Agility and Proximity Considerations in Supply Chain Design

45 Pages Posted: 10 Jun 2015 Last revised: 26 Sep 2015

See all articles by Michael K. Lim

Michael K. Lim

Seoul National University, SNU Business School

Ho-Yin Mak

University of Oxford - Said Business School

Zuo-Jun Max Shen

University of California, Berkeley - Department of Industrial Engineering & Operations Research (IEOR)

Date Written: March 14, 2012

Abstract

Strategic supply chain design decisions are critical to the long-term success of a business. Traditional facility location models for supply chain design focus on the trade-offs between the costs and benefits of proximity, i.e., the distance between facilities and customers. These strategic-focused models do not consider the supply chain's agility, i.e., its ability to quickly respond to unexpected fluctuations in customer needs. In this paper, we study the problem of designing a supply chain distribution network under demand uncertainty and analyze how the optimal design characteristics of proximity and agility depend on various input parameters. We are able to draw managerial insights on how agility considerations may invalidate well-established and widely-accepted qualitative results derived from traditional models. In particular, we show that it is optimal to increase the density of DCs when the shortage penalty cost increases, and to decrease the density of DCs when a certain unit transportation cost parameter increases. Through these findings, our work conveys the message that traditional, proximity-based facility location models can be inadequate for designing modern responsive supply chains, and calls for the need to develop a new class of models for the task.

Keywords: Supply Chain Design, Flexibility System, Logistics, Inventory Sharing

Suggested Citation

Lim, Michael K. and Mak, Ho-Yin and Shen, Zuo-Jun Max, Agility and Proximity Considerations in Supply Chain Design (March 14, 2012). Available at SSRN: https://ssrn.com/abstract=2022679 or http://dx.doi.org/10.2139/ssrn.2022679

Michael K. Lim (Contact Author)

Seoul National University, SNU Business School ( email )

Seoul
Korea, Republic of (South Korea)

Ho-Yin Mak

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Zuo-Jun Max Shen

University of California, Berkeley - Department of Industrial Engineering & Operations Research (IEOR) ( email )

IEOR Department
4135 Etcheverry Hall
Berkeley, CA 94720
United States

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