Unit 2: Supply Chain Design and Network Configuration

Principles of Supply Chain Network Design

Supply Chain Network Design (SCND) refers to setting up the optimal structure of the supply chain—factories, warehouses, suppliers, distribution centres, and retail nodes—so that products reach customers efficiently and cost-effectively.

Key Principles:

1) Align with Business Strategy

The supply chain must support business goals: cost leadership, differentiation, or speed.
Example: Amazon focuses on speed → dense network of warehouses.

2) Balance Cost and Service Level

Companies must minimize cost while ensuring customers get fast and reliable delivery.
Trade-off: More warehouses → faster delivery but higher cost.

3) Optimise Product Flow

Ensure smooth movement of materials from suppliers to customers.
Includes transportation mode selection and inventory placement.

4) Consider Demand Patterns

Design capacity based on:

Market demand
Seasonality
Product life cycle

High-demand areas may need regional distribution centers.

5) Use Technology and Data

Use digital systems (ERP, AI, GIS mapping, simulation models) for deciding:

Optimal locations
Inventory levels
Transportation routes

6) Build Flexibility and Resilience

Diversify suppliers
Add backup facilities
Use multi-country sourcing (China+1 strategy)

7) Sustainability and Compliance

Environment-friendly routes
Energy-efficient buildings
Compliance with international regulations (WTO, ISO)

Decisions on Facility Location, Capacity, and Distribution Channels

Network design requires three major decisions:

A) Facility Location Decisions

Choosing the best place for:

Factories
Warehouses
Distribution Centers

Factors affecting location:

Cost factors → land, labour, taxes
Market proximity → near customers
Supplier proximity → lower inbound costs
Infrastructure → roads, ports, airports
Government policies → SEZs, tax incentives
Risk factors → political stability, natural disasters
Environmental regulations

Examples:

Tata Motors located plants in Pune, Jamshedpur close to automotive clusters.
Foxconn in Tamil Nadu due to skilled workers + export ports.

B) Capacity Decisions

Deciding how much production volume or storage space a facility should have.

Types:

Long-term capacity planning - plant size, equipment, automation investment
Short-term capacity planning - scheduling, shift planning, outsourcing

Factors:

Demand forecast
Flexibility requirements
Cost of expansion
Technology level

Example: Amul builds cold-storage capacity based on seasonal milk production cycles.

C) Distribution Channel Decisions

Determining how products reach customers.

Types of distribution channels:

Direct-to-consumer (D2C) → example: Nykaa, MamaEarth
Retailers/Wholesalers
Distributors
Online marketplaces → Amazon, Flipkart
Third-party logistics (3PL) → DHL, BlueDart

Key considerations:

Delivery speed required
Market coverage
Transportation cost
Product type (perishable/non-perishable)

Global Sourcing Strategies: Make, Buy, or Outsource

Companies decide whether to manufacture internally or source from suppliers globally.

A) MAKE Strategy (In-house Production)

The company produces goods itself.

Advantages:

Full control over quality and production
Protection of intellectual property
Better coordination with R&D

Disadvantages:

High investment
Less flexibility

Example: Reliance Industries produces petrochemicals in-house to maintain control.

B) BUY Strategy (Outsourcing Input Materials)

Purchase components from external suppliers.

Advantages:

Lower cost
Access to specialized suppliers
Flexibility in scaling

Disadvantages:

Dependency on external sources
Risk of supply disruptions

Example: Bajaj Auto sources parts from global suppliers for cost efficiency.

C) OUTSOURCE Strategy (Contract Manufacturing)

A third-party company produces the final product.

Advantages:

Focus on core activities like marketing
Lower cost and investment
Faster market entry

Disadvantages:

Loss of control
Quality risks

Example:

Apple outsources manufacturing to Foxconn.
Many Indian pharma companies outsource API production to China.

Supplier Selection and Relationship Management

A strong supplier network ensures cost efficiency, quality, and delivery reliability.

