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Supply Chain
Supply Chain
SUPPLY CHAIN
• Facility role
• Facility location
• Capacity allocation
• Market and supply allocation
THE ROLE OF NETWORK DESIGN IN THE
SUPPLY CHAIN
• Global supply chain networks can best support their strategic objectives
with facilities in different countries playing different roles.
STRATEGIC FACTORS:
• Offshore facility: low-cost facility for export production. Role of being a
low-cost supply source for markets located outside the country where the
facility is located.
• Source facility: low-cost facility for global production. A source facility
also has low cost as its primary objective, but its strategic role is broader
than that of an offshore facility. Good offshore facilities migrate over time
into source facilities.
• Server facility: regional production facility. A server facility’s objective is
to supply the market where it is located. Examples? Pakistan?
• Contributor facility: regional production facility with development skills.
A contribution facility serves the market where it is located but also
assumes responsibility for product customization, process improvements,
product modifications, or product development. HP in Mexico/3M in
Bangalore.
FACTORS INFLUENCING NETWORK DESIGN DECISIONS
STRATEGIC FACTORS:
TECHNOLOGICAL FACTORS
• Characteristics of available production technologies have a significant
impact on network design decisions. If production technology displays
significant economics of scale, a few high-capacity locations are most
effective. As a result most semiconductor companies build few high
capacity facilities.
• For example, bottling plants for Coca-Cola do not have a very high fixed cost.
MACROECONOMICS FACTORS
For global firms, a decrease in tariffs has led to a decrease in the number of
manufacturing facilities and an increase in the capacity of each facility built.
Taxes/Tariffs
– Several levels of government must be considered
when evaluating potential locations.
– Countries with high tariffs discourage companies
from importing goods into the country.
– High tariffs encourage multinational corporations
to set up factories to produce locally.
– Many countries have set up foreign trade zones
(FTZs) where materials are imported duty-free as
long as the imports are used as inputs to
production of goods.
FACTORS INFLUENCING NETWORK DESIGN DECISIONS
Exchange rate risks may be handled using financial instruments that limit, or
hedge against, the loss due to fluctuations.
POLITICAL FACTORS
Countries with independent and clear legal systems allow firm to feel that they
have recourse in the courts should they need it. April 09 Dawn. Irfan Husain.
INFRASTRUCTURE FACTORS
Poor infrastructure adds to the cost of doing business from a given location.
Key infrastructure elements to be considered during network design include
availability of sites, labor availability, proximity to transportation terminals, rail
service, proximity to airports and seaports, highway access, congestion, and
local utilities. What else?
COMPETITIVE FACTORS
A fundamental decision firms make is whether to locate their facilities close to
competitors or far from them.
FACTORS INFLUENCING NETWORK DESIGN DECISION
COMPETITIVE FACTORS
Positive Externalities b/w Firms
• The result of competition is for both firms to locate close together even though doing so increases
the average distance to the customer.
• Leads to development of appropriate infrastructure --- tier suppliers. Examples?
SOCIOECONOMIC FACTORS
• The industrial policy aims to spread industrialization to backward areas of the country through
institutions, appropriate initiatives and infrastructure investments that would facilitate private
investment.
For example, when iron ore is processed to make steel, the amount of output is a small
fraction of the amount of ore used. Locating the steel factory close to the supply
source is preferred because it reduces the distance that the large quantity of ore has to
travel.
IMPORTANT FACTORS IN THE LOCATION
PROCESS
A Framework for
Global Site Location
Competitive STRATEGY GLOBAL COMPETITION
PHASE I
Supply Chain
INTERNAL CONSTRAINTS Strategy
Capital, growth strategy, TARIFFS AND TAX
existing network INCENTIVES
PHASE III
Desirable Sites AVAILABLE
INFRASTRUCTURE
PRODUCTION METHODS
Skill needs, response time
5-15
FRAMEWORK FOR NETWORK DESIGN DECISIONS
–Cost efficiency?
–Responsiveness?
–Product Variety?
–Quality?
•The objective of the second phase of network design is to identify regions where
facilities will be located, their potential roles, and their approximate capacity.
•The next step is for managers to identify whether economies of scale or scope can play
a significant role in reducing costs, given available production technologies.
•If economies of scale or scope are not significant, it may be better for each market to
have its own facility.
•The regional configuration defines the approximate number of facilities in the network,
regions where facilities will be set up, and whether a facility will produce all products for
a given market or a few products for all markets in the network.
FRAMEWORK FOR NETWORK DESIGN DECISIONS
PHASE III : SELECT A SET OF DESIRABLE POTENTIAL SITES
Managers use network design models in two different situations. First these
models are used to decide on locations where facilities will be established and
the capacity to be assigned to each facility.
Second, these models are used to assign current demand to the available
facilities and identify lanes along which product will be transported.
• Macroeconomic Factors:
– Tariffs
– Exchange Rate Fluctuations
– Tax Incentives
– Demand Risk
– Infrastructure
– Socioeconomic
– Customer response time and local
presence
– Competitive
• Positive externalities
• Locating to split the market
– Logistics and Facility Costs
What other factors can you think of?
MODELS FOR FACILITY LOCATION AND CAPACITY ALLOCATION
•The disadvantages of these approaches are that plants are sized to meet local
demand and may not fully exploit economies of scale. An alternative approach
is to consolidate plants in just a few regions. This improves economies of scale
but increases transportation cost and duties.
•During Phase II, the manager must consider these quantifiable trade-offs along
with nonquantifiable factors such as the competitive environment and political
risk.
•In the models we consider, however, all variables costs grow linearly with the
quantity produced or shipped.
•The vice president wants to know what the lowest cost network should look
like.
MODELS FOR FACILITY LOCATION AND CAPACITY ALLOCATION
The Capacitated Plant Location Model:
•The supply chain team’s goal is to decide on a network design that maximizes
profits after taxes. For the sake of simplicity, however, we assume that all
demand must be met. Taxes on earnings are ignored. Focuses on minimizing
cost of meeting global demand. It can be modified to include profits and taxes.
•Looks at which region to set up a facility or facilities
•Quantitative model. Cannot consider “invisible factors” such as the competitive environment, and
political risk
•Fixed costs
•The constraint in Equation 5.1 requires that the demand at each regional
market be satisfied. The constraint in Equation 5.2 states that no plant can
supply more than its capacity.
MODELS FOR FACILITY LOCATION AND CAPACITY ALLOCATION
During Phase III (see Figure 5-2), a manager identifies potential locations in
each region where the company has decided to locate a plant.