By Thomas K.

Dasaklis
• Introduction
• Supply chain network design principles
• Risk management aspects during the phase
of logistics network design
• Supply chain resilience

University of Piraeus
Department of Industrial Management and Technology
 Introduction

Supply chain network decisions:

Facility role: what role should each facility play? What processes are
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?

University of Piraeus
Department of Industrial Management and Technology
Where inventory needs to be for a one week order response time - typical results -->
1 DC

Customer
DC
Where inventory needs to be for a 5 day order response time - typical results --> 2
DCs

Customer
DC
Where inventory needs to be for a 3 day order response time - typical results --> 5
DCs

Customer
DC
Where inventory needs to be for a next day order response time - typical results -->
13 DCs

Customer
DC
 Supply chain network design principles

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.

Decisions concerning the role of facilities are significant because they

determine the amount of flexibility the supply chain has in changing the
way it meets demand.

University of Piraeus
Department of Industrial Management and Technology
 Supply chain network design principles

For example, Toyota has plants located worldwide in each market that it
serves. Before 1997, each plant was capable of serving only its local market.

This hurt Toyota when the Asian economy went into recession in the late
1990s. The local plants in Asia had idle capacity that could not be used to
serve other markets that were experiencing excess demand. Toyota has
added flexibility to each plant to be able to serve markets other than the
local one.

Additional flexibility helps Toyota deal more effectively with changing global
market conditions

University of Piraeus
Department of Industrial Management and Technology
 Supply chain network design principles

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.

A good location decision can help a supply chain be responsive while keeping
its costs low.

Toyota built its first US assembly plant in Lexington, Kentucky in 1988 and has
used the plant since then. The Lexington plant proved very profitable for Toyota
when the yen strengthened and cars produced in Japan were too expensive to
be cost competitive with cars produced in the US.

The Lexington plant allowed Toyota to be responsive to the US market while

keeping costs low

University of Piraeus
Department of Industrial Management and Technology
 Supply chain network design principles

Capacity allocation decisions have also a significant impact on supply

chain performance. Whereas capacity allocation can be altered more
easily than location, capacity decisions tend to stay in place for
several years.

Allocating toο 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 fulfilled from a distant facility.

University of Piraeus
Department of Industrial Management and Technology
 Supply chain network design principles

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.

This decision should be reconsidered on a regular basis so that the allocation

can be changed as market conditions or plant conditions change.

Of course, the allocation of markets and supply sources can be changed only
if the facilities are flexible enough to serve different markets and receive
supply from different sources.

Amazon.com has built new warehouses and changed the markets supplied
by each warehouse (lowered cost, improved responsiveness).

University of Piraeus
Department of Industrial Management and Technology
 Supply chain network design principles

Factors influencing network design decisions:

• Strategic factors
• Technological factors
• Macroeconomic factors
• Political factors
• Infrastructure factors
• Competitive factors
• Customer response time and local presence
• Logistics and facility costs

University of Piraeus
Department of Industrial Management and Technology
 Supply chain network design principles

Strategic factors:

Firms that focus 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 that focus on responsiveness tend to locate facilities closer to the

market and may select a high-cost location if this choice allows the firm to
react quickly to changing market needs (ZARA as an example).

Global supply chain networks can best support their strategic objectives with
facilities in different countries playing different roles. For example, Nike has
production facilities located in many Asian countries. Facilities in China and
Indonesia focus on cost (mass-market, lowered-price shoes) whereas
facilities located in Korea and Taiwan focus on responsiveness (higher-priced
new designs).

University of Piraeus
Department of Industrial Management and Technology
 Supply chain network design principles

Technological factors:

Characteristics of available production technologies: if technology is

inflexible and products requirements vary from one country to another, a
firm has to set up local facilities to serve the market in each country.
Conversely, if technology is flexible, it is easier to consolidate manufacturing
in a few large facilities.

If production technology displays significant economies of scale, a few high-

capacity locations are most efficient. This is the case of computer chips
manufacturing where very large investment is required and as a result,
semiconductor manufacturers build few high-capacity facilities.

In contrast, if facilities have lower fixed cost, many local facilities are
preferred because this helps lower transportation costs (bottling plants for
Coca-Cola).

University of Piraeus
Department of Industrial Management and Technology
 Supply chain network design principles

Macroeconomic factors:

As global trade has increased, macroeconomic factors have a

significant influence on the success or failure of supply chain
networks.

• Tariffs (high tariffs lead to more production locations)

• Tax incentives (free trade zones-Greece has three free trade

zones, located at Piraeus, Thessaloniki and Heraklion port areas.)

• Exchange rates and demand risk (yen’s appreciation from 2002 to

2004. Production incurred in yen, revenues obtained in dollars).

University of Piraeus
Department of Industrial Management and Technology
 Supply chain network design principles

Political factors: The political stability of the country under consideration

plays a significant role in location choice. Companies prefer to locate facilities
in politically stable countries where the rules of commerce are well defined.

