The influencing factors in network design decision
Strategic Factors
A firms competitive strategy has a significant impact on network design decision
with in the supply chain. Firms that focus on cost leadership tend to find the lowest
Cost location for their manufacturing facilities, even if that means locating very far from the markets they serve. For example, in the early1980s, many apparel producers moved all their manufacturing out of the United States to countries with lower labor costs
in hope of lowering cost. With the drop in apparel quotas in 2005. Most of
Manufacturing is now moving to low-cost countries such as China.
. Offshore facility: low cost facility for export production . An offshore facility serves the of begin a low cost supply source for markets located outside the country where the facility located. The location selected for an offshore facility should have low cost labor and other cost to facility low cost production.
. Source facility: low cost facility for global production. A source facility also has low cost as it primary objective, but its strategic role is broader than that of an offshore facility. A source facility is often a primary source of product for the entire global net ratability low.
. Serve facility: regional product ion facility . A serve facility objective is to supply the market where is located. A serve facility is built because of tax incentives, local content requirement, tariff barriers, or high logistic cost to supply the region from elsewhere.
. Contributor facility: regional production facility with development skills, A contributor facility serves the market where it is focused but also assumes responsibility for Product customization, process improvement, product modification, or product
development.
. Outpost facility: regional production facility built to gain local skills, An outpost facility is located primarily to obtain access to knowledge or skills that may exist within
a certain region. Given its location, it also playes the role of server facility.
. Lead facility: facility that leads in development and process techniques. A lend facility crests new product, processes, and technology for entire network. Lead facility are located in areas with good access to a skilled workforce and technological resources.
The Role of network design decision in the supply chain management: Network design decision have a significant impact on performance because they determine the supply chain configuration and set constraints within which the other supply chain drivers can be used either to decrease supply chain cost or to made taking this fact into consideration. Decision concerning the role of each facility are significant because they determine the amount of flexibility the supply chain has in changing the way it meets demand.
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.
Facility location decisions have a long term impact on a supply chain’s performance because it is very expensive to shut down a facility or move it to a different location. A good location decision can help a supply chain be responsive while keeping its costs low. Toyota, for example, built its first U.S. assembly plant in Lexington, Kentucky, in 1988 and has used to plant proved very profitable for Toyota when the yen strengthened and cars produced in Japan were too expensive to be cost competitive with cars produced in the united states. The Lexington plant allowed Toyota to be responsive to the u.s. market while keeping costs low.
In contrast, a poorly located facility makes it very difficult for a supply chain to perform close to the efficient frontier. For examole,Amazon.com found it very difficult to be costs effective in supplying books throughout the United states when it had a single warehouse in Seattle. As a result, the company has added warehouses in other parts of the country.
Capacity allocation decisions also have a significant impact on supply chain performance. Whereas capacity allocation can be altered more easily than location, capacity decisions do tend to stay in place for several years. Allocating too much capacity to a location results in poor utilization as a result, higher costs. Allocating too little capacity results in poor responsiveness if demand is not satisfied, or high cost if demand is filled from a distant facility.
The allocation of supply sources and markets to facilitates has a significant impact on performance because it affects total production, inventory and transportation costs incurred by the supply chain to satisfy customer demand. This decision should be reconsidered on regular basis so that the allocation can be changed as market condition or plant capacities change. Of course, the allocation of market and supply can only be changed if the facilities are flexible enough to serve different markets and receive supply from different sources. As we mentioned earlier,Amazon.com has built new ware houses and changed the market supplied by each ware houses as its customer base has grown. As a result it has lowered costs improved responsiveness.
Network design decision must be reviewed as a firm grows or when two companies merge. Because of the redundancies and differences in markets served by either the two sepoerate firms, consolidating some facilities and changing the location and role of others can often help reduce costs and improve responsiveness.
