Analysing and Discussing Supply Network Design

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Supply network design involves configuring the shape and capabilities of one's own and other operations with which business interacts (Slack et al 2009). Supply network design includes an interrelation between suppliers, their suppliers which

may be referred to as primary and secondary suppliers and primary and secondary

customers as well. A well structured network design in a supply chain plays an

important role in achieving efficient operations among all market players including

producers, suppliers and retailers.

In today's highly competitive and rapidly changing economical and political

environment every industry should redesign their existing manufacturing and

distribution network to fulfil customer expectations. According to lascelle "Five key

decisions supply chain management strategists have to answer in order to design /

redesign a supply chain" which are

What is the role of facility to the warehouse/ plant distribution centre?

How many are we going to have?

Where are we going to locate them?

What is our capacity and how we are going to make use of it?

What are the relationships between two markets at different locations?

These points can be well discussed with the Supply chain facility decisions also known as

2) Supply chain network design decisions -

2.1) Facility Role -

The most important components of the planning activities in a production firm are

the efficient design of its supply chain and role of every facility organisation

provides. These two factors are responsible for determination of the amount of

flexibility an organisation possesses during changes in demand and supply ratios.

2.2) Facility location -

Facility location involves the determination of the geographical site to locate a firm's

operations and play a very important role in the strategic design of supply chain

networks. It is not an easy task for any company to dislocate its whole operations

because of many reasons such as financial, political, environmental etc and a good

facility location can be helpful in making a supply chain responsive and economical.

2.3) Capacity allocation -

Capacity allocation is another important factor which determines utilization vs.

responsiveness of various capacities. Unlike capacity location it is comparatively

easy to make alteration in capacity allocation but utmost care should be taken in

taking decisions about capacity allocation because allocating too much capacity can

lead to poor utilization of asset and ultimately leads to wastage of money and


2.4) Market and supply allocation -

Market and supply allocations have a marked impact on production procedures,

inventory planning, and transportation decisions as they are a helpful tool in

evaluating the actual demand from the market and further helpful in taking supply

related decisions. These decisions should be revaluated within a regular interval of

time so that changes in allocation may take place in accordance with change in

market conditions or change in plant capacity.

3) Factors affecting network design decision -

3.1) Strategic factors -

A firm's competitive strategy has a significant impact on network design decisions

within the supply chain. (Chopra and Meindl, 2001)

Business strategy includes leveraging the core competencies of an organization

to achieve predetermined goals. It also includes the analytic and decision-making

things like what to offer (services and products) and when to offer (timing, business

cycles,), and where to offer (projected markets and segments) as a competitive plan.

The business strategy constitutes the framework for the overall direction that an

organization wishes to proceed and the supply chain strategy determines the actual

operations of that organization and the extended supply chain to meet a specific

supply chain objective.

3.2) Technological factors -

New technologies play a vital role in creating new products and new processes. New

marketing techniques as online shopping, bar coding and computer aided design are

some of the major contributions of technological advancements. Technology reduces

costs, improve quality and finally lead to innovation developments. These

developments can further benefit consumers and organisations as well.

3.3) Macro economic factors -

Macroeconomic factors have significant effects on supply network design decisions.

Macroeconomic factors are the factors which are not internal to the organisation

and these factors include interest rates, exchange rates, inflation along with

employment rate and industrial relations. As mentioned above that macroeconomic

factors have significant effects on supply chain, the effects of these factors can be

either positive or negative on the business environment. Negative effects can create low profitability to the business whereas positive effects can be seen as high profitability to the business. The economy of a country moves in ups and downs forming a business cycle and most of the times these positive or negative effect depends upon the phase of the business cycle the economy is in.

3.4) Political factors -

Political factors have a significant role on sustainability of business environment. A

politically stable country can provide a better business environment than a politically

unstable country. Companies prefer to choose a politically stable country for their

business expansion. Other political factors which affect supply network design

include various government policies e.g. the degree of intervention in the economy,

the goods and services does a government want to provide and to what extent does

it believe in providing subsides to the companies Political factors also include the

priorities of the government in terms of business support? Political will , can affect

many vital areas for business such as the basic education, the health of the nation

and infrastructure development including roads and rail network.

