What is network design in supply chain and why is it essential?

Various functions in a company combine to help the business achieve its goals. One of the most important functions in a business is the supply chain. It includes various activities that help deliver the final product to the user. Any fault in the supply chain can greatly affect the organization’s profitability. It will also frustrate the customers, who will eventually move to other firms. It tells us how important the supply chain is, which is why the network design in the supply chain is critical. 

You will learn how to make a network design in the Advanced Executive Certificate Course In Supply Chain Strategy And Operations Management. More details about this program are available on our website. 

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What Is Network Design In Supply Chain?

Now that we know that the supply chain is critical for ensuring customer satisfaction and reducing costs for the company, it is obvious that you need proper planning before creating it. This planning is called supply chain network design. Planning the network design in the supply chain helps the company understand the cost and time consumed in bringing the product to the user. Knowing this will help the organization prepare the supply chain so that the company spends the least money to reach the product to the customer within the shortest duration. 

Designing the network in the supply chain helps the company utilize all the available resources most efficiently. Creating a network design in the supply chain will allow the company to see where to locate the manufacturing facility and the distributors to ensure prompt delivery of products to the customer. Creating a network design model helps the company know where there are opportunities to optimize and improve efficiency. It also enables them to understand the potential risks in the supply chain and plan ways to minimize them. The network design can be used for reference when problems arise.

Factors To Consider When Designing A Supply Chain

Procurement

When designing the supply chain, one of the main points to consider is the location of your suppliers. Some companies have several suppliers selling various raw materials. One must map their locations and see how they can transport the material to the manufacturing facility at the minimum cost and time. 

Manufacturing

When creating the network design in the supply chain, you must decide on the manufacturing location in various aspects. The proximity to suppliers is an important factor. The closer you are to them, the less you will spend on transportation. But there are other considerations like the availability of resources like power, water, workforce, etc. 

Delivery 

Delivery of the finished goods to costumes must be fast, efficient, and economical. They must also be stored properly and at economical costs. So one has to consider the storage facility and cost when designing the network. The distribution network must be close to the buyers for fast delivery. You must also look at transportation and how much it will cost to send goods to the distributors or buyers. 

Importance Of Supply Chain Network Design

Why is it important to create a network design in the supply chain? Most importantly, it allows the company to see the impact of various elements in the supply chain. It also helps the organization know how best to use the existing assets to achieve business goals. Designing the network helps establishments to identify suppliers and understand how their locations can impact the cost of the product. Companies can identify the right suppliers for every raw material through this exercise. It helps reduce costs and ensure that all the materials needed for production are available when needed. 

The other reason for creating the network design in the supply chain is to plan the distribution network so that the customers get the products within their desired delivery period. Designing the network can ensure that goods are delivered to the customers most economically. Transportation is another important element that will be part of the design. Planning the logistics well ensures that there are no delivery snags and that the cost of transportation is kept to the minimum. 

Types Of Network Design

1. Strategic Network Design

This type of network design in the supply chain usually follows certain events in the company. It could be a major expansion of the business or acquiring a new business. It will certainly require redesigning the network. Another reason for network design is to target new market opportunities. There must be a change in the distribution network. All businesses change as time progresses. Such changes will also need one to perform the network design again. The other reason for this exercise is pressure from competition. In this type of network design, all the elements are analyzed and redesigned if needed.

2. Optimisation Of An Existing Network

It happens when the company must optimize the existing facilities to meet new demands. The company will find better ways of using the existing facilities, transportation, product flow, and inventory to meet the company’s long-term goals. The aim of this exercise is to ensure that there is no excessive workload on the existing workforce. In this type of network design in the supply chain, the company looks at adding to existing facilities. They may plan to add warehouses to meet excess demand. In such cases, the design must include the need for an additional workforce for the new warehouse.

3. Contingency Planning

As the name suggests, this type of network design in the supply chain deals with emergencies. The team looks at how well the network is prepared to face emergencies. In this planning, the team must consider various “what if” situations and see whether the network can handle such incidents. They must have a backup plan if one supplier fails to supply raw materials. There must be a suitable plan to take back finished goods if there are some quality issues. It helps to reduce the time required to implement an alternate plan.

You can learn more about the importance of network design in the Advanced Executive Certificate Course In Supply Chain Strategy And Operations Management conducted by reputed institutions. Our website will give you more details about this program. 

Designing A Supply Chain

Creating a network design in a supply chain is difficult as many aspects are to be considered. Price, quality, lead time, discounts, costs, etc., are factors that will affect the company’s profitability, and all these are important when designing a network for the supply chain. Below are the steps to follow to create the best network design. 

Define The Objectives

The first step is to define the supply chain and cross-functional objectives. You must understand the purpose of the supply chain and the customers you want to service. The other important factor to consider is the parameters you will use to assess the supply chain’s performance. You must evaluate the performance both within the function and across other functions. What is required is to answer what you expect the supply chain to achieve by creating this design. You must be clear about what your customers expect and what can help you achieve that. 

Form A Team

It is essential to form a team that will be involved in creating the network design in the supply chain. You must carefully select the people as they must have the skills needed to complete the job successfully. The team must consist of a project leader and a team of skilled people who understand the objectives of designing the supply chain. You must also involve key executives and supply chain personnel in designing the network

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Selecting The Right Modelling Tool

Most companies don’t have experts for making network design in the supply chain as their employees, so the company has to depend on outside consultants or modeling software. Various tools for this purpose are available in the market. There are packages and platforms for this purpose. The packages usually run on the cloud and are easy. But they may not give the exact solution that you are looking for. Platforms are better but need additional coding skills. 