Macroeconomic Factors
Macroeconomic factors include taxes, tariffs, exchange rates, and other economic factors that are not internal to an individual firm. As global trade has increased, macroeconomic factors have had a significant influence on the success or failure of supply chain networks. Thus, it is imperative that firms take these factors into account when making network design decisions.
Technological factors
Characteristics of available production technologies have a significant impact on network design decisions. If production technology displays significant economies of scale, a few high capacity location are most effective. This is the case in the manufacture of computer chips, for which factories requires vary large investment. As result moist semiconductor companies build few high-capacity facilities.
In contrast, if facilities have lower fixed costs, many local facilities are preferred because this helps lower transportation costs. For example, bottling plants for coca-cola sets up many bottling plants all over the world, its serving the its local market.
Flexibility of the production technology affects the degree of consolidation can be achieved in the network. If the production technology is very inflexible and product requirements vary from one country to another, a firm has to set up local facilities to serve the market in each country. Conversely, if the technology is flexible, it becomes easier to consolidate manufacturing in a few large facilities.
Tariffs and Tax Incentives
Tariffs refer to any duties that must be paid when products and/or equipment are moved across international, state or city boundaries. Tariffs have a strong influence on location decision within a supply chain. If a country has very tariffs, companies either do not serve the local market or set up manufacturing plants within the country to save on duties. High tariffs lead to more production locations within supply chain networks with each location having a lower allocated capacity. High tariffs lead to more production location within a supply chain network, with each location having a lower allocated capacity. As tariffs have come down with the World Trade Organization, and regional agreements such as NAFTA , EU, and MERCOSUR, firms can now supply the market within a country from a plant located outside that country without incurring high duties.
Tax incentives are a reduction in tariffs or taxes that countries, states, and cities often provide to encourage firms to locate their facilities in specific areas. Many countries vary incentives from city to city to encourage investments in areas with lower economic development.
Political Factors
The political stability of the country under consideration plays a significant role in location choice. Companies prefer to locate facilities in politically stable countries where the rules of commerce and ownership are well defined. Countries with independent and clear legal system allow firms to feel that they have resources in the courts should they need it. This makes it easier for companies to invest in facilities these countries.
Exchange Rate and Demand Risk
Fluctuation in exchange rates are common and have a significant impact on the profits of any supply chain serving global markets. For example, the dollar fluctuated between 102 and 132 yen in the three years from 2002 to 2004. A firm that sells its products in the United States with production in japan is exposed to the risk of appreciation of the yen.
Exchange rate risks may be handled using financial instruments that limit, or hedge against, the due to fluctuations. Suitably designed supply chain networks, however, offer the opportunity to take advantage of exchange-rate fluctuations and increase profits. An effective to this is to build some overcapacity into the network and make the capacity flexible so that it can be used to supply different markets. This flexibility allows the firm to react to exchange-rate fluctuations by altering production flows within the supply chain to maximize profits.
Infrastructure Factors
The availability of good infrastructure is an important prerequisite to locating a facility in a given area. Poor infrastructure adds to the cost of doing business from a given location. Global companies have located their factories in China and near Shanghai, Tianjin, or GuangZhuo-even though these locations do not have the lowest labor or land cost-because there is good infrastructure at these locations.
Competitive Factors
Companies must consider competitors strategy, size, and location when designing their supply chain networks. A fundamental decision firms make is whether to locate their facilities close to competitors or far from them. The form of competition and factors such as raw material or labor availability influence this decision.
Positive Externalities Between Firms
Positive externalities are instances where the collocation of multiple firms benefits all of them. Positive externalities lead to competitors locating close to each other. For example, gas station and retail stores tend to locate close to each other because doing so increase the overall demand, thus benefiting all parties.
Locating to Spilt the Market
When there no positive externalities, firms locate to be able to capture the largest possible share of the market. A simple model first proposed by Hotelling explains the issues behind this decision. When firms do not control price but compete on distance from the customer, they can maximize the market share by locating close to each other and splitting the market. Consider a situation in which customers are uniformly located along the line segment between 0 and 1 and two firms compete based on their distance from the customer.
