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
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?
Strategic Factors
Strategic Focus of the Company
Cost leadership or Responsiveness
Strategic Role of Each 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.
Infrastructure
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
- Off shore facility
- Source facility
- Server facility
- Contributor facility
- Outpost facility
- 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.
Infrastructure
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.
Competition
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.
In gravity model, the conversion facility, the supply sources and market locations are assigned grid points on a plane map of the region or country. The distance between supply source and conversion facility is calculated as the geometric distance between the grid points. Similarly, the distance between conversions facility and market location is also calculated. The cost of transportation is assumed to vary linearly with distance between the locations.
Therefore the total transport cost of the system - supply sources to conversion facility to market locations can be calculated for various assumed locations of the conversion facility. An iterative procedure gives a better locations based on the current candidate position. The iteration will stop if the new suggested solution is the same as the current one.
Network Optimization Models
In supply network, multiple supply sources, multiple factories, multiple warehouses and multiple market locations exist. Besides establishing the network of facilities, allocation of supply quantities to factories, factory output to warehouses, and warehouse stock to market locations needs to be done periodically. Also the cost keep fluctuating and quantities required also keep fluctuating. Optimal decision making is required every period taking into account quantities and costs.
Variables of interest in network optimization problems
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 h 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
Allocation from factory to warehouse problem
Minimize total cost = Total of cie*xie over various factories i and warehouses e.
Uncertainty and Network Design
Uncertainty and Network Design
While the above network design is for specific set of demand data, sensitivity analysis to likely scenarios can be made and decisions modified as needed.
Updated 2 March 2021, 29 July 2019, 29 June 2018
29.9.2013
Updated 2 March 2021, 29 July 2019, 29 June 2018
29.9.2013
Read on 1 April 2016.
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