Framework for Network Design Decisions

Framework for Network Design Decisions

In this lesson, you’re expected to learn:
– a basic overview of the framework
– models for facility location and capacity allocation

FrameWork Overview

When designing an effective supply chain network, a manager needs to consider all the internal and external factors that we previously discussed.

When designing a supply chain network, we want to minimize the organization’s cost, while satisfying the customers’ needs in terms of demand and responsiveness.

As a reference, we can use the following 4-phase framework in order to take our network design decisions:
Phase I: define a supply chain strategy / design
Phase II: define the regional facility configuration
Phase III: select a set of potentially desirable sites
Phase IV: choose the locations

Enlarged version:

Phase I: Define a supply chain strategy / design
The objective of the first phase is to define the organization’s high-level supply chain design characteristics, such as determining the stages and whether functions are going to be outsourced or not.

Enlarged version:

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.

Phase II: Define the regional facility configuration
The second phase aims at defining the regions for facility location, their roles, and approximate capacity.
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).

Phase III: Select a set of potentially desirable sites
In Phase III, we identify some potentially desirable sites within each region defined in Phase II.
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.

Phase IV: Choose the locations
Finally, we select the precise location and capacity allocation for each facility.
– 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.

Models of Facility Location & Capacity Allocation
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)

[Optional] Capacitated Plant Location Model
Watch this 9-minute to learn more about network optimization models:
[Optional] Facility Location – Center of Gravity Method
Watch this 22-minute video by Edupedia World to learn more about Gravity Location models:
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