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JAIN (16215)
SWAR (16035)


Odd Gleditsch dy.

Norway-based Jotun Paints, a recent entrant in the country, has set up its first plant in
Ranjangaon near Pune with an investment of around Rs125 crore.

The plant will manufacture its entire range of paints, including decorative, protective,
marine and powder coatings.

Jotuns greenfield project, along with the host of foreign players like Sherwin and Nippon
who are fast expanding their footprint in India, is expected to change the dynamics of the
colour space in the country.

In spite of strong competition, both from domestic players and other global majors, the
company has set an aggressive target of 8% market share in the next two years.
The Pune plant has a capacity to produce up to 50 million litres in wet paint and 10,000
tonnes of powder coatings.

Claes Jansson, managing director, Jotun Paints India said, We have closely assessed
the Indian paint sector over the last two years and are now set with a plant of our own to
make our presence felt. While we will drive our dominance in industrial and marine
coatings, along with the decorative segment, we will look at capturing a market share of
8% by end of 2010.

Jotun is said to be looking actively at Kerala, Karnataka, Tamil Nadu and Maharashtra
and will move to northern markets like Gujarat, Delhi and Haryana subsequently.

The company, which is very strong in the Gulf region, is focused on south India.
Sources said mergers and acquisitions are not Jotuns style, and it might come up with
another manufacturing unit after a few years.

It will be interesting to see how Jotun Paints makes a mark on the decorative market,
which at present is dominated by Indian biggies like Asian Paints, Berger, Kansai Nerolac
and ICI.

Unlike Indian paint companies, Jotun is not exactly driven by dealers on the marketing
front. Rather, it has a shop-in-shop concept through which it sells paints. Industry
sources hinted that the company is likely to expand to 300 outlets once its starts
operations in India.

Currently, almost 90% of its turnover is from project sales.

At present, Jotun Paints turnover is around Rs100 crore, contributed mainly by marine
paints and protective coatings, apart from decoratives, which it plans to increase to
Rs110 crore next year.


Jotun has organised its global organisation into seven regions responsible for the
sale of Decorative Paints and Performance Coatings (Marine, Protective and
Powder Coatings). The company has 36 production facilities in 19 countries, 69
companies in 45 countries and is represented in more than 90 countries around
the world. Jotun manufactures, sells and distributes interior and exterior paints
to consumers and professionals world wide. Jotun Marine Coatings is the world's
leading provider of marine coatings to shipowners and management companies
for newbuilding, drydock and seastock. Jotun Protective Coatings protect assets
in industries such as offshore, energy, infrastructure and hydrocarbon
processing. otun Powder Coatings is a leading supplier of powder coatings to
companies active in industries related to appliances, furniture, building
components, pipelines and general industries.

Establishing the brand as legal entity

Although the brand was originally set up in Kenya through an agent (Hardware
and General Stores) in 1995, Jotuns investment now establishes the brand as
a legal entity in the country. Products are being imported from Jotun facilities
located in Egypt and Dubai, and Jotun will initially focus on offering protective
coating and decorative paints as part of its portfolio.

Designing the supply chain network of Jotun

Role of Distribution in the supply chain:
Distribution refers to the steps taken to move and
store a product from the supplier stage to a customer
stage in the supply chain. Distribution is a key driver
of the overall profitability of a firm because it affects
both the supply chain cost and the customer
experience directly.
The appropriate distribution network can be used to
achieve a variety of supply chain objectives ranging
from low cost to high responsiveness. As a result,
companies in the same industry often select very
different distribution networks.
Dell distributes its PCs directly to end consumers,
whereas companies such as HP distribute through
resellers. Dell customers wait several days to get a
PC, whereas customers can walk away with an HP PC
from a reseller.
P&G has chosen to distribute directly to large
supermarket chains while obligating smaller players
to buy P&G products from distributors. Products
move directly from P&G to the larger chains , but
move through an additional stage when going to
smaller supermarkets.

