Supply Chain Frontiers issue #45
When designing supply chain networks, companies locate facilities to give them maximum competitive advantage. In other words, companies strive to make it as easy and as cost-effective as possible for customers to access their facilities. This is fairly straightforward for normal operating conditions, but the exercise becomes more challenging when major disruptions such as natural disasters are taken into account. New research from Dr. Mozart Menezes, Professor of Supply Chain Management at the MIT-Zaragoza International Logistics Program, Zaragoza, Spain, and Dr. Oded Berman and Dr. Dmitry Krass, both from the Joseph L. Rotman School of Management, University of Toronto, Canada, aims to help companies make better decisions about how they design networks for extreme conditions.
The supply chain networks in question could be regional, national, or international in scope. And the component facilities might be distribution centers, plants, or some other type of facility. The term “customers” covers those in need of your product or service, which includes buyers and entities within the organization; for example, a company-owned plant that delivers to the organization’s sales outlets.
“Many factors influence where facilities are located in a network, but we are looking at the options in emergency situations. In a hurricane, for instance, you cannot serve the affected population with a facility that is in the stricken area,” says Menezes.
The impact of disasters such as Hurricane Katrina that struck the US Gulf Coast in 2005, and the tsunami that devastated parts of Japan last year, ripples through supply chains far and wide. Moreover, manufacturing methods such as just-in-time delivery and lean inventory models that are meant to cut costs can make networks vulnerable to even relatively mild supply-demand imbalances.
When facilities are disabled and there are no viable alternatives, the cost in terms of customer dissatisfaction can be high. If working facilities are not close enough to the customer’s location to provide a sufficient level of convenience, or if operational centers are too busy to provide the required service when a customer visits, the result can be a serious loss of demand for the seller.
“My research provides insights into the role of location in mitigating the effects of facility failure in supply chain networks and, by extension, the impact on long-term operating costs,” Menezes says.
There are various ways in which an enterprise can use facility location as a way to make a network less prone to service failure during crisis situations. They can make distribution centers in critical areas less vulnerable to shutdowns by physically strengthening the structures or reconfiguring the layout, for example, but the additional investment has to be justified. Building redundancy into the network is another possible mitigation strategy that incurs additional expense.
The project headed by Menezes considers two types of scenarios: one where customers have no information on the operational status of a facility, and a second where customers have full information on the condition of the facility they are visiting.
In the first scenario, customers without advance information may have to visit several facilities before finding one that is operational. The cost to the customer has three components: travel (searching for a functional facility), reliability (how reliable the network is), and information (being ill informed about which facilities are available in emergency situations). Possible remedies are constructing more facilities to reduce travel costs, making the system more reliable, or removing informational uncertainty by providing an information hub.
When customers are informed about the state of the supply chain network, they can make better decisions about accessing facilities when disruptions occur. In this case, the goal is to find ways to locate facilities so that customers can make these decisions as easily and cost-efficiently as possible.
Up until now, much of this work has been carried out in relation to public-service facilities such as hospitals, but the same principles apply to the private sector. As Menezes points out, “Given the increasing risk profile of supply chain networks, the importance of facility location in mitigating the effects of large-scale disruptions is likely to increase.”
For more information on the facility location research project, contact Dr. Mozart Menezes.