Network Design

Network Design

ELI5

Network Design is like deciding where to open lemonade stands in your city:

Big questions:

• How many stands? (1 big one or 10 small ones?)
• Where to put them? (Near schools? Near parks? Near your house?)
• How much lemonade at each? (Big stands = cheaper, but far away)

Trade-offs:

• Few big stands: Cheaper to run, but kids have to walk far
• Many small stands: Close to kids, but expensive (more stands, more workers)

Real examples:

• Amazon: 1000+ warehouses near big cities = fast delivery but super expensive
• Starbucks: A shop on every corner = convenient but lots of rent

Three anchors to think about:

1. 🏠 Customers (where are they?)
2. 🏭 Suppliers (where do lemons come from?)
3. 👷 Workers (where can you hire people?)

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Mention in the Slides

• Global Network Optimization: “Optimizing global network of suppliers, producers, and distributors” [Chapter 1, Slide 19]
• Supply Chain Members: Coordinating relationships between all members of the supply chain [Chapter 1]
• Location Decisions: Implied in discussions of sourcing and delivering [Chapter 1]

Enrichment

Network Design is the strategic process of determining the optimal configuration of suppliers, production facilities, distribution centers, and customers in a supply chain.

Strategic Importance

Network design decisions are:

• Long-term: Facilities last decades; relationships take years to build
• Capital-intensive: Building/closing facilities costs millions
• Difficult to reverse: Real estate, labor contracts, regulatory approvals
• Competitively decisive: Wrong network = structural cost disadvantage

Key Design Decisions

Decision	Options	Trade-offs
Number of facilities	Few (centralized) vs. Many (decentralized)	Efficiency vs. Responsiveness
Location	Near suppliers vs. Near customers	Input cost vs. Delivery speed
Capacity	High utilization vs. Excess capacity	Cost vs. Flexibility
Make vs. Buy	In-house vs. Outsource	Control vs. Specialization
Labor	Low-cost regions vs. Skilled regions	Cost vs. Quality/Innovation

Network Design Framework

1. Define Customer Service Requirements

   • Delivery time expectations
   • Product variety needs
   • Service level requirements

2. Identify Constraints

   • Budget/capital available
   • Regulatory requirements
   • Existing facilities/contracts

3. Map Demand Locations

   • Customer concentrations
   • Demand volumes by region
   • Growth projections

4. Evaluate Supplier/Labor Locations

   • Raw material sources
   • Labor availability and cost
   • Infrastructure quality

5. Optimize Network Configuration

   • Facility locations
   • Capacity allocation
   • Product-to-facility assignment

6. Consider Strategic Factors

   • Political/economic stability
   • Exchange rate risk
   • Sustainability goals

Current Issues in Network Design

• Globalization vs. Reshoring: Balancing cost advantages of offshoring with resilience and speed of nearshoring
• Sustainability: Carbon footprint considerations in location decisions
• Risk Management: Diversifying suppliers and facilities to reduce disruption risk
• E-commerce Impact: Need for last-mile delivery infrastructure

Concept

Term	Definition	Network Design Implication
Centralization	Few large facilities serving broad areas	Economies of scale, longer delivery times
Decentralization	Many small facilities close to customers	Faster delivery, higher inventory/fixed costs
Nearshoring	Moving production closer to end markets	Higher labor cost, lower transportation, faster response
Offshoring	Moving production to low-cost countries	Lower labor cost, longer lead times, higher complexity

Examples

From Slides:

• HP DeskJet Global Supply Chain: HP managed a complex global network with multiple manufacturing sites (likely in Asia for cost), distribution centers (regional hubs), and customer markets (global). The case illustrates challenges in coordinating production, inventory, and delivery across international boundaries with different time zones, regulations, and market requirements

• Coca Cola Vietnam: Coca Cola’s operations in Vietnam demonstrate supply chain network design in an emerging market. The company had to adapt its global network to local conditions — sourcing some ingredients locally, building distribution infrastructure, navigating local regulations

Enriched Examples:

• Amazon: Network design places fulfillment centers within 20 miles of major metropolitan areas. This enables same-day/next-day delivery but requires massive real estate investment. Over 1,000 facilities worldwide as of 2024.

• Toyota: Supplier network organized in tiers:

  • Tier 1: Direct suppliers (often co-located with assembly plants)
  • Tier 2: Suppliers to Tier 1
  • Tier 3: Raw material suppliers
  • Key insight: Geographic proximity reduces transportation cost and enables JIT

• IKEA: Designs products for flat-pack shipping → minimizes shipping volume → can source globally and still offer low prices. Network designed around product architecture.

• Zara: Unusual network design — most manufacturing in/near Spain (higher cost) but enables 2-3 week design-to-store cycle. Trade-off: Higher labor cost for faster response

Essay Angle

An essay might ask you to design a supply chain network for a given scenario or evaluate trade-offs in network design. Framework: (1) identify customer service requirements, (2) list key design decisions (number, location, capacity of facilities), (3) analyze trade-offs (efficiency vs. responsiveness, cost vs. risk), (4) recommend optimal configuration with justification.

MCQ Watch-outs

• Strategic vs. Tactical: Network design is STRATEGIC (long-term, capital-intensive, hard to reverse). Routing, scheduling, and inventory management are TACTICAL (short-term, adjustable).
• Centralization Trade-off: Centralization = lower costs (scale), slower delivery. Decentralization = faster delivery, higher costs. MCQs may ask which to choose based on scenario priorities.
• Multiple Factors: Network design considers customers, suppliers, AND labor. Not just one factor.

Memory Aid

NETWORK = Nodes, Economics, Response, Trade-offs, Optimization, Workforce, Customers

• Nodes (facilities, DCs, suppliers)
• Economics (scale vs. speed)
• Response time (delivery speed)
• Trade-offs (cost vs. service)
• Workforce (labor availability/cost)
• Optimization (math models help)
• Risk (diversification)
• Keys: Customers, Suppliers, Locations

Simple Version: “C-S-L = Customers, Suppliers, Labor” — the three anchors of network design

Sources

Chapter1.pptx [Slide 19], Chapter7.pptx [Slide 3-4]