Factors Influencing Distribution Network Design

Performance of a distribution network should be
evaluated along two dimensions:
Customer needs that are met

Cost of meeting customer needs

The customers needs that are met influence the
companys revenues, which along with cost decide
the profitability of the delivery network.
Customer service components:
Response time Amount of time it takes for a
customer to receive an order.
Product variety Number of different
products/configurations that are offered by the
distribution network.
Product availability Probability of having a
product in stock when a customer order arrives.
Customer experience includes the ease with
which customers can place and receive orders as
well as the extent to which this experience is
Time to market Time it takes to bring a new
product to the market.
Order visibility Ability of customers to track
their orders from placement to delivery.
Return ability Ease with which a customer can
return unsatisfactory merchandise and the ability
of the network to handle such returns.
Firms that target customers who can tolerate a
long response time require only a few locations
that may be far from the customer. These
companies can focus on increasing the capacity of
each location. In contrast, firms that target
customers who value short response times need
to locate facilities close to them. These firms
must have many facilities, each with a low
capacity. Thus, a decrease in the response time
customers desire increases the number of
facilities required in the network.
Changing the distribution network design affects
the following supply chain costs:


Facilities and handling


A decrease in the response time customers desire

increases the number of facilities required in the
network. As the number of facilities in a supply
chain increases, the inventory and resulting
inventory costs also increase.

Relationship between Desired Response Time and

Number of Facilities

Desired Response Time

Relationship between Number of Facilities and
Inventory Costs

Inbound transportation costs are the costs

incurred in bringing material into a facility.
Outbound transportation costs are the costs of
sending material out of a facility.
Outbound transportation costs per unit tend to be
higher than inbound costs because inbound lot
sizes are typically larger.
Increasing the number of warehouse locations
decreases the average outbound distance to the
customer and makes outbound transportation
distance a smaller fraction of the total distance
travelled by the product.
Thus, as long as inbound transportation
economies of scale are maintained, increasing the
number of facilities decreases total
transportation cost.

Relationship between Number of Facilities and

Transportation Cost
Number of facilities

If the number of facilities is increased to a point

where inbound lot sizes are also very small and
result in a significant loss of economies of scale in
inbound transportation, increasing the number of
facilities increases total transportation cost.
Facility costs decrease as the number of facilities
is reduced.
Total logistics costs are the sum of inventory,
transportation and facility costs for a supply
chain network. As the number of facilities
increases, total logistics costs first decrease and
then increase. Each firm should have at least the
number of facilities that minimize total logistics
costs. As a firm wants to reduce the response
time to its customers further, it may have to
increase the number of facilities beyond the point
that minimizes logistics costs. A firm should add
facilities beyond the cost-minimizing point only if
managers are confident that the increase in
revenues because of better responsiveness is
greater than the increase in costs because of the
additional facilities.
Relationship between Number of Facilities and Facility

Number of Facilities

Variation in Logistics Cost and Response time with

Number of Facilities

Number of Facilities

Design Options for a Distribution Network

Manufacturer storage with direct shipping
Product is shipped directly from the manufacturer
to the end customer, bypassing the retailer ( who
takes the order and initiates the delivery
request). This option is also referred to as drop
shipping, with product delivered directly from the
manufacturer to the customer. It is best suited for
a large variety of low-demand, high-value items
for which customers are willing to wait for
delivery and accept several partial shipments.

Manufacturer Storage with Direct Shipping

(Drop Shipping)

Manufacturer storage with direct shipping and in-

transit merge Unlike pure drop-shipping, under
which each product in the order is sent directly
from its manufacturer to the end customer, in-
transit merge combines pieces of the order
coming from different locations so that the
customer gets a single delivery.
For eg, when a customer orders a PC from Dell
along with a Sony monitor, the package carrier
picks up the PC from the Dell factory and the
monitor from the Sony factory; it then merges the
two together at a hub before making a single
delivery to the customer.
It is best suited for low-to medium demand, high
value items the retailer is sourcing from a limited
number of manufacturers.


Distributor Storage with Carrier Delivery Under

this option, inventory is not held by
manufacturers at the factories but is held by
distributors/ retailers in intermediate
warehouses, and package carriers are used to
transport products from the intermediate location
to the final customer. It is well suited for medium-
to-fast moving items. It also makes sense when
customers want delivery faster than is offered by
manufacturer storage but do not need it
Distributor Storage

Distributor Storage with Last-Mile Delivery- Last-

mile delivery refers to the distributor/retailer
delivering the product to the customers home
instead of using a package carrier.
In areas with high labor costs, it is very hard to
justify distributor storage with last mile delivery
on the basis of efficiency or improved margin. It
can only be justified if there is a large enough
customer segment willing to pay for this
An effort should be made to couple last-mile
delivery with an existing distribution network to
exploit economies of scale and improve
Information Flow