Logistics and Facility Costs
Logistics and facility costs incurred within a supply chain change as the number of facilities there location, and capacity allocation is changed. Companies must consider inventory, transportation, and facility costs when designing their supply chain networks.
Inventory and facility cost increase as the number of facilities in a supply chain increase. Transportation costs decrease as the number of facilities is increased. If number of facilities increase to a point where inbound companies economies of scale are lost, then transportation cost increases.
The supply chain also networks design is also influenced by the transportation occurring at each facility. When there is a significant reduction in material weight or volume as a result of processing, it may be better to locate facilities closer to the supply sources rather than the customer.
Total logistics costs are a sum of the inventory, transportation, and facility costs. The facilities in a supply chain network should at equal the number that minimize total logistics cost. A firm may increase the number of facilities beyond this point to improve the response time to its customers. This decision is justified if the revenue increase from improve response outweighs the increase cost from additional facilities.
Framework for network design decisions:
Strategic Factors
A firms competitive strategy has a significant impact on network design decision
with in the supply chain. Firms that focus on cost leadership tend to find the lowest
Cost location for their manufacturing facilities, even if that means locating very far from the markets they serve. For example, in the early1980s, many apparel producers moved all their manufacturing out of the United States to countries with lower labor costs
in hope of lowering cost. With the drop in apparel quotas in 2005. Most of
Manufacturing is now moving to low-cost countries such as China.
. Offshore facility: low cost facility for export production . An offshore facility serves the of begin a low cost supply source for markets located outside the country where the facility located. The location selected for an offshore facility should have low cost labor and other cost to facility low cost production.
. Source facility: low cost facility for global production. A source facility also has low cost as it primary objective, but its strategic role is broader than that of an offshore facility. A source facility is often a primary source of product for the entire global net ratability low.
. Serve facility: regional product ion facility . A serve facility objective is to supply the market where is located. A serve facility is built because of tax incentives, local content requirement, tariff barriers, or high logistic cost to supply the region from elsewhere.
. Contributor facility: regional production facility with development skills, A contributor facility serves the market where it is focused but also assumes responsibility for Product customization, process improvement, product modification, or product
development.
. Outpost facility: regional production facility built to gain local skills, An outpost facility is located primarily to obtain access to knowledge or skills that may exist within
a certain region. Given its location, it also playes the role of server facility.
. Lead facility: facility that leads in development and process techniques. A lend facility crests new product, processes, and technology for entire network. Lead facility are located in areas with good access to a skilled workforce and technological resources.
The Role of network design decision in the supply chain management: Network design decision have a significant impact on performance because they determine the supply chain configuration and set constraints within which the other supply chain drivers can be used either to decrease supply chain cost or to made taking this fact into consideration. Decision concerning the role of each facility are significant because they determine the amount of flexibility the supply chain has in changing the way it meets demand.
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.
Facility location decisions have a long term impact on a supply chain’s performance because it is very expensive to shut down a facility or move it to a different location. A good location decision can help a supply chain be responsive while keeping its costs low. Toyota, for example, built its first U.S. assembly plant in Lexington, Kentucky, in 1988 and has used to plant proved very profitable for Toyota when the yen strengthened and cars produced in Japan were too expensive to be cost competitive with cars produced in the united states. The Lexington plant allowed Toyota to be responsive to the u.s. market while keeping costs low.
In contrast, a poorly located facility makes it very difficult for a supply chain to perform close to the efficient frontier. For examole,Amazon.com found it very difficult to be costs effective in supplying books throughout the United states when it had a single warehouse in Seattle. As a result, the company has added warehouses in other parts of the country.
Capacity allocation decisions also have a significant impact on supply chain performance. Whereas capacity allocation can be altered more easily than location, capacity decisions do tend to stay in place for several years. Allocating too much capacity to a location results in poor utilization as a result, higher costs. Allocating too little capacity results in poor responsiveness if demand is not satisfied, or high cost if demand is filled from a distant facility.
