1. Supply Chain Network - Design
N.K.Agarwal

2. Supply Chain Network - Design
Network design decisions are among the most important decisions as their implications are very significant and long lasting
It is necessary to consider use of all the SCM drivers together to support the competitive strategy of a firm and maximise profits
Facilities
Transportation
Inventory, and
Information

3. Supply Chain Network - Design
The design of Supply chain must take into consideration
The distribution network
Facility related decisions that the firm must make while deciding about location of facilities, allocating capacities and markets to each facility, and
Uncertainties in financial factors such as prices, exchange rate variation and inflation

4. Distribution network design
Distribution refers to steps taken to move and store product from supply stage to a customer stage in the chain
Distribution occurs between every stage from raw material supply to finished goods to customers
Distribution costs in U.S.A forms about 20% of the cost of manufacturing
In India, the distribution cost in the cement industry forms about 30% of the cost of manufacturing and selling cement
A poor distribution network can hurt the service level while increasing the cost

5. Is supply chain so simple?
Supplier
Manufacturer
Distributor
Retailer
Customer
Supplier
Manufacturer
Distributor
Retailer
Customer
Dell
Supplier
Manufacturer
Distributor
Retailer
Customer
Upstream
Downstream

6. Distribution network design-Factors
Performance of the network can be evaluated from
Customer needs that are met, and
Cost of meeting the customer needs
Customer service is affected by
Response time
Time between when a customer places an order to receiving delivery
Product variety
Number of different products/configurations that a customer desires from the network
Product availability
The probability of having a product in stock when a customer order is received

7. Distribution network design-Factors
Customer experience
Includes the ease with which the customer can place and receive their order
Order visibility
Ability of the customer to track their order from placement to delivery
Returnability
Ease of returning an unsatisfactory merchandise and the ability of the network to handle such returns
Changing the distribution network design affects the following supply chain costs
Inventories
Transportation
Facilities and handling
information

8. Distribution network design-Factors
Transportation costs include inbound as well as outbound transportation costs
Outbound transportation costs per unit tend to be higher than inbound because inbound lot sizes are typically large
Increasing the number of facilities generally decreases total transportation cost, whereas
Facility costs decrease as the number of facilities is reduced as consolidation of facilities enables the firm to exploit economies of scale
Total logistics costs are the sum of inventory, transportation and facility costs for a supply chain network

9. Distribution network –Design Options
Two key decisions while designing the distribution network
Will product be delivered to the customer location or picked up from a pre-decided site?
Will product flow through an intermediary or intermediate location?
Based upon the above, there are six distinct designs
Manufacturer storage with direct shipping
Product is directly shipped from the manufacturer to the end customer, bypassing the retailer (who takes the order and initiates the delivery request)
Also known as drop-shipping with product delivered directly from manufacturer to the customer location

10. Manufacturer storage with direct shipping
Retailer
Customers
Drop Shipping

11. Distribution network –Design Options
Manufacturer storage with direct shipping and in-transit merge
Combining pieces of the order coming from different locations so that the customer gets a single delivery
Transportation costs are lower than drop-shipping as the merger takes place at the carrier hub prior to delivery to the customer
Distribution storage with package carrier delivery
Inventory is not held by the manufacturer at the factories but is held by distributors/retailers in intermediate warehouses and package carriers transport products from this intermediate location to the final customer
Transportation costs will be somewhat lower for this option compared to manufacturer storage as an economic mode of transport can be employed for inbound shipments to the warehouse closer to the customer

12. Manufacturer storage with direct shipping and in-transit merge
Retailer
In-transit Merge by carriers
Customers

13. Distributor storage with carrier delivery
Manufacturer
Warehouse Storage by Distributor/Retailer
Customers

14. Distribution network –Design Options
Distributor storage with last mile delivery
Distributors or retailer delivering the product to the customer's home instead of using a package carrier
Ex. Grocery industry
Requires higher levels of inventory compared to the other options (except for retail stores) as it has a low level of aggregation
Transportation costs will be the highest using last mile delivery
Manufacturer/ distributor storage with customer pickup
Inventory is stored at the manufacturer or distributor warehouse
Customers place their orders online or on the phone
Customers come to the designated pickup point to collect their orders

15. Distribution network –Design Options
Inventory costs can be kept low with either the manufacturer or distributor storage to exploit aggregation
Transportation costs is lower than any other solution using package carriers as significant aggregation is possible when delivering orders to a pickup site
Retail storage with customer pickup
Inventory is stored locally at retail stores
Customers walk into the retail store or place an order online or on phone, and
Pickup the goods at the retail stores
Ex. Grocery stores
Local storage increases inventory costs
Transportation cost is lower than other solutions as cheaper modes of transport can be used to replenish the product at the retail stores

16. Distribution Network Design- Final Selection
Most companies use a combination of delivery network
The network is tailored to match the characteristics of the product or the needs of the customers
Fast moving and emergency items are stocked locally, and
Customers can either pickup from stores directly ,or
Have them delivered depending upon the urgency
Slow moving items are stocked at a regional distribution center from where they are shipped to the customer with in a day or two
Very slow moving are typically drop-shipped from the manufacturer and involve a longer lead time
Ranking of various network relative to each other along different dimensions:
Ranking 1 give best performance against a specific dimension and higher ranking means increasingly inferior performance

