1

Role of Network Design in the Supply Chain

2
Supply chain network design decisions

3
 Supply chain network design decisions

• 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.
• Supply chain network design decisions can be classified as follows:
• 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: What markets should each facility
serve? Which supply sources should feed each facility?

4
 Supply chain network design decisions

• Facility location decisions - long-term impact on a supply

chain’s performance - 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 - in poor utilization and, as a result,
higher costs.
–Allocating too little capacity - in poor responsiveness if demand is
not satisfied or high cost if demand is filled from a distant facility.

5
 Supply chain network design decisions

• The allocation of supply sources and markets to facilities

has a significant impact on performance because
–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.
• The allocation of markets and supply sources can be
changed only if the facilities are flexible enough to serve
different markets and receive supply from different sources.

6
7
 Strategic Roles of Units in the Network

• The primary advantage for exploiting the plant, that is, market proximity, availability
of low-cost input factors, and availability of skills or know-how.
• The degree of contribution of the plant to the company’s strategy, ranging from “low” for
factories that have as their sole role to get products produced, to “high” for factories
that do not only produce products, but are also important developers and
providers of know-how for the other plants in the network.
• Plant’s competence, which may include, next to production, also process technical
maintenance, procurement, local logistics, production planning, product and process
development and improvement, development of suppliers, the supply of global
markets, and a global hub role for product and process knowledge. (Ferdows, 1997)

8
9
 Strategic Roles of Units in the Network
Ferdows framework
High

Source Lead Contributor

Strategic Role

Offshore Outpost Server

Low

Access to low resources Access to skills Access to markets

Strategic Reason for Plant 10

Framework for Network Design Decisions

11
12
13
 Framework for Network Design
Decisions

14
Framework for Network Design Decisions
Phase II Phase III
Phase I Phase IV
Regional Desirable
SC Strategy Location
Facility Sites Choices
Configuration

Competitive
Strategy
Phase I Global
SC Strategy Competition

Internal Constraints
(Capital, Growth
Strategy, Existing Cost leadership Vs Responsiveness
network (Walmart, Sam’s Club Vs Zara)

15
Framework for Network Design Decisions
Phase I Phase II Phase III Phase IV
SC Strategy Regional Desirable Location
Facility Sites Choices
Configuration

Tariffs and
Taxes
Production
Baddi-Barotiwala Nalagarh (BBN) industrial corridor.
Technologies
Phase II
Regional
Facility Regional Demand
Competitive Environment Configuration

Political, Exchange Risk

Logistics Costs and Demand Risk

16
17
 Location Decisions

• Location decisions depends on whether the organization is

into manufacturing or service
• A fast food chain, a bank, an ATM, multiplex etc. providing
services to customers have to be located close to customers
• Firms which are in to manufacturing end of supply chain
such as agriculture, mining, soap production etc. need not to
be close to customer but their location decision are governed
by factors such as close to raw material, availability of cheap
labor etc.
• Factors to be considered
–nature of industry i.e. manufacturing or service and
–type of product/service

18
 FACTORS AFFECTING LOCATION DECISIONS

• Location of Raw Materials – Necessity | Perishability | Transportation

• Proximity to Markets – Competition | Convenience | Perishability
• Labour Factors – Skill set of labour | Cost of Labour
• Taxes and Tariffs
• Community Considerations
• Utilities
• Site Related Factors

19
 Case of Toyota Motor Corporation

• A large number of its around 1,000 auxiliary organizations and

members are associated with the creation of autos, car parts, and
business and mechanical vehicles.
• Central command is in Toyota City, a modern city east of Nagoya,
Japan
• In Malaysia, the one of chosen manufacturer is IQH (Integrated Quality
Hub) at Bukit Raja - also known as second important manufacturer
hub after Shah Alam hub.
• This manufacturer is more focus on Energy Efficient Vehicles (EEVs).
• It has an output of 50,000 units a year. Bukit Raja plant is considered
as one of most advanced car manufacturing plant in the world.
• It also used advanced technologies such as Solar Panel and Rainwater
Recycling Facilities present

20
 Case of Toyota Motor Corporation

Factors influencing the decisions

• Macroeconomic factor
• What made Toyota interested to set up a manufacturing plant
in Malaysia was its opportunity of economic growth.
• In May 1964, the Malaysian government enacted a policy to encourage
the local assembly of vehicles and manufacturing of automotive
components.
• The policy is the 1964 Malaysian Automotive Policy aimed to boost
national industrialization through the local assembly of vehicles
and manufacturing of automobile components.