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Gather Data

Before making the network design in the supply chain, you must have all the information you need for the purpose. Gathering these can be difficult, but nowadays, most of these are available easily in the company’s ERP system. You must know each product’s demand and where to deliver them. The cost of warehousing must be known accurately, as it will influence your profitability. You must calculate the inventory costs and know the transport time for different locations. The manufacturing and raw material costs are also needed for the exercise. 

Understand Your Constraints

It is often overlooked when making the network design in the supply chain. Various constraints can influence the cost and delivery time. Financial and budgetary constraints can prevent you from having more warehouses or using faster transport methods. Your production facility may have capacity limitations. As the delivery time is important in network design, knowing your constraints is very important. You must also look at sourcing constraints. There can also be unique tariffs and duties in your customers’ locations that will affect your price. 

Model The Supply Chain Network

There are many supply chain network optimization tools that will help you create the network design in the supply chain with ease. You must make sure that the tools are suitable for your industry and company. You must go beyond using predictive and prescriptive analytics for modeling your supply chain. A close look must be given at the constraints and limits. The model must be a complete representation of the supply chain. It would be ideal if you could include factors that can affect the operations in the future. You must also consider factors like financial status in the future, the addition of new markets, etc.  

Analyse And Optimise The Supply Chain

Once you have created the model, you must analyze it using various situations. It is necessary to think of various scenarios and see how the supply chain will perform. This is important when creating the network design in the supply chain because it will help answer many questions. Such an analysis can give you the best sourcing strategies. You can find out the optimum inventory levels using the optimization exercise and avoid excessive or fewer stocks. The exercise can also help you find the best locations for your facilities and warehouses. You can also find out the best distribution path to reduce landed costs. 

Implement The Design

Once you have analyzed and optimized the network design in the supply chain, it is time to implement the same. But one thing that you must remember is that this is not a one-time activity. There can be many changes often. The company could add a new customer big enough to demand changes in the supply chain. As the demand for the goods goes up, there could be a revision of the production capacity. So many unexpected events could happen, and this needs you to revisit the design and make changes when needed. 

Supply Chain Resilience

What many forget when they create a network design in the supply chain is the possibility of various unexpected events that can destroy the process completely. The supply chain must be ready to face any eventuality without losing its capabilities. Disruptions like the Covid situation badly affected the supply chain system of many companies as governments imposed various restrictions on the movement of goods. So when you design the network, you must incorporate the ability to face such events and get back to normal soon.

Supply Chain Design Mistakes

Minimising Cost Instead Of Maximising Profits

One of the mistakes that many people make when creating a network design in the supply chain is that they focus only on minimizing costs. It is true that cost reduction is one of the aims of supply chain design. But one must also include profit increase in the scope of design. The aim of the supply chain must be to ensure profitable growth. The design should concentrate on increasing sales and revenue, resulting in better profits. Improving fill rates and increasing the speed of delivery, even at extra cost, can lead to better customer satisfaction and increased sales. 

Not Considering Distributed Logistics System

This is another mistake that most people make when creating a network design in the supply chain. Most companies either use their own facilities or one that is a 3PL company. Some organizations also use a combination of both. But when they design the network, most people don’t look at the distributed logistics system. This is a system that has multi-seller automated facilities that only demand the company to pay for what they use. There are no fixed costs, and firms can rent them for as short as one year. 

Not Looking At Future Customer Requirements

When companies make a network design in the supply chain, they take all the requirements of their customers. It is not enough to look at customer requirements of the present. Companies must also consider what customers will need five years from now. It is a difficult thing to predict. But they must use the latest methods to arrive at a broad idea and design the network accordingly. You can also do this by keeping the network design flexible enough and making provisions for revising it on a yearly basis. Customer demands keep changing with time.

Incorrect Transportation Costs

This is another danger that often occurs when making a network design in the supply chain. There are different transportation costs at different stages of the supply chain. There is the cost of bringing raw materials from the supplier. When designing the network, it is assumed that the sourcing locations will not change. The delivery costs are different for different locations in the country. One must also consider that two-day, one-day, and same-day deliveries cost differently. One can also not correctly estimate the trans-shipment charges. The other mistake happens as new last-mile delivery options keep emerging. 

Non-Optimal Inventory Levels

Supply chain experts most commonly use the square root law for distributed safety stock when calculating the safe inventory levels. This method is correct when the company pushes materials regularly to different warehouses across the country. But this law is not true when deploying stocks during periods of high demand. Most people creating network design in the supply chain use this method even when sending stocks on demand, thereby resulting in non-optimal inventory levels. 

Wrong Financial Planning

Another factor that affects the preparation of network design in the supply chain is the calculation of investment and operation expenses. It is not easy to calculate the costs for a period of five years, considering how the cost of various things keeps changing. These costs may not be as impactful as transportation costs, but still, they form a good part of the supply chain expenses. There are also various quick changes in the technologies used for material handling for fulfilling orders. All these can result in wrong planning when it comes to investment and operations costs. 

Conclusion

Network design is an excellent way to optimize a company’s supply chain. The modeling method allows you to analyze all scenarios and help you arrive at the best supply chain decisions. While the mathematical modeling method is good, it needs IT skills. The drag-and-drop models offer greater visibility. Designing a supply chain network is an expensive and time-consuming activity. But the benefits outweigh the costs and help you save money in the future also. 

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