The allocation of supply sources and markets to facilitates has a significant impact on performance because it affects total production, inventory and transportation costs incurred by the supply chain to satisfy customer demand. This decision should be reconsidered on regular basis so that the allocation can be changed as market condition or plant capacities change. Of course, the allocation of market and supply can only be changed if the facilities are flexible enough to serve different markets and receive supply from different sources. As we mentioned earlier,Amazon.com has built new ware houses and changed the market supplied by each ware houses as its customer base has grown. As a result it has lowered costs improved responsiveness.
Network design decision must be reviewed as a firm grows or when two companies merge. Because of the redundancies and differences in markets served by either the two sepoerate firms, consolidating some facilities and changing the location and role of others can often help reduce costs and improve responsiveness.
Macroeconomic Factors
Macroeconomic factors include taxes, tariffs, exchange rates, and other economic factors that are not internal to an individual firm. As global trade has increased, macroeconomic factors have had a significant influence on the success or failure of supply chain networks. Thus, it is imperative that firms take these factors into account when making network design decisions.
Technological factors
Characteristics of available production technologies have a significant impact on network design decisions. If production technology displays significant economies of scale, a few high capacity location are most effective. This is the case in the manufacture of computer chips, for which factories requires vary large investment. As result moist semiconductor companies build few high-capacity facilities.
In contrast, if facilities have lower fixed costs, many local facilities are preferred because this helps lower transportation costs. For example, bottling plants for coca-cola sets up many bottling plants all over the world, its serving the its local market.
Flexibility of the production technology affects the degree of consolidation can be achieved in the network. If the production technology is very inflexible and product requirements vary from one country to another, a firm has to set up local facilities to serve the market in each country. Conversely, if the technology is flexible, it becomes easier to consolidate manufacturing in a few large facilities.
Tariffs and Tax Incentives
Tariffs refer to any duties that must be paid when products and/or equipment are moved across international, state or city boundaries. Tariffs have a strong influence on location decision within a supply chain. If a country has very tariffs, companies either do not serve the local market or set up manufacturing plants within the country to save on duties. High tariffs lead to more production locations within supply chain networks with each location having a lower allocated capacity. High tariffs lead to more production location within a supply chain network, with each location having a lower allocated capacity. As tariffs have come down with the World Trade Organization, and regional agreements such as NAFTA , EU, and MERCOSUR, firms can now supply the market within a country from a plant located outside that country without incurring high duties.
Tax incentives are a reduction in tariffs or taxes that countries, states, and cities often provide to encourage firms to locate their facilities in specific areas. Many countries vary incentives from city to city to encourage investments in areas with lower economic development.
Political Factors
The political stability of the country under consideration plays a significant role in location choice. Companies prefer to locate facilities in politically stable countries where the rules of commerce and ownership are well defined. Countries with independent and clear legal system allow firms to feel that they have resources in the courts should they need it. This makes it easier for companies to invest in facilities these countries.
Exchange Rate and Demand Risk
Fluctuation in exchange rates are common and have a significant impact on the profits of any supply chain serving global markets. For example, the dollar fluctuated between 102 and 132 yen in the three years from 2002 to 2004. A firm that sells its products in the United States with production in japan is exposed to the risk of appreciation of the yen.
Exchange rate risks may be handled using financial instruments that limit, or hedge against, the due to fluctuations. Suitably designed supply chain networks, however, offer the opportunity to take advantage of exchange-rate fluctuations and increase profits. An effective to this is to build some overcapacity into the network and make the capacity flexible so that it can be used to supply different markets. This flexibility allows the firm to react to exchange-rate fluctuations by altering production flows within the supply chain to maximize profits.
Infrastructure Factors
The availability of good infrastructure is an important prerequisite to locating a facility in a given area. Poor infrastructure adds to the cost of doing business from a given location. Global companies have located their factories in China and near Shanghai, Tianjin, or GuangZhuo-even though these locations do not have the lowest labor or land cost-because there is good infrastructure at these locations.