Manufacturer or Distributor Storage with

Customer Pickup Inventory is stored at the
manufacturer or distributor warehouse but
customers place their orders online or on the
phone and then travel to designated pickup
points to collect their merchandise. Orders are
shipped from the storage site to the pickup points
as needed. Such a network is likely to be most
effective if existing locations such as coffee
shops, convenience stores, or grocery stores are
used as pickup sites, because this type of
network improves the economies from existing
Information Flow

Frame work for Network design

Phase I: Design a Supply Chain Strategy Starts
with a clear definition of the firms competitive strategy
as the set of customer needs that the supply chain aims
to satisfy. Managers must forecast the likely evolution of
global competition and whether competitors in each
market will be local or global players. Constraints on
available capital and whether growth will be
accomplished by acquiring existing facilities, building
new facilities or partnering.
Phase II: Define the Regional Facility
Configuration Forecast of the demand by country.
Include a measure of the size of the demand as well as a
determination of whether the customer requirements
are homogenous or variable across different countries.
Homogenous requirements favor large consolidated
facilities whereas requirements that vary across
countries favor smaller, localized facilities. If economies
of scale are significant in reducing costs, it may be
better to have few facilities serving many markets. If
economies of scale are not significant , it may be better
for each market to have its own facility. They must
identify demand risk, exchange rate risk, political risk,
tax incentives and regional tariffs for local production.
They must also decide whether a facility needs to be
located close to or far from a competitors facility.
Phase III: Select a Set of Desirable Potential Sites
Hard infrastructure requirements include the
availability of suppliers, transportation services,
communication, utilities and warehousing infrastructure.
Soft infrastructure facilities include the availability of
skilled workforce, workforce turnover and the
community receptivity to business and industry.
Phase IV: Location Choices Maximize total profits
taking into account the expected margin and demand in
each market, various logistics and facility costs, and the
taxes and tariffs at each location.

Cost Minimization Model

Data Needed:
Plant Data: Capacity, Fixed Cost, Unit variable
production cost.
Market data : Quarterly Demand, Price per unit.
Transportation Cost from one plant to another market.
M = No. of plants; let i = 1,,m
N = No. of markets; let j = 1,., n
Dem j = Quarterly demand at market j
Cap i = Quarterly production capacity at plant i.
Cost ij = Cost of producing and transporting one unit
from plant I to market j
Fcost i = Fixed cost of facility I
Quant ij = Quantity shipped from plant i to market j
Objective function will be :
Minimize Cost ij x Quant ij
Constraints : Quant ij = Dem j
Quant ij Cap I
Quant ij 0
Profit Maximization Model
Gross Profit = Revenue VC
Net Profit = Gross Profit Fixed Cost

Objective Function:

Maximize Price j x Quant ij - Cost ij x Quant ij

Constraints : Quant ij Dem j

Quant ij Cap i

Quant ij 0

1 Strategic network design ensures a competitive supply


The strategic value of network design

Network design is the strategic planning process for evaluating alternative structures for a supply
chain, and selecting the one that maximizes profitability and helps to improve performance at each link
in the supply chain.

The design of robustly operating and highly efficient networks for global operations is widely perceived as
one of the key challenges in supply chain management. Together with product research & develop-ment and
strategic marketing, the right supply chain design is one of the essential tools for a company to achieve its
strategic business goals and gain sustainable competitive advantages.

Network design plays a crucial role for companies in all industries striving to deliver outstanding supply
chain performance. Companies pursuing global sourcing strategies, operating complex manufacturing
networks, and serving their customers through a tiered distribution network are especially compelled to pro-
actively address strategic network design considerations (Figure 1).

Network design has

to ensure the
efficiency of global
and often complex

The role of network design has become even more prominent in todays business environment, as
companies have to cope with a variety of fundamental challenges in order to secure smooth material flows
and satisfy sophisticated customer needs (see Figure 2). A holistic approach to network design, which is
tightly aligned to the overall supply chain and corporate strategy, is required to ensure success in todays
demanding markets.
Key characteristics
of todays com-
petitive markets
Increasing Growing risks &
cost pressure market volatility

Higher Stronger focus on

service requirements Sustainability

If delivered successfully, strategic network design improves a companys supply chain performance in
a variety of areas:

Higher return on assets as network design optimizes capital-intensive investments that are
typically of a highly irreversible nature.
Lower supply chain cost as network design sets the conditions for ensuring operational efficiency of
virtually all supply chain-related functions and processes.
Reducing the supply chains exposure to supply and demand risks.
Creating strategic preconditions for responding to changes in the business environment and
enabling future growth.
Higher customer service and lower time-to-market for new products through lower lead times
throughout the supply chain.
Strategic network design affects the whole supply chain

Strategic decisions made at network level affect all levels of supply chain management and provide the
framework for successful tactical and operational supply chain processes (Figure 3).