A) Supplier Selection Criteria (Indian & Global Context)

1) Cost Competitiveness

Competitive pricing
Total cost including logistics and tariffs

2) Quality Capability

Certifications (ISO, BIS)
Past performance

3) Reliability & Delivery

On-time delivery record
Ability to meet urgent orders

4) Technological Capability

Automation, innovation
Digital integration (EDI, ERP)

5) Capacity & Flexibility

Ability to scale production
Handle fluctuations

6) Financial Stability

Prevent supplier bankruptcy risk

7) Sustainability Practices

Ethical labour
Environmental compliance

B) Supplier Relationship Management (SRM)

Types of Supplier Relationships:

1) Transactional Relationship

Short-term
Price-focused
Suitable for basic or commodity items

Example: Retailers buying standard packaging materials.

2) Collaborative/Partnership Relationship

Long-term relationship
Joint planning and forecasting
Shared risks and rewards
Vendor-managed inventory (VMI)

Example:

Maruti Suzuki collaborates deeply with Indian auto-component suppliers.
Walmart partners with Indian farms for quality produce.

3) Strategic Alliance

High mutual dependence
Joint product development
Shared technology

Example: Tata Motors and Cummins for engine technology.

Indian Context of Supplier Relationship Management

1) Auto Industry (Maruti, Tata, Mahindra)

Strong local supplier clusters
Tier-1 and Tier-2 suppliers integrated via JIT and VMI
Focus on innovation and quality upgrades

2) Pharma Industry

Bulk of APIs sourced from China
Indian companies building strategic partnerships with European suppliers

3) IT Services (Infosys, TCS)

Global vendor partnerships for hardware, cloud, cybersecurity

4) FMCG Sector (HUL, ITC)

Long-term contracts with farmers and raw-material suppliers
Digital procurement tools for transparency

Summary Table

Topic	Key Points
Principles of Network Design	Strategy alignment, cost-service balance, demand-driven, resilience
Facility Location	Cost, market proximity, infrastructure, risks
Capacity Decisions	Forecast-based, flexible, scalable
Distribution Channels	D2C, retail, distributors, online, 3PL
Make	Control, high cost
Buy	Flexible, dependency risk
Outsource	Low investment, quality risks
Supplier Selection	Cost, quality, reliability, technology, sustainability
SRM	Transactional, collaborative, strategic partnerships

Impact of Trade Policies, Tariffs, and Customs on Indian Exporters/Importers

Trade policies, tariffs, and customs procedures significantly affect how Indian businesses operate globally. Their impact is both financial and operational.

A) Impact on Indian Exporters

1) Export Incentives Affect Profitability

Government schemes like:

RoDTEP (Remission of Duties and Taxes on Exported Products)
EPCG Scheme
Duty Drawback

These reduce cost and improve competitiveness.

✔️ More incentives → higher margin
❌ Removal → reduced profit

2) Tariffs Imposed by Other Countries

If foreign countries impose high tariffs on Indian goods:

Effects:

Indian products become expensive abroad
Reduced export volumes
Need to shift focus to new markets

Example: US tariffs on Indian steel reduced Indian exporters' competitiveness.

3) Customs Delays Affect Delivery Speed

Slow customs clearance:

Causes shipment delays
Reduces reliability
Increases warehousing & demurrage cost

Modern reforms (ICEGATE, faceless assessment) have improved speed.

4) Non-Tariff Barriers (NTBs)

Foreign nations impose strict rules on:

Quality standards
Packaging
Labelling
Environmental compliance

Impact: Higher compliance cost but ensures quality improvement.

5) Exchange Rate Policies

Exporters benefit from a weaker rupee because they earn more INR for the same dollar revenue.

B) Impact on Indian Importers

1) Import Duties Increase Cost

High tariffs on raw materials and intermediate goods can:

Increase production costs
Reduce competitiveness in global markets
Encourage local sourcing (Atmanirbhar Bharat)

2) Customs Paperwork

Complex customs documentation can cause:

Shipment delays
Higher logistics cost
Production stoppages if raw materials are delayed

3) Anti-Dumping Duties

If India imposes anti-dumping duty (e.g., on Chinese chemicals):

Protects Indian manufacturers
Increases import cost
Forces importers to find alternative suppliers

4) Free Trade Agreements (FTAs)

India has FTAs with:

ASEAN
Japan
South Korea
UAE (CEPA)

Impact:

Lower tariff rates → cheaper imports
Faster processing
Reduced costs for Indian manufacturers

5) Licensing Requirements

Some products need special permissions:

Electronics
Pharmaceuticals
Defence equipment

This increases compliance costs and lead times.

