D,& - ON

• /ong term impact on a supply chain s performance• 0ood location can help a supply chain to e responsi$e

while keeping its cost low

('ample: )oyota uilt its assem ly plant in the S since 1+ -pro$ed to e $ery pro ta le for )oyota when the 3en currencystrengthened and cars produced in 4apan were too e'pensi$e to

e cost competiti$e with cars produced in the S. )he plantallowed )oyota to e responsi$e to the S market while keepingcosts low.

oorly located facility

• *ake it di5cult for a supply chain to perform close to thee5cient frontier

• ('ample: 6ma7on: found it di5cult to e cost e8ecti$e in

supplying ooks throughout the S when it had a singlewarehouse in Seattle. 6s a result the company addedwarehouses located in other parts of the country

". &apacity (llocation



• Signi cant impact on chain performance• #apacity allocation can e altered more easily than location,

capacity decisions do tend to stay in place for se$eralyears

• )oo much capacity to a location results in poor utili7ationand as a result higher costs.

• )oo little capacity results in poor responsi$eness if demandis not satis ed or high cost if demand is lled from a distantfacility

/. 'arket and supply allocation.

• 68ects total production, in$entory, and transportationcosts incurred y the supply chain to satisfy customerdemand

• 9eeds to e considered on a regular asis so that theallocation can e changed as market conditions or plantcapacities change

9etwork design decisions:

Signi cant impact on performance ecause they determine

the supply chain con guration and sets constraints within

which in$entory, transportation and information can e used

to either decrease supply chain cost or increase

responsi$eness

irm need to focus on network design decisions as it demandgrows and its current con guration ecomes too e'pensi$e

or pro$ides poor responsi$eness. ;ell has to uild a facility

in <ra7il to ser$e its South 6merican market ecause the



factories in )e'as , =reland , and *alaysia could not do so in

the most pro ta le manner>ery important when two companies merge consolidation

facilities and changing the location and role of others canoften help reduce cost and impro$e responsi$eness

$(&)O+- N$LU,N& N0 N,) O+ D,- 0N D,& - ON-

( nu#ber of factors have an in!uence on network designdecisions

1. -trategic factors3 identify the mission or strategic role of

each facility#ost leadership tend to nd the lowest cost location

e$en though it means locating $ery far from the

market they ser$eirms focusing on responsi$eness tend to locate

facilities close to the market and may select high cost

location if this choice allows the rm to react uickly

to changing market needs, @ con$enience storesA

0LO4(L -U L* &5( N N,) O+ -

0lo al supply chain networks can est support their strategic

o Becti$es with facilities in di8erent countries playing di8erent

roles



Strategic roles played y each facility when designing it glo al

network

1. O6shore $acility : Low cost facility for export production-

serves the role of being a low cost supply source for

markets located outside the country where the facility is

located2. Source facility : :low –cost facility for global production-

source of product for the entire global network !. Server facility : egional production facility: supply the

market where it is located uilt ecause of ta' incenti$es,

tari8 arriers or high costs to supply the region from

elsewhere". #ontri utor facility- regional production facility with

de$elopment skills- ser$e the market where it is located ut

also assumes responsi ility for product customi7ation,

process impro$ements, product modi cations , product

de$elopmentC. Output facility %egional facility uilt to gain local skills-

located primarily to get access to knowledge or skills that

may e'ist within a certain region.0i$en its location it also plays the role of ser$er facility

D. /ead facility- facility that leads in de$elopment and process

technologies- a lead facility creates new products, processes

and technologies for the entire network. lead facilities arelocated in areas with good access to a skilled workforce and

technological resources

2. )echnological factors



• 6$aila le production technologies ha$e a signi cant

impact on network design decisions• =f production technology displays signi cant economies

of scale , few high capacity locations are the moste8ecti$e-

('ample in the manufacturer of computer chips where

factories re uire huge in$estments as a result most

companies uild few chip production facilities and each one

they uild has a $ery large capacity=n contrast if facilities ha$e lower 'ed costs many local

facilities are preferred ecause this helps lowertransportation costs. or e'ample ottling plants for #oca-

