Unit 2: Designing the supply chain network
Supply Chain & Logistic Management notes · PTU syllabus (MBA 953-18)
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Unit summary
Network design decides where facilities sit and how product flows. This unit covers the role and design of distribution networks, factors and a framework for supply chain network design, facility location and capacity allocation models, the impact of uncertainty on network design, discounted cash flow analysis and decision trees.
After this unit you can
- Explain the role and design options of distribution networks
- Apply the network design decision framework
- Use facility location and capacity allocation models
- Evaluate network decisions under uncertainty using DCF and decision trees
PTU syllabus topics
- Distribution networking role and design
- SCN factors and design decision framework
- facility location and capacity allocation models
- impact of uncertainty on SCN
- discounted cash flow analysis
- decision trees
- 1Supply chain strategy
- 2Regional facility configuration
- 3Desirable sites
- 4Location choices and capacity allocation
- 5Evaluate with DCF and decision trees
Topic 1
Role and design of distribution networks
Manufacturer storage with direct shipping (drop-shipping)
Low facility cost, slow delivery
Direct shipping with in-transit merge
Combine items from several sources
Distributor storage with carrier delivery
Faster delivery, more inventory
Distributor storage with last-mile delivery
Home delivery — quick commerce
Manufacturer or distributor storage with customer pickup
Pickup points, lockers
Retail storage with customer pickup
Traditional stores
- Performance measures: response time, product variety, product availability, customer experience, order visibility, returnability; cost — inventory, transport, facilities, information.
Topic 2
Network design: factors and framework
- Factors: strategic (cost vs responsiveness), technological, macroeconomic (tariffs, exchange rates, tax incentives), political, infrastructure, competitive, customer response time and local presence, logistics and facility costs.
- 1Phase I — supply chain strategy
Competitive strategy, constraints
- 2Phase II — regional facility configuration
Demand forecasts, costs, tariffs
- 3Phase III — desirable sites
Infrastructure, production methods
- 4Phase IV — location choices
Precise locations and capacity allocation
Topic 3
Facility location and capacity allocation models
- Gravity location model: find a location minimising transport cost weighted by distances and volumes.
X coordinate
Σ (Dn × Fn × xn ÷ dn) ÷ Σ (Dn × Fn ÷ dn)
Y coordinate
Σ (Dn × Fn × yn ÷ dn) ÷ Σ (Dn × Fn ÷ dn)
Notation
D = quantity, F = transport cost per unit-distance, d = distance from the facility
- Capacitated plant location model: mixed-integer linear programming choosing which plants to open and how to allocate demand to minimise fixed and variable costs.
- Other methods: factor rating, centre of gravity, network optimisation software.
Topic 4
Impact of uncertainty on network design
- Uncertainty in demand, prices, exchange rates and policy affects the value of a network; flexibility (excess capacity, multiple sources, modular plants) has option value.
- Approaches: scenario analysis, sensitivity analysis, real options, risk-adjusted discount rates.
Topic 5
Discounted cash flow analysis
NPV
Σ Ct ÷ (1 + k)^t − initial investment
Decision
Accept the design with the highest NPV
Example
A new warehouse costs ₹10 crore and saves ₹3 crore a year for 5 years at 12%: NPV = 3 × 3.605 − 10 = ₹0.82 crore — worthwhile.
Topic 6
Decision trees
- Decision trees evaluate network choices under uncertainty by mapping decisions, chance events with probabilities and payoffs, then rolling back to find the decision with the best expected value.
Example
Lease a large warehouse now (expected NPV ₹5 crore) or a small one with an option to expand if demand is high (expected NPV ₹5.6 crore) — the tree shows the flexibility option is better.
Key terms
- Drop-shipping
- Manufacturer ships directly to the customer
- Last-mile delivery
- Final delivery to the customer's door
- Gravity location model
- Location model weighting distances by volumes and costs
- Capacitated plant location model
- Optimisation model for opening plants and allocating demand
- Decision tree
- Diagram for decisions under uncertainty
Quick revision
- Six distribution network options; service and cost measures.
- Network design factors; four-phase framework.
- Gravity model; capacitated plant location; factor rating.
- Uncertainty and flexibility; DCF; decision trees.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.What is drop-shipping?
- Q2.Name four factors influencing network design.
- Q3.State the phases of the network design framework.
- Q4.What is the gravity location model?
- Q5.How does uncertainty affect network design?
- Q6.What is a decision tree?
Long-answer questions
- Q1.Explain the design options for distribution networks.
- Q2.Discuss the factors and framework for supply chain network design.
- Q3.Explain facility location and capacity allocation models.
- Q4.Explain how DCF and decision trees are used to evaluate network design under uncertainty.
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