Determining the right supply chain design involves a lot of quantitative data as well as some nonquantitative considerations. I would like to discuss this concept, as well as how to use mathematical optimization to sort through this quantitative data.
A firm’s supply chain allows it to move product from the source to the final point of consumption. Leading firms around the world, from large retailers to high-tech electronics manufacturers, have learned to use their supply chain as a strategic weapon. A supply chain is defined by the suppliers, plants, warehouses, and flows of products from each product’s origin to the final customer. The number and locations of these facilities is a critical factor in the success of any supply chain. In fact, some experts suggest that 80% of the costs of the supply chain are locked in with the location of the facilities and the determination of optimal flows of product between them. (This is similar to the notion from manufacturing that you lock in 80% of the cost to make a product with its design.) The most successful companies recognize this and place significant emphasis on strategic planning by determining the best facility locations and product flows. The discipline used to determine the optimal location and size of facilities and the flow through the facilities is called supply chain network design.
Sometimes it is referred to as network modeling because you need to build a mathematical model of the supply chain. This model is then solved using optimization techniques and then analyzed to pick the best solution. Specifically, we will focus on modeling the supply chain to determine the optimal location of facilities (warehouses, plants, lines within the plants, and suppliers) and the best flow of products through this facility network structure. Here are four examples to illustrate the value of supply chain network design.
Example #1 Firms acquiring or merging with another firm in the same industry to reduce the overall costs to operate both firms
Example #2 Often, a large firm will find that its supply chain no longer serves its business needs. In situations like this, the firm will have to transform its supply chain.
Example #3 In the spring of 2011 global chemical company decided to close their plant in Egypt due to political unrest.
Example #4 As consumer behavior and buying patterns change, firms often want to bring their product to the market through different channels.
As the previous examples highlight, many different types of firms could benefit from network design and many factors go into the good design of the supply chain. Along with ever-growing complexity, the need to truly understand how all these requirements affect a company’s costs and performance is now a requirement. Using all these variables to prove out the optimal design configuration commonly saves companies millions of dollars each year.
References
Optimal Supply Chain Network Design and Redesign at Minimal Total Cost By Anna Nagurney University of Massachusetts May 2010 http://supernet.isenberg.umass.edu/articles/SupplyChainNetworkDesignNagurney.pdf
The Value of Supply Chain Network Design By Michael Watson, Peter Cacioppi, Jay Jayaraman, Sara Lewis