Chapter 5 Network Design in the Supply Chain

True/False 1. Supply chain network design decisions include the location of manufacturing, storage, or transportation-related facilities and the allocation of capacity and roles to each facility. Answer !rue Difficulty "oderate Decisions concerning the role of each facility are significant $ecause they determine the amount of fle%i$ility the supply chain has in changing the way it meets demand. Answer !rue Difficulty "oderate Decisions concerning the role of each facility are significant $ecause they determine the amount of rigidity the supply chain has in changing the way it meets demand. Answer 'alse Difficulty "oderate 'acility location decisions ha)e a long-term impact on a supply chain*s performance $ecause it is cost effecti)e to shut down a facility or mo)e it to a different location. Answer 'alse Difficulty +asy Capacity allocation decisions ha)e a significant impact on supply chain performance $ecause they tend to stay in place for se)eral years. Answer !rue Difficulty "oderate !he allocation of supply sources and markets to facilities has a significant impact on performance $ecause it affects total production, in)entory, and transportation costs incurred $y the supply chain to satisfy customer demand. Answer !rue Difficulty +asy !he allocation of supply sources and markets to facilities does not need to $e reconsidered on a regular $asis so that the allocation can $e changed as market conditions or plant capacities change. Answer !rue Difficulty "oderate

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Network design decisions ha)e a significant impact on performance $ecause they determine the supply chain configuration and set constraints within which in)entory, transportation, and information can $e used to either decrease supply chain cost or increase responsi)eness. Answer !rue Difficulty "oderate Network design decisions ha)e a significant impact on performance $ecause they determine the supply chain conflagration and set constraints within which in)entory, transportation, and information can $e used to either increase supply chain cost or reduce responsi)eness. Answer 'alse Difficulty +asy 'irms focusing on cost leadership tend to find the lowest cost location for their manufacturing facilities, $ut only if that means locating )ery far from the markets they ser)e. Answer 'alse Difficulty +asy 'irms focusing on responsi)eness tend to locate facilities closer to the market and may select a high-cost location if this choice allows the firm to 1uickly react to changing market needs. Answer !rue Difficulty "oderate 2f production technology displays significant economies of scale, many local locations are the most effecti)e. Answer 'alse Difficulty "oderate 2f facilities ha)e lower fi%ed costs, many local facilities are preferred $ecause this helps lower transportation costs. Answer !rue Difficulty "oderate 2f the production technology is )ery infle%i$le and product re1uirements )ary from one country to another, a firm has to set up local facilities to ser)e the market in each country. Answer !rue Difficulty 3ard 2f the technology is fle%i$le, it $ecomes more difficult to consolidate manufacturing in a few large facilities. Answer 'alse Difficulty 3ard !ariffs ha)e a minor influence on location decisions within a supply chain. Answer 'alse Difficulty +asy

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3igh tariffs lead to more production locations within a supply chain network, with each location ha)ing a lower allocated capacity. Answer !rue Difficulty 3ard 4hen designing supply chain networks, companies must $uild appropriate fle%i$ility to help counter fluctuations in e%change rates and demand across different countries. Answer !rue Difficulty "oderate 2n)entory and facility costs increase as the num$er of facilities in a supply chain increase. Answer !rue Difficulty "oderate !ransportation costs increase as the num$er of facilities is increased. Answer 'alse Difficulty "oderate A firm may increase the num$er of facilities $eyond the point that minimi5es total logistics cost to impro)e the response time to its customers. Answer !rue Difficulty +asy 4hen faced with a network design decision, the goal of a manager is to design a network that minimi5es the firm*s costs while satisfying customer needs in terms of demand and responsi)eness. Answer 'alse Difficulty 3ard !he supply chain network is designed to ma%imi5e total profits, taking into account the e%pected margin and demand in each market, )arious logistics and facility costs, and the ta%es and tariffs at each location. Answer !rue Difficulty +asy