Case Analysis: Analyzing Supply Chain Design Decisions

Case Scenario

ABC Textiles Pvt. Ltd., an Indian company exporting cotton garments to Europe and the US.

Key Supply Chain Design Decisions

1) Sourcing Decision

Cotton sourced from Gujarat and Maharashtra
Dyes imported from China (cost-effective)

Challenge: High import duty on Chinese chemicals increases cost → consider Vietnam or local suppliers.

2) Manufacturing Location

Main plant in Tiruppur, Tamil Nadu
Reasons: skilled labour, textile ecosystem, export port proximity (Tuticorin, Chennai)

3) Warehouse & Distribution Design

To deliver fast to Europe:

Establish a European distribution center in Rotterdam
Ship bulk inventory to EU → use local distribution for final delivery

Advantage: Reduces delivery time from 25 days → 3 days.

4) Transportation Decisions

Sea freight for bulk export (cost efficient)
Air freight for urgent seasonal orders (expensive but fast)

5) Technology Integration

ERP system for real-time visibility
Demand forecasting models for European markets
RFID for tracking cartons in warehouse

6) Risk Management

Challenges:

Port congestion
Customs delays
Currency fluctuations

Solutions:

Multi-port strategy (Chennai + Mundra)
Hedging currency
Multiple global suppliers for chemicals

Exercise: Design a Supply Chain Network for an Indian Manufacturing Exporter

Case: Design a Supply Chain Network for a Ceramic Tiles Exporter

Let’s design a network for “Shree Ceramix Ltd.”, a ceramic tiles exporter from Morbi, Gujarat.

A) Step-by-Step Supply Chain Network Design

Step 1: Identify Key Objectives

Reduce logistics cost
Improve export lead time
Increase global market reach
Ensure quality and compliance

Step 2: Product Flow Structure

Inbound Raw Materials:

Clay, sand, and feldspar sourced from Gujarat
Glazing chemicals imported from Italy/Spain

Outbound:

Finished tiles exported to the Middle East, Africa, and Europe

Step 3: Facility Location Decisions

a) Manufacturing Plant

Located in Morbi, due to:

Skilled labour
Raw material availability
Industrial cluster advantages

b) Export Warehouse

Location: Mundra Port (Gujarat)

Reason:

Largest private port
Fast clearance
Reduced inland transportation cost

c) International Distribution Centers

Dubai Distribution Hub

Close to Middle East and African buyers
Low tariffs
High re-export potential

Step 4: Capacity Planning

Manufacturing capacity: 50,000 sq. meters/day
Export warehouse capacity: 20,000 pallets

Additional flexible capacity using:

Contract manufacturing
Temporary warehousing during peak season

Step 5: Transportation Design

Inbound: trucks from raw material suppliers
Outbound India → Global: ocean freight containers
Last-mile: local distributors in each country

Step 6: Sourcing Strategy (Make vs Buy vs Outsource)

Make: Manufacture tiles in-house (core competency)

Buy: Import glazing chemicals from Italy/China

Outsource: Outsource printing designs to an Italian design company (design outsourcing)

Step 7: Supplier Selection & Relationship Management

Indian Suppliers

Quality certification required (ISI, ISO)
Price negotiation
On-time delivery

International Suppliers

Long-term contract for chemical imports
Quality inspection at source
Manage risks of currency fluctuations

Step 8: Technology Integration

WMS at export warehouse
GPS for truck tracking
Real-time shipment tracking
Demand forecasting using AI

Step 9: Risk Management

Alternative ports: Kandla (backup)
Dual suppliers for chemicals
Insurance for cargo damage
Compliance with customs rules

Final Network Map

Element	Decision
Factory	Morbi, Gujarat
Export Warehouse	Mundra Port
International Hub	Dubai
Sourcing	Local raw materials + imported chemicals
Distribution	Ocean freight → distributors
Technology	ERP, WMS, GPS tracking
Risk Plan	Multi-sourcing, insurance, backup ports