Strategic level: strategic structure and

Network design Impact on SC configuration of the supply chain
decisions impact on Performance
all levels of supply
chain management
Tactical level: transportation and production
policy, inventory management

Operational level: operational policies

and processes of local sites

The far-reaching implications of strategic network design can be illustrated by taking the practical example
of establishing a new production facility (see Figure 4). A variety of decisions have to be made to integrate
efficiently the new facility into the existing supply chain and secure the required service levels. Supplier
base and production capacities are typically subject to strategic considerations, while at a tactical level the
respective transportation and material flows have to be aligned. Operational deci-sions are predominantly
linked to local site processes, for instance regarding replenishment policies and transportation schedules.

Opening up a new
production plant HR policies
triggers various
decisions at all Review Replenishment
decision levels inventory policies

Adjust transportation Production
supplier base flows planning

Re-allocate Select service
capacities provider

New Plant Strategic level Tactical level Operational level

Business drivers and typical questions for strategic network design

There are many drivers that can prompt companies to initialize network design projects. Nevertheless,
considering the constantly changing economic environment and the significant contribution of an optimally
designed supply chain to overall business success, companies are well advised to continuously evaluate
the performance of their networks and place supply chain review and design on their strategic agenda.

Depending on the actual business requirements, companies might consider either redesigning their
supply chain or designing a new chain so as to align their networks with changing business conditions
or meet new strategic objectives (Figure 5).

Supply chain re-design is typically driven by changing market and business conditions, frequently in
conjunction with elevated cost pressure and service requirements that for example require expand-ing
or restructuring operations. If a company grows through external acquisitions, network re-design
addresses the integration of acquired operations in order to fully exploit all benefits and synergies at
supply chain level.

The need for designing a new network emerges when a company enters new geographical markets or
grows into new product segments. Also, companies might want to analyze a so called greenfield
approach to evaluate how far their existing supply chain design deviates from an optimal footprint.

Business driver Type of Figure 5:

network design Different drivers for
strategic network
Mergers & acquisitions

Expansion Re-design
of supply
Restructuring & simplification chain


New geographic market entry Design of

new supply
New business field entry chain
If the supply chain network in place does not optimally support the targeted business model, network (re)-design should be
considered as a solution for achieving the strategic objectives by answering key business questions with regard to different
supply chain segments (supply, manufacturing and distri-bution network). As shown in Figure 6, a well-structured network
design approach provides optimal answers regarding supplier base, manufacturing footprint and distribution systems, and
establishes the basis for far-reaching network design decisions.

Typical business Supply Optimal number of suppliers?

questions answered network Regionalized or global supplier base?
optimization Single or multi-sourcing and impact on risk management?
through strategic
network design

Strategic Manufacturing World factories or regionalized plants?

Network network Best location for plants: close to customers or close to suppliers?
Design optimization In-house manufacturing or outsourcing?

Distribution Company-owned or 3PL-operated warehouses?

network Direct or indirect distribution channels to customers?
optimization Optimal number and location of warehouses?
Aligning network design with strategy

The business strategy has to be the ultimate starting

point for network design

Network design translates an envisioned business strategy into the supply chain. Therefore, you have
to ensure that your decisions regarding network design are driven by your companys strategic direction.

As shown in Figure 7, there are four key strategy dimensions which primarily characterize such consid-
erations. Strategic network design makes a significant contribution to achieving the desired perform-ance in
each dimension. Network design affects the cost dimension through optimizing both capital and operational
expenditures, and the service dimension, for example through providing appropriate customer service
levels. Internal throughput times as well as lead times to customers affect perform-ance with regard to time,
while agility captures the capability of a supply chain to respond to changing requirements.

As high performance in each dimension

Figure 7:
would be typically neither economically Key strategy
justified nor even feasible, it is crucial dimensions that
affect network
to align network design with the op- design
timal strategy regarding products and
markets, and to carefully investigate the
potential trade-offs between the dif-
ferent performance dimensions. When Service Design
designing a supply chain, it is therefore
critical to understand the different
requirements of the various product
or customers segments. For example, Agility
innovative, high margin products might
require a different strategic positioning
than less risky but low margin commod-
ity products (see Figure 8).

