Designing the Distribution

Network,Location Planning
and Analysis in a Supply Chain

Prepared by Mehdi Abbas

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 Why Network Planning?

o Find the right balance between inventory,

transportation and manufacturing costs,
o Match supply and demand under uncertainty by
positioning and managing inventory effectively,
o Utilize resources effectively by sourcing
products from the most appropriate
manufacturing facility
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 Global Location Strategies
 Global location decisions are made to optimize the performance of
the supply chain and be consistent with the firm’s competitive
strategy.
 However, COVID-19 showed what a global pandemic can do to an
interconnected global economy. Seemingly overnight, everything
changed: ports closed, planes were grounded, businesses shuttered,
and workers were sent home.
 The movement of people across borders came to a standstill, as most
countries imposed partial or complete border closures in response to
the pandemic. The global economy stalled.
 A firm competing on cost is more likely to select a location that
provides a cost advantage. For instance, Amazon.com locates logistics
facilities in areas that will minimize logistics (movement) and
inventory costs.
Terms to understand

1. Insourcing
2. Outsourcing
3. Offshore
4. Offshore plus Outsourcing
 Critical Location Factors

 Some of the questions and concerns that need to be addressed

for each potential location are:
• Where is the target market located?
• Will the location provide a sustainable competitive advantage?
• What will be the impact on product or service quality?
• Can the right people be hired?
• What will be the effect on supply chains?
• What is the projected cost?
• What will be the impact on delivery performance?
• How will the market react?
Network Design Decisions

o Facility role
What role should each facility play? What processes are
performed at each facility?
Facility location
Where should facilities be located?
o Capacity allocation
How much capacity should be allocated to at each facility?
o Market and supply allocation
What markets should each facility serve? Which supply
sources should feed each facility? 6
Factors Influencing
Network Design Decisions
o Strategic factors
o Technological factors
o Macroeconomic factors
o Political
o Logistics and facility costs
o Competitive factors
Positive externalities between firms
Locating to split the market 7
 Strategic factors
 A firm’s competitive strategy has a significant impact on network design
decisions within the supply chain
 Firms that focus on cost leadership tend to find the lowest cost location for
their manufacturing facilities, even if that means locating far from the
markets they serve.
 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. 8
Strategic factors
 Global supply chain networks can best support their
strategic objectives with facilities in different
countries playing different roles
 For example, Zara has production facilities in Europe
as well as Asia. Its production facilities in Asia focus on
low cost and primarily produce standardized, low-value
products that sell in large amounts. The European
facilities focus on being responsive and primarily
produce cutting-edge designs whose demand is
unpredictable. This combination of facilities allows
Zara to produce a wide variety of products in the most
profitable manner 9
Technological factors

 Characteristics of available production

technologies have a significant impact on network
design decisions.
If production technology displays significant
economies of scale, a few high-capacity locations are
most effective.
This is the case in the manufacture of computer
chips, for which factories require a large investment
and the output is relatively inexpensive to transport.
As a result, most semiconductor companies build a
few high-capacity facilities. 10
Macroeconomic factors

Macroeconomic factors include taxes,

tariffs, exchange rates, and shipping
costs that are not internal to an
individual firm.
As global trade has increased,
macroeconomic factors have had a
significant influence on the success or
failure of supply chain networks
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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
 Tax incentives are a reduction in tariffs or taxes that countries, states,
and cities often provide to encourage firms to locate their facilities in
specific areas
 China, for example, waived tariffs entirely for “high-tech” products, in an
effort to encourage companies to locate there and bring in stateof-the-art
technology. Motorola located a large chip manufacturing plant in China to
take advantage of the reduced tariffs and other incentives available to
high-tech products

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Political
The political stability of the country
under consideration plays a significant
role in location choice.
Companies prefer to locate facilities in
politically stable countries where the
rules of commerce and ownership are
well defined

