Chapter 5

Network
Design in the
Supply Chain

5-1
 Outline
 Network Design Decisions
 Factors Influencing Network Design Decisions
 Framework for Network Design Decisions
 Models for Facility Location and Capacity
Allocation
 The Role of IT in Network Design
 Making Network Design Decisions in Practice

5-2
 Network Design Decisions

 Network is a collection of facilities across

supply chain.
 Important factors
– Facility role
– Facility location
– Capacity allocation
– Market and supply allocation

5-3
 Factors Influencing
Network Design Decisions
 Strategic: efficiency vs. responsiveness
 Technological
 Macroeconomic
 Political
 Infrastructure
 Competitive
 Customer response time and local presense
 Logistics and facility costs

5-4
 Strategic Factors: Facility Roles
 Offshore facility: lows cost facility for export
production
 Source facility: low cost facility for global production
 Server facility: regional production facility
 Contributor facility: regional production facility with
development skills
 Outpost facility: regional production facility built to
gain local knowledge
 Lead facility: facility that leads in development and
process technologies
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
 Technological Factors
 Production technology and economies of scale
– production technology too costly with significant
economies of scale?
– Cement, sugar, microchip (one or few facility)
– Production technology/setup cost low – similar
economies achievable with smaller plants?
– Bottling, bricks making etc
 Flexibility in production technology
– can be used for multiple product? Regions?

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

 Macroeconomic and Competitive
Factors
 Marcoeconomic
– Tariffs and Tax Incentives
– Exchange Rate
– Demand and buying power
 Competitive factors
– Positive externalities
– Locating to split the market

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

 Customer response time and local
presence
 Do customers require short response time?
– Dominos
– National vs. International
 Do customer expects local presence?
– Convenience store vs Carrefour
– Gourmet vs. Khalifa Bakers
– Coffee shop
– Customer expects to speak someone in local
language/accent/dialect?
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.
 Logistics and Facility costs
 Must consider inventory, transportation and
facility costs tradeoff
 does transportation cost significantly affects
total cost and thus price
 Does transformation occurring at processing
facility significantly reduces material weight,
thus transportation cost?

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.

The Cost-Response Time Frontier

Hi Local FG
Mix
Regional FG

Local WIP
Cost Central FG

Central WIP

Central Raw Material and Custom production

Custom production with raw material at suppliers

Low
Low Response Time Hi

5-10
 Service and Number of Facilities
Response
Time

Number of Facilities

5-11
Costs and Number of Facilities

Inventory

Costs Facility costs

Transportation

Number of facilities

5-12
 Cost Buildup as a Function of Facilities
Total Costs
Cost of Operations

Percent Service
Level Within
Promised Time
Facilities
Inventory
Transportation
Labor

Number of Facilities
5-13
 Framework for Network Design
Decisions
 Phase I – Supply Chain Strategy
 Phase II – Regional Facility Configuration
 Phase III – Desirable Sites
 Phase IV – Location Choices

5-14
 A Framework for
Network Design Decisions
Competitive STRATEGY GLOBAL COMPETITION
PHASE I
Supply Chain
INTERNAL CONSTRAINTS Strategy
Capital, growth strategy, TARIFFS AND TAX
existing network INCENTIVES

PRODUCTION TECHNOLOGIES REGIONAL DEMAND

Cost, Scale/Scope impact, support PHASE II Size, growth, homogeneity,
required, flexibility
Regional Facility local specifications
Configuration
COMPETITIVE
ENVIRONMENT POLITICAL, EXCHANGE
RATE AND DEMAND RISK

PHASE III
Desirable Sites AVAILABLE
INFRASTRUCTURE
PRODUCTION METHODS
Skill needs, response time

FACTOR COSTS PHASE IV LOGISTICS COSTS

Labor, materials, site specific Location Choices Transport, inventory, coordination

5-15
 Conventional Network

Materials Customer
Vendor Finished Customer
DC Store
DC Goods DC DC

Customer
Component Store
Vendor Manufacturing
DC Plant Customer Customer
Warehouse DC Store
Components
DC Customer
Vendor Store
DC Finished
Customer
Goods DC
Final DC Customer
Assembly Store

5-16
 Tailored Network: Multi-Echelon
Finished Goods Network
Local DC
Cross-Dock Store 1
Regional Customer 1
Finished DC
Goods DC Store 1
Local DC
Cross-Dock
National Store 2
Customer 2
Finished
DC
Goods DC
Local DC Store 2
Cross-Dock
Regional
Finished Store 3
Goods DC

Store 3

5-17
 Gravity Methods for Location
 Ton Mile-Center Solution
2
– x,y: Warehouse Coordinates ( x  x n)  ( y  y n)
2
d n

– xn, yn : Coordinates of delivery
D nx F
k
location n  d
n n

– dn : Distance to delivery x n 1 n

D nF
k
location n  d
n

– Fn : Annual tonnage to delivery n 1 n

D ny F
k
location n
 n 1 d
n n

y n

D nF
k

Min  d n Dn F n  dn 1
n

5-18
 Models for Facility Location and
Capacity Allocation
 Phase II
– Capacitated Plant location model
 Phase III
– Gravity location models

5-19
 Network Optimization Models

 Allocating demand to production facilities

 Locating facilities and allocating capacity
Key Costs:

• Fixed facility cost

• Transportation cost
• Production cost
• Inventory cost
• Coordination cost

Which plants to establish? How to configure the network?

5-20
 Demand Allocation Model
 Which market is served n m

by which plant? Min cij xij

i 1 j 1

 Which supply sources s.t.

are used by a plant? n

x  D ij j
, j  1,..., m
xij = Quantity shipped from i 1
m

plant site i to customer j x  K

j 1
ij i
, i  1,..., n

x ij
0

5-21
Plant Location with Multiple Sourcing
 yi = 1 if plant is located n n m

at site i, 0 otherwise Min f y   c x

i i ij ij
i 1 i 1 j 1
 xij = Quantity shipped s.t.
from plant site i to n

customer j  x  D , j  1,..., m
i 1
ij j

 x  K y , i  1,..., n
j 1
ij i i

 y  k ; y {0,1}
i 1
i i

5-22
Plant Location with Single Sourcing
 yi = 1 if plant is located n n m

at site i, 0 otherwise
Min f y   D j c x
i i ij ij
i 1 i 1 j 1

 xij = 1 if market j is s.t.

n
supplied by factory i, 0 x ij
 1, j  1,..., m
otherwise i 1
n

 D j x  K y , i  1,..., n
j 1
ij i i

xij , y {0,1}i

5-23
 The Role of IT in Network Design
 IT systems help with network design by:
1. Making the modeling of the network design
problems easier
2. Containing high-performance optimization
technologies
3. Allowing for “what-if” scenarios
4. Interfacing with planning and operational
software

5-24
 Making Network Design Decisions In
Practice
 Do not underestimate the life span of facilities
 Do not gloss over the cultural implications
 Do not ignore quality of life issues
 Focus on tariffs and tax incentives when
locating facilities

5-25
Summary of Learning Objectives
 What is the role of network design decisions in
the supply chain?
 What are the factors influencing supply chain
network design decisions?
 Describe a strategic framework for facility
location.
 How are the following optimization methods used
for facility location and capacity allocation
decisions?
– Gravity methods for location
– Network optimization models

5-26