Figure 8:
Commodity Cost Example for dif-
Innovative Cost Products ferent strategic
Products requirements that
need to be consid-
ered in network

Service Time
Service Time

Objectives and reference models for strategic network design

It is crucial to derive the concrete objectives for network design based on the envisioned business strategy.
While you might consider different objectives, you should focus on the objectives that support the intended
business strategy. Objectives for network design can be either financial targets, business targets, or
social & environmental targets (see Figure 9 for examples). While some of these objectives complement
each other, other targets might be conflicting. Therefore, you should carefully asses which goals will help to
implement your target strategy, and set feasible targets accordingly.

Revenue and cost optimization Hedging potential against

Objectives pursued through
currency risks Liquidity and financial budgets
strategic network design


Design Objectives

Business Carbon footprint Corporate

targets targets
Customer service Image Employee concerns
Complexity and risk reduction Growth in
new markets

When defining the strategic direction and objectives for a supply chain, a key question for companies is:
which principles should guide their strategic network design? Industry benchmarks as well as state-of-the-
art research studies point out that companies are well advised to follow two main design models: Lean
network design and agile network design (Figure 10). These two reference models can help to guide you
in selecting objectives and identifying the right scope for supply chain design.

Lean Lead time reduction

Reference models Focus on
Network Simplification
for strategic physical efficiency
Design Leveled capacity allocation
network design


Agile Structural flexibility

Focus on
Network Surge capacity
Design Operational flexibility
Lean network design focuses in particular on the following aspects:

Lead-time reduction is characterized by optimizing internal throughput times and lead times to
Simplification reduces network complexity, for instance by concentrating products or processing
steps at certain facilities and outsourcing the processing steps that add less value.
Leveled capacity allocation eliminates capacity bottlenecks and helps to avoid over-investment in
assets and low utilization rates.

Agile network design focuses on the ability to respond rapidly and cost-efficiently to changes in the
business environment. The following factors characterize an agile network design:

Structural flexibility, e.g. through flexible plants and flexible workforce models, allows you to respond to
demand fluctuations or supply chain disruptions. A flexible manufacturing footprint also forms an efficient
hedge against currency and cost risks.
Surge capacity at the plant and supplier level ensures that the supply chain can provide high cus-
tomer service when demand increases.
Operational flexibility, such as multi-sourcing strategies and flexible transshipment modes, makes
supply chain processes capable of dealing with short-term changes in operational requirements.

It should be emphasized that the
e 11:
two design approaches are not A

mutually exclusive, but rather n


complement each other in x
several cases. Consider again a
the case of innovative versus
commod-ity products (Figure l
11). While inno-vative products e
typically face higher market f
c ts

uncertainty and thus require a h


substantial degree of supply
chain agility, lean principles are n
the pre-dominant design e
approach for more stable w
commodity products. However, o
lean network design also
supports the efficiency of desig
mismatch match
delivering innovative products to n approaches should be mapped
the market, e.g. through lead o
time reduction approaches.


match Partly
Agile Network Lean Network
Design Design

To ensure that network design goes in the right direction, matching potential design alternatives with
identified strategic requirements should be an integral part of the whole network design process.
Key decisions for strategic network design

In order to ensure that the whole supply chain follows strategy and objectives and to identify the right scope
for a network design project, it is essential to take an integrated and comprehensive view on the whole
supply chain, including key suppliers, the various manufacturing facilities, all warehouses, trans-portation
channels, and the end customers. This cradle to grave approach in terms of geographical and functional
scope can help companies to achieve and maintain outstanding performance in their supply chain in the
long run.

Flow of Materials and Products

Key decisions for
strategic network
design Number and location In-house operation or outsourcing

Market allocation

Single sourcing

Direct distribution

Product allocation
Multi sourcing Capacity, location, and technologies

Suppliers Plants / CMs Warehouses Customers

As shown in Figure, network design can help to define the optimal number and location of facilities
(manufacturing plants, warehouses, and distribution centers), the allocation of capacity and technology
requirements to facilities, the assignment of products to plants, and the flow of goods throughout the supply
chain. Furthermore, network design should determine whether services and processes should be conducted
internally or externally. For example, network design projects can be used to decide whether products
should be manufactured in-house or by contract manufacturers, taking into account all of the implications for
the supply chain.

