When faced with a network design decision, the goal of a manager is to design a network that

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The goal when designing a supply chain network is to maximize the firm’s profits while satisfy­ing customer needs in terms of demand and responsiveness. To design an effective network, a manager must consider all the factors described in Section 5.2 and those discussed in Chapter 4. Global network design decisions are made in four phases, as shown in Figure 5-2. We describe each phase in greater detail.

1. Phase I: Define a 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 the supply chain and whether each supply chain function will be performed in-house or outsourced (see Chapter 4).

Phase I starts with a 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 the supply chain network must have to support the competitive strategy (see Chapter 2). Next, managers must forecast the likely evolution of global competition and whether competitors in each market will be local or global players. Managers must also identify constraints on avail­able capital and whether growth will be accomplished by acquiring existing facilities, building new facilities, or partnering.

When faced with a network design decision, the goal of a manager is to design a network that

Based on the competitive strategy of the firm, its resulting supply chain strategy, an analy­sis of the competition, any economies of scale or scope, and any constraints, managers must determine the broad supply chain design for the firm.

2. Phase II: Define 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 by country or region. Such a forecast must include a measure of the size of the demand and a determination of the homogene­ity or variability of customer requirements across different regions. Homogeneous requirements favor large consolidated facilities, whereas requirements that vary across countries favor flexible facilities or smaller, localized, dedicated facilities.

The next step is for managers to identify whether economies of scale or scope can play a significant role in reducing costs, given available production technologies. If economies of scale or scope are significant, it may be better to have a few facilities serving many markets. For example, semiconductor manufacturers such as Advanced Micro Devices have few plants for their global markets, given the economies of scale in production. If economies of scale or scope are not significant, it may be better for each market to have its own facility.

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 restrictions for each market. The goal is to design a network that maximizes after-tax profits.

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 discussed in the next section. The regional configuration defines regions where facilities will be set up, the approximate number of facilities in the network, and whether a facility will produce all products for a given market or a few prod­ucts for all markets in the network.

3. Phase III: Select a Set of Desirable Potential 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 suppliers, transportation services, communication, utilities, and ware­housing facilities. Soft infrastructure requirements include the availability of a skilled workforce, workforce turnover, and the community receptivity to business and industry.

4. Phase IV: Location Choices

The objective of Phase IV is to select, from among the potential sites, a precise location and capacity allocation for each facility. 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.

In the next section, we discuss methodologies for making facility location and capacity allocation decisions during Phases II through IV.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.

Supply Chain network decisions include

the assignment of facility role;location of manufacturing-, storage-, or transportation-related facilities;

and the allocation of capacity and markets to each facility

what role should each facility play?
what processes are performed at each facility?

where should facilities be located?

how much capacity should be allocated to each facility?

Market and supply allocation

what markets should each facility service?
which supply sources should feed each facility?

network design decisions 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 increase responsiveness.

Facility location decisions have a long-term impact on a supply chains performance because

it is 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.

Capacity allocation can be altered more easily than location, but

capacity decisions do tend to stay in place for several years.

Allocating too much capacity to a location results in

poor utilization and 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.

Allocation of supply sources and markets to facilities 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 a regular basis so the allocation can be changed as production and transportation costs, market conditions, or plant capacities change.

A fundamental decision firms must make is

whether to locate their facilities close to or far from competitors.
The form of competition and factors such as raw material or labor availability influence this decision.

Positive externalities occur when

the collocation of multiple firms benefits all of them.
Positive externalities leads to competitors locating close to each other.

Positive externalities example

Retail stores tend to locate close to each other because doing so increases overall demand, thus benefiting all parties. By locating together in a mall, competing retail stores make it more convenient for customers, who need drive to only one location, to find everything they are looking for. This increases the total number of customers who visit the mall, increasing demand for all stores located there.

What impact does competition have on attempting to minimize average customer travel distance?

The result of competition is for both firms to locate close together, even though doing so increases the average distance to the customer.

Objective of Phase I:
Define a Supply Chain Strategy/Design

define a firm's broad supply chain design. This includes determining the stages in the supply chain and whether each supply chain function will be performed in-house or outsourced.

Objective of Phase I:
Define a Supply Chain Strategy/Design

define a firm's broad supply chain design. This includes determining the stages in the supply chain and whether each supply chain function will be performed in-house or outsourced.

Phase I starts with a 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 the supply chain network must have to support the competitive strategy.

Phase I:
Define a Supply Chain Strategy/Design

-Clearly defined competitive strategy-forecast likely evolution of global competition-identify constraints-determine growth strategy

Objective of Phase II:
Define the Regional Facility Configuration

identify regions where facilities will be located, their potential roles, and their approximate capacity.

Phase II:
Define the Regional Facility Configuration

-Forecast demand by country or region; -Economies of scale or scope-Identify demand risk, exchange-rate risk, political risk, tariffs, etc.

