ISL455U-SUPPLY CHAIN MANAGEMENT
Chapter 2: Supply Chain Network Design
What is Supply Chain Network Design?
A traditional (forward) supply chain network includes suppliers, manufacturers, distribution centers, retailers and customers. In this structure, components/raw materials are manufactured by the suppliers and shipped to manufacturers. In manufacturing plants, products (finished goods) are manufactured by using the raw materials/components procured from suppliers. Then, these products are shipped to distribution centers in different regions and shipped from distribution centers to retailers. Finally, the products in retailers are purchased by the customers
Recently, in addition to forward supply chains, closed- loop supply chains have also become popular in both academia and industry due to increasing concerns about sustainability and economic value that can be obtained by product recovery. In a closed-loop supply chain, forward flows work as in the traditional (forward) supply chains and satisfy the demands of customers. However, there are also some reverse supply chain processes in addition to forward supply chain processes. These processes include collection of used-products, quality control, repair, remanufacture and disposal of non reusable products or components.
Costs
Costs are divided into two categories;
• Fixed costs are costs which are independent from the amount processed. For example, when a company rents a warehouse, it has to pay the same rent each month regardless of the amount of product in the warehouse. • Variable costs are costs depending on the amount processed. It is a variable cost. For example, the manufacturing cost of company depends on the amount of products manufactured.
Decision
The decision maker focuses on various decisions while designing the supply chain network. These decisions can be listed as follows:
• Procurement Decisions (Supplier Selection) • Facility Decisions • Flow Decisions • Shipment Decisions • Other Decisions
Procurement Decisions (Supplier Selection)
While selecting the suppliers, various qualitative and quantitative criteria such as cost, quality, lead time and environmental performance should be considered and these criteria generally contradict with each other.
Facility Decision
Facility decisions include the determination of the number, locations and capacities of the facilities
(manufacturing plants, distribution centers, warehouses etc.).
Flow Decisions
Flow decision focus on the determination of the flows between different facilities in the supply chain. It gives the answer to the question of how many products should be shipped from which manufacturing plant and which networks (distribution centers, retailers) should be used while being transferred to the customer.
Shipment Decision
Shipment decisions mainly cover two decisions; transportation mode decisions and vehicle decisions. Transportation mode decision determines which transportation among road transportation, rail transportation, marine transportation and air transportation would be used. In some transportation modes it becomes not possible for the company to select the vehicles but especially in road transportation, selection of the appropriate vehicles is important since the vehicles in road transportation significantly differ from each other in terms of various criteria such as cost, capacity, speed etc. and generally there is a conflict between these criteria, i.e. it may not be possible to find a vehicle with low cost but high speed and capacity.
Other Decisions
In addition to above-mentioned decisions, in some cases the decision maker may face some other decisions such as quality decision, sustainability level decision and outsourcing decision. Putting these decisions into account may make the problem more difficult but at the same time more real-life oriented.
Objectives
Supply chain networks strongly depend on the objective or objectives considered in the design process. Objectives can be categorized as;
• Economic Objectives • Environmental Objectives • Social Objectives
Constraints
While designing the supply chain network, the decision maker must consider various constraints. These constraints can be listed as follows.
• Supply constraints • Facility constraints • Flow constraints • Demand satisfaction constraints • Capacity constraints • Other constraints
Supply Constraints
Supply constraints are constraints related to procurement of component or raw materials.
Facility Constraints
Facility constraints are contains on location of the manufacturing, location and number of distribution center and warehouses.
Flow Constraints
Flow constraints are related to the controlling the flow of products from suppliers to customers.
Demand Satisfaction Constraints
These constraints ensure the satisfaction of the demands of either all or a fraction of the customers in the supply chain. They vary significantly from a company to another based on the structure of the company and objective of the supply chain.
Capacity Constraints
In real life applications, capacities of the facilities and vehicles are generally limited. Hence, while designing the supply chain network, the decision maker must consider the capacity constraints. If they are not considered, obtained supply chain network may be infeasible in daily operations.
Other Constraints
In addition to above-mentioned common constraints, in some cases the decision maker may also need to consider some specific constraints that are related to governmental regulations, product characteristics or company policies.
Factors Influencing the Network Design Decision
Various factors influence the network design decisions. Some of these factors can be listed as follows:
• Strategic • Technological • Macroeconomic • Infrastructure • Competitive • Logistics and facility costs
Solving Supply Chain Network Design Problems
There are many different solution approaches to deal with the supply chain network design problems. We can categorize them in two groups as exact solution approaches and heuristic solution approaches. We will discuss them in detail as follows;
Exact Solution Approaches
Exact solution approaches are approaches that provide the optimal solution for a problem. Mathematical programming is one of the exact solution approaches that are commonly used in existing supply chain network design literature. GAMS is one of the well-known and widely used commercial optimization software. Each optimization software has some advantages and disadvantages such as price, ease of use, performance etc.
Heuristic Solution Approaches
If the problem size is very large, even those commercial optimization software cannot find the optimal solution. In other words, in some problem instances, it may not be possible for the decision maker to find the optimal solution by using exact solution approaches. In those cases, the decision maker may consider using a heuristic solution approach to find a solution. Heuristic approaches are efficient algorithms developed with the expectation of finding a “good” solution. These approaches never guarantee to find the optimal solution. Since they do not guarantee the optimal solution, heuristic solution approaches are generally used in the cases in which the decision maker could not obtain a solution by using exact solution approaches and they are used with the expectation of finding at least a good solution. Finally, it should be noted that there are numerous researchers who focus on developing high quality heuristic approaches providing high quality solutions for different problems. These approaches generally include multi-step complex algorithms and they find near optimal or optimal solutions in a reasonable time.