Unit-II

Network design in the supply chain

Role of network design

For a trade-off between efficiency and responsiveness:

How to get the supply and which suppliers should deliver which facility?

Where to produce and with what capacities?

Where to store and how to transport?

How to market and which facility should deliver or meet the demand for
which market?

What are the constraints in each function?

How to exploit economies of scale and scope?

Network design decisions

Facility role
Facility location
Capacity allocation
Market and supply allocation

Factors influencing network design decisions

Strategic issues
Technology
Macroeconomic conditions
Political situations
Infrastructure
Competition
Logistics and facility costs
4

The cost-response time frontier

Hi

Local FG
Mix
Regional FG
Local WIP

Cost

Central FG
Central WIP
Central Raw Material and Custom production
Custom production with raw material at suppliers

Low
Low

Response time

Hi
5

Service and number of facilities

Response
time

Number of facilities
6

Cost build-up as a function of facilities

Total costs

Cost of operations

Percent service level

within promised time

Facilities
Inventory
Transportation
Labour

Number of facilities
7

Facility location and demand allocation

1. Factor rating method (site selection)
2. Centre of gravity method (site selection)
3. Load-distance method (site selection)
4. Transportation model (demand allocation)

Factor rating method

1. Identify and list out all relevant factors for location decision
2. Establish the relative importance of each factor (normalization)
3. Rate the performance of each location using a rating

mechanism
4. Compute a total score and rank them, 1 being the highest

Note: Cost based analysis, in addition to the above, will help

making better decisions

Centre of gravity method

When distance (proximity to the market) is a prime concern (minimizes the distance
travelled):
demand or supply points are represented on Cartesian coordinate
weights are assigned to them in terms of quantum of supply or demand per unit time
The coordinates of centre of gravity are:
Xc = xiwi / wi

and Yc = yiwi / wi , i = 1 to n

Note: infeasible site (land acquisition/govt regulation etc.) may come up as a result so a
few alternatives near that area should be evaluated to come to a decision

10

Load-distance method
When distance (proximity to the market) is a prime concern (minimizes the
distance travelled) and have few proposed locations which need to be evaluated:
Dij = (xi Xj)2 + (yi Yj)2
LDj (total load-distance) = DijWi
Where,
Dij is the distance between existing demand/supply point and proposed facility
(xi, yi) are the demand or supply points
(Xj, Yj) are the proposed locations
Wi is the demand at ith market
11

Optimization (transportation) model

Capacity/demand allocation model:
objective is to minimize cost/maximize profit/capacity utilization etc.
demand/requirement and supply/availability should match (balanced)
unbalanced cases - if demand/supply is more than supply/demand

then dummy supply/demand point should be added with zero

transportation costs and assigned value with the difference between
demand and supply

12

Uncertainties in network design

Supply chain design decisions include investments in number and size
of plants, number of trucks, number of warehouses etc.
These decisions cannot be easily changed in the short- term
There will be a good deal of uncertainty in demand, prices, exchange
rates and the competitive market over the lifetime of a supply chain
network
Strategy to deal with uncertainties (demand, supply, price etc.): building
flexibility into supply chain operations allows the supply chain to deal
with uncertainty in a manner that will maximize profits
13

Making supply chain design

decisions under uncertainty
Combine strategic planning and financial planning
during network design
Use multiple metrics to evaluate supply chain networks
Use financial analysis as an input to decision making,
not as the decision-making process
Use estimates along with sensitivity analysis
14