You should be aware of the fact that to reach optimal decisions, you typically need to balance different
objectives. For instance, the trade-offs between conflicting cost objectives affect the optimal degree of
centralization in a companys distribution network (Figure). Companies aiming to decide on the optimal
number of distribution centers have to ensure that all relevant cost dimensions are adequately incorporated,
in order to minimize total supply chain costs while maintaining or improving delivery service levels.

Supply Chain costs

Total cost
Example of cost
trade-offs when
designing a distri-
bution network
Range of optimal
values Warehousing costs
Inventory carrying costs
Transfer freight

Delivery freight
Service costs

Number of DCs

The complexity of network design problems becomes obvious, even on the basis of this rather simple
example. However, there are typically far more objectives, constraints and dimensions that have to be
considered at different planning levels. That is why network design should in most cases be supported by
business analytics and optimization tools capable of addressing all relevant factors and trade-offs.

How to approach strategic network design

Strategic network design wisdoms

The ultimate goal of a strategic network design project is to gain competitive advantages and secure long-
term success by providing the right structure for the supply chain. To accomplish this goal success-fully,
this section shows several design wisdoms consisting of success factors for network design and best
practices for the design process.

factors for strategic

and holistic orientation
design Key

to implemen-

As shown in Figure 14, there are five key success factors in particular which ensure that a network
design project yields a practically feasible plan for the supply chain. As argued in the previous chapter, the
business strategy needs to be the ultimate starting point for supply chain design. Consequently, supply
chain design must be driven by strategic views and closely aligned with the strategic targets of a company.
When designing a network, it is crucial to ensure that the envisioned design is capable of meeting the
future requirements, given the typically high investment volumes and the limited revers-ibility of decisions.
An integrated and holistic design approach should consider the supply chain as a whole, assessing both
strategic and operational aspects. During the whole network design process, the possibilities for
implementing the designed network must be comprehensively studied. In the end, a practicable design
needs to mirror the organization in place. As it is not uncommon that network design projects cause
significant changes to a supply chain, organizational alignment needs to be sup-ported by adequate
change management activities.
The network
design cycle network

Prepare for Sustain a
network competitive
design network

Because of constant changes in the business environment, companies should not consider network de-sign
as a one-time exercise. Instead, the whole network design process should be regarded as a continu-ous
improvement cycle consisting of the right preparation of network design projects, the execution of these
projects in response to business needs, and sustaining a competitive network for the supply chain (see
Figure 15). Once the supply chain design has become outdated, the cycle should start again. Experi-ence
shows that simply following a couple of best practices helps significantly to increase the success of network
design projects, and thus to develop a competitive supply chain footprint.

Prepare for network design Figure 16:

Best practices for
preparing network
design projects
Prepare for Early data collection
network Cross-functional teams
Change management support

Data is the key for a comprehensive design of the supply chain. The effort required for data collection should
not be underestimated (especially if model-based approaches are considered), but at the same time the
collected data offers many additional opportunities for business improvements. Therefore, sufficient time and
resources should be dedicated to data collection. Cross-functional project teams consisting of all supply
chain disciplines and neighboring departments, such as customer service or R&D, make sure that the
analysis covers all relevant angles. In order to ensure both acceptance and business practicability of the
envisioned network, a structured change management approach encompassing change planning,
stakeholder management, organizational alignment, and appropriate communica-tion is highly
recommended from the beginning.
Conduct network design
Best practices for
conducting network
design projects
Elaborate scope definition
Conduct Industry best practices
network Network optimization tools
Continuous business validation
Quick win realization

There are various approaches to supply chain design. To define the appropriate project approach, you
should start by elaborating the right scope very thoroughly. Industry best practices should guide the
development of suitable business scenarios (e.g. centralization versus decentralization strategies), while
network optimization tools can help to visualize, evaluate and optimize the envisioned business scenarios. A
continuous validation of all project results (e.g. business scenarios, data, and model results) by cross-
functional teams and relevant stakeholders ensures feasibility and organizational acceptance of the
designed network. You should be aware that systematically collected and analyzed data provides a lot of
insight into your own supply chain. Based on this data, immediate improvement opportunities, such as
inefficient shipment sizes or inappropriate use of express shipments, can be identified and even realized
before a new network structure is in place.