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Multiple Choice 1. Supply chain network design decisions include a. only the location of manufacturing, storage, or transportation-related facilities. $. only the allocation of capacity and roles to each facility. c. $oth the location of manufacturing, storage, or transportation-related facilities and the allocation of capacity and roles to each facility. d. neither the location of manufacturing, storage, or transportation-related facilities nor the allocation of capacity and roles to each facility. e. none of the a$o)e Answer c Difficulty +asy Supply chain network design decisions classified as facility role are concerned with a. what processes are performed at each facility. $. where facilities should $e located. c. how much capacity should $e allocated to each facility. d. what markets each facility should ser)e and which supply sources should feed each facility. e. none of the a$o)e Answer a Difficulty "oderate Supply chain network design decisions classified as facility location are concerned with a. what processes are performed at each facility. $. where facilities should $e located. c. how much capacity should $e allocated to each facility. d. what markets each facility should ser)e and which supply sources should feed each facility. e. none of the a$o)e Answer $ Difficulty +asy Supply chain network design decisions classified as capacity allocation are concerned with a. what processes are performed at each facility. $. where facilities should $e located. c. how much capacity should $e allocated to each facility. d. what markets each facility should ser)e and which supply sources should feed each facility. e. none of the a$o)e Answer c Difficulty +asy Supply chain network design decisions classified as market and supply allocation are concerned with a. what processes are performed at each facility. $. where facilities should $e located. c. how much capacity should $e allocated to each facility.

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d. what markets each facility should ser)e and which supply sources should feed each facility. e. none of the a$o)e Answer d Difficulty +asy ,. Decisions concerning the role of each facility are significant $ecause a. they determine the amount of fle%i$ility the supply chain has in demanding change. $. they determine the amount of fle%i$ility the supply chain has in changing the way it meets demand. c. they determine the amount of capacity the supply chain has in changing the way it meets demand. d. they determine the amount of in)entory the supply chain has in demanding change. e. None of the a$o)e are true. Answer $ Difficulty "oderate 'acility location decisions ha)e a long-term impact on a supply chain*s performance $ecause a. it is )ery e%pensi)e to shut down a facility or mo)e it to a different location. $. it is not e%pensi)e to shut down a facility or mo)e it to a different location. c. it is ad)isa$le to shut down a facility or mo)e it to a different location. d. it is cost effecti)e to shut down a facility or mo)e it to a different location. e. none of the a$o)e Answer a Difficulty "oderate Capacity allocation decisions ha)e a significant impact on supply chain performance $ecause a. capacity decisions tend to $e permanent. $. capacity decisions tend to $e changed fre1uently. c. capacity decisions do not tend to stay in place for se)eral years. d. capacity decisions tend to stay in place for se)eral years. e. none of the a$o)e Answer d Difficulty "oderate Allocating too much capacity to a location results in a. permanent damage. $. poor utili5ation, and as a result, higher costs. c. high utili5ation, and as a result, higher costs. d. poor utili5ation, and as a result, lower costs. e. high utili5ation, and as a result, lower costs. Answer $ Difficulty "oderate

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Allocating too little capacity results in a. temporary damage. $. good responsi)eness if demand is not satisfied or low cost if demand is filled from a distant facility. c. good responsi)eness if demand is not satisfied or high cost if demand is filled from a distant facility. d. poor responsi)eness if demand is not satisfied or low cost if demand is filled from a distant facility. e. poor responsi)eness if demand is not satisfied or high cost if demand is filled from a distant facility. Answer e Difficulty "oderate !he allocation of supply sources and markets to facilities has a significant impact on performance $ecause a. it cannot affect total production, in)entory, and transportation costs incurred $y the supply chain to satisfy customer demand. $. it cannot affect customer demand. c. it affects total production, in)entory, and transportation costs incurred $y the supply chain to satisfy customer demand. d. it cannot satisfy customer demand. e. none of the a$o)e Answer c Difficulty "oderate !he allocation of supply sources and markets to facilities should $e reconsidered on a regular $asis so that a. the allocation can $e held constant as market conditions or plant capacities e%pand. $. the allocation can $e changed as market conditions or plant capacities stagnate. c. the allocation can $e held constant as market conditions or plant capacities change. d. the allocation can $e changed as market conditions or plant capacities change. e. none of the a$o)e Answer d Difficulty "oderate Network design decisions ha)e a significant impact on performance $ecause they a. determine the supply chain configuration. $. determine the supply chain conflagration. c. set constraints within which in)entory, transportation, and information can $e used to either decrease supply chain cost or increase responsi)eness. d. set constraints within which in)entory, transportation, and information can $e used to either increase supply chain cost or decrease responsi)eness. e. a and c only Answer e Difficulty 3ard