3.5) Infrastructure factors -

The most important prerequisite for industrial development is a strong and

developed infrastructure of the respective country. Poor infrastructure is responsible

for stunted growth of companies whereas a good infrastructure can reduce the cost

of doing business from a specific location.

3.6) Competitive factors -

In today's cut throat business competitive environment the fittest can survive and to

survive as fittest this is necessary for every company to have a close vigil on

competitor's strategies.

4) Distribution network design -

According to Chopra and Meindl (2001) the design of transportation network affects

the performance of supply chain by establishing the infrastructure within which

operational transportation decisions regarding scheduling and routine are made. A

well planned transportation network facilitates the expected rate of responsiveness

at a comparatively economical price. Various transportation networks including their

merits and demerits are as follows -

4.1) Direct Shipment -


Direct ship network (Source - Module manual - Global supply chain management)

In direct shipment, product to be delivered is shipped directly from the manufacturer to the end customer, bypassing the retailer. This kind of direct shipment is also known as drop shipping. In direct shipment all inventories are stored at the manufacturer end. Requirement comes directly from the customer, to the manufacturer, via retailer and the product is shipped directly from the manufacturer to customer.

We can see the example of direct shipment in case of day to day a milk supply on the milk run. In direct shipment a truck either supplies product of a single supplier to multiple buyers or multiple suppliers to single retailer.

Merits of this system are that the direct shipping eliminates the intermediates and as a result of which both supplier and customer get a high amount of profits so a win win situation.

Another advantage of this system is manufacturer can control the inventory level by postponing customization until after the customer order has been placed. Companies like Dell having Build-to-order like USP hold inventories as common components and postpone product customization, and hence able to manage unnecessary piling up of inventory.

Some of the disadvantages include Transportation costs which is high with drop shipping because delivery of goods is possible vis transportation and carriers have high shipping costs per unit.

A good information system is needed throughout the whole activity so that the retailer can provide product availability information to the customer and the customer should also have direct information into order processing at the manufacturer end.

4.2 Consolidate in supply region - direct ship to final market


Direct ship to final market (Source - Module manual - Global supply chain management)

Unlike direct shipment technique in which product is delivered directly from producer to end customer, this kind of distribution network has a central distribution point where all the suppliers store their goods and from that central distribution point all the goods are further distributed to respective retail stores. This process is also known as in-transit merge. In transit merge combines requirements order coming from different sources so that the customer gets a single delivery.

Indian pharmaceutical industry follows in transit merge kind of technique for distribution of medicines across various states in the country. In every state there is a central distribution point where companies use to store the products and from this point products are further distributed to various retailers.

The major advantage of in-transit merge over drop shipping is that up to some extent this method minimises the transportation cost and improve customer experience.

The major disadvantage of in transit merge is the additional inventory blockade at central distribution point which causes a hike in marketing expenditures and as a result of which a high product cost.

Compared to drop shipping, in-transit merge requires comparatively high manpower requirement so as to control the various processes involved including high manpower planning and allocation, transportation, costing issues etc.

4.3) Consolidate by source - break bulk locally -


Consolidate by source (Source - Module manual - Global supply chain management)

Under the Consolidate by source, inventory is not held by manufacturers at the factories but is held by distributors and retailers at various warehouses and packaged goods are supplied from one point to another via transport. and industrial distributors like W.W.Grainger use this approach with the addition of drop shipping from a manufacturer to supply a product.

Merits of all shipment via central distribution centre include comparative lowering of transportation costs as bulk inventory is transported to warehouses. Bulk transportation of inventory ultimately lowers the transportation expenditure.

Unlike manufacturer storage where multiple shipments may need to go out for a single customer order with multiple items, distributor storage allows outbound orders to the customer to be bundled into a single shipment further reducing transportation cost. Transportation savings from distributor storage relative to manufacturer storage increase for faster moving items. (Boyer, 2010)

From a better inventory planning, distributor storage is helpful for products with comparative higher demand. Amazon and e bay only stock the medium to fast moving consumer goods at their warehouse while they tend to manage a limited inventory stock of slower moving items.

