Framework for Network Design Decisions in the Supply Chain

The goal when designing a supply chain network is to maximize the firm’s profits while satisfy­ing customer needs in terms of demand and responsiveness. To design an effective network, a manager must consider all the factors described in Section 5.2 and those discussed in Chapter 4. Global network design decisions are made in four phases, as shown in Figure 5-2. We describe each phase in greater detail.

1. Phase I: Define a supply Chain strategy/Design

The objective of the first phase of network design is to define a firm’s broad supply chain design. This includes determining the stages in the supply chain and whether each supply chain function will be performed in-house or outsourced (see Chapter 4).

Phase I starts with a clear definition of the firm’s competitive strategy as the set of cus­tomer needs that the supply chain aims to satisfy. The supply chain strategy then specifies what capabilities the supply chain network must have to support the competitive strategy (see Chapter 2). Next, managers must forecast the likely evolution of global competition and whether competitors in each market will be local or global players. Managers must also identify constraints on avail­able capital and whether growth will be accomplished by acquiring existing facilities, building new facilities, or partnering.

Based on the competitive strategy of the firm, its resulting supply chain strategy, an analy­sis of the competition, any economies of scale or scope, and any constraints, managers must determine the broad supply chain design for the firm.

2. Phase II: Define the Regional Facility Configuration

The objective of the second phase of network design is to identify regions where facilities will be located, their potential roles, and their approximate capacity.

An analysis of Phase II starts with a forecast of the demand by country or region. Such a forecast must include a measure of the size of the demand and a determination of the homogene­ity or variability of customer requirements across different regions. Homogeneous requirements favor large consolidated facilities, whereas requirements that vary across countries favor flexible facilities or smaller, localized, dedicated facilities.

The next step is for managers to identify whether economies of scale or scope can play a significant role in reducing costs, given available production technologies. If economies of scale or scope are significant, it may be better to have a few facilities serving many markets. For example, semiconductor manufacturers such as Advanced Micro Devices have few plants for their global markets, given the economies of scale in production. If economies of scale or scope are not significant, it may be better for each market to have its own facility.

Next, managers must identify demand risk, exchange-rate risk, and political risk associated with regional markets. They must also identify regional tariffs, any requirements for local pro­duction, tax incentives, and any export or import restrictions for each market. The goal is to design a network that maximizes after-tax profits.

Managers must identify competitors in each region and make a case for whether a facility needs to be located close to or far from a competitor’s facility. The desired response time for each market and logistics costs at an aggregate level in each region must also be identified.

Based on all this information, managers identify the regional facility configuration for the supply chain network using network design models discussed in the next section. The regional configuration defines regions where facilities will be set up, the approximate number of facilities in the network, and whether a facility will produce all products for a given market or a few prod­ucts for all markets in the network.

3. Phase III: Select a Set of Desirable Potential Sites

The objective of Phase III is to select a set of desirable potential sites within each region where facilities are to be located. Sites should be selected based on an analysis of infrastructure avail­ability to support the desired production methodologies. Hard infrastructure requirements include the availability of suppliers, transportation services, communication, utilities, and ware­housing facilities. Soft infrastructure requirements include the availability of a skilled workforce, workforce turnover, and the community receptivity to business and industry.

4. Phase IV: Location Choices

The objective of Phase IV is to select, from among the potential sites, a precise location and capacity allocation for each facility. The network is designed to 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.

In the next section, we discuss methodologies for making facility location and capacity allocation decisions during Phases II through IV.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.

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