Chopra scm6 Inppt 05

5 Network Design in the
Supply Chain
PowerPoint presentation
to accompany
Chopra and Meindl
Supply Chain Management, 6e
Copyright © 2016 Pearson Education, Inc. 5–1
Learning Objectives
1. Understand the role of network design in a
supply chain.
2. Identify factors influencing supply chain network
design decisions.
3. Develop a framework for making network design
decisions.
4. Use optimization for facility location and
capacity allocation decisions.

The Role of Network Design
• Facility role
– What role, what processes?
• Facility location
– Where should facilities be located?
• Capacity allocation
– How much capacity at each facility?
• Market and supply allocation
– What markets? Which supply sources?

The Role of Network Design
• Revisit design decisions after market
changes, mergers, or factor cost changes

Factors Influencing
Network Design Decisions
• Strategic factors
• Technological factors
• Macroeconomic factors
– Tariffs and tax incentives
– Exchange-rate and demand risk
– Freight and fuel costs
• Political

Factors Influencing
Network Design Decisions
• Infrastructure factors
• Competitive factors
– Positive externalities between firms
– Locating to split the market
• Customer response time and local
presence
• Logistics and facility costs

Competitive Factors
– Positive externalities between firms
• Collocation benefits all
FIGURE 5-1
– Locating to split the market

• Locate to capture largest market share

Framework for Network Design
Decisions
• Phase I: Define a Supply Chain
Strategy/Design
– Clear definition of the firm’s competitive strategy
– Forecast the likely evolution of global competition
– Identify constraints on available capital
– Determine broad supply strategy

Decisions FIGURE 5-2

Decisions
• Phase II: Define the Regional Facility
Configuration
– Forecast of the demand by country or region
– Economies of scale or scope
– Identify demand risk, exchange-rate risk, political
risk, tariffs, requirements for local production, tax
incentives, and export or import restrictions
– Identify competitors
Copyright © 2016 Pearson Education, Inc. 5 – 10

Decisions
• Phase III: Select a Set of Desirable Potential
Sites
– Hard infrastructure requirements
– Soft infrastructure requirements
• Phase IV: Location Choices

Models for Facility Location and
Capacity Allocation
• Maximize the overall profitability of the supply
chain network while providing customers with
the appropriate responsiveness
• Many trade-offs during network design
• Network design models used
– to decide on locations and capacities
– to assign current demand to facilities and identify
transportation lanes

Models for Facility Location and
Capacity Allocation
• Important information
– Location of supply sources and markets
– Location of potential facility sites
– Demand forecast by market
– Facility, labor, and material costs by site
– Transportation costs between each pair of sites
– Inventory costs by site and as a function of quantity
– Sale price of product in different regions
– Taxes and tariffs
– Desired response time and other service factors

Phase IV: Location Choices
Transportation &facility modeling
• An iterative procedure for solving problems that
involves minimizing the cost of shipping products
from a series of sources to a series of destinations.
• Example: Arizona Plumbing, which makes, among

other products, a full line of bathtubs. In our
example, the firm must decide which of its
factories should supply which of its warehouses.
Relevant data for Arizona Plumbing are presented
below

Transportation &facility modeling (cont.)
Capacity
Albuquerque Boston Cleveland
100
Des Moines $5 $4 $3
300
Evansville $8 $4 $3
300
Fort Lauderdale $9 $7 $5
700
Demand 300 200 200


Solution:
Min  C
i j
ij X ij
Subject to
X
j
ij  capacity of i for all i
X
i
ij  demand of j for all j
X ij  0 for all i, j

H.W Project

Locating Plants and Warehouses
Simultaneously
FIGURE 5-13

Accounting for Taxes, Tariffs, and
Customer Requirements
• A supply chain network should maximize profits after
tariffs and taxes while meeting customer service
requirements
• Modified objective and constraint

Making Network Design Decisions
In Practice
• Do not underestimate the life span of
facilities
• Do not gloss over the cultural implications
• Do not ignore quality-of-life issues
• Focus on tariffs and tax incentives when
locating facilities

Summary of Learning Objectives
1. Understand the role of network design in
a supply chain
2. Identify factors influencing supply chain
network design decisions
3. Develop a framework for making network
design decisions
4. Use optimization for facility location and
capacity allocation decisions

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5 Network Design in the

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– Locating to split the market

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• Example: Arizona Plumbing, which makes, among

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