When deciding upon locational decision a manager basically decides upon suppliers, plants, ware houses and markets. There may also be other facilities such as super stockists, consolidation centers or transit points.
Besides locating the facilities a manager must also decide how market may be allocated to ware houses and how ware houses will be allocated to plants. The allocation decision can be altered on a regular basis as different costs change and markets evolve. When designing the network, both location and allocation decisions are made jointly.
In some cases, companies want to design supply chain networks, in which a market is supplied from only one factory. This is commonly known as the capacitated plant location model with single sources. Companies may impose this constraint because it lower the complexity of coordinating the network and requires less flexibility from each Facility.
A much more general form of the plant location model needs t be considered if the entire supply chain network from the supplier to the customer must be designed. Consider a supply chain in which suppliers send materials to factories that supply ware houses that supply markets. Location and capacity allocation decision has to be made for both factories and ware houses. Multiple ware houses may be used to satisfy demand at a market, the multiple factories may be used to replenish warehouses.
Supply chain design decision should be evaluated for a variety of future scenarios that reflect the underlying uncertainty. Accounting for uncertainty relieve the managers to built extra capacity in to supply chain network and make the available capacity more flexible in terms of the markets that can be served. If capacity is flexible, demand can be reallocated within the supply chain network to react best to changing demand, prices, costs, and / or exchange rates. If capacity is inflexible, production cannot be changed in response to change in condition. The presence of flexibility thus increases potential profits.
Customer / Market to be Served from Each Distribution Center
Firms must consider the response time customers desire when designing their supply chain methods. Firms that target customers who can tolerate a large response and require few locations and can focus on increasing the capacity of each location. In contrast, firms that customers who value short response time need to locate close to them. these firms must have many facilities, with each location having low capacity. First, a decrease in the response time customers desire increases the number of facilities required in the network.
For example customers are unlikely to come to a convenient store if they have to travel a long distance to get there. It is thus best for a convenient store chain to have many stores distributed in an area so that most people have convenience stores close to them. In contrast, customers shop for larger amount at super market and are willing to travel longer distances to get to one. Thus, super market chains tend to have stores that are much larger tan convenient stores and not as densely distributed.
If a firm is delivering product to customers, use of rapid means of transportation allows it to build fewer facilities and still provide a short response time. However, this option increases transportation cost. Moreover, there are many situations in which the presence of a facility close to a customer is important. For example a coffee shop is likely to attract customers who live or work nearby. No faster mode of transport can serve as a substitute and be used to attract customers that are far away.