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 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 GuangZhou 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 D1 = a + (1-b-a)/2 = (1+a-b)/2 D2 = 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