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Customer order entry is a. the point in time when the customer has access to choices and makes a decision regarding a purchase. $. the customer informing the retailer of what they want to purchase and the retailer allocating product to the customer. c. the process where product is prepared and sent to the customer. d. the process where the customer recei)es the product and takes ownership. e. none of the a$o)e Answer $ Difficulty "oderate 4hich of the following is not a factor influencing network design decisions in supply chains6 a. Strategic factors $. !actical factors c. "acroeconomic factors d. 7olitical factors e. 2nfrastructure factors Answer $ Difficulty "oderate 'irms focusing on cost leadership tend to a. locate facilities close to the market they ser)e. $. locate facilities )ery far from the market they ser)e. c. find the lowest cost location for their manufacturing facilities. d. select a high-cost location to $e a$le to react 1uickly. e. none of the a$o)e Answer c Difficulty "oderate 'irms focusing on responsi)eness tend to a. locate facilities close to the market they ser)e. $. locate facilities )ery far from the market they ser)e. c. find the lowest cost location for their manufacturing facilities. d. select a high-cost location to $e a$le to react slowly. e. none of the a$o)e Answer a Difficulty "oderate 4hich of the following is not one of 8asra 'erdows* classifications of possi$le strategic roles for )arious facilities in a glo$al supply chain network6 a. 9ffpost facility $. Source facility c. Ser)er facility d. Contri$utor facility e. 9utpost facility Answer a Difficulty "oderate A facility that ser)es the role of $eing a low-cost supply source for markets located outside the country where the facility is located is

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a. an offshore facility. $. a source facility. c. a ser)er facility. d. a contri$utor facility. e. an outpost facility. Answer a Difficulty "oderate #0. A facility that also has low cost as its primary o$:ecti)e, $ut its strategic role is $roader than that of an offshore facility is a. an offshore facility. $. a source facility. c. a ser)er facility. d. a contri$utor facility. e. an outpost facility. Answer $ Difficulty "oderate A facility $uilt $ecause of ta% incenti)es, local content re1uirement, tariff $arriers, or high logistics cost to supply the region from elsewhere with the o$:ecti)e to supply the market where it is located is a. an offshore facility. $. a source facility. c. a ser)er facility. d. a contri$utor facility. e. an outpost facility. Answer c Difficulty "oderate A facility located primarily to o$tain access to knowledge or skills that may e%ist within a certain region is a. an offshore facility. $. a source facility. c. a ser)er facility. d. a contri$utor facility. e. an outpost facility. Answer e Difficulty "oderate A facility that ser)es the market where it is located $ut also assumes responsi$ility for product customi5ation, process impro)ements, product modifications, or product de)elopment is a. an offshore facility. $. a source facility. c. a ser)er facility. d. a contri$utor facility. e. an outpost facility. Answer d Difficulty "oderate

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A facility that creates new products, processes, and technologies for the entire network is a. an offshore facility. $. a source facility. c. a ser)er facility. d. a lead facility. e. an outpost facility. Answer d Difficulty "oderate 2f production technology displays significant economies of scale, a. many high-capacity locations are the most effecti)e. $. few high-capacity locations are the most effecti)e. c. few high-capacity locations are the least effecti)e. d. few low-capacity locations are the most effecti)e. e. few low-capacity locations are the least effecti)e. Answer $ Difficulty "oderate 2f facilities ha)e lower fi%ed costs, a. a few high-capacity facilities are preferred $ecause this helps lower transportation costs. $. a few local facilities are preferred $ecause this helps lower transportation costs. c. many high-capacity facilities are preferred $ecause this helps lower transportation costs. d. many local facilities are preferred $ecause this helps lower transportation costs. e. one central facility is preferred $ecause this helps lower transportation costs. Answer d Difficulty "oderate 2f the production technology is )ery infle%i$le and product re1uirements )ary from one country to another, a firm has to set up a. local facilities to ser)e the market in each country. $. a few high-capacity facilities to ser)e the market in each country. c. many local facilities $ecause this helps lower transportation costs. d. a few high-capacity facilities $ecause this helps lower transportation costs. e. many high-capacity facilities $ecause this helps lower transportation costs. Answer a Difficulty 3ard 2f the technology is fle%i$le, a. it $ecomes more difficult to consolidate manufacturing in a few large facilities. $. it $ecomes more difficult to distri$ute manufacturing in many local facilities. c. it $ecomes easier to consolidate manufacturing in a few large facilities. d. it $ecomes easier to consolidate manufacturing in many local facilities. e. the firm should ha)e one central facility. Answer c Difficulty 3ard