21
 Case of Toyota Motor Corporation

• Factors influencing the decisions – Macroeconomic contd…

• Initially in 1956, Toyota cars were imported into Malaysia as
complete-built up (CBU) vehicles.
• But, with the 1964 policy, the government reduced imports of CBU vehicles
by means of quota regulations and tariffs.
• Locally assembled vehicles incorporated with Malaysian manufactured
components would be granted reductions in import duties, making them
cheaper and more competitive as a result.
• Another perk of the policy are manufacturing licenses to both foreign and
local companies who were interested in setting up automobile assembly
plants in any Malaysian state.
• Thus government hoped to create more job opportunities and establish a
market for Malaysian-made parts such as tires, paints, batteries,
electrical cables, upholstery and other rubber-based goods

22
23
 Case of Toyota Motor Corporation

• Factors influencing the decisions – Logistics and Facility

Costs
• Bukit Raja was chosen for its strategic location – The location is very
important factor.
• Shah Alam plant was the first manufacturing plant for the Toyota and few
years later, Toyota has established new place for their second important
manufacturing plant located in Bukit Raja.
• The distance from Bukit Raja plant to Shah Alam plant just 8.4 km.
• The worker also has no issues of working in new plant as the distance is not
too far for them to travel.
• Other than that, they also can transfer their machines, spare part for cars
and needed items easily. It can reduce the cost of travelling since they are
not too far.
• Next, it also closes to West Port, Port Klang – a port very famous for import
and export activity and one of top busiest port in the world ranking.

24
Case of Toyota Motor Corporation
• Factors influencing the decisions – Logistics and Facility Costs

25
 Case of Toyota Motor Corporation

• Factors influencing the decisions –

Technological
• Manufacturing technology serves as a strategic instrument for
businesses to adapt and respond to an increasingly unpredictable
and complicated business environment.
• Manufacturing technology is a collection of computer-based
technologies that includes computer-aided design, computer-
aided manufacturing, manufacturing resource planning, robotics,
group technology, flexible systems, automated material handling
systems, computer numerically controlled machine tools, and bar
coding or other automated identification.

26
 Case of Toyota Motor Corporation

• Factors influencing the decisions –

Competitive
• Toyota is making use of the latest technology in their vehicles that will
make the drivers at ease while driving.

27
28
Framework for Network Design Decisions
Phase I Phase II Phase III Phase IV
SC Strategy Regional Desirable Location
Facility Sites Choices
Configuration

Tariffs and
Taxes
Production
Technologies
Phase II
Regional Regional
Facility Demand
Competitive Environment Configuration

Political,
Logistics Costs Exchange
Risk and
Demand Risk 29
Framework for Network Design Decisions
Phase I Phase II Phase III Phase IV
SC Strategy Regional Desirable Location
Facility Sites Choices
Configuration

Production
Methods (Skill
Phase III
needs, Available
Desirable
response Infrastructure
Sites
time)

30
Framework for Network Design Decisions
Phase I Phase II Phase III Phase IV
SC Strategy Regional Desirable Location
Facility Sites Choices
Configuration

Factor Costs Logistics

(Labour, Costs
Phase IV
material, site (Transport,
Location
specific) Inventory,
Choices
Coordination)

31
Framework for Network Design Decisions
Competitive
Strategy
Phase I Global
SC Strategy Tariffs and
Competition
Taxes
Production
Internal Constraints
Technologies
(Capital, Growth Phase II
Strategy, Existing Regional Regional
network Facility Demand
Competitive Environment Configuration

