Network Design in the Supply Chain

Role of Network Design • • Network design of a SC has long term effect on SC performance Include location of facilities & allocation of capacity in light of. • • • Economic factors Market segmentation & location Supply sources • • Should focus on future more than the present Also important in case of merger .

Network Design (ND)  Critical things in network design of SC Facilities Role  Facility Location  Capacity allocation  Market and Supply Allocation  .

Factors Influencing Network Design Decisions • Important to identify the mission of each facility when designing the global network • Strategic Factors • Offshore facility: Low-cost facility for export production • Low-cost supply source for markets outside the country • Have low labor and other costs • Source facility: Low-cost facility for global production • Strategic role is broader than offshore facility • Have low costs. well developed infrastructure & labor skills • Server facility: Regional production facility • Supply the only market where it is located • Built for local requirements. tax incentives & cater high logistics costs .

Factors Influencing Network Design Decisions • Contributor facility: Regional production facility with development skills • • Serves the local market & also customization. improvements & development Good server facilities change into contributor facility • Outpost facility: Regional production facility built to gain local skills • • Primary objective is to access local knowledge and skills for entire SC network Also plays role of server facility like firms in Japan .

processes & technologies for the entire network • Located in areas with good access to skilled workforce and technological resources .Factors Influencing Network Design Decisions • Lead facility:.Facility that leads in development and process technologies • To create new products.

• If local requirements vary. large investment lead to less global facilities Low fixed cost leads to more facilities Flexibility of technology impacts the degree of consolidation. inflexible production technology will force to establish dedicated facility • Flexible technology will help to consolidate production in more facilities .Factors Influencing Network Design Decisions • Technological Factors • • • • Technology characteristics play a vital role Economies of scale.

Factors Influencing Network Design Decisions Macroeconomic factors • Tariffs and Tax Incentives • • • Duty to be paid when moving item across borders Low/free tariff/taxes result into decrease in facilities of firm but increase facilities in that region like Dubai Tariffs generally used by countries and firms for strategic purposes like China. USA (free trade zone) Greatly impact the profits like that happened to Yen Results in flexibility in SCN & some over capacity for cross utilization incase of demand/currency fluctuation • Exchange Rate and Demand Risk • • .

utilities.g coffee shop. of facilities depend upon product requirement from customers e. land/air connection Customer Response Time & Local Presence • Customers priorities also affect the ND decisions • No. stable Govt & legal systems enable sense of security Infrastructure Factors • Key factor for network design • Include suitable site.Factors Influencing Network Design Decisions Political Factors • Rules of commerce. super market .

location affect ND • Either to locate far or closer to the competitors Positive Externalities b/w firms • Instances where collection of multiple firms benefit all • Positive externalities lead to competitors locating close to each other Location to Split the market • Instances where firms locate to capture market share • Firms do not compete on price but on distance • It minimizes price competition and helps to split the market and maximize profits .Factors Influencing Network Design Decisions Competitive Factors • Competitors strategy. size.

their location & capacity • Transport. inventory costs are greatly affected • • Transformation in process affects the ND • E. transportation and facility costs • SC costs change with the number of facilities.Factors Influencing Network Design Decisions Logistics & Facility Costs • Total logistics cost are the sum of inventory.g steel factory to be located close to ore source Facilities in a SC must at least equal the No that minimizes the total logistics cost .

Framework for Network Design (ND) Decisions • • • Aim of ND is to maximize firms profit while meeting customer needs ND decisions made in 4 phases Phase 1: Design a SC strategy • • • Identify firms competitive strategy Forecast evolution of local & global competition Identify internal constraints • Identify mode of action after growth in revenues • Analysis of economies of scale/scope & financials .

tax incentives. exchange rate and political risk. laws etc • Evaluate strategy for competitors.Framework for Network Design (ND) Decisions Phase 2: Regional facility configuration • Identify region where facility will be located. location of facility. their roles. number and capacity • Forecast the regional demand among countries • Feasibility of economies of scale/scope • Identify demand. logistics costs & desired response time .

suppliers etc Soft Infrastructure. Labor skill. site cost) . community receptivity Phase 4: Location Choices • Precise selection & capacity allocation of facility • Criteria only to maximize profits.Framework for Network Design (ND) Decisions Phase 3: Select Desirable Sites • Select a set of desirable sites for facilities within each region based upon skill. Utilities. material. minimize costs & utilize tax incentive (labor. response time etc • Should be based upon infrastructure available to support the production • • Hard Infrastructure.

costs. relocate etc Do not gloss over cultural implications • ND decisions impact the culture of each facility • Culture at a facility is influenced by other in the vicinity • Location affects autonomy. technology • Production facilities harder to change than storage facilities • Rented facilities provide flexibility to change. communication etc .Making ND Decisions in Practice Do not underestimate life span of facilities • Consider future demand.

customer relations.Making ND Decisions in Practice Do not ignore quality of life issues • It influences the workforce available. BMW. Mercedes follow same strategy . morale • Location affects quality. skill level etc Focus on tariffs and tax incentives • Tax incentives mostly drive the location choice • Mostly feasible for international locations • Toyota.

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