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4hich of the following is a macroeconomic factor influencing network design decisions6 a. !a%es $. !ariffs c. +%change rates d. all of the a$o)e e. none of the a$o)e Answer d Difficulty +asy Duties that must $e paid when products and;or e1uipment are mo)ed across international, state, or city $oundaries are referred to as a. ta%es. $. ta% incenti)es. c. tariffs. d. incenti)es. e. none of the a$o)e Answer c Difficulty "oderate 2f a country has )ery high tariffs, a. companies either do not ser)e the local market or set up manufacturing plants within the country to sa)e on duties. $. companies do not ser)e the local market. c. companies set up manufacturing plants within the country to sa)e on duties. d. companies will not ser)e the local market or set up manufacturing plants within the country to sa)e on duties. e. companies will ser)e the local market $y setting up regional manufacturing plants. Answer a Difficulty "oderate De)eloping countries often create free trade zones where a. duties and tariffs are imposed as long as production is used primarily for e%port. $. duties and tariffs are imposed as long as production is used primarily for import. c. duties and tariffs are rela%ed as long as production is used primarily for e%port. d. duties and tariffs are rela%ed as long as production is used primarily for import. e. duties and tariffs are increased as long as production is used primarily for e%port. Answer c Difficulty +asy <uilding some o)er-capacity in the supply chain network and making the capacity fle%i$le allows a firm to alter production flows within the supply chain to a. produce less in facilities that ha)e a lower cost $ased on current e%change rates.

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$. produce more in facilities that ha)e a lower cost $ased on current e%change rates. c. produce more in facilities that ha)e a higher cost $ased on current e%change rates. d. produce less in facilities that ha)e the same cost $ased on current e%change rates. e. None of the a$o)e are accurate. Answer $ Difficulty "oderate &(. 2n)entory and facility costs a. decrease as the num$er of facilities in a supply chain increases. $. increase as the num$er of facilities in a supply chain increases. c. increase as the num$er of facilities in a supply chain decreases. d. are sta$le as the num$er of facilities in a supply chain increases. e. None of the a$o)e are accurate. Answer $ Difficulty "oderate !ransportation costs a. decrease as the num$er of facilities is decreased. $. decrease as the num$er of facilities is increased. c. increase as the num$er of facilities is decreased. d. remain sta$le as the num$er of facilities is increased. e. All of the a$o)e are accurate. Answer $ Difficulty +asy !otal logistics costs are a sum of the a. in)entory and facility costs. $. transportation and facility costs. c. in)entory and transportation costs. d. in)entory, transportation, and facility costs. e. in)entory, transportation, and faculty costs. Answer d Difficulty +asy !he facilities in a supply chain network must a. at least ma%imi5e total logistics cost. $. at least e1ual the num$er that ma%imi5es total logistics cost. c. at least e1ual the num$er that minimi5es total logistics cost. d. at least minimi5e total logistics cost. e. none of the a$o)e Answer c Difficulty +asy 4hen faced with a network design decision, the goal of a manager is to design a network that a. ma%imi5es the firm*s profits. $. minimi5es the firm*s costs. c. satisfies customer needs in terms of demand and responsi)eness.

