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Chapter 5

BU435 Chapter 5: BU435 Chapter 5

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Wilfrid Laurier University
Hamidreza Faramarzi

Chapter 5: Network Design in the Supply Chain Learning Objectives 1. Understand the role of network design in a supply chain. 2. Identify factors influencing supply chain network design decisions. 3. Develop a framework for making network design decisions. 4. Use optimization for facility location and capacity allocation decisions. 5.1 THE ROLE OF NETWORK DESIGN IN THE SUPPLY CHAIN Supply chain network design decisions include the assignment of facility role; location of manufacturing, storage, or transportation related facilities; and the allocation of markets to each facility Design decisions are classified as: Facility Role: What processes are performed and what role does each facility play? Facility Location: Where are the facilities physically located (think transportation) Capacity Allocation: How much capacity should be allocated to each facility Market and Supply Allocation: What markets should be served and what supply sources should feed each facility 5.2 FACTORS INFLUENCING NETWORK DESIGN DECISIONS Strategic Factors Low cost strategies will locate the production facilities in countries of cheap labor for example Companies focusing on responsiveness may locate close to their market (at a higher cost) Convenience stores vs. Costco Location vs. Low price strategy There can be a combination of production strategies, for example Zara has low price production in Asia and very responsive production in Europe Technological Factors Production technologies that offer significant economies of scale will be large and in few numbers Facilities with lower fixed costs will have smaller but higher number of production locations to reduce transportation costs Macroeconomic factors Tariffs and Tax Incentives Tariffs being any duties that must be paid when products andor equipment are moved across international, state, or city boundaries Tax Incentives being a reduction in tariffs or taxes that countries, states, and cities often provide to encourage firms to locate in specific areas These createe a strong influence on location decisions to avoid countries with high tariffs, and seek out places with tax breaks Developing countries often create free trade zones to stimulate production, as long as goods are exported These counties also offer tax breaks for training, meals, transportation, etc. for employees Exchange rates and Demand Risk Fluctuation in exchange rates can create your production facilities to be more expensive to run in countries with appreciating currency
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