The Impact of Uncertainty on Network Design

THE IMPACT OF UNCERTAINTY ON NETWORK DESIGN

Supply chain design decisions such as the number and size of plants to build, the size

and scope of a distribution system, and whether to buy or lease one's facilities involve

significant investment. These decisions, once made, cannot be altered in the short term.

They remain in place for several years and define the constraints within which the sup-

ply chain must compete. Thus, it is important that these decisions be evaluated as accu-

rately as possible.

Over the life of a supply chain network, a company experiences fluctuations in

demand, prices, exchange rates, and the competitive environment. A decision that

looks very good under the current environment may be quite poor if the situation

changes. For example, long-term contracts for warehousing are more attractive if the

demand and price of warehousing do not change in the future or if the price of ware-

housing goes up. In contrast, a short-term contract is more attractive if either demand

or the price of warehousing drops in the future. The degree of demand and price uncer-

tainty has a significant influence on the appropriate portfolio of long- and short-term

warehousing space that a firm should carry.

Uncertainty of demand and price drives the value of building flexible production

capacity at