Competitive Factors
Companies must consider competitors strategy, size, and location when designing their supply chain networks. A fundamental decision firms make is whether to locate their facilities close to competitors or far from them. The form of competition and factors such as raw material or labor availability influence this decision.
Positive Externalities Between Firms
Positive externalities are instances where the collocation of multiple firms benefits all of them. Positive externalities lead to competitors locating close to each other. For example, gas station and retail stores tend to locate close to each other because doing so increase the overall demand, thus benefiting all parties.
Locating to Spilt the Market
When there no positive externalities, firms locate to be able to capture the largest possible share of the market. A simple model first proposed by Hotelling explains the issues behind this decision. When firms do not control price but compete on distance from the customer, they can maximize the market share by locating close to each other and splitting the market. Consider a situation in which customers are uniformly located along the line segment between 0 and 1 and two firms compete based on their distance from the customer.
Logistics and Facility Costs
Logistics and facility costs incurred within a supply chain change as the number of facilities there location, and capacity allocation is changed. Companies must consider inventory, transportation, and facility costs when designing their supply chain networks.
Inventory and facility cost increase as the number of facilities in a supply chain increase. Transportation costs decrease as the number of facilities is increased. If number of facilities increase to a point where inbound companies economies of scale are lost, then transportation cost increases.
The supply chain also networks design is also influenced by the transportation occurring at each facility. When there is a significant reduction in material weight or volume as a result of processing, it may be better to locate facilities closer to the supply sources rather than the customer.
Total logistics costs are a sum of the inventory, transportation, and facility costs. The facilities in a supply chain network should at equal the number that minimize total logistics cost. A firm may increase the number of facilities beyond this point to improve the response time to its customers. This decision is justified if the revenue increase from improve response outweighs the increase cost from additional facilities.
Framework for network design decisions:
The goal when design supply chain network is to maximize the firm’s profit while satisfying customer needs in terms of demand and responsiveness. To design an effective network a manager must consider these factors given below:
· Phase: I Supply chain strategy
· Phase: II Regional facility configuration
· Phase: III Desirable sites
· Phase: IV Location choices
Phase I: supply chain strategy/ Design:
The objective of the first phase of network design is to define a firm’s broad supply chain design. This includes determining the stages in supply chain and whether each supply chain function will be performed in-house or outsourced.
Phase I starts with clear definition of the firm’s competitive strategy as the set of customer needs that the supply chain aims to satisfy. The supply chain strategy then specifies what capabilities that supply chain network must have to support the competitive strategy. Next, managers must forecast the likely evolution of global competition and weather competitors in each market will be local or global players. Managers must also identify constraints on available capital and weather growth will be accomplished by acquiring existing facilities, or partnering.
Based on the competitive strategy of the firm, its resulting supply chain strategy, an analysis of the competition, any economics of scale scope, and any constraints managers must determine the supply chain design for firm.
Models for facility location and capacity allocation:
A manager’s goal when locating facilities and allocating capacity should be to maximize the overall profitability of the resulting supply chain network while providing customers with the appropriate responsiveness. Revenue comes from the scale of product, whereas cost arise from facilities, labor, transportation, material and inventories. The profits of the firm are also affected by taxes and tariffs. Ideally, profits after tariffs and taxes should be maximized when designing supply chain network.
A manager must consider many tread-offs during network design. For example, building many facility to serve local markets reduces transportation cost and fast response time, but it increases the facility and inventory cost incurred by the firm.
Managers use network design models in two situations. First these models are used to decide on locations where facilities will be established and the capacity to be assigned to each facility. Managers must make this decision considering a time horizon over which locations and capacities will not be altered (typically a years). Second, these models are used to assign current demand to the available facilities and identify lanes along which product will be transported. Managers must consider this decision at least on an annual basis as demand, prices, exchange rates, and tariffs change. In both cases the goal is to maximize the profit while satisfying customer needs. The following information ideally is available in making the design decision:
· Location of supply sources and markets
· Location of potential facility sites
· Demand forecast by market
· Facility, labor, and material cost by sites
· Inventory costs by site and as a foundation of quantity
· Sale price of product in different regions
· Taxes and tariffs
· Desired response time and other services factors
Given this information, either gravity models or network optimization may be used to design the network.
