CHAPTER 6

Network Design in the Supply Chain

M. Vikneswary Suresh
Outline

• A strategic framework for facility location

• Multi-echelon networks
• Gravity methods for location
• Plant location models
Network Design Decisions

• Facility role
• Facility location
• Capacity allocation
• Market and supply allocation
Factors Influencing
Network Design Decisions

• Strategic
• Technological
• Macroeconomic
• Political
• Infrastructure
• Competitive
• Logistics and facility costs

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The Cost-Response Time Frontier

Local FG
Hi
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

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Service and Number of Facilities

Response
Time

Number of Facilities

5-6
Where inventory needs to be for a one week order response
time - typical results --> 1 DC

Customer
DC
Where inventory needs to be for a 5 day order response
time - typical results --> 2 DCs

Customer
DC
Where inventory needs to be for a 3 day order response time - typical
results --> 5 DCs

Customer
DC
Where inventory needs to be for a next day order response time -
typical results --> 13 DCs

Customer
DC
Where inventory needs to be for a same day / next day order response
time - typical results --> 26 DCs

Customer
DC
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Costs and Number of Facilities

Inventory

Facility costs
Costs

Transportation

Number of facilities

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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

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A Framework for
Global Site Location

COMPETITIVE STRATEGY GLOBAL COMPETITION

PHASE I
Supply Chain
INTERNAL CONSTRAINTS Strategy TARIFFS AND TAX
Capital, growth strategy, INCENTIVES
existing network

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

LOGISTICS COSTS
FACTOR COSTS PHASE IV
Transport, inventory, coordination
Labor, materials, site specific Location Choices

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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

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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

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 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?

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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.

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