Infrastructure factors: 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 terminal, rail service, proximity to airports and seaports,
highway access, congestion and local utilities.

Competitive factors:

• Positive externalities among firms

• Positive externalities and development of appropriate infrastructure
(Suzuki, India)

University of Piraeus
Department of Industrial Management and Technology
 Supply chain network design principles

Customer response time and local presence:

Firms that target customers who value a short response time must be
located close to them.

For example, customers are unlikely to come to a convenience store if they

have to travel a long distance to get there.

Therefore, a convenience store chain has many stores distributed in an area.

In contrast, customer shop for larger amounts of goods at supermarkets and
are willing to travel longer distances to get to one.

University of Piraeus
Department of Industrial Management and Technology
 Supply chain network design principles

Logistics and facility costs: Logistics and facility costs incurred within a supply chain 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. If the
number of facilities increases to a point where inbound economies of scale are lost,
then transportation cost increases.

Total logistics costs are a sum of the inventory, transportation and facility costs.
Facilities should at least equal the number that minimizes total logistics cost

The supply chain network design is also influenced by the transformation occurring at
each facility (steel industry).

University of Piraeus
Department of Industrial Management and Technology
 Supply chain network design principles

Costs and Number of Facilities

Inventory

Costs Facility costs

Transportation

Number of facilities

5-20
 Supply chain network design principles

A Framework for Global Site Location

Competitive STRATEGY GLOBAL COMPETITION

PHASE I
Supply Chain
INTERNAL CONSTRAINTS
Strategy TARIFFS AND TAX
Capital, growth strategy,
existing network INCENTIVES

PRODUCTION TECHNOLOGIES
REGIONAL DEMAND
Cost, Scale/Scope impact, support PHASE II Size, growth, homogeneity,
required, flexibility Regional Facility local specifications
Configuration
COMPETITIVE
ENVIRONMENT POLITICAL, EXCHANGE
RATE AND DEMAND RISK

PHASE III
Desirable Sites AVAILABLE
INFRASTRUCTURE
PRODUCTION METHODS
Skill needs, response time

FACTOR COSTS PHASE IV LOGISTICS COSTS

Labor, materials, site specific Location Choices Transport, inventory, coordination
 Risk management aspects during the phase of logistics network design
Disruptions Natural disasters, war, terrorism, labor disputes,
supplier bankruptcy
Delays High capacity utilization at supply source, inflexibility
of supply source, poor quality or yield at supply
source
Systems risk Information infrastructure breakdown, system
integration or extent of systems being networked
Forecast risk Inaccurate forecasts due to long lead times,
seasonality, product variety, short life cycles, small
customer base, bullwhip effect or information
distortion
Intellectual property risk Vertical integration of supply chains, global
outsourcing and markets
Procurement risk Exchange rate risks, fraction purchased from a single
source, industry-wide capacity utilization
Receivables risk Number of customers, financial strength of
customers
Inventory risk Rate of product obsolescence, inventory holding
cost, product value, demand and supply uncertainty
Capacity risk Cost of capacity, capacity flexibility
University of Piraeus
Department of Industrial Management and Technology
 Risk management aspects during the phase of logistics
network design

University of Piraeus
Department of Industrial Management and Technology
 Risk management aspects during the phase of logistics
network design

University of Piraeus
Department of Industrial Management and Technology
 Supply chain resilience

Adapted from (Kamalahmadi and Parast 2016)

University of Piraeus
Department of Industrial Management and Technology
 Supply chain resilience

Adapted from (Kamalahmadi and Parast 2016)

University of Piraeus
Department of Industrial Management and Technology
 Supply chain resilience

Adapted from (Kamalahmadi and Parast 2016)

University of Piraeus
Department of Industrial Management and Technology
 Supply chain resilience

(World Economic Forum, 2012)

University of Piraeus
Department of Industrial Management and Technology
 References
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operation. Das Summa Summarum des Management, Springer: 265-275.
 Chopra, S. and M. S. Sodhi (2004). "Managing risk to avoid supply-chain
breakdown." MIT Sloan management review 46(1): 53.
 Hohenstein, N. O., E. Feise, et al. (2015). "Research on the phenomenon of supply
chain resilience: A systematic review and paths for further investigation."
International Journal of Physical Distribution and Logistics Management 45: 90-117.
 Kamalahmadi, M. and M. M. Parast (2016). "A review of the literature on the
principles of enterprise and supply chain resilience: Major findings and directions
for future research." International Journal of Production Economics 171: 116-133.
 Tukamuhabwa, B. R., M. Stevenson, et al. (2015). "Supply chain resilience:
Definition, review and theoretical foundations for further study." International
Journal of Production Research 53(18): 5592-5623.
 World Economic Forum (2013). Building Resilience in Supply Chains. Retrieved
October 12, 2016 from
http://www3.weforum.org/docs/WEF_RRN_MO_BuildingResilienceSupplyChains_R
eport_2013.pdf.