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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

Factors Influencing Network Design Decisions

Lead facility:- Facility that leads in


development and process technologies To create new products, processes & technologies for the entire network Located in areas with good access to skilled workforce and technological resources

Factors Influencing Network Design Decisions

Technological Factors

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

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


Factors Influencing Network Design Decisions


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

Factors Influencing Network Design Decisions


Competitive Factors Competitors strategy, size, 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


Logistics & Facility Costs Total logistics cost are the sum of inventory, transportation and facility costs SC costs change with the number of facilities, their location & capacity

Transport, inventory costs are greatly affected

Transformation in process affects the ND

E.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

Framework for Network Design (ND) Decisions


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

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, response time etc Should be based upon infrastructure available to support the production

Hard Infrastructure; Utilities, suppliers etc Soft Infrastructure; Labor skill, community receptivity

Phase 4: Location Choices Precise selection & capacity allocation of facility Criteria only to maximize profits, minimize costs & utilize tax incentive (labor, material, site cost)

Making ND Decisions in Practice


Do not underestimate life span of facilities Consider future demand, costs, technology Production facilities harder to change than storage facilities Rented facilities provide flexibility to change, 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, communication etc

Making ND Decisions in Practice


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