18. Supply Chain Network Design – Facilities/Suppliers
Network design addresses the issue of determining
The number and types of facilities a firm will operate
Their location, and
How these will be operated?
Key decisions while planning the network
Determining the number of plants
Determining the number of warehouses
Determining the size of each warehouse
Allocating space for products in each warehouse
Determining which products customers will receive from each warehouse
Selection of transportation mode

19. Supply Chain Network Design – Facilities/Suppliers
Role of facility decisions in a Supply Chain
Facility location decisions
Needs huge investments and as such it is expensive to close down or shift a facility to a different location
A good location decision can enable a supply chain to be more responsive to customer requirements and at the same time cost effective
A poorly located facility affects the supply chain efficiency
Capacity allocation decisions
Capacity decisions can not be changed frequently though minor changes can be accommodated
Too much capacity in a facility may result in poor utilisation and thereby higher costs

20. Supply Chain Network Design – Facilities/Suppliers
Too little capacity results in poor responsiveness if demand is not fulfilled
This may result in higher costs if unmet demand is met from alternate location
Allocation of supply sources and markets
Has a major impact on performance as it affects total production, inventory and transportation costs incurred by the chain while satisfying customer demand
Need a review whenever market conditions or plant capacities change and allocation of supply sources and market can be changed accordingly
Facility must be flexible enough to serve different markets and receive supply from different sources

21. Supply Chain Network Design – Facilities/Suppliers
Factors affecting network design decisions related to facilities
Strategic factors
Firms having the strategy of cost leadership will tend to locate their facilities at the lowest cost location even if these are far away from the markets
On the other hand, firms having quick response strategy will tend to locate facilities nearer to the market even if that amounts to locating in high cost locations
Strategy of convenience stores is to provide easy access as part of their competitive strategy
Global supply chain networks consist of facilities in different countries having different roles to play and different objectives to achieve

22. Supply Chain Network Design – Facilities/Suppliers
Technological factors
If production technology provides significant economies of scale, a few high capacity locations are most effective
If facilities have lower fixed costs, many facilities having small capacities are located well dispersed in the market to keep transportation costs low
If technology is flexible, manufacturing can be consolidated in a few large facilities
If not flexible, and product requirements vary from country to country, a firm has to set up local facilities to serve local markets in each country
Macroeconomical factors
Tariffs
If a country charges high tariffs, firms either do not export goods to that country or setup manufacturing plants locally to avoid tariffs

23. Supply Chain Network Design – Facilities/Suppliers
Tax incentives
Developing countries provide free trade zones where duties and tariffs are relaxed for products produced solely for exports
Exchange rate risk and demand risk
Flexibility provided in some over-capacity plants helps in meeting changes in demand at lower costs and also to produce more in facilities having lower cost based on current exchange rates
Political factors
Preference for locating facilities in countries having stable government and clearly defined commercial laws and other legal systems

24. Supply Chain Network Design – Facilities/Suppliers
Infrastructural factors
Availability of good infrastructure is an important consideration for locating a plant in a certain area
Competitive factors
Competitor’s strategy , capacity and location should be considered while deciding location
Logistics and facility costs
Depend upon the number of facilities, their location and capacity
Firm to consider inventory, transportation and facility costs while designing the network
Operating costs
Fixed costs
Leasing or construction costs
Variable costs
Costs associated with production or warehousing operations

25. Network Design Decisions- A Framework
Global network design decisions are made in four phases
Phase I
Define a supply chain strategy
A firm’s supply chain strategy specifies what capabilities the network must have to support its competitive strategy
Company defines the set of customer needs that it seeks to satisfy through offering its products and services to them
To achieve maximum possible customer satisfaction and customer retention
Supply chain strategy determines the nature of procurement of raw materials, transportation of materials to and from the firm, manufacturing the product or operation to provide service, distribution of the product and after sales service to the customer

26. Network Design Decisions- A Framework
It includes supplier strategy, transportation strategy and logistics strategy
Phase II
Identifying the regions where facilities will be located and defining their roles and capacities
Starting point is the forecast of demand country wise which specifies the size of the demand and whether the customer requirements are homogenous or not across the country
Large facilities in case of similar demands but smaller localised facilities to meet varying customer demand across countries
Large facilities at few places if benefit of economy of scales can be exploited
Or else, smaller facilities to serve localised markets

27. Network Design Decisions- A Framework
Trade barriers in each region or country
Competitor’s facility locations
Firm identifies the configuration of regional facilities to decide upon the number of facilities, location, capacities and the product-mix to be produced in each factory
Phase III
Selecting desirable sites for locating the facilities
Major considerations in selecting the suitable sites
Availability of infrastructure to support production technologies
Availability of suppliers, transportation services, communication services, warehousing, utilities, skilled labour, community attitude etc.