Best practices for sustaining a com- Sustain a competitive network design

petitive network design

Sustain a
competitive Integrated in strategic planning
Knowledge management
network Regular network design review

It is highly recommended to establish supply chain review and design as a regular part of the strategic planning process. Considering the constantly high
pressure on supply chain performance, clear organi-zational responsibilities can help to establish a regular review of the supply chain network in place, as
advocated by the network design cycle. To continuously improve capabilities and know-how regarding concepts, modeling, and potential tool-based
approaches for network design, the results and data of past projects should be an integral element of a companys knowledge management. To this end, a
company might also consider to establish an own organizational unit responsible for network design if it faces network design questions such as product or
capacity (re-)allocation frequently.
The strategic network design process

Generally, the strategic network design

process should run through a
structured sequence of planning
steps (see Figure ).

Definition of Selection of Strategic network

Analysis of Scenario Scenario
objectives & supply chain design should rely
supply chain generation evaluation
network strategy design on a structured

Potential process

The main phases of the network design

process can be summarized as follows
and should be accompa-nied by the
best practices described above:

Definition of objectives and

network strategy: Identifying all
relevant targets in alignment with the
overall supply chain strategy, ranking
them according to their relevance,
and investigating appropri-ate trade-
offs are extremely important
prerequisites for a successful network
design project.
Analysis of the supply chain: An
in-depth and future-focused
analysis of the as-is supply chain
us-ing information and data from IT
systems as well as from key
stakeholders helps to identify
current strengths and weaknesses
and to refine objectives.
Scenario generation: Alternative
supply chain scenarios are
developed from a business
perspective. To elaborate the
business scenarios, optimization
tools can be used in this phase, for
example to decide on optimal
facility locations or capacity levels.
Scenario evaluation: The
developed scenarios undergo a
validation and prioritization process.
Both quantitative and qualitative
factors have to be taken into
account when ranking the identified
sce-narios according to their
benefits and business feasibility.
Selection of supply chain
design: A detailed business case
and implementation plan is
essential for the final selection of a
certain scenario. Typically, this is
only done for a few scenarios
which have been evaluated as the
best ones.

During the entire process, suggestions

for the investigation of additional
scenarios and objectives or modified
alternatives may arise. As a
consequence, the middle phases of the
process may go through several
iterations. Appropriate analytical tools
for optimization and simulation can
significantly speed up and improve the
outcome of the whole network design
Which tools can support strategic network design?

The benefits of optimization tools unfold especially in the middle stages of the network design process
(see Figure 20). Network design tools support in particular the analysis of the current supply chain by
providing in-depth statistics and visualization functions, and simplify the design and evaluation of alter-native
supply chain scenarios.

Use of optimiza- Definition of Selection of

Analysis of Scenario Scenario
tion tools during objectives & supply chain
supply chain generation evaluation
a network design network strategy design

The question is often the following: which tool should be used to adequately support a network design
project? The range of instruments for modeling a network varies substantially in complexity and detail.
While simple modeling problems can be solved using Excel and Access based applications, more com-
plex problems might require optimization and simulation approaches. As shown in Figure 21, network
optimization tools are especially suitable for supporting strategic decisions such as the location and
capacity of facilities in the network, while tactical optimization tools and simulation engines refine and
complement strategic design at the tactical level.

Tools that support

strategic network Network optimization tools

Tactical design Strategic Design

Detailed evaluation

Transport optimization tools

Simulation tools
Inventory optimization tools

Network optimization tools use state-of-the-art mathematical algorithms to determine the optimal location
and capacities of facilities and suppliers, and the optimal routing of logistic flows throughout the supply chain
network (see Figure 22). They find optimal decisions through maximizing profit or optimizing cost objectives,
taking into consideration revenues and all relevant cost components (trans-portation, warehousing,
manufacturing, sourcing) with respect to network constraints such as available capacities or lead-time
requirements. Consequently, these should be considered if you want to find the best solutions among
multiple alternatives while simultaneously considering multiple constraints and potentially conflicting
objectives. Sensitivity analysis of the models allows you to study the impact of changing business
conditions (e.g. demand growth or fuel price changes) on the network structure and expected costs.

Vogel Approximation Method

Why it is used ?

Vogel Approximation Method is used to find the feasible solution for transportation of goods
where the solution is either optimal or near to the optimal solution.

This method is used to reduce the transportation costs by interpreting in a mathematical table the
transportation costs from one place to another. The column represents the demand centers while
the row represents the supply points.
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