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Week 3 Discussion: Network Design in the Supply Chain
Kelli Ware
School of Business, Liberty University
Introduction
Managing supply chain operations efficiently is the cornerstone of success for any
organization which facilitates consumer value delivery and cost optimization across the full
spectrum of the supply chain. The strategic configuration of production facilities directly impacts
supply chain management efforts that contribute to profitability. Depending on the industry, a
centralized approach that utilizes a small number of facilities and a decentralized approach that
has a large number of facilities has advantages and disadvantages that must be considered
when making supply chain decisions. This post aims to outline the impact of facility location,
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quantity and capacity on supply chain operations and analyzes the inherent trade-offs that
accompany each strategy.
How do the location and size of warehouses affect the performance of a firm such as
Amazon? What factors should Amazon take into account when deciding where and how
big its warehouses should be?
The location and size of warehouses for firms, the size of Amazon plays a key role
impacting operational performance such as meeting consumer demand, order fulfillment,
logistics, operational and labor costs (Chopra, 2018). Conversely Moradlou et al. (2023) argue
that facility decisions are based on two factors being geographical location and governance. The
researchers claim that geographical location decisions are influenced by local labor costs, trade
barriers and access to economies of scale whereas governance decisions are impacted by cost
efficiencies of out-sourcing vs. in-sourcing (Moradlou et al., 2023). Decision-makers must also
consider the implications of regulatory costs, warehouse size and production capacity (Chopra,
2018). Capacitated decision models support management in location placement, facility size,
and production capability determinations (Chopra, 2018). Larger warehouses allow Amazon to
leverage economies of scale while lowering labor costs and lead times by expanding inventory in
an individual location (Chopra, 2018 & Moradlou et al., 2023). Moreover, larger fulfillment
centers support the integration of technologically advanced tools such as robotics and artificial
intelligence which are heavily relied on for enhancing efficiency (Jeong et al., 2020).
When deciding where to locate warehouses, companies the size and breadth of Amazon
additional factors such as land costs and proximity to competition. Budget considerations are
directly influenced by land costs as they contribute to the overall cost to set up the facility as
well as determining the amount of taxes that will be paid (Pajić et al., 2024). Land costs are fixed
overhead expenses and if the cost to operate on the land is to high it lowers profitability making
the location a less viable option (Pajić et al., 2024). If the land cost is high, and the local
government offers tax incentives, that could offset the costs and make it a more appealing
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option (Chopra, 2018). Selecting a warehouse location within a close proximity to a competitor
poses threats to workforce availability, land viability and market share (Pajić et al., 2024).
Moreover, proximity to a competitor could also create pricing wars that will impact profits
(Chopra, 2018).
How do import duties and exchange rates affect the location decision in a supply chain?
With import duties and exchange rates impacting supply chain operational costs such as
production and distribution expenses, location decision must consider these factors. According
to Chopra (2018), high import duties and other macroeconomic factors escalate the cost of
goods importation making locations such as developing countries with low to no tariffs a more
appealing choice. While offshore outsourcing provides considerable cost savings, there are
inherent risks such as exchange rate fluctuation and import disruptions that amongst the top
considerations when making supply chain location decisions (Ogunranti et al., 2020). That being
the case, manufacturers must consider the trade-offs they are willing to take and the risks they
are willing to assume when building their supply chain network.
How is a rise in transportation costs likely to affect global supply chain networks?
Transportation costs are one of the foremost considerations in supply chain budget
allocation as it is how products are transported between facilities and delivered to customers
(Chopra, 2018). Consequently, a rise in transportation costs will significantly impact operational
expenses, alter sourcing and logistics strategies, influence facility locations and diminish
profitability. As Chopra (2018) transportation costs decrease as the number of warehouses and
distribution centers increases; conversely, oversaturating an area may prove counterproductive.
Supply chain leaders must consider the balance of facilities versus transportation costs to
maintain cost efficiency and ensure their ability to deliver goods to their customers on time.
Companies that have high overhead costs may consider building larger warehouses with greater
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capacity in prime areas where customers are centrally located while others may consider
smaller facilities in more areas when fixed costs are lower.
Amazon has built new warehouses as it has grown. How does this change affect various
costs and response times in the Amazon supply chain?
By building new warehouses and expanding its enterprise, Amazon has been able to
reduce response times and transportation costs (Chopra, 2018). Conversely, new warehouses
escalate fixed costs tied to land acquisition, facility construction and design, and variable costs
primarily tied to utilities and inventory management (Chopra, 2018). Fixed costs are not tied to
utilization whereas variable costs are linked to production output. However, strategically located
warehouses reduce transportation costs by narrowing proximity to customers which truncates
delivery distances allowing for quicker delivery services (Pajić et al., 2024). While increasing the
number of warehouses positively impacts transportation costs and improves responsiveness,
Amazon decision-makers must carefully monitor rising costs in other areas to ensure the
additional facilities are profitable.
McMaster-Carr sells MRO equipment from five warehouses in the United States. W.W.
Grainger sells products from more than 300 retail locations, supported by several
warehouses. In both cases, customers place orders using the Internet or on the phone.
Discuss the pros and cons of the two strategies.
Both McMaster-Carr and W.W. Grainger’s supply chain strategies have advantages and
drawbacks, but profits, demand, and market dynamics dictate which strategy is the most
beneficial. The advantages of McMaster-Carr’s strategy are the five warehouses can better
leverage economies of scale and maintain efficient inventory management while saving money
on fixed expenses with fewer warehouses (Chopra, 2018). The drawbacks to that strategy are
the centralized operating model increases transportation costs, diminishes responsiveness, draw
out delivery times which may negatively impact consumer satisfaction, and potential exposure
to risks such as delays, disruptions, and demand variance (Chopra, 2018). The pros of W.W.