Political,
Production Logistics Costs Exchange
Methods (Skill Risk and
Phase III
needs, Available Demand Risk
Desirable
response Infrastructure
Sites
time)
Factor Costs Logistics
(Labour, Costs
Phase IV
material, site (Transport,
Location
specific) Inventory,
Choices 32
Coordination)
 Framework for Network Design
Decisions

33
34
Facility Location

35
 Concept of Facility Location

• Facility location may be defined as a place where the facility will be

set up for producing/storing goods or services.
• The need for location selection may arise under any of the following
conditions:
a) When a business is newly started.
b) When the existing business unit has outgrown its original facilities
and expansion is not possible; hence a new location has to be
found.
c) When the volume of business or the extent of market
necessitates the establishment of branches.
d) When the lease expires and there is no chance for renewal.
e) Other social or economic reasons such as inadequate labour
supply, shifting of the market, Govt. policy, etc.
Procedures and Techniques for Selecting Facility
Location
 LOCATION PLANNING METHODS

Techniques for Selecting Sites

• Location decisions could be one of the two:

–One facility–multiple candidates and
–Multiple facilities–multiple candidates
–Location Factor Rating
–The Centre-of-gravity Method
–The Load–Distance Method
–The Transportation Model
 Problem 1
• Antonio is evaluating three different locations for his new Italian
restaurant. Costs are comparable at all three locations. He has
identified seven factors that he considers important and has decided to
use factor rating to evaluate his three location alternatives based on a
five point scale, with 1 being poor and 5 excellent. Table given below
shows Antonio’s factors, the weights he has assigned to each factor, as
well as the factor score for each factor at each location.
Problem 1
 Problem 1
• Antonio is evaluating three different locations for his new Italian
restaurant. Costs are comparable at all three locations. He has
identified seven factors that he considers important and has decided to
use factor rating to evaluate his three location alternatives based on a
five point scale, with 1 being poor and 5 excellent. Table given below
shows Antonio’s factors, the weights he has assigned to each factor, as
well as the factor score for each factor at each location.

Weight Location 1 Location 2 Location 3

Appearance 20 5 3 2
Ease of expn 10 4 4 2
Proximity 20 2 3 5
Customer
parking 15 5 3 3
Access 15 5 2 3
Competition 10 2 4 5
Labor Supply 10 3 3 4
380 305 340
The Centre-of-gravity Method
The Centre-of-gravity Method
The Centre-of-gravity Method

A 125 550 200

B 350 400 450
C 450 125 175
D 700 300 350

X Y

430.85 354.78
The Load–Distance Method
The Load–Distance Method

Average x y
x y
Qty coord coord
coordinate coordinate shipped
inate inate
A 125 550 200 1 300 500
B 350 400 450 2 200 500
C 450 125 175 3 500 350
D 700 300 150 4 400 200
The Load–Distance Method

Average Qty x y
x coordinate y coordinate shipped coordinate coordinate

A 125 550 200 1 300 500

B 350 400 450 2 200 500
C 450 125 175 3 500 350
D 700 300 150 4 400 200
The Load–Distance Method

X Y W X Y
A 125 550 200 1 300 500
B 350 400 450 2 200 500
C 450 125 175 3 500 350
D 700 300 150 4 400 200

1 2 3 4
A 182.00 90.14 425.00 445.11
B 111.80 180.28 158.11 206.16
C 403.89 450.69 230.49 90.14
D 447.21 538.52 206.16 316.23
The Load–Distance Method

X Y W X Y
A 125 550 200 1 300 500
B 350 400 450 2 200 500
C 450 125 175 3 500 350
D 700 300 150 4 400 200

1 2 3 4
A 182.00 90.14 425.00 445.11
B 111.80 180.28 158.11 206.16
C 403.89 450.69 230.49 90.14
D 447.21 538.52 206.16 316.23
The Load–Distance Method

1 2 3 4
A 182.00 90.14 425.00 445.11
B 111.80 180.28 158.11 206.16
C 403.89 450.69 230.49 90.14
D 447.21 538.52 206.16 316.23
Load Distance
224474.41 258801.57 227410.05 245000.80
The Load–Distance Method