28. Network Design Decisions- A Framework
Phase IV
Choosing the final locations for facilities and allocating capacity to each factory
The network is designed to maximise the total profits or minimise total costs taking into consideration the expected profit margins and demand in each market
The various logistics and facility costs should also be considered

29. Phase I : Supply Chain Strategy
Network Design Decisions – A Framework
Competitive Strategy
Phase I : Supply Chain Strategy
Global Competition
Internal Constraints. Capital, growth strategy, existing network
Tariffs & Tax Incentives
Phase II : Regional Facility Configuration
Production Tech. Cost, scale/scope impact, support reqd. Flexibility
Regional Demand. Size, Growth, Homogeneity, Local Specs
Competitive Environment
Political, Exchange Rate,& Demand Risk
Production Methods. Skill needs, response time
Phase III: Desirable site
Available Infrastructure
Logistics Costs. Transport, Inventory, Coordination
Factor Costs. Labour, Materials, Site specific
Phase IV: Location Choices

30. Network Design Decisions
Do not under estimate the life span of facilities
Facilities last a long time and have a major impact on the firm’s performance
Location of warehouses or storage facilities , not owned by the firm, can be changed within a year of making a decision but change in facility locations are very expensive
Do not gloss over the cultural implications
Culture at a facility will be influenced by other facilities in the vicinity
Location of a facility has a significant effect on the extent and form of communication that develops in the supply chain network
Locating a firm away from head quarter gives it more of cultural autonomy and is beneficial if the new division starting needs to function in a different manner from the rest of the company
Locating two facilities close together can encourage communication between them

31. Network Design Decisions
Do not ignore quality of life issues
Quality of life at selected facility influences the work force available and their morale
Focus on tariffs and tax incentives when locating facilities
Especially for international locations, many times tax incentives drive the location overcoming all of the other factors combined

32. Supply Chain Network
Companies must create and maintain the most efficient supply chain possible to compete and succeed in today’s demanding marketplace
Strategic supply chain design and analysis must consider a wide range of alternatives, including
Site locations,
Product mix,
Transportation,
Inventory deployment,
Suppliers,
Cost-service levels, and
Constraints, as well as
Supply chain operations.

33. MNC supply chain in India - Localising
A number of MNCs have been operating in India for some time
Most of these have adopted strategies to suit the Indian conditions
Nivea
Almost 80 percent of Nivea products are imported into the country
Some of its products are now , however, manufactured locally through third party contract manufacturers
For this, it sources and imports the essential raw material, components and the packaging material

34. MNC supply chain in India - Localising
The company operates a total of 13 warehouses in the country, to compensate for the highly fragmented nature of the market
Also, India is perhaps the only country where it continues to manufacture and offer its legacy talcum powder because of the consumer demand
Most of the FMCG companies in India are reworking their supply chains both inward as well as outward to a great extent
Dell Computers
Bulk of Dell’s supply chain practices are decided globally, but in terms of how they actually do the distribution in a specific country is decided locally
They are free to set up warehouses, create their own networks and distribution channels and not follow any preset norms.

35. MNC supply chain in India - Localising
McDonald
McDonald’s have had to create supply chains from scratch before they could open their first outlet in India
They had to do this so that they could provide the consistency and quick service that end-customers would expect from McDonald’s anywhere in the world
Nestle India
Despite being an outsider, Nestle in India seems just as Indian as any other FMCG company of native roots
No matter where you go in India, you can never be too far away from a Maggi, a Nescafe, Kitkat or a Polo

36. MNC supply chain in India - Localising
Some of the key supply chain priorities for the company are reduction in the finished goods inventory pipeline to improve freshness of stocks and lower working capital, control on distribution costs through innovative measures and reduction in obsolescence of materials
Acer India
One of the world’s leading branded PC vendors Acer has become one of the top selling brands in the Indian subcontinent
Acer doesn’t have any manufacturing facilities in the country and relies solely on its distribution capabilities to compete with other vendors in the country

37. MNC supply chain in India - Localising
Acer facilitates quick turn around time to its customers and fresh technology by using just-in-time inventory (JIT)
Critical success factors in their outsourcing model is identifi-cation of right partner with long term commitment
Also the business model offered is extremely viable for the partner

38. Global supply chains by Indian companies
Tata Motors
Tata Motors have been purchasing automotive components from places like Malaysia, China, South Africa and Thailand in the last few years
It’s also been sourcing steel from countries including Russia, China, Belarus, Japan, and South Korea
Bharat Forge
Component manufacturer Bharat Forge have already built one such chain
Its worldwide plants in Germany, Sweden, Scotland, US, China and India work with one global supply chain wherein all its procurement is presently coordinated through its Germany based global purchase manager

39. Global supply chains by Indian companies
Steel Manufacturers
Tata Steel and Ispat have been purchasing coal from places such as South Africa, Nigeria and Mozambique to run their Indian plants
FMCG
Emami is sourcing critical chemical ingredients from US and Spain.
Nitco
Tiles manufacturer Nitco already has a contract manufacturing agreement with a China based manufacturing company
Croma
Tata Group’s consumer electronics retail arm, Croma’s sourcing is handled by its Australian partner

40. References Logistics and Supply Chain Management : K. Shridhara Bhat
Supply Chain management : Chopra / Meindl
Google Web Site

41. Thank You