-Identify competitors

Objective of Phase III:
Select a Set of Desirable Potential Sites

select a set of desirable potential sites within each region where facilities are to be located.

Phase III:
Select a Set of Desirable Potential Sites

Sites should be selected based on an analysis of infrastructure availability to support the desired production methodologies.
--Hard and soft infrastructure requirements

Hard Infrastructure Requirements

include the availability of suppliers, transportation services, communication, utilities, and warehousing facilities.

Soft Infrastructure requirements

include the availability of a skilled workforce, workforce turnover, and the community receptivity to business and industry.

Objective of Phase IV: Location Choices

select, from among the potential sites, a precise location and capability allocation for each facility.

A managers 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.
-A manager must consider many trade-offs during network design

Managers use network design models in two situations.

1. decide on locations and capacities
2. assign current demand to facilities.

Key Modeling Information.

-Location of supply sources and markets-Location of potential facility sites-Demand forecast by market-Facility, labor, and material costs by site-Transportation costs between each pair of sites-Inventory costs by site and as a function of quantity-Sale price of product in different regions-Taxes and tariffs

-Desired response time and other service factors

Duties that must be paid when products and/or equipment are moved across international, state, or city boundaries are referred to as

If a country has very high tariffs,

companies either do not serve the local market or set up manufacturing plants within the country to save on duties.

Developing countries often create free trade zones where

duties and tariffs are relaxed as long as production is used primarily for export.

Building some over-capacity in the supply chain network and making the capacity flexible allows a firm to alter production flows within the supply chain to

produce more in facilities that have a lower cost based on current exchange rates.

Total logistics costs are a sum of the

inventory, transportation, and facility costs.

The facilities in a supply chain network must

at least equal the number that minimizes total logistics cost.

When faced with a network design decision, the goal of a manager is to design a network that

maximizes the firm's profits while satisfying customer needs in terms of demand and responsiveness.

The objective of the first phase of network design is to

specify what capabilities the supply chain network must have to support a firm's competitive strategy.

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.

The objective of the third phase of network design is to

C) select a set of desirable sites within each region where facilities are to be located.

It is very important that long-term consequences be thought through when making facility decisions, because

facilities last a long time and have an enduring impact on a firm's performance.

The implications of culture should not be glossed over because

tariffs and tax incentives should be carefully considered.

The quality of life at selected facility locations has a significant impact on performance because

it influences the work force available and their morale.

Capital, growth strategy, existing networks and global competition mostly affect which of the four Global Network Design Decisions?

Phase I - Supply Chain Strategy

The availability of suppliers, transportation services, communication, utilities, and warehousing infrastructure mostly affect which of the four Global Network Design Decisions?

Phase III - Desirable Sites

Tariffs, economies of scale and aggregate factor costs mostly affect which of the four Global Network Design Decisions?

Phase II - Regional Facility Configuration

Supply chain network design decisions include

both the location of manufacturing, storage, or transportation-related facilities and the allocation of capacity and roles to each facility.

Supply chain network design decisions classified as facility role are concerned with

what processes are performed at each facility.

Supply chain network design decisions classified as facility location are concerned with

where facilities should be located.

Supply chain network design decisions classified as capacity allocation are concerned with

how much capacity should be allocated to each facility.

Supply chain network design decisions classified as market and supply allocation are concerned with

what markets each facility should serve and which supply sources should feed each facility.

Decisions 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 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.

Capacity allocation decisions have a significant impact on supply chain performance because

capacity decisions tend to stay in place for several years.

Allocating too much capacity to a location results in

poor utilization, and 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 facilities has a significant impact on performance because

it affects total production, inventory, and transportation costs incurred by the supply chain to satisfy customer demand.

The allocation of supply sources and markets to facilities should be reconsidered on a regular basis so that

the allocation can be changed as market conditions or plant capacities change

Network design decisions have a significant impact on performance because they

determine the supply chain configuration.andset constraints within which inventory, transportation, and information can be used to either decrease supply chain cost or increase responsiveness.

Firms focusing on cost leadership tend to

find the lowest cost location for their manufacturing facilities.

Firms focusing on responsiveness tend to

locate facilities close to the market they serve.

A facility that serves the role of being a low-cost supply source for markets located outside the country where the facility is located is

A facility that also has low cost as its primary objective, but its strategic role is broader than that of an offshore facility is

A facility built because of tax incentives, local content requirement, tariff barriers, or high logistics cost to supply the region from elsewhere with the objective to supply the market where it is located is

A facility located primarily to obtain access to knowledge or skills that may exist within a certain region is

A facility that serves the market where it is located but also assumes responsibility for product customization, process improvements, product modifications, or product development is

A facility that creates new products, processes, and technologies for the entire network is

Production technology displays significant economies of scale,

few high-capacity locations are the most effective.

If facilities have lower fixed costs,

many local facilities are preferred because this helps lower transportation costs.

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.

If the technology is flexible,

it becomes easier to consolidate manufacturing in a few large facilities.