Chapter 5 Network Design in the Supply Chain Essay

5.3 Essay Questions 1) Explain how supply chain network design decisions are classified. Answer: Supply chain network design decisions include the location of manufacturing, storage, or transportation-related facilities and the allocation of capacity and roles to each facility. Supply chain network design decisions are classified as follows: 1. Facility role: What role should each facility play? What processes are performed at each facility? 2. Facility location: Where should facilities be located? 3. Capacity allocation: How much capacity should be allocated to each facility? 4. Market and supply allocation: What markets should each facility serve? Which supply sources should feed each facility? Diff: 2 Topic: 5.1 The Role of Network Design in the Supply Chain AACSB: Application of knowledge Objective: LO 5.1: Understand the role of network design in a supply chain. 2) Describe the factors that influence supply chain network design decisions. Answer: Strategic Factors. Firms focusing 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. Firms focusing on responsiveness tend to locate facilities closer to the market and may select a high-cost location if this choice allows the firm to quickly react to changing market needs. Technological Factors. If production technology displays significant economies of scale, a few high-capacity locations are the most effective. In contrast, 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. Conversely, if the technology is flexible, it becomes easier to consolidate manufacturing in a few large facilities. Macroeconomic Factors. Macroeconomic factors include taxes, tariffs, exchange rates, and other economic factors that are not internal to an individual firm. 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. High tariffs lead to more production locations within a supply chain network, with each location having a lower allocated capacity. 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. Developing countries often create free trade zones where duties and tariffs are relaxed as long as production is used primarily for export. This creates a strong incentive for global firms to set up a plant in these countries to be able to exploit their low labor costs. Many countries also place minimum requirements on local content and limits on im ts. Suc icies lead com nies to set a facilities and source por h pol pa 21 up m ny from local suppliers. Exchange rate risks may be handled using financial instruments that limit, or hedge against, the loss due to fluctuations. Suitably designed supply chain networks, however, offer the opportunity to take advantage of exchange rate fluctuations and increase profits. An effective way to do this is to build some over-capacity in the network and make the capacity flexible so that it can be used to supply different markets. This flexibility allows the firm to alter production flows within the supply chain to produce more in facilities that have a lower cost based on current exchange rates. When designing supply chain networks, companies must build appropriate flexibility to help counter fluctuations in exchange rates and demand across different countries. Political Factors. Companies prefer to locate facilities in politically stable countries where the rules of commerce are well defined. Countries with independent and clear legal systems allow firms to feel that they have recourse in the courts should they need it. This makes it easier for companies to invest in facilities in these countries. Political stability is hard to quantify, so a firm makes an essentially subjective evaluation when designing its supply chain network. 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. Key infrastructure elements to be considered during network design include availability of sites, labor availability, proximity to transportation terminals, rail service, proximity to airports and seaports, highway access, congestion, and local utilities. 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. How the firms compete and whether external factors such as raw material or labor availability force them to locate close to each other influence this decision. Positive externalities lead to competitors locating close to each other. When there are no positive externalities, firms locate to be able to capture the largest possible share of the market. Customer Response Time and Local Presence. Firms that target customers who value a short response time must locate close to them. If a firm is delivering its product to customers, use of a rapid means of transportation allows it to build fewer facilities and still provide a short response time. This option, however, increases transportation costs. Moreover, there are many situations where the presence of a facility close to a customer is important. Logistics and Facility Costs. Logistics and facility costs incurred within a supply chain change as the number of facilities, their location, and capacity allocation is changed. Companies must consider inventory, transportation, and facility costs when designing their supply chain networks. Inventory and facility costs increase as the number of facilities in a supply chain increase. Transportation costs decrease as the number of facilities is increased. Increasing the number of facilities to a point where inbound economies of scale are lost increases transportation cost. The supply chain network design is also influenced by the transformation 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 source rather than the customer. 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 costs. 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 improved response outweighs the increased cost from additional facilities. Diff: 3 Topic: 5.2 Factors Influencing Network Design Decisions AACSB: Application of knowledge Objective: LO 5.2: Identify factors influencing supply chain network design decisions. 22 3) Describe the four phases in the framework for network design decisions. Answer: Phase I: Define a Supply Chain Strategy The objective of the first phase of network design is to define a firm's supply chain strategy. The supply chain strategy specifies what capabilities the supply chain network must have to support a firm's competitive strategy. 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. 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. Based on the competitive strategy of the firm, an analysis of the competition, any economies of scale or scope, and any constraints, managers must determine the supply chain strategy for the firm. 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 is started with a forecast of the demand by country. Such a forecast must include a measure of the size of the demand as well as a determination of whether the customer requirements are homogenous or variable across different countries. 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. Next, managers must identify demand risk, exchange rate risk, and political risk associated with different 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 tax and tariff information is used to identify the best location to extract a major share of the profits. In general, it is best to obtain the major share of profits at the location with the 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 must also be identified. Managers must also identify the factor and logistics costs at an aggregate level in each region. Based on all this information, managers will identify the regional facility configuration for the supply chain network using network design models discussed in the next section. 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: Select Desirable Sites The objective of Phase III is to select a set of desirable sites within each region where facilities are to be located. The set of desirable sites should be larger than the desired number of facilities to be set up so that a precise selection may be made in Phase IV. 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 infrastructure. Soft infrastructure requirements include the availability of skilled workforce, workforce turnover, and the community's receptivity to business and industry. 23 Phase IV: Location Choices The objective of this phase is to select a precise location and capacity allocation for each facility. Attention is restricted to the desirable 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. Diff: 3 Topic: 5.3 Framework for Network Design Decisions AACSB: Application of knowledge Objective: LO 5.3: Develop a framework for making network design decisions. 4) Explain the two situations in which managers use network design models. Answer: Managers use network design models in two different 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 in 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, and tariffs change. In both cases, the goal is to maximize the profit while satisfying customer needs. Diff: 2 Topic: 5.4 Models for Facility Location and Capacity Allocation AACSB: Application of knowledge Objective: LO 5.4: Use optimization for facility location and capacity allocation decisions. 24 5) A manufacturer of cat towers wishes to locate a super assembly facility to meet their cat tower assembly needs for the next millennium. Currently, carpet, cylinders, yarn and fasteners are purchased in bulk from suppliers in North Haverbrook, Ogden, and Springfield in the quantities shown in the table. The super assembly facility would ship to distribution centers located in Seattle, Lubbock, Nashville, and Philadelphia. The locations of all of these cities on an x-y grid, transportation costs on a ton per mile basis, and total tonnage are all contained in the table. Formulate and solve a model that will minimize the shipping costs to the super assembly center. Transportation Sources/Markets Cost $/ton mile (Fn) Supply North Haverbrook 1.1 Ogden 1.2 Springfield 1.4 Market Seattle 2.25 Lubbock 2.25 Nashville 2.25 Philadelphia 2.25 Quantity in Tons (Dn) Xn Yn 650 450 400 700 250 225 1200 600 825 300 200 500 500 50 450 800 950 1200 300 250 1100 Where should the new plant be located and what is the total system shipping cost? Answer: The model requires that the weighted rectilinear distance between the Super Assembly Center and all sources and sinks of materials and product be minimized. rectilinear distance is given by dn = and transportation cost is given by TC = from n = 1 to 7 Formulating this nonlinear model (and running it in the nifty table provided by the authors) results in a location for the Super Assembly Center of (550.6,808.3) and total cost of $2,586,342. Diff: 3 Topic: 5.4 Models for Facility Location and Capacity Allocation AACSB: Analytical thinking Objective: LO 5.4: Use optimization for facility location and capacity allocation decisions. 25