Supply Chain Management: Strategy, Planning, and Operation: Seventh Edition

Supply Chain Management: Strategy,
Planning, and Operation

Seventh Edition
Chapter 5
Network Design in the
Supply Chain
Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved
Learning Objectives (1 of 2)
5.1 Understand the role of network design in a supply

chain.
5.2 Identify factors influencing supply chain network design
decisions.
5.3 Discuss a framework for making network design
decisions.
The Role of Network Design (1 of 2)
• Network design decisions
– How many manufacturing plants, production lines,

distribution centers, cross-docking facilities?
– Where should facilities be located?
– How much capacity at each facility?
– Which products?
– What markets?
– time horizon over which these need to be altered
– Factors?
The Role of Network Design (2 of 2)
• Amazon – number of facilities—responsiveness- same day or

one day delivery
• Toyota -1998- US assembly plant
• Changes in the technology- change in the facility location-
insurance company
• Altering facility location is expensive than changing
capacity
• Revisit design decisions after market changes, mergers, or
factor cost changes
Summary of Learning Objective 1
These decisions define the physical constraints within

which the network must operate as market conditions
change.
Good network design decisions increase profits by
supporting the supply chain strategy.
Which Supply Facilities (capacity / Which Markets ?

sources flexibility) ?
• Allocation of
multiple product –
facilities need to be
flexible
Facilities
– places where inventory is stored, assembled, or fabricated

– production sites and storage sites
• Role in the supply chain
– the “where” of the supply chain
– manufacturing or storage (warehouses)
• Role in the competitive strategy

– economies of scale (efficiency priority)-----few no. of stores
IKEA
– larger number of smaller facilities (responsiveness priority) --
---Seven Eleven Japan
Facilities
• Location
– centralization (efficiency) vs. decentralization (responsiveness)
– other factors to consider (e.g., proximity to customers)
• Capability-flexibility versus dedicated(efficiency)
• Manufacturing methodology (product focused versus process focused like

fabrication or only assembly)
• Warehousing methodology (cross-docking or storage)
• Overall trade-off: Responsiveness versus efficiency

Facility related metrics
• Capacity: amount a facility can process
• Fraction of capacity currently used as utilization increases  associated
delays but unit cost of processing decreases
• Processing time/ setup/ idle time
• Average production cost per unit or per case per depending upon the
product
• Quality losses: production lost due to defects
• Theoretical flow/ cycle time of production: time required to process a unit
when no delays
• Actual average flow/ cycle time: avg. time taken for all units over specified
period (month/week etc..) including delays.
• Flow time efficiency = Theoretical flow/Actual average flow time
Examples: Facility – market changes
M3
M2 Toyota
plant
(M1)
M4
• Asian economy –recession- idle capacity in plants – non flexibility couldn’t serve where
demand was high.
• Netflix ( 58 DCs to 38) – video streaming
• Amazon (20-70 DCs)

Factors Influencing Network Design Decisions
Strategic factors
Convenie
Cost leadership nce
stores
Efficiency Con
veni
ence Convenienc
stor e stores
Location of es Discount stores
facilities-away
form the
market- low Convenie
cost regions
nce stores Convenie
nce
stores
Zara: local manufacturing - responsiveness
Competitive factors
• Location, size and competitor strategy
• Positive externalities:
• Multiple retail stores in mall- increases demand, benefiting all parties
• Presence of competitors also lead to development of appropriate
infrastructure in a developing area.
▪ Suzuki- manufacturing plant in India supplier networks 
competitors to also set up the assembly plants in India
Technological factors
• Production technology
• High fixed cost-semiconductor manufacturers
– Few number of higher capacity
• Low fixed cost – bottling plants
– Higher number of facilities serving local markets
– Transportation cost is relatively higher than the
Factors Influencing Network Design
Decisions (1 of 2)
• Socioeconomic factors
• Political Factors- global political risk index (GPRI)- govt, society,
security and economy
• Infrastructure Factors: prerequisite for facility set up availability
of sites and labor, proximity to transportation, rail services,
airports and seaports
– Quality of life- influences the workforce morale
Factors Influencing Network Design
Decisions (2 of 2)
• Customer Response Time and Service Level
• Total Logistics Cost: inventory , transportation and facility cost
– Also dependent upon the technological factors
– Inventory cost- physical storage, cost of capital, any

obsolescence
– Transportation cost : inbound cost to bring supply to the

facility and deliver the o/p out of the facility
– Facility cost: cost of the building, labor and equipment
▪ Fixed cost , variable cost (quantity processes)

• Macroeconomic Factors
– Tariffs and tax incentives- free trade zones (taxes are

relaxed)- China reduced the tariff for high tech companies
to attract state –of –art technology- Motorola
– Toyota, BMW setting up plants in US – tax incentives
– Exchange-rate and demand risk- profit of the supply chain