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d. ma%imi5es the firm*s profits while satisfying customer needs in terms of demand and responsi)eness. e. none of the a$o)e Answer d Difficulty "oderate &/. 4hich of the following is not a phase in the design of a glo$al supply chain network6 a. Define a supply chain strategy. $. Define the regional facility configuration. c. Select desira$le sites. d. =ocation choices. e. 2mplement supply chain strategy. Answer e Difficulty "oderate 4hich of the following is the first phase in the design of a glo$al supply chain network6 a. Define a supply chain strategy. $. Define the regional facility configuration. c. Select desira$le sites. d. =ocation choices. e. 2mplement supply chain strategy. Answer a Difficulty "oderate !he o$:ecti)e of the first phase of network design is to a. ma%imi5e total profits, taking into account the e%pected margin and demand in each market. $. select a precise location and capacity allocation for each facility. c. select a set of desira$le sites within each region where facilities are to $e located. d. identify regions where facilities will $e located, their potential roles, and their appro%imate capacity. e. specify what capa$ilities the supply chain network must ha)e to support a firm*s competiti)e strategy. Answer e Difficulty 3ard !he o$:ecti)e of the second phase of network design is to a. ma%imi5e total profits, taking into account the e%pected margin and demand in each market. $. select a precise location and capacity allocation for each facility. c. select a set of desira$le sites within each region where facilities are to $e located. d. identify regions where facilities will $e located, their potential roles, and their appro%imate capacity. e. specify what capa$ilities the supply chain network must ha)e to support a firm*s competiti)e strategy. Answer d Difficulty 3ard

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!he o$:ecti)e of the third phase of network design is to a. ma%imi5e total profits, taking into account the e%pected margin and demand in each market. $. select a precise location and capacity allocation for each facility. c. select a set of desira$le sites within each region where facilities are to $e located. d. identify regions where facilities will $e located, their potential roles, and their appro%imate capacity. e. specify what capa$ilities the supply chain network must ha)e to support a firm*s competiti)e strategy. Answer c Difficulty 3ard 2t is )ery important that long-term conse1uences $e thought through when making facility decisions, $ecause a. network designers can use this fact to influence the role of the new facility and the focus of people working there. $. facilities last a long time and ha)e an enduring impact on a firm*s performance. c. it is astounding how often ta% incenti)es dri)e the choice of location. d. the location of a facility has a significant impact on the e%tent and form of communication that de)elops in the supply chain network. e. the 1uality of life at selected facility locations has a significant impact on performance. Answer $ Difficulty 3ard !he implications of culture should not $e glossed o)er $ecause a. tariffs and ta% incenti)es should $e carefully considered. $. facilities last a long time and ha)e an enduring impact on a firm*s performance. c. it is astounding how often ta% incenti)es dri)e the choice of location. d. the location of a facility has a significant impact on the e%tent and form of communication that de)elops in the supply chain network. e. the 1uality of life at selected facility locations has a significant impact on performance. Answer a Difficulty 3ard !he 1uality of life at selected facility locations has a significant impact on performance $ecause a. network designers can use this fact to influence the role of the new facility and the focus of people working there. $. facilities last a long time and ha)e an enduring impact on a firm*s performance. c. it is astounding how often ta% incenti)es dri)e the choice of location. d. the location of a facility has a significant impact on the e%tent and form of communication that de)elops in the supply chain network. e. it influences the work force a)aila$le and their morale. Answer e

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Difficulty 3ard (-. "anagers making facility location decisions should carefully consider tariffs and ta% incenti)es, $ecause a. network designers can use this fact to influence the role of the new facility and the focus of people working there. $. facilities last a long time and ha)e an enduring impact on a firm*s performance. c. it is astounding how often ta% incenti)es dri)e the choice of location. d. the location of a facility has a significant impact on the e%tent and form of communication that de)elops in the supply chain network. e. it influences the work force a)aila$le and their morale. Answer c Difficulty "oderate

Essay/Problems 1. +%plain how supply chain network design decisions are classified. Answer Supply chain network design decisions include the location of manufacturing, storage, or transportation-related facilities and the allocation of capacity and roles to each facility. Supply chain network design decisions are classified as follows 1. Facility role: 4hat role should each facility play6 4hat processes are performed at each facility6 2. Facility location: 4here should facilities $e located6 3. Capacity allocation: 3ow much capacity should $e allocated to each facility6 4. Market and supply allocation 4hat markets should each facility ser)e6 4hich supply sources should feed each facility6 Difficulty: "oderate #. Descri$e the factors that influence supply chain network design decisions. Answer: Strategic Factors. 'irms focusing on cost leadership tend to find the lowest cost location for their manufacturing facilities, e)en if that means locating )ery far from the markets they ser)e. 'irms focusing on responsi)eness tend to locate facilities closer to the market and may select a high-cost location if this choice allows the firm to 1uickly react to changing market needs. Technological Factors. 2f production technology displays significant economies of scale, a few high-capacity locations are the most effecti)e. 2n contrast, if facilities ha)e lower fi%ed costs, many local facilities are preferred $ecause this helps lower transportation costs. 2f the production technology is )ery infle%i$le and product re1uirements )ary from one country to another, a firm has to set up local facilities to ser)e the market in each country. Con)ersely, if the technology is fle%i$le, it $ecomes easier to consolidate manufacturing in a few large facilities.

