SUPPLY CHAIN

NETWORKS
Supply chain network design

■ Supply chain network decisions include the location of manufacturing, storage, or

transportation-related facilities and the allocation of capacity and roles to each facility.
– Facility role: What role should each facility play? What processes should be
performed at each facility?

– Facility location: Where should facilities be located?

– Capacity allocation: How much capacity should be allocated to each facility?

– Market and supply allocation: What markets should each facility serve? Which
supply sources should feed each facility?
■ Supply chain network design is the practice of locating and rationalizing the facilities
within the supply chain, determining the capacity of these facilities, determining how to
source demand through the network and selecting modes of transportation in a manner
that provides the required level of customer service at the lowest cost.
■ A network design is the strategic planning process for evaluating alternative structures
for a supply chain, and selecting the one that maximizes profitability and helps to
improve performance at each link in the supply chain.
A network design project answer many types of questions such as these:
■ How many plants or manufacturing sites should company have, where should they be, how
large should they be, how many production lines should company have and what products
should they make, and which warehouses should they service?
■ Which products should company make internally and which should it source from outside
firms?
■ If company source from outside firms, which suppliers should it use?
■ What is the trade-off between the number of facilities and overall costs?
■ When should company make product to best manage and plan for seasonality in the
business?
■ How do company ensure the proper capacity and flexibility within the network? To meet
demand growth, do company need to expand existing plants or build new plants? When do
company need to add this capacity?
■ How can company reduce the overall supply chain costs?
Benefits

■ Good network design means higher profitability: effective network design optimizes
investments in capital-intensive assets, lowers operational costs, and helps to reduce
working capital in the supply chain while maintaining the targeted customer service.
■ Good network design means management of growth: comprehensive network design
determines where and when new facilities are needed to ensure that new markets can be
accessed effectively and new products can be manufactured as needed.
■ Good network design means less business risks: The business world is continuously
changing. An optimal supply chain network reduces the supply chain’s exposure to
supply and demand risks by creating agility and flexibility at strategic level.
Classification of Facilities

■ Offshore facility- low-cost facility for export production:

– It serves as low-cost supply source for markets located outside the country where the facility
is located.
– The location for offshore facility should have low labour and other costs to facilitate low-
cost production.
■ Source facility-low-cost facility for global production:
– It is a primary source of product for the entire global network.
– Source facilities are located in places where production costs are relatively low,
infrastructure is well developed and skilled workforce is available.
– Good offshore facilities evolve overtime into source facilities
– Nike’s plants in Korea and Taiwan.
■ Server facility- regional production facility:
– It’s objective is to supply to market where it is located.
– A server facility is built because of tax incentives, local content requirement, tariff barriers, or
high logistics cost to supply the region from elsewhere.

■ Contributor facility- regional production facility with development skills:

– It serves the market where it is located but also assumes responsibility for product
improvements, product modifications or product development.
– Most well-managed server facilities become contributor facilities overtime.
– The Maruti facility in India today develops many new products for both Indian and overseas
markets.
■ Outpost facility- regional production facility built to gain local skills:
– It is built with an objective to gain access to knowledge or skills that may exist
within a certain region.
– It also plays the role of server facility.
– Many global firms have production facilities located in Japan in spite of high
operating costs.
■ Lead facility- facility that leads in development and process technologies:
– This facility creates new products, processes and technologies for the entire
network.
Factors influencing network design
decisions
■ Strategic factors:
– The firm’s competitive strategy: cost leadership or responsiveness.
– Cost leadership: The company will find lowest-cost location for its manufacturing
facilities, even it means locating very far from the markets it serve.
– Responsiveness: The company establish facilities near to customer markets, even if
it means selecting a high-cost location.
– Nike: Manufacturing facilities in China and Indonesia focus on cost and produce
the mass-market, lower priced shoes for Nike.
■ Major locational determinants:
1) Labour Conditions: Cost and availability of labour, workforce’s degree of unionisation,
skill level, Work ethics, productivity, level of unemployment etc.

2) Transportation services and Infrastructure: Suitable location may require one or more of
these features: interstate highway access, availability of intermodal or local rail facilities,
convenience of a major airport facility, proximity to inland or ocean port facilities and so
on.
3) Proximity to Markets and Customers: The geographical market size that can be served on a same day
or next-morning basis.
– The greater the number of customer firms within the market area, the greater the competitive
advantage offered by the proposed location.

