Network Design in the Supply Chain

1
Network Design in the Supply Chain
2
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?)

3
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.

4
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)

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Cost / Responsiveness Trade-off
Cost
Total cost
SC response time
Inventory cost
Facility cost
Transportation cost
Number of Facilities
6
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

7
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.

8
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)

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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.

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Infrastructure factors

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

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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.

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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
Total demand 1
D1 a (1-b-a)/2 (1a-b)/2 D2 1-a-(1-b-a)/2
(1b-a)/2
gt
a b 1/2
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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

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Phases III IV Selecting specific locations

• Important factors
• Infrastructure
• Costs
• Labor
• Materials
• Facilities
• Transport
• Inventory
• Taxes and Tariffs