Macroeconomic Factors. Macroeconomic factors include ta%es, tariffs, e%change rates, and other economic factors that are not internal to an indi)idual firm. 2f a country has )ery high tariffs, companies either do not ser)e the local market or set up manufacturing plants within the country to sa)e on duties. 3igh tariffs lead to more production locations within a supply chain network, with each location ha)ing a lower allocated capacity. Tax incentives are a reduction in tariffs or ta%es that countries, states, and cities often pro)ide to encourage firms to locate their facilities in specific areas. "any countries )ary incenti)es from city to city to encourage in)estments in areas with lower economic de)elopment. De)eloping countries often create free trade zones where duties and tariffs are rela%ed as long as production is used primarily for e%port. !his creates a strong incenti)e for glo$al firms to set up a plant in these countries to $e a$le to e%ploit their low la$or costs. "any countries also place minimum re1uirements on local content and limits on imports. Such policies lead companies to set up many facilities and source from local suppliers. +%change rate risks may $e handled using financial instruments that limit, or hedge against, the loss due to fluctuations. Suita$ly designed supply chain networks, howe)er, offer the opportunity to take ad)antage of e%change rate fluctuations and increase profits. An effecti)e way to do this is to $uild some o)er-capacity in the network and make the capacity fle%i$le so that it can $e used to supply different markets. !his fle%i$ility allows the firm to alter production flows within the supply chain to produce more in facilities that ha)e a lower cost $ased on current e%change rates. 4hen designing supply chain networks, companies must $uild appropriate fle%i$ility to help counter fluctuations in e%change rates and demand across different countries. Political Factors. Companies prefer to locate facilities in politically sta$le countries where the rules of commerce are well defined. Countries with independent and clear legal systems allow firms to feel that they ha)e recourse in the courts should they need it. !his makes it easier for companies to in)est in facilities in these countries. 7olitical sta$ility is hard to 1uantify, so a firm makes an essentially su$:ecti)e e)aluation when designing its supply chain network. n!rastructure Factors. !he a)aila$ility of good infrastructure is an important prere1uisite to locating a facility in a gi)en area. 7oor infrastructure adds to the cost of doing $usiness from a gi)en location. 8ey infrastructure elements to $e considered during network design include a)aila$ility of sites, la$or a)aila$ility, pro%imity to transportation terminals, rail ser)ice, pro%imity to airports and seaports, highway access, congestion, and local utilities. Competiti"e Factors. Companies must consider competitors* strategy, si5e, and location when designing their supply chain networks. A fundamental decision firms make is whether to locate their facilities close to competitors or far from them. 3ow the firms compete and whether e%ternal factors such as raw material or la$or a)aila$ility force them to locate close to each other influence this decision. 7ositi)e e%ternalities lead to competitors locating close to each other. 4hen there are no positi)e e%ternalities, firms locate to $e a$le to capture the largest possi$le share of the market. Customer #esponse Time an$ %ocal Presence. 'irms that target customers who )alue a short response time must locate close to them. 2f a firm is deli)ering its product to customers, use of a rapid means of transportation allows it to $uild fewer facilities and still pro)ide a short response time. !his option, howe)er, increases transportation costs. "oreo)er, there are many situations where the presence of a facility close to a customer is important.