4.4) Consolidate in region - break bulk locally


Consolidate in region - break bulk locally (Source - Module manual - Global supply chain management)

Consolidate in region consists of different regions from where the goods are supplied to a single collection point and from this collection point part or whole of the goods are supplied to another collection point . From this collection point further distribution takes place and finally goods arrive at consumer distribution point.

Merits of this system include availability of different types of products at a single point and through further distribution network product is available at various junctions for consumers.

Demerits of this type of distribution network includes heavy transportation cost involved in movement of product from various distribution channels.

5) Inventory centralisation versus / Decentralisation -

Centralization and Decentralization of Inventories

The key issue in manufacturing companies related to inventory management is the decision on multiple warehousing or stocking branches. The fundamental questions concerning this issue are:

Whether each location manage its own inventory or

To create central restocking purchase orders for each location.

Decentralization of Inventories:


The main advantage of inventory decentralization is that staff at the local center is aware of the local factors and future events. This enables them to take effective decisions since they are also in the position to judge some special promotion that are strictly local in nature. Moreover, local staff may also be aware of the plans of major customers in the locality. Another advantage of decentralization is that it gives a sense of ownership and control to the local management which is highly desirable to foster inventories.


The major drawback of decentralization is the lack of inventory management skills by the local staff that operates highly on subjective issues rather than operating on sophisticated tools. Secondly, the nature of over reacting to temporary issues becomes harmful for effective inventory management. Finally, local management remains more concerned about the inventories that are visually present at local warehouse and ignores to take advantage of the inventory present in pipeline or in central warehouse.

Bullwhip Effect:

The magnification of demand fluctuations is called the bullwhip effect. It is evident when demand increases and decreases in supply chain. This variation in demand is exaggerated as we further move up the supply chain. Bullwhip effect causes larger variance in orders to supplier as compared to sales to buyers (Zarbock et al, 2005). The term was first observed by Proctor & Gamble when the demand of their product 'Pampers' (baby diapers) fluctuated substantially. This can be seen as a classic example where product had very little consumer demand fluctuation. P&G observed large variation in distributor orders preceding the retail demand resulting in even larger fluctuations in material demand to suppliers. Retail sales depends on the predictable rate at which babies use diapers. The information regarding the number of babies using diapers is available at all stages of supply chain. Although the product had uniform demand still company observed wave of changes up the supply chain due to minor changes in demand.



Figures above show bullwhip effect between two supply chain partners. From the graphs we can notice a huge difference in distributor demand and retail demand since distributor demand fluctuate more drastically than retail demand. During the stage when distributor builds inventory and fulfills orders, it communicates different demand levels by the amount of order it requests to the upstream factory. This phenomenon becomes more complex as we move up the supply chain.

Reasons that might cause Bullwhip Effect:

Over reaction to backlog orders

Delay in processing the order, receipt of product and demand

Lack of proper communication among supply chain partners

Limitations in order size e.g. limitation on retailers to order product in cases of 10 while wholesalers receive the in cases of 1000

Inaccuracy in forecasting demand

Order batching

Centralization of Inventories:


The major disadvantage of centralized inventory is that stronger and more professional inventory managers are employed on regular basis, causing reactionary actions due to resentment. These managers can be thoroughly trained in general principles of inventory and the system that is being used for ordering process. Finally, opportunity to buy can be explored more effectively since all the information remains at one central location, the whole company remains visible to a single person.


Problems in centralized inventory may arise if there is no central planner to make central management aware of local events. Finally disenfranchised feeling may arise in the local management by not having control of their inventories.

6) Outsourcing decisions and risks -

√ā¬†Outsourcing can be defined as any job, operation, process, or task of a company that could be performed by workers outside an organization on contractual terms. Outsourcing can be performed by the third party either on-site or off-site.

According to Slack et al (2009) "the most controversial issue in supply network design is that of outsourcing". History has witnessed a number of agitations by Industrial workers globally on the issue of outsourcing. It's a common perception between Industrial workers that the main motive of outsourcing by the companies is nothing but terminating their services from organisation.

The outsourcing of services need not always lead to a loss of knowhow, and when working from the heart of the organization it is a tool that can even be used to support a culture of change and the revitalization of organizations less likely to change.

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