The Network and Distribution

Designs in SC
Network Design In
Supply Chain
 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?
 Factors Influencing
Network Design Decisions
• Strategic factors
• Technological factors
• Macroeconomic factors
• Political
• Logistics and facility costs
• Competitive factors
• Positive externalities between firms
• Locating to split the market
 Macro Economics Factors
• Tax (Tax Incentives)

• Tariffs (Eg. EU)

• Exchange Rate (Demand Risk)

• External Economic Factors (Political,

Infrastructure, Competitive Factors)
 Competitive Factors

– Locating to split the market

• Locate to capture largest market share
 Distribution

Role of Distribution
 Factors Influencing Distribution
Design
• Customer needs that are met.
• Company’s revenues
• Profitability of distribution network.
• Cost of meeting customer needs.
• Response time
• Product variety
• Product availability
• Customer experience
• Time to market
• Order visibility
• Return-ability
 Relationship b/w Desired
Response Time & No. of Facilities
Relationship b/w No. of Facilities
& Inventory Cost
Changing Distribution Design

Costs affected are:

• Inventories
• Transportation (In-Bound & Out-Bound)
• Facilities (and Handling)
• Information
 Cost / Responsiveness Trade-off
Cost
Total cost
SC response time

Inventory cost

Facility cost

Transportation cost

Number of Facilities
Design Options for a Distribution
Network

• Will product be delivered to the customer

location OR picked up from a preordained
site?

• Will product flow through an intermediary (or

Intermediate Location)?
 Distribution Designs
1. Manufacturer Storage with Direct Shipping.
2. Manufacturer Storage with Direct Shipping
& In-Transit Merge.
3. Distributor Storage with Package Carrier
Delivery.
4. Distributor Storage with Last-Mile Delivery.
5. Manufacturer/Distributor Storage with
Customer Pickup.
6. Retail Storage with Customer Pickup.
 E-Business & The Distribution
Network
• Response time
• Product variety
• Product availability
• Customer experience
• Faster time to market
• Order visibility
• Return-ability
• Direct sales to customers
• Flexible pricing, product portfolio, & Promotions
• Efficient funds transfer
Impact of E-Business On Cost
• Inventory

• Facilities

• Transportation

• Information
 Locational Cost-Profit-Volume Analysis
The economic comparison of location alternatives is facilitated by
the use of cost-profit-volume analysis. The procedure for locational
cost-profit-volume analysis involves these steps:
i. Determine the fixed and variable costs associated with each
location alternative.
ii. Plot the total-cost lines for all location alternatives on the same
graph.
iii. Determine which location will have the lowest total cost for the
expected level of output.

• Alternatively, determine which location will have the highest

profit.
 Cont…
This method assumes the following:
1. Fixed costs are constant for the range of probable output.
2. Variable costs are linear for the range of probable output.
3. The required level of output can be closely estimated.
4. Only one product is involved.
 Example - 1
Cost Analysis: Fixed and variable costs for four potential
plant locations are shown below:
a. Plot the total-cost lines for these locations on a single
graph.
b. Identify the range of output for which each alternative
is superior (i.e., has the lowest total cost).
c. If expected output at the selected location is to be 8,000
units per year, which location would provide the lowest
total cost?
Cont…

a. To plot the total-cost lines, select an output that is

approximately equal to the expected output level
(e.g., 10,000 units per year). Compute the total cost
for each location at that level:
Plot each location’s fixed cost (at Output=0) and the
total cost at 10,000 units; and connect the two points
with a straight line.
Cont…
a. .

b. The approximate ranges for which the various

alternatives will yield the lowest costs are shown on
the graph. Note that location D is never superior.
The exact ranges can be determined by finding the
output level at which lines B and C and lines C and
A cross.
 Example - 2
Cost analysis: A farm implements dealer is seeking a fourth warehouse
location to complement three existing warehouses. There are three
potential locations: Charlotte, NC; Atlanta, GA; and Columbia, SC.
Charlotte would involve a fixed cost of $4,000 per month and a variable
cost of $4 per unit; Atlanta would involve a fixed cost of $3,500 per
month and a variable cost of $5 per unit; and Columbia would involve a
fixed cost of $5,000 per month and a variable cost of $6 per unit.
Use of the Charlotte location would increase system transportation costs
by $19,000 per month, Atlanta by $22,000 per month, and Columbia by
$18,000 per month. Which location would result in the lowest total cost to
handle 800 units per month?
Given: Volume = 800 units per month
Cont…
 Example - 3
Profit analysis: A manufacturer of staplers is about to lose its lease, so it
must move to another location. Two sites are currently under
consideration. Fixed costs would be $8,000 per month at site A and
$9,400 per month at site B. Variable costs are expected to be $5 per unit
at site A and $4 per unit at site B. Monthly demand has been steady at
8,800 units for the last several years and is not expected to deviate from
that amount in the foreseeable future. Assume staplers sell for $6 per
unit. Determine which location would yield the higher profit under these
conditions.
Total Profit = Q(price per unit – Vc) - Fc
Cont…