Framework for Network Design Decisions

Based on the organization’s business strategy, analysis of global competition (and its likely evolution), and internal constraints, managers must determine a high level supply chain design.

The six major types of distribution networks can come in handy in this phase.

The second phase starts with aggregated demand forecasting(the topic of the next lesson). Such a prediction should include the demand’s characteristics in demand variability and stability of customer’s requirement.

Then the manager can identify opportunities for cost reduction using economies of scale or scope. Such information should be used to determine capacity allocation decisions.

Managers should also consider macroeconomic, political, and competitive factors (as we previously saw).

For each region defined in Phase II, we define a list of potential sites based on the infrastructure availability and other ”soft” factors:

– Available infrastructure: accessibility to suppliers, transportation services, communication, utilities, and warehouse facilities.

– “Soft” factors: availability of skilled workforce, community receptivity.

– From the preliminary list of potential sites defined in Phase III, we pick those that are more suitable to the organization’s needs and define the capacity of each one.

– Here we add in the cost components into our decision model, such as labor, materials, site-specifics, transport, inventory, and coordination costs.

The use of quantitative models can be helpful when defining the network’s locations and capacity allocation

Aiming at maximizing profits, while providing the customers with the appropriate responsiveness, designing a supply chain network is not a trivial question and involves a multitude of variables.

From the profit side, we have a significant cost component that, in a supply chain network, is driven by the characteristics of the facilities (such as location and capacity), the cost of labor, transportation, material, inventories, and also taxes and tariffs.

Managers have to decide between several trade-offs when designing a network. For example, building many facilities to serve local markets can reduce transportation costs and increase responsiveness, however it increases facility and inventory costs.

Therefore, since considering the large number of trade-offs at once can be a herculean task, if done by hand, we can make use of some mathematical / computer models in order to support our decision (please, take a look at the optional material section for further instructions on these models). Some models that can be used are:

Network optimization models: good for defining a regional facility configuration (phase II) and setting specific location choices (phase IV)

Gravity location models: helpful on defining a set of desirable sites (phase III)