Designing Supply

Chain Networks
 Distribution Network Design
Choice of distribution network affects
supply chain efficiency and responsiveness

6 contacts F1 F2 F3
18 routes
3 contacts C1 C2 C3 C4 C5 C6

2 contacts F1 F2 F3

(3+3) contacts W1 W2
12 routes

1 contact C1 C2 C3 C4 C5 C6
Distribution Network Design
Affects Customer Service
• Elements of customer service influenced
by network structure:
 Response time
 Product variety
 Product availability
 Customer experience
 Time to market
 Order visibility
 Returnability
Distribution Network Design
Affects Costs

• Supply chain costs affected by network

structure:
 Inventories
 Transportation
 Facilities and handling
 Information
Desired Response Time and
Number of Facilities
Number of Facilities
and Inventory Costs
 Number of Facilities
and Transportation Costs
Number of Facilities
and Facility Costs
 Number of Facilities and
Logistics Cost, Response Time
Design Options for a Distribution
Network

• Two key decisions

 Will product be delivered to the
customer location or picked up from a
prearranged site?
 Will product flow through an
intermediary (or intermediate location)?
Design Options for a Distribution
Network

• One of six designs may be used

1. Manufacturer storage with direct shipping
2. Manufacturer storage with direct shipping
and in-transit merge
3. Distributor storage with carrier delivery
4. Distributor storage with last-mile delivery
5. Manufacturer/distributor storage with
customer pickup
6. Retail storage with customer pickup
Manufacturer Storage with
Direct Shipping
In-Transit Merge Network
Distributor Storage with
Carrier Delivery
Distributor Storage with
Last Mile Delivery
 Manufacturer or Distributor
Storage with Customer Pickup
Retail Storage with Customer
Pickup
Factories

Retailers

Customers

Customer Flow
Product Flow
Information Flow
Delivery Networks for Different
Product Characteristics
Drop Retail
Shipping Store
High demand product -2 +2
Med demand product -1 +1
Low demand product +1 -1
Very low demand product +2 -2
High product value +2 -1
Time to market +2 -2
High product variety +2 -1
Low customer effort +1 -2
Key: +2 = very suitable; +1 = suitable; 0 = neutral; -1 = unsuitable; -2 = very unsuitable
 Risk Management In
Global Supply Chains
• Risks include supply disruption, supply
delays, demand fluctuations, price
fluctuations, and exchange-rate fluctuations
• Critical for global supply chains to be aware
of the relevant risk factors and build in
suitable mitigation strategies
 Risk Drivers In
Global Supply Chains

Category Risk Driver

Disruptions Natural disaster, war, terrorism, pandemic

Labour disputes
Supplier bankruptcy
Supply Delays High capacity utilization at supply source
Inflexibility of supply source
Poor quality or yield at supply source
Systems risk Information infrastructure breakdown
System integration or extent of systems being
networked
 Risk Drivers In
Global Supply Chains
Category Risk Driver

Forecast risk Inaccurate forecasts due to long lead times,

seasonality, product variety, short life cycles,
small customer base
Information distortion
Intellectual Vertical integration of supply chain
property risk Global outsourcing and markets
Procurement Exchange-rate risk
risk Price of inputs
Fraction purchased from a single source
Industry-wide capacity utilization
 Risk Drivers In
Global Supply Chains

Category Risk Driver

Receivables Number of customers

risk Financial strength of customers
Inventory risk Rate of product obsolescence
Inventory holding cost
Product value
Demand and supply uncertainty
Capacity risk Cost of capacity
Capacity flexibility
 Risk Management In
Global Supply Chains

• Good network design can play a significant

role in mitigating supply chain risk
• Every mitigation strategy comes at a price and
may increase other risks
• Global supply chains should generally use a
combination of rigorously evaluated
mitigation strategies along with financial
strategies to hedge uncovered risks
 Generic Strategies for
Risk Mitigation In
Global Supply Chains

• Increase capacity
• Get Redundant Suppliers
• Increase responsiveness
• Increase inventory
• Increase flexibility
 Flexibility
• Three broad categories of flexibility
 New product flexibility – Ability to introduce new
products into the market at a rapid rate
 Mix flexibility – Ability to produce a variety of products
within a short period of time
 Volume flexibility - Ability to operate profitably at
different levels of output
• An alternate set of categories of flexibility
 Flexibility in sourcing
 Flexibility in manufacturing
 Flexibility in order fulfillment
• As flexibility is increased, the marginal
benefit derived from the increased
flexibility decreases (diminishing returns)