Framework for Network Design
Decisions (1 of 4)
• Maximize the overall profitability of the supply chain network

while providing customers with the appropriate responsiveness
• Many trade-offs during network design
• Network design models used
– to decide on locations and capacities
– to assign current demand to facilities and identify
transportation lanes
– Decide upon the horizon- how frequent these decisions
are to be relooked
– Profit----- customer satisfaction

Framework for Network Design Decisions
Broad supply chain design
Roles , location and capacity

Decisions (2 of 4)
• Phase I: Define a Supply Chain Strategy/Design

– Clear definition of the firm’s competitive strategy
– SC strategy
– Defining stages in the SC
– In-house / outsource
– Forecast the likely evolution of global competition-
local or global players
– Identify existing network, constraints on available
capital
– Determine broad supply strategy
Framework for Network Design Decisions
• Phase II: Define the Regional Facility Configuration
– Forecast of the demand by country or region
– Size of the demand and homogeneity (higher capacity , few )

and heterogeneity –(smaller, flexible)
– Identify fixed and variable costs, economies of scale or scope-

pdtn , transportation and storage
– Identify regional tariffs, requirements for local production, tax

incentives, and export or import restrictions
– Identify competitors- facility close or far
– Identify demand risk, exchange-rate risk, political risk

Decisions (4 of 4)
• Phase III: Select a Set of Desirable Potential Sites

– Hard infrastructure requirements-suppliers,
warehousing facilities
– Soft infrastructure requirements
• Phase IV: Location Choices and Market Allocation

– Location specific-Fixed cost , variable cost (logistics
and facility cost)
– Taxes and tariffs
– revisit with changing demand and cost
Indian Paints: Five Plants and Six Markets
Indian Paints: Production Plus
Transportation Cost*
*per unit
Network Optimization: Parameters and
Variables*
• M= Number of plants. Let i= 1..m describe m respective
manufacturing plants.
• N= Number of markets. Let j= 1..n describe n respective markets
• Demj , Pricej , = demand & Price at market j
• Capi = production capacity at plant i
• Costij = Cost of producing and transporting one unit from plant i to
market j
• F costi = Fixed cost of facility i
• Decision Variables:
• Quantij = Quantity shipped from plant i to market j
Network Operations Planning:
Cost Minimization Model
m n
Minimize  Cost
i 1 j 1
ij * Quantij
Subject to following constraints:

m
 Quantij  Demj for j=1..n
i 1
n
 Quantij  Capi for i=1…m
j 1
Quant ij  0 for i=1..m , j=1..n
Number of variables= m *n & number of constraints= m+n

Indian Paints: Production Plus
Transportation Cost*
*per unit
Network Operations Planning:
Cost Minimization Model
Objective function value= Total Variable costs=773,770

Revenue= 1,017,450 , Gross Profit = 243,680 , Net Profit= 15,680

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Supply Chain Management: Strategy,

Planning, and Operation

5.1 Understand the role of network design in a supply

• Network design decisions

– How many manufacturing plants, production lines,

– Where should facilities be located?

– How much capacity at each facility?

– time horizon over which these need to be altered

• Amazon – number of facilities—responsiveness- same day or

These decisions define the physical constraints within

Which Supply Facilities (capacity / Which Markets ?

– places where inventory is stored, assembled, or fabricated

• Role in the competitive strategy

– centralization (efficiency) vs. decentralization (responsiveness)

– other factors to consider (e.g., proximity to customers)

• Capability-flexibility versus dedicated(efficiency)

• Manufacturing methodology (product focused versus process focused like

• Warehousing methodology (cross-docking or storage)

• Overall trade-off: Responsiveness versus efficiency

• Netflix ( 58 DCs to 38) – video streaming

• Amazon (20-70 DCs)

• Total Logistics Cost: inventory , transportation and facility cost

– Also dependent upon the technological factors

– Inventory cost- physical storage, cost of capital, any

– Transportation cost : inbound cost to bring supply to the

– Facility cost: cost of the building, labor and equipment

▪ Fixed cost , variable cost (quantity processes)

– Tariffs and tax incentives- free trade zones (taxes are

– Toyota, BMW setting up plants in US – tax incentives

– Exchange-rate and demand risk- profit of the supply chain

• Maximize the overall profitability of the supply chain network

– Profit----- customer satisfaction

Broad supply chain design

Roles , location and capacity

• Phase I: Define a Supply Chain Strategy/Design

– Forecast of the demand by country or region

– Size of the demand and homogeneity (higher capacity , few )

– Identify fixed and variable costs, economies of scale or scope-

– Identify regional tariffs, requirements for local production, tax

– Identify competitors- facility close or far

– Identify demand risk, exchange-rate risk, political risk

• Phase III: Select a Set of Desirable Potential Sites

• Phase IV: Location Choices and Market Allocation

Subject to following constraints:

Quant ij  0 for i=1..m , j=1..n

Number of variables= m *n & number of constraints= m+n

Objective function value= Total Variable costs=773,770

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