SCM NETWORK DESIGN

LONEY T BABY

School of Management Studies

CUSAT,Kochi-22
e-mail: [email protected]

Abstract: Supply Chain Management (SCM)is the process of planning ,

implementing ,and controlling the operations of the supply chain as efficiently
as possible. The geographical distribution of suppliers, plants, warehouses
and customers represent the core of the supply chain. The supply chain
network strategy is a part of three important strategies a firm’s management
should make toward satisfying customer service goals in terms of the
product , logistics services and information system .Over time, the customer
base, products and facilities may change, thus it is of vital importance to
constantly review the network design of one’s supply chain. By analyzing
updated information on cost of labor, tax policies, transportation costs and
production capacity, the company will be actively evaluating the cost benefit
of certain geographical sites with others, to ensure that it is not missing out
on potential savings. Conventional supply chain management targets mainly the
operational aspect of businesses, whereby inventory levels need to be analyzed
on a month to month basis with corresponding customer demand and adhoc
operational issues. Network design, on the other hand, presents a more strategic
viewpoint to capturing the dependencies between distinct operational units.
When companies examine their network design every two or three years, they
have the opportunity to reconsider the various benefits and trade-offs associated
with different sites. By making decisions on the placement of facilities and the
selection of suppliers, companies are empowered to restructure their supply
chain to further maximize profitability. a firm's supply chain network can range, in
terms of structural complexity, from being quite simple to a highly complex one.
For example, the warehouses or distribution centres can be spatially located in a
single echelon between a plant and the retail outlets or in multi echelons. In SCM
the network Design in an inseparable part.

Key Words: SCM, Network Design, trade-off, profitability.

1.0 INTRODUCTION

1.1 General information

A supply chain is a network of facilities and distribution options that performs the
functions of procurement of materials, transformation of these materials into intermediate
and finished products, and the distribution of these finished products to customers .Thus
we can say that Supply Chain network consist of suppliers, warehouses, distribution
centers, and retail outlets as well as raw materials, work-in-process inventory, and finished
products that flow between the facilities .

Network design is of great importance because a firm pursues the goals of minimizing the
total production, inventory, and transportation costs and satisfying customer service
requirements through selecting a set of warehouse locations and capacities, production
levels for each product at each plant, and transportation flows between facilities in the
supply chain. At the same time the firms try to get products to market as quickly and
efficiently as possible.

The problem of network configuration is one of specifying the structure through which
products will flow from their source points to demand point to match supply and demand.
Specifically management of the firm should determine the type of decisions involved in the
network design process provided below ,

• Facility role

• What role should each facility play?

• Facility location

• Where should each facility 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?

1.2 Supply chain management

Supply Chain Management (SCM) is the process of planning, implementing and
controlling the operations of the supply chain as efficiently as possible, SCM spans all
movement and storage of raw materials, work-in-progress inventory and finished goods
from point-of-origin to point of consumption

Supply chain management (SCM) is the oversight of materials, information, and finances
as they move in a process from supplier to manufacturer to wholesaler to retailer to
consumer. Supply chain management involves coordinating and integrating these flows
both within and among companies. It is said that the ultimate goal of any effective supply
chain management system is to reduce inventory (with the assumption that products are
available when needed).

2.0 SCM NETWORK DESIGN

Network design is of great importance because a firm pursues the goals of minimizing the
total production, inventory and transportation costs and satisfying the customer service
requirements through selecting a set of warehouse locations and capacities, production
levels for each product at each plant.

Supply Chain network design is a challenging task because

a) Supply Chain Networks are frequently large and complex, executing the flows of
various products services ,and information through a number of physical facilities of
supply chain partners

b) Supply chain networks must effectively respond to customer requirements

c) Supply chain networks must be cost-efficient while effectively meeting market

needs

The Network design has five different aspects: Strategic, tactical, operational, spatial and temporal.

Strategic : network optimization, including the number, location, and size of warehouses,
distribution centers and facilities. Strategic partnership with suppliers, distributors, and customers,
creating communication channels for critical information and operational improvements such as
cross docking, direct shipping, and third-party logistics. Product design coordination, so that new
and existing products can be optimally integrated into the supply chain, load management
Information Technology infrastructure, to support supply chain operations. Where-to-make and
what-to-make-or-buy decisions Aligning overall organizational strategy with supply strategy.

Tactical: Sourcing contracts and other purchasing decisions. Production decisions, including
contracting, scheduling, and planning process definition. Inventory decisions, including quantity,
location, and quality of inventory. Transportation strategy, including frequency, routes, and
contracting. Benchmarking of all operations against competitors and implementation of best
practices throughout the enterprise. Milestone payments. Focus on customer demand.
Operational: Daily production and distribution planning, including all nodes in the supply chain.
Production scheduling for each manufacturing facility in the supply chain (minute by minute).
Demand planning and forecasting, coordinating the demand forecast of all customers and sharing
the forecast with all suppliers. Sourcing planning, including current inventory and forecast demand,
in collaboration with all suppliers. Inbound operations, including transportation from suppliers and
receiving inventory. Production operations, including the consumption of materials and flow of
finished goods. Outbound operations, including all fulfillment activities and transportation to
customers. Order promising, accounting for all constraints in the supply chain, including all
suppliers, manufacturing facilities, distribution centers, and other customers

Spatial: It refer to determining geographic locations; sizes of facilities such as plants, warehouses
and retail outlets; considering customer service requirement ; production/ purchase cost ; inventory
carrying cost; facility cost and transportation cost.