4) Quality of life: The quality of life of particular region or area affects the well-being of employees an
the quality of work that they are expected to perform.
– The quality of life factor is most important for companies which require mobile professional
and technical workforce.
– The Places Rated Almanac rates the quality of life in metropolitan areas in terms of climate,
housing costs, health care and environment, crime, education, recreation, and economic
opportunities.
5) Taxes and Industrial development Incentives: The prevailing business taxes such as
revenue tax, inventory taxes, property taxes etc. have a significant impact on the cost of
operating a business in the area under consideration.
– If the country has high import duties then companies either do not serve the market
or set up manufacturing plants within the country to save on duties.
– Higher tariffs lead to more production facilities with in a supply chain network,
with each location having a lower allocated capacity
– Regional agreements among countries have led to decrease or abolishment of
import duties, which have led to a decrease in the number of manufacturing
facilities and an increase in the capacity of each facility built.
■ Industrial development incentives: These are used to attract companies to locate in a
particular area.
– These include tax incentives ( reduced tax rates or waiver of tax for particular
number of years), financing arrangements ( state loans 0r state-guaranteed loans),
reduced water and sewage rates etc.
– Free trade Zones: The duties and tariffs are relaxed as long as production is used
primarily for export.
– China waives tariffs entirely for high-tech products in an effort to encourage
companies to locate there and bring in state-of-the-art technology.
6) Land costs and utilities: The cost of land, cost of construction, availability and
expenses of utilities such as electrical power, sewage, and industrial waste disposal need to
be considered.

7) Political factors: The political stability of country and Judicial system of country are
considered.

8) Competitive factors
Supply chain network design process

1) Define process steps

2) Perform supply chain audit
3) Examine network alternatives
4) Conduct facility location analysis
5) Network/ location decision making
6) Develop implementation plan
1) Define the supply chain network design process:
– Formation of supply chain network transformation team that will be responsible for
all the elements of the network design process.
– The team must be aware of overall corporate and business strategies and the
underlying business needs of the firm and the supply chain in which it is a
participant.
– Determine the objectives of the network design process.
■ Revenue and cost optimization, Improving Customer service, Complexity and risk
reduction and growth in new markets
– Consider the availability of needed resources in the areas of funding, people, and
systems .
2) Perform a Supply chain Audit: It helps transformation team in collecting the following
types of information:
– Profile of the current supply chain network and the firm’s positioning in respective
supply chain.
– Understanding of key supply chain activities and processes
– Setting benchmark, or target values for supply chain costs and key performance
measurements.
– Identification of gaps between current and desired supply chain performance.
– Key objectives for supply chain network design , expresses in numerical terms, that
will facilitate measurement.
3) Examine the Supply chain network Alternatives:
– The team examines the alternatives for the supply chain network.
– It involves applying quantitative models to the alternative systems.
– The use of these models provides considerable insight into the functioning and cost/service
effectiveness of the various possible networks.
– The team decides upon the modelling technique to be used and uses the modelling technique to identify
a supply chain network that is consistent with the key objectives identified during the audit phase.
– Once preliminary design solutions have been identified, subsequent “ what-if” types of analysis should
be conducted to test the sensitivity of recommended network designs to changes in key logistics
variables.
– This step provides a useful set of recommendations for the number and general location of logistics
facilities that will help to meet the desired objectives.
4) Conduct a facility location analysis:
– To carefully analyse the attributes of specific regions that are candidates for sites
of logistics facilities, distribution centres, cross-docking operations etc.
– The location selection team is formed which collects information on specific
attributes such as labour conditions, transportation issues, proximity to markets ,
taxes and industrial development incentives etc.
– The company may also take assistance from local consulting firms.
– The first screening by the location team usually eliminates areas that are
uneconomical from a logistics perspective, thereby reducing the number of
alternatives.
5) Make decisions regarding network and facility location
6) Develop an Implementation plan:
■ It involves the development of an effective implementation plan.
■ This plan serves as a roadmap for moving from current logistics/supply chain network
to the desired new one.
Impact of Supply chain network design
on Supply chain
Types of supply chain network designs

There are six chain network models, as given below:

■ Producer/ Manufacturer storage with direct shipping
■ Producer/ Manufacturer storage with direct shipping and in-transit merge (cross docking)
■ Distributor storage with package carrier delivery
■ Distributor storage with last mile delivery
■ Producer or distributor storage with costumer pickup
■ Retail storage with customer pickup
The supply chain network basically deals with three major entities: Producer, Distributor and
Merchant
1) Producer/ Manufacturer Storage with
Direct Shipping
In this model, goods are moved directly from the manufacturer’s location as the starting
point to the end customer’s location as the destination point bypassing the retailer. The
retailer only takes the order and initiates the delivery request. This option is also called
drop-shipping, with product delivered directly from the manufacturer’s location to the
customer’s destination.
1) Producer/ Manufacturer Storage with
Direct Shipping
2) Producer/ Manufacturer storage with direct shipping
and in-transit merge

■ It is somewhat congruent to pure drop-shipping or moving, but the difference is that

pieces of the order come from different locations and they are merged into one so that
the customer gets a single delivery.
3) Distributor storage with package
carrier delivery
■ This comes into action when the inventory is not owned by the manufacturers at the
plants; instead it is owned by the merchants/retailers in intermediate warehouses and
package carriers are used for shipment of goods from the intermediate location to the
final customer.
4) Distributor storage with last mile delivery

■ This type results when the merchant/retailer delivers the goods ordered by the customer
to the customer’s home instead of using a package carrier.
5) Producer or distributor storage with costumer pickup

■ In this type, the inventory is stored at the warehouse owned by the manufacturer or
producer but the customers place their orders online or through phone and then come to
pick up points allotted for collecting their orders.
6) Retail storage with customer pickup

■ This is mostly applied on situations when inventory is locally stored at retail stores;
customers walk into the retail shop or order something online or on the phone and pick
it up at the retail store.
Modelling Approaches

■ These techniques help in deciding about the locations of plants, distribution centers, and
customers to be served etc.

■ The modelling technique facilitate the comparison of the functioning and cost/service
effectiveness of current versus proposed supply chain networks.

■ The modelling procedures help in identifying a supply chain network that is consistent
with the key objectives identified by company.
Strategic/Managerial issues relevant to
supply chain network modeling
■ System structure issues:
– Number and location of raw material suppliers
– Number and location of plants
– Number and location of distribution centres
– Assignment of Plants to suppliers
■ Facility ownership issue
– Owned
– Leased
– Public
■ Facility Mission Issues
– Plants
■ Manufacturing capacity
■ Manufacturing level- intermediate or finished products
■ What-if issues
– Multi-division mergers
– Facility capacity changes
– Seasonal demand/supply
– Product introductions/deletions
■ Optimization Models:
– The optimization model is based on mathematical procedures that are guaranteed to find the
‘best’ or optimum solution, given the mathematical definition of the problem under evaluation.
– While recognizing relevant constraints, optimization approaches essentially select an optimal
course of action from a number of feasible alternatives.
– The optimization models use techniques such as mathematical programming, enumeration,
sequencing etc.
– The most widely used optimization technique is Linear programming.
– This approach is most useful for linking facilities in a network where supply and demand
limitations at plants, distribution centres, or market areas are treated as constraints.
– The objective could be minimization of cost or maximizing profits.
■ Simulation Models:
– Simulation is defined as “ the process of designing a model of real system and
conducting experiments with this model for the purpose of understanding the
behaviour of the system or of evaluating various strategies within the limits
imposed for the operation of the system”.

– Network simulation involves developing a computer representation of the supply

chain network and then observing the cost and service characteristics of the
network as cost structures, constraints and other factors are varied.

– For location analysis, the use of simulation allows the decision maker to test the
effect of alternative locations upon costs and service levels.
■ Simulation does not guarantee an optimum solution but simply evaluates the
alternatives that are fed into it.

■ Sometimes an optimization approach is used to first identify and evaluate feasible

network design alternatives and then simulation models are used to focus on the exact
logistics network that will best meet the desired objectives.
3) Heuristic Models:
– Heuristic models are able to accommodate broad problem definitions but they do
not provide optimum solution.
– To reduce the number of location alternatives, the decision maker should
incorporate into the heuristic program site characteristics considered to be optimal.
– For example, the location team may consider a desirable warehouse site to be 1)
with in 20 miles of a major market area, 2) at least 250 miles from other company
distribution centers, 3) within three miles of an interstate highway etc.
– The heuristic model searches for sites with these characteristics thus reducing the
number of alternative sites to those the decision makers consider practical.