%ogistics an$ Facility Costs. =ogistics and facility costs incurred within a supply chain change as the num$er of facilities, their location, and capacity allocation is changed. Companies must consider in)entory, transportation, and facility costs when designing their supply chain networks. 2n)entory and facility costs increase as the num$er of facilities in a supply chain increase. !ransportation costs decrease as the num$er of facilities is increased. 2ncreasing the num$er of facilities to a point where in$ound economies of scale are lost increases transportation cost. !he supply chain network design is also influenced $y the transformation occurring at each facility. 4hen there is a significant reduction in material weight or )olume as a result of processing, it may $e $etter to locate facilities closer to the supply source rather than the customer. !otal logistics costs are a sum of the in)entory, transportation, and facility costs. !he facilities in a supply chain network must at least e1ual the num$er that minimi5es total logistics costs. A firm may increase the num$er of facilities $eyond this point to impro)e the response time to its customers. !his decision is :ustified if the re)enue increase from impro)ed response outweighs the increased cost from additional facilities. Difficulty: 3ard &. Descri$e the four phases in the framework for network design decisions. Answer: Phase & 'e!ine a Supply Chain Strategy !he o$:ecti)e of the first phase of network design is to define a firm*s supply chain strategy. !he supply chain strategy specifies what capa$ilities the supply chain network must ha)e to support a firm*s competiti)e strategy. 7hase 2 starts with a clear definition of the firm*s competiti)e strategy as the set of customer needs that the supply chain aims to satisfy. Ne%t, managers must forecast the likely e)olution of glo$al competition and whether competitors in each market will $e local or glo$al players. "anagers must also identify constraints on a)aila$le capital and whether growth will $e accomplished $y ac1uiring e%isting facilities, $uilding new facilities, or partnering. <ased on the competiti)e strategy of the firm, an analysis of the competition, any economies of scale or scope, and any constraints, managers must determine the supply chain strategy for the firm. Phase & 'e!ine the #egional Facility Con!iguration !he o$:ecti)e of the second phase of network design is to identify regions where facilities will $e located, their potential roles, and their appro%imate capacity. An analysis of 7hase 22 is started with a forecast of the demand $y country. Such a forecast must include a measure of the si5e of the demand as well as a determination of whether the customer re1uirements are homogenous or )aria$le across different countries. !he ne%t step is for managers to identify whether economies of scale or scope can play a significant role in reducing costs gi)en a)aila$le production technologies. Ne%t, managers must identify demand risk, e%change rate risk, and political risk associated with different regional markets. !hey must also identify regional tariffs, any re1uirements for local production, ta% incenti)es, and any e%port or import restrictions for each market. !he ta% and tariff information is used to identify the $est location to e%tract a ma:or share of the profits. 2n general, it is $est to o$tain the ma:or share of profits at the location with the lowest ta% rate. "anagers must identify competitors in each region and make a case for whether a facility needs to $e located close to or far from a competitor*s facility. !he desired response time for each market must also $e identified. "anagers must also identify the factor and logistics costs at an

aggregate le)el in each region. <ased on all this information, managers will identify the regional facility configuration for the supply chain network using network design models discussed in the ne%t section. !he regional configuration defines the appro%imate num$er of facilities in the network, regions where facilities will $e set up, and whether a facility will produce all products for a gi)en market or a few products for all markets in the network. Phase & Select 'esirable Sites !he o$:ecti)e of 7hase 222 is to select a set of desira$le sites within each region where facilities are to $e located. !he set of desira$le sites should $e larger than the desired num$er of facilities to $e set up so that a precise selection may $e made in 7hase 2>. Sites should $e selected $ased on an analysis of infrastructure a)aila$ility to support the desired production methodologies. Hard infrastructure re uirements include the a)aila$ility of suppliers, transportation ser)ices, communication, utilities, and warehousing infrastructure. !oft infrastructure re uirements include the a)aila$ility of skilled workforce, workforce turno)er, and the community*s recepti)ity to $usiness and industry. Phase (& %ocation Choices !he o$:ecti)e of this phase is to select a precise location and capacity allocation for each facility. Attention is restricted to the desira$le sites selected in 7hase 222. !he network is designed to ma%imi5e total profits, taking into account the e%pected margin and demand in each market, )arious logistics and facility costs, and the ta%es and tariffs at each location. Difficulty: 3ard (. +%plain the two situations in which managers use network design models. Answer: "anagers use network design models in two different situations. 'irst, these models are used to decide on locations where facilities will $e esta$lished and the capacity to $e assigned to each facility. "anagers must make this decision considering a time hori5on o)er which locations and capacities will not $e altered ?typically in years@. Second, these models are used to assign current demand to the a)aila$le facilities and identify lanes along which product will $e transported. "anagers must consider this decision at least on an annual $asis as demand, prices, and tariffs change. 2n $oth cases, the goal is to ma%imi5e the profit while satisfying customer needs. Difficulty: "oderate