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Grainger supply chain strategy are a larger network of retailers which conveniently meets
consumer needs by better responsiveness, shorter delivery timeframes and diminished logistics
costs since consumers can shop in-person thereby absorbing transportation costs (Pajić et al.,
2024). The cons of that strategy are the significantly higher number of fixed expenses for
complex inventory management, staff, utilities, and retail location maintenance. Having such a
large number of retail locations poses inventory management risks along with demand
uncertainty (Chopra, 2018). McMaster-Carr’s strategy places priority on cost effectiveness
through economies of scale but risks backlash due to diminished responsiveness and increased
delivery times for customers farther away. Contrarily, W.W. Grainger’s operating model prevails
in responsiveness and order fulfillment but incurs significantly higher operational costs and the
complexity of the network makes inventory management a bigger challenge.
Consider a firm such as Apple or Dell, with few production facilities worldwide. List the pros
and cons of this approach and why it may or may not be suitable for the computer
industry.
Using a limited number of production facilities has its positives and negatives. The pros
to this approach are the concentrated production in a few locations increases volume which
reduces associated costs, the ability to leverage economies of scale, and the ability to
standardize production processes which increases efficiency and quality control (Chopra, 2018).
Both Dell and Apple produce large volumes of products within a limited number of product
lines, and as such they benefit from operating fewer facilities. Contrastingly, operating from a
few warehouses increases transportation costs and duty fees, elongates delivery and response
times, and heightens exposure to risks such as a natural disasters that can create tremendously
diminish Supply chain resilience.
This centralized strategy, while it comes with its set of cons, still works for the computer
industry given the high value and the demand for the product being manufactured. The
utilization of too many facilities could potentially resource availability, quality control, and
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inventory control (Tripathy & Eppinger, 2013). Fewer facilities also simplify supply chain
operation, streamlines systemization, and reduce fixed and variable costs which are significant
trade-offs that make the centralized approach used by Apple and Dell worth accepting (Chopra,
2018).
Consider a firm such as Ford, with more than 150 facilities worldwide. List the pros and cons
of having many facilities and why this model may or may not be suitable for the
automobile industry.
Automotive manufacturers that utilize a decentralized strategy for supply chain
operations assumer much higher operational costs, sacrifice economies of scale and increase
the complexity of supplier, resource, and logistics management (Chopra, 2018). Furthermore,
firms such as Ford face heightened coordination and operational alignment requirements that if
managed improperly leads to inefficiencies and profit loss (Cai et al., 2019). The cons are offset
by pros such as enhanced supply chain resilience, responsiveness, and increased resources
along with a major reduction in transportation costs and import duties (Chopra, 2018).
Moreover, risks regarding loss deriving from supply disruptions are diminished as the risk is
shared across 150 sites reducing the potential for yield loss (Cai et al., 2019).
Given the size of the product being manufactured, transportation costs alone would be
extremely high if firms in the automotive industry operated a small number of production
facilities. More over the proximity to so many markets diminishes lead times and delivery times
while increasing customer satisfaction (Jum’a et al., 2024). However, the use of a decentralized
strategy that incorporates the use of over 150 facilities is not without its challenges.
Socialpolitical factors such as unstable economic conditions, governmental sanctions, and global
pandemic (Jum’a et al., 2024) also play a role in the issues that companies such as Ford has to
take on. Resource diversification was one of the primary factors that saved the automotive
industry as it was able to rely on local and regional suppliers to supplement any disruptions to
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access of global supply chain partners. A decentralized strategy to supply chain management is
still suitable for the automobile industry.
References
Cai, J., Hu, X., Chen, K., Tadikamalla, P. R., & Shang, J. (2019). Supply chain coordination under
production yield loss and downside risk aversion. Computers & Industrial
Engineering, 127, 353–365. https://doi.org/10.1016/j.cie.2018.10.026
Chopra, S. (2018). Supply Chain Management (7th ed.). Pearson Education.
https://libertyonline.vitalsource.com/books/9780134732459
Jeong, H. Y., Song, B. D., & Lee, S. (2020). The Flying Warehouse Delivery System: A quantitative
approach for the optimal operation policy of Airborne Fulfillment Center.
IEEE Transactions on Intelligent Transportation Systems, 22(12), 7521–7530.
https://doi.org/10.1109/tits.2020.3003900
Jum’a, L., Qamardin, S., & Ikram, M. (2024). Developing resilience strategies amid supply chain
risks in the automotive industry: A stakeholder theory perspective. Business Strategy and
the Environment. https://doi.org/10.1002/bse.3977
Moradlou, H., Boffelli, A., Mwesiumo, D. E., Benstead, A., Roscoe, S., & Khayyam, S. (2023).
Building parallel Supply chains: How the manufacturing location decision influences
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https://doi.org/10.1111/1467-8551.12757
Pajić, V., Andrejić, M., Jolović, M., & Kilibarda, M. (2024). Strategic Warehouse Location
Selection in Business Logistics: A Novel approach using IMF SWARA–MARCOS—A case
study of a Serbian logistics service provider. Mathematics, 12(5), 776.
https://doi.org/10.3390/math12050776
Tripathy, A., & Eppinger, S. D. (2013). Structuring work distribution for global product
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