The Role of Network Design in the Supply Chain

Supply chain network design decisions include the assignment of facility role; location of manu­facturing-, storage-, or transportation-related facilities; and the allocation of capacity and mar­kets to each facility. Supply chain network design decisions are classified as follows:

1. Facility role: What role should each facility play? What processes are performed at each facility?
2. Facility location: Where should facilities be located?
3. Capacity allocation: How much capacity should be allocated to each facility?
4. Market and supply allocation: What markets should each facility serve? Which supply sources should feed each facility?

Network design decisions have a significant impact on performance because they deter­mine the supply chain configuration and set constraints within which the other supply chain drivers can be used either to decrease supply chain cost or to increase responsiveness. All net­work design decisions affect one another and must be made taking this fact into consideration. Decisions concerning the role of each facility are significant because they determine the amount of flexibility the supply chain has in changing the way it meets demand. For example, Toyota has plants located worldwide, in each market that it serves. Before 1997, each plant was capable of serving only its local market. This hurt Toyota when the Asian economy went into a recession in the late 1990s. The local plants in Asia had idle capacity that could not be used to serve other markets that were experiencing excess demand. Toyota has added flexibility to each plant to be able to serve markets other than the local one. This additional flexibility helps Toyota deal more effectively with changing global market conditions. Similarly, the flexibility of Honda’s U.S. plants to produce both SUVs and cars in the same plant was helpful in 2008 when SUV demand dropped but small-car demand did not.

Facility location decisions have a long-term impact on a supply chain’s performance because it is expensive to shut down a facility or move it to a different location. A good location decision can help a supply chain be responsive while keeping its costs low. Toyota, for example, built its first U.S. assembly plant in Lexington, Kentucky, in 1988, and has continued to build new plants in the United States since then. The U.S. plants proved profitable for Toyota when the yen strengthened and cars produced in Japan were too expensive to be cost competitive with cars produced in the United States. Local plants allowed Toyota to be responsive to the U.S. market while keeping costs low.

Capacity allocation can be altered more easily than location, but capacity decisions do tend to stay in place for several years. Allocating too much capacity to a location results in poor utili­zation and, as a result, higher costs. Allocating too little capacity results in poor responsiveness if demand is not satisfied or high cost if demand is filled from a distant facility.

The allocation of supply sources and markets to facilities has a significant impact on per­formance because it affects total production, inventory, and transportation costs incurred by the supply chain to satisfy customer demand. This decision should be reconsidered on a regular basis so the allocation can be changed as production and transportation costs, market conditions, or plant capacities change. Of course, the allocation of markets and supply sources can be changed only if the facilities are flexible enough to serve different markets and receive supply from differ­ent sources.

Network design decisions must be revisited as market conditions change or when two companies merge. For example, as its subscriber base grew, Netflix had 58 DCs by 2010 across the United States to lower transportation cost and improve responsiveness. With the growth in video streaming and the corresponding drop in DVD rentals, Netflix closed almost 20 DCs by the end of 2013. In contrast, Amazon increased the number of DCs in the United States from about 20 in 2009 to about 40 in 2013. Changing the number, location, and demand allocation of DCs with changing demand has been critical to maintaining low cost and responsiveness at both Netflix and Amazon.

Following a merger, consolidating some facilities and changing the location and role of others can often help reduce cost and improve responsiveness because of the redundancies and differences in markets served by either of the two separate firms. Network design decisions may also need to be revisited if factor costs such as transportation have changed significantly. In 2008, P&G announced that it would rethink its distribution network, which was implemented when the “cost of oil was $10 per barrel.”

We focus on developing a framework as well as methodologies that can be used for net­work design in a supply chain.

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