Network Design in the Supply Chain Network Design

Network Design in the Supply Chain

Network Design Decisions • Facility role: What role should each facility play? What processes should be performed at each facility? • Facility location: Where should facilities be located? • Capacity allocation: How much capacity should be allocated to each facility? • Market and supply allocation: What markets should each facility serve? Which supply sources should feed each facility? • (How many plants, DC’s, retail stores, etc. to build? )

A framework for network design decisions • (Figure 5. 2; page 107) • Notice the decomposing nature of this framework as it proceeds from regional decisions to more localized ones.

Phase I: Strategy Considerations • Understand where is the main emphasis: – Cost leadership – Responsiveness – Product differentiation • Who are the key competitors at each target market? • Identify constraints on available capital • Key mechanisms that will support growth – Reuse of existing facilities – Build new facilities – Partner with other companies (mergers and acquisitions are potential options here)

Cost / Responsiveness Trade-off Cost Total cost SC response time Inventory cost Facility cost Transportation cost Number of Facilities

Phase II: Regional facility configuration • Important Factors: • Regional demand • Production technologies and economies of scale and scope • Tariffs and Tax incentives • Infrastructure factors • Political, exchange rate and demand risk • Competitive Environment

Regional demand • Forecast the demand on a region by region basis • Need to study its – size – homogeneity • Non-homogeneous demand will require a more localized network • Frequently the final customization of a product for a particular market is done at a local distribution center – Labeling – Manuals – etc.

Production technologies and the underlying economies • Expensive dedicated production technologies will require large production volumes and therefore a more centralized production network (e. g. , chip production). • Lower fixed cost facilities can be duplicated more easily (e. g. , bottling factories). • In case of non-homogeneous demand, technological flexibility facilitates consolidation of production to a few manufacturing facilities. • The more cumbersome the transfer of raw material, the closer the facility must be to the source site (e. g. , factories processing minerals)

Tariffs and Tax incentives • Tariffs: Any duties that must be paid when products and/or equipment are moved across international, state or city boundaries. • High tariffs necessitate localized production. • Presently, there is a systematic effort to open the markets to global competition through the World Trade Organization Policies (WTO) and regional agreements (NAFTA, MERCOSUR for S. America, ASEAN for Pacific rim, etc. ) • Tax incentives: a reduction in tariffs or taxes that countries, states and cities often provide to encourage firms to locate their facilities in specific areas. • Free trade zones: Areas where duties and tariffs are relaxed as long as production is used primarily for export (e. g. , Taiwan and China’s Guang. Zhou area) Allows companies to take better advantage of low labor costs. • Tax incentives can be focusing on certain – Industries – Technologies – Regions • Quotas: Limits on import volumes placed by different countries in an effort to protect their local industry. Sometimes there is also some requirement on minimum local content.

Infrastructure factors • Availability of skilled labor • Availability of transportation facilities – – Ports Airports Rail Highways • Availability of necessary utilities – – Power Water Sewage Telecommunications / IT

Political, exchange rate and demand Risks • Political risks -- Need for: – Well-defined rules of commerce – Independent and clear legal systems – Political stability • Exchange rate risks: This risk arises from the fact that companies might incur their costs in one currency and collect their revenues in other currencies. (e. g. , Japanese production under an expensive Yen in the late 80’s / early 90’s; the role of an expensive EURO these days for the American economy) • Potential protection to exchange rate risk: Build some flexible over-capacity to the regional facilities so that production is shifted to the lower-cost regions. • Demand risk: Comes from extensive demand fluctuation due to regional economic crises (e. g. , Asia markets between 1996 -1998) Plant flexibility is also a potential protection to this type of risk.

Competitive factors • Positive Externalities: Instances where collocation of multiple firms benefits all of them, since – They share the cost of the necessary infrastructure – And the collocation can stimulate demand for all of them – Examples: a mall, silicon valley, industrial parks • Locating to “split the market”: For companies that – Do not have price control, and – try to maximize their market share by minimizing their distance from the customer, collocation can allow each competing party to maximize their market share. a b Total demand = 1 D 1 = a + (1 -b-a)/2 = (1+a-b)/2 D 2 = 1 -a-(1 -b-a)/2 = (1+b-a)/2 => a = b = 1/2

A (production) facility categorization (Kasra Ferdows, 1997) • Offshore Facility: Low-cost facility for export production • Source Facility: Low cost facility for global production – facilities with more strategic role in the SC, resulting from the evolution of good offshore facilities • Server Facility: Regional production facility • Contributor Facility: Regional production facility with development skills (mainly focusing on customization for the local market) • Outpost Facility: Regional production facility built to gain local skills • Lead Facility: Facility that leads in development and process technologies

Phases III & IV: Selecting specific locations • Important factors • Infrastructure • Costs – – – Labor Materials Facilities Transport Inventory Taxes and Tariffs