Phase II: The regional facility configuration
The objective of the second phase of network design is to identify regions where facilities will be located, their potential roles, and their approximate capacity.
An analysis of phase II starts with a forecast of the demand of the country. Such a forecast must include a measure of the size of the demand as well as determination of whether the customer requirements are homogenous or variable across different countries. Homogenous favor large consolidate facilities, whereas requirements that vary across countries favor smaller, localize facilities.
The next step is for managers to identify whether economics of scale or scope can play a significant role in reducing costs, given available production technologies. If economics of scale or scope are significant, it may be better to have few facilities serving many markets.
Next, managers must identify demand risk, exchange-rate risk, and political risk associated with regional markets. They must also identify regional tariffs any requirements for local production, tax incentives and any export or import restriction for each markets. The tax and tariff information is to identify the best location to extract a major share of profits. In general, it is best to obtain the major share of profits at the location with lowest tax rate.
Managers must identify competitors in each region and make a case for whether a facility needs to be located close to or far from a competitor’s facility. The desired response time for each market and logistics costs at an aggregate level in each region must also be identified.
Based on all this information, managers identify the regional facility configuration for the supply chain network using network design models. The regional configuration defines the approximate number of facilities in the network, regions where facilities will be set up, and whether a facility will produce all products for a given market or a few products for all markets in the network.
Phase III: Desirable sites
The objective of Phase III is to select a set of desirable potential sites within each region where facilities are to be located. Sites should be selected based on an analysis of infrastructure availability to support the desired production methodologies. Hard infrastructure requirements include the availability of supplier, transportation services, communication, utilities, and warehousing infrastructure. soft infrastructure requirements include the availability of skilled workforce, workforce turnover, and the community receptivity to business and industry.
Phase IV: Location choices
The objective of Phase IV is to select a precise location and capacity allocation for each facility. Attention is restricted to the desirable potential sites selected in phase III. The network is designed to maximize total profits taking into account the expected margin and demand in each market, various logistics and facility costs, and the taxes and tariffs at each location.
The role of IT in network design:Even though it may seem at first glance that the strategic nature of the network design problem makes information technology systems less valuable,good IT systems can significantly improve the capability of network designer.For much larger problems,there are four ways that an IT system can help with network design relative to the use of a general purpose tool such as Excel.
1. A good network design system makes the modeling of the network design problems much easier than in a general purpose tool such as Excel.These applications have many built-in tools that facilitate an accurate description of a large supply chain network and incorporate realistic features that would be time consuming and difficult to built in Excel.
2. An IT system contains high performance optimization tchnologies,which deliver a high quality solution for large problems for a resonable amount of time.Although Excel’s solver can be upgrated,there are many cases in which the size and complexity of the optimization require a more spohisticated system that a network design application can provide.
3. Agood network design application also allows for an analysis of various “what if”scenarios.Given the uncertainty associated with forecasts,the ability to evaluate network designs in a variety of scenarios is a very powerfull tool for a designer.A network designer may find it much more appropriate to select a design that gives very good costs in many likely scenarios rather than a design that is optimal in one scenario but very poor in another.The ease of modeling and speed of solution allows a good network design application to facilitate what if analysis to a far greater extent than a general purpose tool such as Excel.
4. Finally,network design applications are structured to interface easily with the planning and operational software used by firms which contain much of the actual data required for network design.the ease of interface with the data source speeds up the creation and solution of a network design model.
In summary ,although network design is an area that is not as closely tied to IT as many other supply chain areas we discuss,it is nonetheless one that can benefit from the power of IT at relatively little cost.
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