Temporal : They are made to maintain the availability of the product to meet customer service
targets and maximize the customer satisfaction through order response time and maintaining
inventory close to the customer, while minimizing the capital costs, order-processing costs and
transportation costs.

3.0 FRAMEWORK FOR NETWORK DESIGN

The Network Design has a Framework which has got four phases. The decomposing
nature of this framework as it proceeds from regional decisions to more localized ones.
Fig 1: Network Framework.

3.1 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)

Fig 2: Costs and Number of Facilities

3.2 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

3.3 Phase III :Select desirable sites

• Within each region where facilities are to be located; Selected based on analysis of
infrastructure

 Hard Infrastructure Requirements

 Soft Infrastructure Requirements

3.3 Phase IV :Location Choices

• In the choice of the location two important costs are to be considered,

Factor cost and Logistics cost. The Labor, materials, site specific and facilities comes
under factor cost and Transport, inventory, coordination comes in logistics cost

4.0 NETWORK DESIGN: KEY ISSUES

Pick the optimal number, location, and size of warehouses and/or plants and Determine optimal
sourcing strategy which plant/vendor should produce which product . Determine best distribution
channels which warehouses should service which customers The objective is to balance service
level against 1.Production/ purchasing costs;2.Inventory carrying costs;3.Facility costs (handling
and fixed costs);4.Transportation cost

That is, we would like to find a minimal-annual-cost configuration of the distribution network that
satisfies product demands at specified customer service levels.

4.1 Design consideration

It is possible to include all facilities, including plants, warehouses, distribution centers and retail
outlets of the complete supply chain, but practically it would be prohibitive to consider the entire
supply chain within a single solution platform Though there are planning models which include
plants and retail outlets, in most practical cases plants and retail outlets are likely to be excluded
from consideration when designing the supply chain network. A plant or a manufacturing unit is
more likely to be located at a place which is strategically selected because of its proximity to a
source of raw material or to a source of cheap labour, and this is unlikely to be influenced in any
medium term planning of the firm. On the other hand, the retail outlets represent the customers. We
will address the design problem in this simplified form keeping in mind that just as each supply
chain is unique so are the requirements of planning.

4.2 Techniques to solve supply Chain Network Design Problems

According to hicks there are four steps to solve the network design problem: identify the
problem, model the problem, apply a technique(mathematical, computational, or heuristic)
to find a good solution to the model , and then use the solution to abstract the problem to
change and improve the real world problem. In the whole of the process of solving the
network problem , much of the following data are needed :

1. A listing of all products

2. Location of customers, stocking points and sources

3. Demand for each product by customer location

4. Transportation rates

5. Warehousing costs

6. Shipment sizes by product

7. Order patterns by frequency, size, season, content

 8. Order processing costs

9. Customer service goals

5.0 Major Components of Network Design Tools

I. Mapping

• Mapping allows you to visualize your supply chain and solutions

• Mapping the solutions allows you to better understand different

scenarios

• Color coding, sizing, and utilization indicators allow for further analysis

II. Data: are available from such sources as business operating documents,
accounting reports, logistics research, marketing research, published information and
judgment by management

• Data specifies the costs of your supply chain

• The baseline cost data should match your accounting data

• The output data allows you to quantify changes to the supply chain

III. Engine

• Optimization Techniques (exact algorithms) : are guaranteed to find

optimal solutions (best alternatives) based on precise mathematical procedures for
evaluating alternatives

• Finally an expert system is an artificially intelegient computer program

that solves prpblems at an expert level.

6.0 A model for network design : Gravity location models

 xn, yn :Coordinate location of either a market or supply source ‘n’

 Fn : Cost of shipping one unit for one mile between the facility & either market or
supply source ‘n’

 Dn :Quantity to be shipped between facility & market or supply source ‘n’

( x − x n) + ( y − y n) ..............................(1)
2 2
d n
=

D nx F
k

∑ n n

d ...............................................(2)
x= n =1 n

F
∑ Dn d
k
n

n =1 n

D ny F
k

∑ n n

d ................................................(3)
y= n =1
k
n

nF
Tc =∑d n Dn F

D
n

∑
………………………………………(4)
n

REFERENCES
dn =1
n=1
n

1. John T. Mentzer , 2001 “ Supply Chain Management “ , Sage

Publications ,Inc

2. Chopra, S.; Meindl, P., Supply Chain Management: Strategy, Planning

and Operation. Prentice Hall: Saddle River, NJ, 2003.
3. Anonymous ,2007 http://jpkc.dhu.edu.cn/gylgl/file/ppt/SCM_2
downloaded on 25-01-2009

4. http://www.icmrindia.org/courseware/SupplyManagement/SCM-
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