How Supply Chain Network Design Works

Supply chains move, shift, and morph over time. Ideally, these changes occur to accommodate growth, but sometimes factors like natural disasters, economic downturns, or the threat of tariffs also impact supply chains.

Supply chain network design ensures that efficient supply chains are carefully configured. Businesses consider multiple factors for an ideal supply chain, from optimal locations for manufacturing to producing high-quality products at a reasonable price for consumers. Business owners and supply chain managers typically plan every facet of the supply chain design, making continuous improvements over time to accommodate shifts in consumer demand, social trends, and changes in partner relationships.

Most supply chains are designed with a few trade-offs. Designers make informed decisions around procurement, manufacturing, warehousing, and service levels, among other factors.

Read on to learn how good supply chain network design encompasses strategic planning for efficiency and proactive decision-making based on a data-driven approach.

What is supply chain network design?

Supply chain network design is a methodical, systematic approach to establishing supply chains. Rather than approaching a supply chain piecemeal, supply chain network design factors human observations of a changing economic, political, or social landscape into data-driven decisions. The practice evolved from logistics and operational strategies that managers and business owners created over the past few decades.

“Your supply chain network design begins with where you can make your product and where you’re selling your product,” says Laura Schwabe, the vice president of supply chain at SOMOS Foods. There are multiple factors that dictate supply chain procedures—such as lead times, customer satisfaction, sustainability, and cost savings—all of which can, at times, be at odds. Managers are often balancing cost with optimal network design, asking questions like, Do fast lead times override cost-efficiency?

Business owners and supply chain management teams for both brick-and-mortar and ecommerce enterprises analyze data around questions like this one to decide which factors of the supply chain best align with their businesses’ goals.

Factors in supply chain network design

• Quality and service level
• Transportation costs
• Inventory management and costs
• Lead times
• Regulatory compliance
• Economy
• Political climate
• Supply chain contingencies
• Environmental and social impact

Supply chain variables like data analytics around warehouse costs, fuel prices, import taxes or tariffs, labor costs, and inventory levels all factor into supply chain design. Below are common factors businesses consider when mapping out their supply chain network model:

Quality and service level

“Quality is incredibly important in all aspects of your supply chain, especially when you’re talking about food,” Laura says. She adds that service from providers like manufacturers goes hand in hand with quality. Criteria for quality and service level will vary depending on the company, but might include things like:

• Attention to detail. Manufacturing partners deliver on time and in correct quantities. 

• Control. Warehousing providers have control of incoming and outgoing inventory.

• Reliability. Logistics partners deliver on-time in-full (OTIF).

• Accuracy. Customers receive accurate deliveries, on time. 

Transportation costs

Strategic network design also requires an assessment of freight costs and associated fees. Business owners and supply chain managers might balance the quality and cost optimization of manufacturing facilities, distance between warehouses or distribution centers, transportation routes, fuel, and tolls for the most informed decision-making possible. A supply chain’s transportation costs may include:

• Transportation labor. From drivers and loaders to mechanics and engineers, you will have to pay for labor.

• All types of transportation. Modes and costs include trucking, freight, cargo, and air, including fuel.

• International fees. Factor in duties, taxes, tariffs, custom fees, and tolls when crossing international borders or state lines.

Inventory management and costs

Managing inventory levels is tricky; businesses want to be prepared for a surge in demand, yet too much inventory is expensive to warehouse, and certain products, like food and some beauty products, risk spoilage. Maintaining low inventory levels is cheaper but runs the risk of stockouts. Inventory costs that factor into supply chain network design:

• Cost of labor. You’ll need to pay the workers who load and unload shipments at the warehousing facilities.

• Rent. Unless a business owns its own warehouse, companies pay rent for inventory storage.

• Utility fees. You might pay fees for electricity, temperature control, and other utilities.

• Cost of warehouse equipment. Everything from forklifts to Internet of Things (IoT) devices like smart shelving comes at a price.

Lead times

Customers want their orders ASAP, which requires a lot of unseen work for a business to pull off successfully. Short lead times typically make customers happy and likely to return, but they can be costlier, as workers might bill for overtime, or partners charge rush fees for services. However, long lead times could convince customers to purchase elsewhere. Several factors that impact lead times include:

• The manufacturer. Manufacturing speed, quality, and location.

• Geography. The optimal location of warehouses and distribution centers means shorter transportation times.

• Warehouse costs. These can include labor, materials, rent or mortgage, and machinery upkeep.

• Procurement quality. Ordering high-quality goods and/or specific materials can take longer to source.

• Purchase processes. Purchasing raw materials and selling products to customers can be quick and streamlined or lengthy and complicated.

Regulatory compliance

Regulatory compliance factors into supply chain network design, for both domestic manufacturing and imported materials or products. Regulations affect cost, production speeds, transportation methods, and sustainability.

Regulations can also change: The FDA ban on FD&C Red No. 3 (known more commonly as “red dye number 3”) in food is a recent example of this. Every country has its own regulations pertaining to manufacturing, production, and services, and they can differ from sector to sector. In the United States, most regulation is federal, though some states have specialty compliance regulations—for example, when it comes to dairy production. 

