Module 02
Strategy -> Structure -> Location -> Flow
01
What are we optimizing?
02
What should we own?
03
Where should we operate?
04
How should product flow?
Saturday
Design the System
Tuesday
Model the System
Cost, speed, responsiveness, resilience, differentiation, or a deliberate mix.
Vertical integration, outsourcing, suppliers, partners, and control points.
Facility choices shape service, cost, risk, capability, and customer access.
Push, pull, postponement, transportation, inventory, and information flow.
Learning Objectives
Distinguish efficient and responsive supply-chain strategies.
Evaluate make-vs.-buy and outsourcing decisions.
Evaluate facility locations using qualitative and quantitative methods.
Calculate a center-of-gravity location.
Formulate and solve a transportation problem.
Explain how changing assumptions or constraints changes the optimal design.
Supply Chain Design
These choices support the organization's strategy, mission, and competitive priorities before the day-to-day work begins.
Strategic Decisions
Tactical Decisions
These shape how the supply chain is managed, measured, and adjusted over time.
Centralize or decentralize control of the supply chain.
Secure supplier and customer payments along the chain.
Decide who should access transaction data across the chain.
Hint: Think visibility, speed, trust, risk, payment security, and decision rights.
Global Supply Chain Example
Inditex is a global fashion retailer based in La Coruna, Spain. Zara is its most recognized brand, operating thousands of stores across many countries and customer markets.
Signals
Market data + customer voice + trends
Design
La Coruna design teams translate demand
Make
Pattern-cutting, sewing, and finishing
Deliver
Rapid movement to retail stores
Customer response informs design, replenishment, and production decisions.
Nearby production can be worth more when trends move quickly.
Zara keeps enough control to reduce delay and act on market feedback.
Low cost
High utilization
Large batches
More forecast dependence
Speed
Capacity cushion
Smaller batches
Flexibility
Pull
The pull signal moves earlier because the customer configures the product before final assembly.
Push
Finished goods are pushed closer to dealers, then customers pull from available inventory.
Postponement keeps products generic longer, then customizes late in the chain to reduce mismatch and inventory risk.
Backward
Acquire or build capability closer to suppliers, inputs, materials, or production.
Forward
Acquire or build capability closer to distribution, channels, service, or customers.
More ownership can increase control and coordination.
More ownership can also increase complexity, fixed costs, and exposure to risk.
The right boundary depends on what capability creates advantage.
Offshoring
Different from outsourcing: the firm still owns the offshore capability.
The decision includes both economic and noneconomic issues.
Ownership does not eliminate distance, coordination, or political risk.
Reshoring
Managers revisit the decision when cost, service, risk, talent, customer demand, or strategic control changes.
Economic to Noneconomic Factors
Economic Reasons
Lower labor, import-duty, and capital costs.
Grow global market share and preempt competitors.
Access worldwide skills, suppliers, and government relationships.
Build robust value-chain networks for global markets.
Control and Risk Questions
What happens to remaining employees and public perception?
How exposed are intellectual property and key processes?
Can the firm manage political, regulatory, and communication risk?
Will the move build capability or create dependence?
Outsourcing
01
Many industries moved manufacturing jobs outside the firm or outside the United States.
02
Companies later outsourced standardized services such as billing, payment processing, data entry, and simple software work.
03
Outsourcing now includes engineering design, customer support, creative work, architecture, and chip design.
Contract Manufacturing
What They Do
Design
Customized product or component design.
Produce
Manufacturing, assembly, and packaging.
Serve
Work under contract for a brand owner or end user.
Why Managers Use Them
Technology
Access advanced manufacturing capabilities.
Speed
Move products to market faster.
Customization
Adapt goods for regional customer needs.
Scale
Lower total costs through economies of scale.
3PL Providers
Integrated Services
01
Packaging
02
Warehousing
03
Inventory Management
04
Transportation
Scale Advantage
Business Intelligence
See patterns across shipments, customers, routes, and service levels.
Analytics
Use data to coordinate routes, capacity, timing, and network trade-offs.
Visibility
Make disruptions, delays, and inventory movement easier to detect.
Textbook Solved Problem 6.1 gives managers a clean outsourcing decision: compare the total cost of each operating structure at the forecasted volume.
Model Notes
In-house cost = FCI + CI x Q
Outsource cost = FCO + CO x Q
Q* = (FCO - FCI) / (CI - CO)
Q* = (0 - 45,000) / (130 - 160) = 1,500 parts
Use the textbook Solved Problem 6.1 structure first, then adapt the same template for homework.