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Competitive Factors
 Companies must consider competitors’ strategy, size, and
location when designing their supply chain networks
 A fundamental decision firms make is whether to locate their
facilities close to or far from competitors.
 POSITIVE EXTERNALITIES BETWEEN FIRMS
 Positive externalities occur when the collocation of multiple
firms benefits all of them. Positive externalities lead to
competitors locating close to each other.
 For example, retail stores tend to locate close to each other
because doing so increases overall demand, thus benefiting all
parties. By locating together in a mall, competing retail stores
make it more convenient for customers, who need drive to
only one location to find everything they are looking for. This
increases the total number of customers who visit the mall,14

increasing demand for all stores located there

Competitive Factors

– Locating to split the market

• Locate to capture largest market share

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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
 Inventory and facility costs increase as the number of facilities in
a supply chain increases.
 Transportation costs decrease as the number of facilities
increases
 . If the number of facilities increases to the point at which
inbound economies of scale are lost, then transportation costs
increase
 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. 16
Relationship b/w Desired Response Time & No.
of Facilities

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Relationship b/w No. of Facilities & Inventory
Cost

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Transportation Costs and
Number of Facilities (Fig. 4.3)
Transportation
Costs

Number of facilities
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Facility Costs and Number
of Facilities (Fig. 4.4)
Facility
Costs

Number of facilities
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 Cont.

Cost
Total cost
SC response time

Inventory cost

Facility cost

Transportation cost

Number of Facilities
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 Locational Cost-Profit-Volume Analysis
• The economic comparison of location alternatives is
facilitated by the use of cost-profit-volume analysis. The
procedure for locational cost-profit-volume analysis
involves these steps:
i. Determine the fixed and variable costs associated with each
location alternative.
ii. Plot the total-cost lines for all location alternatives on the same
graph.
iii. Determine which location will have the lowest total cost for the
expected level of output.
 Alternatively, determine which location will have the
highest profit.
 Cont.
• This method assumes the following:
1. Fixed costs are constant for the range of probable output
2. Variable costs are linear for the range of probable output
3. The required level of output can be closely estimated
4. Only one product is involved
Example - 1
Cost Analysis: Fixed and variable costs for four potential plant locations
are shown below:
a. Plot the total-cost lines for these locations on a single graph.
b. Identify the range of output for which each alternative is superior
(i.e., has the lowest total cost)
c. If expected output at the selected location is to be 8,000 units per
year, which location would provide the lowest total cost?
Cont.
a. To plot the total-cost lines, select an output that is approximately
equal to the expected output level (e.g., 10,000 units per year).
Compute the total cost for each location at that level:
Plot each location’s fixed cost (at Output=0) and the total cost at
10,000 units; and connect the two points with a straight line
Cont.
b. The approximate ranges for which the various alternatives will
yield the lowest costs are shown on the graph. Note that location
D is never superior. The exact ranges can be determined by
finding the output level at which lines B and C and lines C and A
cross.
Example - 2

Cost analysis: A farm implements dealer is seeking a fourth warehouse location

to complement three existing warehouses. There are three potential locations:
Charlotte, NC; Atlanta, GA; and Columbia, SC.
Charlotte would involve a fixed cost of $4,000 per month and a variable cost of
$4 per unit; Atlanta would involve a fixed cost of $3,500 per month and a
variable cost of $5 per unit; and Columbia would involve a fixed cost of $5,000
per month and a variable cost of $6 per unit.
Use of the Charlotte location would increase system transportation costs by
$19,000 per month, Atlanta by $22,000 per month, and Columbia by $18,000 per
month. Which location would result in the lowest total cost to handle 800 units
per month?
Given: Volume = 800 units per month
Cont.
Example - 3
 Profit analysis: A manufacturer of staplers is about to lose its lease, so it
must move to another location. Two sites are currently under
consideration. Fixed costs would be $8,000 per month at site A and $9,400
per month at site B. Variable costs are expected to be $5 per unit at site
A and $4 per unit at site B. Monthly demand has been steady at 8,800
units for the last several years and is not expected to deviate from that
amount in the foreseeable future. Assume staplers sell for $6 per unit.
Determine which location would yield the higher profit under these
conditions.

Total Profit = Q(price per unit – Vc) - Fc

Cont.