July 28, 2018

Facility Decisions: Network Design in the Supply Chain - Review Notes

Supply Chain Network Design

1. The role of facility decisions in a supply chain
2. Factors influencing network design decisions
3. A framework for network design decisions
4. Models for Facility location and capacity allocation
5. Making network design decisions in practice

The role of facility decisions in a supply chain

During supply chain network design facility related decisions are made. The decisions are:

1. What is the role of the facility?

What processes are done at the facility.

2. Location Where should facilities be located?

3. Capacity decision How much capacity is to be created

4. Market and supply allocation - What markets should each facility serve? Which supply sources should feed each facility?

Supply chain facilities are manufacturing, storage and transportation-related facilities. We may need to think of adding information processing facilities also to them to have a wider view of the facilities used in supply chains. Location of these facilities, capacity of these facilities, capacity allocated to them in an period and role given to them etc. are facility related supply chain decisions. Facility decisions are referred to as supply chain network decision decisions.

Decision regarding role become important in providing flexibility. If facilities can serve demand in a region globally there is more flexibility. Similarly in a multi-product firm, if facilities can produce large number of products, there is flexibility.

Factors Influencing Facility Decisions

Strategic Factors

    Strategic Focus of the Company
    Cost leadership or Responsiveness

    Strategic Role of Each Facility

  1. Off shore facility
  2. Source facility
  3. Server facility
  4. Contributor facility
  5. Outpost facility
  6. Lead facility

Technological Factors

If available production technology displays significant economies of scale, a few high-capacity location are most effective and accordingly supply chain will have less number of facilities.

Instead, if fixed costs are low, many local facilities are preferred.

Economic Incentives - Macroeconomic Factors

These include taxes, tariffs, exchange rates and other economic factors that are not internal to an individual firm.

Political Factors

The political stability of the country is an important criterion for locating facilities.


Key infrastructure elements that effects costs of sourcing, making and distributing are availability land and buildings, labor availability, proximity to transport terminals, rail service, proximity to airports and sea ports, highway access, ease of goods traffic and local utilities.

A Framework for Network Design Decisions

Phase I  Developing Supply Chain Strategy

Phase II. Regional Level Decisions

Phase III. Selecting Desirable Sites in Each Region

Phase IV. Choice of Location

Models for Facility Location and Capacity Allocation

Gravity Location Models

Gravity models are used to find locations that minimize the cost of transporting raw materials from supply sources to conversion facilities and from them to market serving facilities.

Network Optimization Modes

Locating plants and warehouses simultaneously
m  number of markets or demand points
n  number of potential factory locations
l number of suppliers
t  number of potential warehouse locations

D annual demand customer j
K  annual capacity of factory at site I
S  annual supply capacity at sup h
W  annual warehouse capacity at site e
F  fixed annual cost of locating plant at site I
f  fixed an cost of locating warehouse
chi  cost of shipping one unit of supply source ha to site e
cie factory I to warehouse e
cej warehouse e to customer j

Minimize total cost
fixed cost factories fixed cost warehouses  total cost warehouse to market  total cost factory to factories  total cost suppliers factories

Uncertainty and Network Design

Updated 29 July 2019,  29 June 2018


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