Model Notes
TC In-House = 45,000 + 130(Q)
TC Outsource = 0 + 160(Q)
Cost difference = TC In-House - TC Outsource
Break-even quantity = 1,500 parts
In-house cost
$201,000
Outsource cost
$192,000
Difference
$9,000
Break-even
1,500 units
6-4 Location Decisions
Location choices shape cost, customer service, and the reliability of the data used to coordinate work across the network.
Cost
Labor, land, utilities, taxes, inventory, transportation, and facility operating costs.
Service
Customer access, response time, delivery reliability, and the ability to support local needs.
Data Reliability
Better locations improve signal quality across demand, inventory, orders, and disruptions.
Facilities Managers Must Place
R&D Offices
Where ideas, product design, and technical capability develop.
Call Centers
Where customer information, service issues, and demand signals surface.
Warehouses
Where inventory buffers service promises and absorbs uncertainty.
Distribution Centers
Where transportation, speed, consolidation, and delivery cost meet.
Cost structure, demand, currency, incentives, and market access.
Regulation, legal stability, trade policy, taxes, and public risk.
Transportation, utilities, suppliers, data, and logistics capacity.
Talent, management depth, supplier maturity, and operational know-how.
Choose a supply-chain strategy: efficient, responsive, or hybrid.
Decide where to use push versus pull.
Identify what to own and what to outsource.
Name the most important facility-location factor.
Identify the biggest supply-chain risk.
Prepare a 60-second executive recommendation.
Cost, speed, local quality, resilience, or a deliberate hybrid.
Owning a capability gives control, but outsourcing can add flexibility and expertise.
The best site depends on the criteria and assumptions you are willing to defend.
Tuesday's models test whether the proposed network is feasible and cost-aware.
Tuesday
Use data to test the supply-chain decisions from Saturday.
Saturday
Strategy -> Ownership -> Location factors
Tuesday
Factor rating -> Center of gravity -> Transportation
Output
A recommendation you can defend
It depends on what we value.
Model Notes
Score_j = sum(W_i x R_ij)
Weights reveal what management values.
Ratings reveal how each location performs.
Use the Location Analysis template to compare candidate sites with weighted criteria.
Model Notes
Criteria x Importance x Performance
Weighted score = weight x rating
Highest total score wins under the current assumptions
Increase the eastern demand point and watch the center move.
Center: (52.4, 51.0)
Model Notes
Cx = sum(Xi x Wi) / sum(Wi)
Cy = sum(Yi x Wi) / sum(Wi)
Interpretation: a demand center, not automatically a final address.
Use the Center of Gravity template to locate a weighted demand center.
Model Notes
Original center: calculate first
Changed demand: recalculate
Explain direction, not just the coordinate
Model Notes
Decision: X_ij = units shipped from origin i to destination j
Objective: Min sum_i sum_j C_ij X_ij
Supply: sum_j X_ij <= S_i
Demand: sum_i X_ij = D_j
Nonnegative: X_ij >= 0
Cost
$1,740
Capacity feasible
Yes
Demand satisfied
Yes
Use SUMPRODUCT to connect the cost matrix and shipment matrix.
Model Notes
=SUMPRODUCT(CostMatrix, ShipmentMatrix)
Supply used <= available supply
Demand received = required demand
Objective: total cost.
To: minimize.
Changing cells: shipment matrix.
Constraints: shipments <= capacity.
Constraints: receipts = demand.
Constraints: shipments >= 0.
Method: Simplex LP.
Every destination receives required demand.
No origin exceeds available capacity.
No shipment quantity is negative.
The objective formula includes every route.
Feasible and optimal are not the same thing.
Before rerunning Solver, predict what can happen to minimum cost.
What did management's requirement cost us?
Model Notes
Original optimal cost
Constrained optimal cost
Cost of the requirement = new cost - old cost
Problem 28: Make or buy -> break-even.
Problem 39: Where is demand centered? -> center of gravity.
Problem 40: Demand changed -> recalculate and interpret center of gravity.
Problem 43(b): Who ships what where? -> transportation model + Solver.
Problem 43(c): Management adds a restriction -> add constraint + re-optimize.
Hint: Think resilience, brand, quality, service, supplier power, ethics, or long-term capability.
Strategy defines what matters.
Structure decides what the firm owns, coordinates, or buys.
Location models make trade-offs visible.
Flow models quantify cost and feasibility.
Managers use models to inform decisions, not to avoid judgment.