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Considerations for supply chain network design

The fierce competition in today’s markets and the swift changing of customers’ preferences, together with the rapid development of technology and globalization, have forced organizations to operate as members of a supply chain (SC) instead of acting as individual enterprises.

The success of a SC depends on the integration and coordination of its all entities to form an efficient network structure; an efficient network leads to cost-effective operations throughout the chain and helps it to react quickly in response to customers’ needs. SC network design is the most basic decision of SC management, which influences all other decisions concerning an SC and has the most extensive effect on the chain’s return on investment and its overall performance.

SC network design deals with long-term strategic decisions of the chain, such as the number, location and capacity of entities in each echelon of the chain. However, the network structure of the chain strongly influences the later operational decisions of flow management throughout the chain, so in addition to strategic locating and capacity setting costs, the resulting operational inventory holding and transportation costs should be considered at the network design stage.

Considering changes over time also has an important role in making suitable strategic decisions. This fact necessitates considering uncertainties of the environment at the strategic decision making stage, as uncertainty is an undeniable part of today’s business environment.

Designing a robust SC network structure and managing the product flow throughout this network in a manner which enables them to be able to predict, cope with and recover from disruptions. Today, many experts believe that numerous risk sources are involved in an SC.

  • Potential SC risks categories are as follows:

  • Inaccurate information, forecast, bullwhip effect, etc. (internal)

  • Demand and supply uncertainty (internal)

  • Disruption risks (external)

However, other sources of uncertainties can be found in chains, such as exchange rates, travel times, amounts of returns in reverse logistics and transportation costs. Considering these factors in designing a network structure for green and global SCs is essential. In addition, the competitive environment in which a firm operates may significantly affect the decisions that a firm makes with respect to risk mitigation. For many firms, the key objective may be ensuring that their post-disruption situation is not worse than that of their competitors.

Considering uncertainties and disruptions helps companies to supply a better service level to their customers. Service level is one of the most important competitive factors in today’s fierce markets. Increasing the inventory level of the retailers improves the service level, but also increases the risk of unsold products. These important cost components have been ignored from the set of operational costs considered as network design problems.

To determine the optimal network structure of a chain in a manner which maximizes its whole profit, which is calculated as the difference between its income and the total cost. The total cost of the chain is the sum of the current investment costs and expected future shortages, production, transportation and risk factors costs. Various decisions, namely the number, location, and capacity of entities in each tier and material/product flow throughout the network are made at strategic decision-making level.

Azhar Qadri

Supply Chain Expert | Operational Intelligence | Smart Manufacturing & Excellence | Supply Chain Optimization | Consultant and Trainer


Trainer and Consultant - SMEDA

Executive Member - SCAP

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