#ola sets many ottling plants all o$er the world each

ser$ing its local market )echnology &e'i ility makes it easier to consolidate

manufacturing in a few large facilities". 'acroecono#ic factors 3 =ncludes ta'es, tari8s E

e'change rates

• )a'es- duties paid when products Fe uipment are

mo$ed across international , state or regional

oundaries• )ari8s ha$e a strong in&uence on location decisions

within a supply chain-• Gigh tari8s may lead to setting production locations

within the country or not ser$ing it.• )a' incenti$es are a reduction in tari8s or ta'es that

countries states and cities often pro$ide to encourage

rms to locate their facilities in speci c areas



Holitical sta le countries where usiness climate and

incenti$es are good will attract rms to locate facilities

8. nfrastructure $actors

+oad networks&o##unication$acilities

9. &o#petitive $actors

• 9eed to consider competitors strategy si7e, and

location• Whether need to locate facilities close to competitors or

far from them

ositive e7ternalities between :r#s

•

6re instances where the collocation of multiple rms ene tsall of them

• Hositi$e e'ternalities lead to competitors locating close to

each other. or e'ample gas stations and retail stores tend

to locate close to each other ecause doing so increases the

o$erall demand, thus ene tting all parties• <y locating together in a mall, competing retail stores make

it more con$enient for customers who need only dri$e to one

location and nd e$erything they are looking for.• )his increases the total num er of customers who $isit the

mall increasing demand for all stores located there.



$ra#ework for Network Design Decisions

When faced with a network design decision, the goal of themanager is to design a network that ma'imi7es the rm s pro ts

while satisfying customer needs in terms of demand and

responsi$eness

)o design an e8ecti$e network, the manger needs to consider four

phases.

hase %

• ;e ne a rm s supply chain strategy- speci es what

capa ilities the supply chain must ha$e to support a rm s

competiti$e strategy• *anagers must forecast the likely e$olution of glo al

competition and whether competitors in each market will e

local or glo al players• *anagers must also identify constraints on a$aila le capital

and whether growth will e accomplished y ac uiring

e'isting facilities uilding new facilities

5(-, %

• =dentify regions where facilities will e located their potential

roles and their appro'imate capacity



• *ake a forecast of the demand y country. *ust include a

measure of si7e of the demand as well as their common

characteristics•

=dentify whether economies of scale can play a signi cantrole in reducing costs. e'ample for #oca-#ola companies

economies of scale are not signi cant as each market it

ser$es it has its own ottling facility• *anagers ne't need to assess the risk of e'change

&uctuations , political risk , tari8s, ta' incenti$es• =dentify competitors in each region and make a case

whether a facility needs to locate near or far from acompetitor s facility

5(-, %

)he o Becti$e of Hhase === is to select a set of desira le s sites

within each region where facilities are to e located. )he set of

desira le sites should e larger than the desired num er of

facilities to e set up so that a precise selection may e made in

Hhase =>

Sites should e selected ased on an analysis of infrastructure

a$aila ility to support the desired production methodologies.

Gard infrastructure re uirements include housing infrastructure

Soft infrastructure re uirements include the a$aila ility of skilled

workforce



HG6S( =>

• Select a precise location and capacity allocation for

each facility. 6ttention is restricted to the desira le sites

selected in Hhase ===. )he network is designed to

ma'imi7e total pro ts taking into account the e'pected

margin and demand in each market. >arious logistics

and facility costs, and the ta'es and tari8s at each

location.

('plain the role of network design decisions in supply chain and

identify the factors in&uencing supply chain network design

decisions

Lect 6 Network Design in a Supply Chain

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Transcript of Lect 6 Network Design in a Supply Chain