Network Design

in the Supply Chain

Network Design Decisions
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?

(How many plants, DCs, retail stores, etc. to build?)

A framework for network design
decisions
(Figure 5.2; page 107)
Notice the decomposing nature of this framework
as it proceeds from regional decisions to more
localized ones.
Phase I: Strategy Considerations
Understand where is the main emphasis:
Cost leadership
Responsiveness
Product differentiation
Who are the key competitors at each target market?
Identify constraints on available capital
Key mechanisms that will support growth
Reuse of existing facilities
Build new facilities
Partner with other companies (mergers and acquisitions are potential
options here)
Cost / Responsiveness Trade-off
Number of Facilities
Cost
Facility cost
Inventory cost
Transportation cost
Total cost
SC response time
Phase II: Regional facility
configuration
Important Factors:
Regional demand
Production technologies and economies of scale
and scope
Tariffs and Tax incentives
Infrastructure factors
Political, exchange rate and demand risk
Competitive Environment

Regional demand
Forecast the demand on a region by region basis
Need to study its
size
homogeneity
Non-homogeneous demand will require a more localized
network
Frequently the final customization of a product for a particular
market is done at a local distribution center
Labeling
Manuals
etc.

Production technologies and the
underlying economies
Expensive dedicated production technologies will require large
production volumes and therefore a more centralized production
network (e.g., chip production).
Lower fixed cost facilities can be duplicated more easily (e.g.,
bottling factories).
In case of non-homogeneous demand, technological flexibility
facilitates consolidation of production to a few manufacturing
facilities.
The more cumbersome the transfer of raw material, the closer the
facility must be to the source site (e.g., factories processing
minerals)


Tariffs and Tax incentives
Tariffs: Any duties that must be paid when products and/or equipment are
moved across international, state or city boundaries.
High tariffs necessitate localized production.
Presently, there is a systematic effort to open the markets to global competition
through the World Trade Organization Policies (WTO) and regional
agreements (NAFTA, MERCOSUR for S. America, ASEAN for Pacific rim,
etc.)
Tax incentives: a reduction in tariffs or taxes that countries, states and cities
often provide to encourage firms to locate their facilities in specific areas.
Free trade zones: Areas where duties and tariffs are relaxed as long as
production is used primarily for export (e.g., Taiwan and Chinas GuangZhou
area) Allows companies to take better advantage of low labor costs.
Tax incentives can be focusing on certain
Industries
Technologies
Regions
Quotas: Limits on import volumes placed by different countries in an effort to
protect their local industry. Sometimes there is also some requirement on
minimum local content.


Infrastructure factors
Availability of skilled labor
Availability of transportation facilities
Ports
Airports
Rail
Highways
Availability of necessary utilities
Power
Water
Sewage
Telecommunications / IT

Political, exchange rate and demand
Risks
Political risks -- Need for:
Well-defined rules of commerce
Independent and clear legal systems
Political stability
Exchange rate risks: This risk arises from the fact that companies might incur
their costs in one currency and collect their revenues in other currencies. (e.g.,
Japanese production under an expensive Yen in the late 80s / early 90s; the
role of an expensive EURO these days for the American economy)
Potential protection to exchange rate risk: Build some flexible over-capacity
to the regional facilities so that production is shifted to the lower-cost regions.
Demand risk: Comes from extensive demand fluctuation due to regional
economic crises (e.g., Asia markets between 1996-1998) Plant flexibility is
also a potential protection to this type of risk.

Competitive factors
Positive Externalities: Instances where collocation of multiple firms benefits all
of them, since
They share the cost of the necessary infrastructure
And the collocation can stimulate demand for all of them
Examples: a mall, silicon valley, industrial parks
Locating to split the market: For companies that
Do not have price control, and
try to maximize their market share by minimizing their distance from the customer,
collocation can allow each competing party to maximize their market share.

a b
D1 = a + (1-b-a)/2 = (1+a-b)/2
D2 = 1-a-(1-b-a)/2 = (1+b-a)/2
Total demand = 1
=>
a = b = 1/2
A (production) facility categorization
(Kasra Ferdows, 1997)
Offshore Facility: Low-cost facility for export production

Source Facility: Low cost facility for global production facilities with more
strategic role in the SC, resulting from the evolution of good offshore
facilities

Server Facility: Regional production facility

Contributor Facility: Regional production facility with development skills
(mainly focusing on customization for the local market)

Outpost Facility: Regional production facility built to gain local skills

Lead Facility: Facility that leads in development and process technologies
Phases III & IV: Selecting specific
locations
Important factors
Infrastructure
Costs
Labor
Materials
Facilities
Transport
Inventory
Taxes and Tariffs