Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy
Supply Chain Network Design — Explained + Example
As taught in the Supply Chain Basics for Procurement Professionals Course / ★★★★★ 4.9 rating
What is a supply chain network design?
- Supply chain network design is the process of creating a model of the supply chain to understand resources, costs, and delivery time.
- Without considering supply chain network, a company can be counterproductive in the long run.
- Significant costs (80%) in the supply chain are identified during the design phase, making network design crucial.
Defining Supply Chain Network Design
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Supply chain network design refers to creating and constructing a model of your supply chain to understand the resources required, costs involved, and time needed to deliver products and services to the market better.
This process allows you and other leaders to optimize the supply chain network given the available resources.
The model enables a company to identify any inefficiencies and potential risks that may exist within its supply chain.
Additionally, it allows for the analysis of hypothetical situations, enabling the optimization of operations to decrease costs, enhance service quality, and increase responsiveness.
The goal of supply chain network design is to create a network that minimizes costs, maximizes service levels, and improves overall efficiency.
This involves considering various factors such as demand variability, lead times, transportation costs, inventory holding costs, and other operational costs.
Supply Chain Network Design Example
Zara, a global fashion retailer based in Spain, has developed a supply chain network that enables it to design, produce, and deliver new clothing items to its stores within a few weeks. This rapid turnaround is achieved through a combination of vertical integration, strategic manufacturing locations, and efficient logistics.
The company’s design team works closely with market specialists to identify emerging fashion trends. Once a new design is approved, Zara utilizes its own factories and a network of local subcontractors in Spain, Portugal, and Morocco to produce the garments. This proximity allows for quick adjustments and reduces lead times.
After production, items are sent to Zara’s central distribution center, known as “The Cube,” located in Arteixo, Spain. From there, products are shipped to stores worldwide, with European locations receiving deliveries within 24–36 hours and other regions within 48 hours. This efficient distribution system ensures that stores receive new inventory twice a week, keeping the product offerings fresh and aligned with current trends.
By maintaining control over its design, production, and distribution processes, Zara can respond swiftly to customer preferences and market changes, setting it apart from competitors in the fast fashion industry.
The Importance of Supply Chain Network Design
Analysts said that 80% of supply chain costs are identified at the design phase of the product and supply chain network. This is why failing to consider network design can cost the company a lot and be counterproductive in the long run.
By designing and modeling the supply chain network, businesses can gain a better understanding of the factors that affect the flow of goods and services, such as transportation costs, inventory holding costs, and lead times.
This enables businesses to pinpoint inefficiencies and potential risks within their supply chains, which can then be identified, addressed, and resolved to enhance overall performance. Furthermore, the ability to analyze “what-if” scenarios through the supply chain network model enables businesses to test and optimize different strategies and configurations.
This allows for the identification of the most cost-effective and efficient supply chain network design, reducing costs and enhancing service quality and responsiveness.
How to Design Your Own Supply Chain Network
Designing a supply chain network is not a one-off project; it is a continuous loop in which strategy, data, and technology constantly interact and mature. Below is a five-step framework that incorporates practical guidance on risk management, ESG metrics, and modern digital tools.
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1. Set Goals and Boundaries
You can begin with a clear hierarchy of targets. Service level commitments, logistics budget, acceptable carbon footprint, and risk tolerance all need to be expressed in precise numbers.
Include potential risk scenarios such as geopolitical events, climate shifts, and capacity constraints, so that you know how much redundancy you are willing to finance for resilience.
ESG objectives such as carbon dioxide per shipment and supplier labor practices should stand on the same footing, because they will influence routes, partners, and inventory policies.
2. Collect and Clean the Data
Your ERP already holds most essentials: item-level demand, freight rates, warehouse costs, lead times, and even emission factors. The real challenge lies in validation and standardization. Good master-data governance delivers a greater payoff than the most sophisticated model when input values are unreliable.
3. Model the Network With the Right Technology
Whether you purchase software or develop it internally, the tool must reflect the nuances of your business, including seasonal capacity limits, customer segment service tiers, mode-specific cycle times, and the cost of alternative scenarios.
Modern solutions provide digital twins and visual analytics, enabling executives to run rapid what-if tests, for example, closing a warehouse or changing customs rules.
4. Stress-Test Scenarios and Sanity-Check Results
Software generates numbers, yet experts who grasp commercial realities must screen out options that are technically optimal but politically or commercially unacceptable. Assess every scenario through three lenses: finances (capital and operating expenses), service (service level agreements and delivery speed), and risk plus ESG (resilience against disruption and carbon output). A balanced scorecard produces a network that is economical, quick, and sustainable.
5. Implement, Measure, Refine
Once the preferred configuration is chosen, introduce changes gradually, monitor savings, and adjust parameters. Success depends on a perpetual cycle: optimize, then implement, then measure, and finally adjust. Conduct this cycle each quarter or year, and launch additional reviews whenever demand, product portfolio, or regulations shift.
Areas of Focus While Creating a Strong Network Design
Here are some of the areas you should focus on planning while building a strong network design:
1. Transportation and logistics
Effective planning of transportation and logistics is a critical aspect of supply chain management, as it plays a key role in driving the overall flow of goods and ensuring smooth operational procedures.
Optimizing logistics through route planning allows for the timely and efficient transportation of both raw materials and finished products.
2. Location of distribution centers and warehouses
The placement of supply chain nodes in strategic locations is an essential aspect of building a strong and efficient supply chain network.
This entails identifying the appropriate locations and determining the optimal number of facilities required.
The size of distribution centers and warehouses should also be based on the specific needs of the supply chain.
3. Inventory planning
One of the most challenging aspects of supply chain management is inventory planning and management.
It involves identifying the optimal level of inventory that needs to be stored and transported, as well as planning for fulfillment time and response time that must be maintained.
4. Procurement costs and processes
Procurement of materials and products requires effective supplier management in terms of cost, time, and location.
It is crucial to know the appropriate number and quality of manufacturers and suppliers to ensure a reliable supply chain.
Conclusion
This detailed article explores the concept of supply chain network design, providing insights into its definition, significance, and the key areas to focus on when building a robust network design.
It emphasizes the importance of understanding the resources, costs, and time required to deliver products and services to the market. The article also guides readers on how to design their own supply chain network effectively.
Frequentlyasked questions
What is supply chain network design?
Supply chain network design refers to the process of creating and constructing a model of your supply chain in order to gain a better understanding of the resources required, costs involved, and time needed to deliver products and services to the market.
Why is supply chain network design important?
Supply chain network design is important because it ensures that a business is able to meet customer demand while keeping costs as low as possible.
What are some benefits of effective supply chain network design?
Effective supply chain network design can result in reduced costs, improved customer service, increased operational efficiency, enhanced agility and flexibility to respond to market changes, and improved collaboration with suppliers and customers.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.