Economy 

The general health of the economy, real or perceived, impacts supply chain network design. The economy can dictate consumer behavior, from the purchase of major assets to small frivolous expenditures. Inflation and a high cost of living, for instance, tend to impact middle-income and lower-income earners the greatest, tightening their budgets. A bull market often has the opposite effect, giving people the confidence to spend money. Bull and bear markets have a similar impact on businesses: When the economy is stable, businesses tend to move toward expansion; when the economy is fragile, businesses tend to remain at status quo or even downsize.

“We have discussions all the time about the economy—the tariffs, the appreciation of the dollar versus the peso,” Laura says, adding that SOMOS, which manufactures all its food products in Mexico, does business in both US dollars and Mexican pesos. She and her team analyze the global markets for rice, one of SOMOS’ ingredients. They might examine how the economy impacts the cost of rice in India versus the cost of rice in Thailand, for example. 

Political climate

A volatile political climate can impact international trade law and policies, inspire international sanctions and boycotts, and reduce tourism, among other radical changes that impact businesses with international supply chains. A few examples of the impact unstable political climates can have on supply chain networks include:

• Fluctuating international tariffs. When tariffs come and go unpredictably, it can make businesses hesitant to move forward with business plans that may include international trade and/or supply chain networks.

• Reduced tourism rates. When tourist numbers dwindle, businesses like restaurants and hotels may hesitate to buy products.

• Changes to immigration laws. If new immigration laws take effect that suddenly prevent or promote labor in certain sectors—for example, in the agricultural or service industries—this can imbalance supply chain labor forces.

Supply chain contingencies

Designing a resilient supply chain network includes contingency plans for catastrophes and other smaller supply chain disruptions. “Having an agile supply chain is really important to be able to deal with the external factors of tariffs, natural disasters, the port of LA going on strike,” Laura says, speaking from her firsthand experience. She adds one more example: A cyberattack recently shut down the system of one of SOMOS’ large customers.

Creating an agile supply chain means you have the ability to quickly pivot, adapt, or change course if need be. This could entail having a robust network of distributors versus a single one, or having a standard operating procedure in place for shipping via ground transportation instead of air, if necessary. Additionally, strategize for worst-case scenarios. Laura says that, in 2025, her team worked on securing alternatives in case the US placed a 25% tariff on imports coming in from Mexico. “We had multiple different strategies for how we were going to offset costs,” she says.

Environmental and social impact

Many businesses include sustainable and socially responsible goals and practices in their supply chains, often referred to as ESG (environmental, social, and governance). This could include sourcing from fair trade– or USDA Organic–certified farms, reducing carbon emissions, or using biodegradable packaging and shipping materials.

“Sustainability is a spectrum,” Laura says. “We do a lot of it, but I would say that there are brands who really focus on recyclability and carbon emissions, and if that’s a pillar to your brand, then it needs to be a pillar within your supply chain network design.” Many sustainable initiatives are costly: Laura gives SOMOS’ microwavable, BPA- and PFA-free pouches as an example. “I’d love to say our pouches are recyclable,” she says, “but it’s cost-prohibitive, and the technology of the film isn’t quite there yet.”

Customers and investors are increasingly interested in seeing their own values represented in the brands they purchase from. A business’s supply chain might be appealing to environmentally conscious customers if it encompasses:

• Clean energy manufacturing and transportation (reducing carbon emissions and minimizing its carbon footprint)

• General reduction of waste, including use of biodegradable packaging and materials

• Union-only manufacturing

• Ethical sourcing and labor practices

• Transparency and traceability of raw materials

Optimizing your supply chain network design

1. Define goals
2. Identify constraints and weaknesses
3. Collect and analyze data
4. Optimize technology that works for your business
5. Develop twin models
6. Plan for unexpected scenarios
7. Monitor and improve

Depending on your business’s size, supply chain complexity, and budget, you might hire a supply chain network design manager or team to see the process through. But whether you have a complicated global supply chain network or a fairly simple supply chain, here are steps you can take toward designing a supply chain network. 

1. Define goals

Prior to defining goals, assess your current supply chain, including shipping methods, distances between manufacturing facilities, and all associated costs. From there, define your supply chain goals and priorities, such as to minimize costs, elevate your level of service, achieve sustainable practices, etc.

SOMOS has conducted several “center of gravity analyses,” Laura says. This process takes data from a set period—six months, for example—and synthesizes inbound, warehousing, and outbound costs. She offers a hypothetical: Say you’ve been shipping everything out of one warehouse, but you suspect it might be beneficial to ship from two warehouses. A center of gravity analysis could demonstrate that, despite inbound logistics and warehousing costs increasing, you’ll ultimately save money with a second warehouse that’s closer to a critical mass of customers.

2. Identify constraints and weaknesses

Maybe you discover you don’t have reliable data on consumer trends, or you acknowledge that you’re experiencing frequent stockouts—identifying your supply chain constraints can lead to effective risk mitigation. Get granular and examine every facet of the supply chain.

Laura recalls a supply chain network recalibration SOMOS had to make with a tortilla chip manufacturer it used in Guadalajara, Mexico. “Guadalajara to the border is a bit of a long commute in a truck, and chips are incredibly lightweight—we say it’s like shipping air. It’s very expensive,” she says. “We were not able to be competitive with cost because of that supply chain design and had to discontinue the product.”

To clarify constraints and weaknesses in your supply chain, examine every aspect and think outside the box if need be. Ask yourself: Are distribution trucks half full when making deliveries and charging you full price? Are you seeing patterns of stockouts or spoiled inventory? Do the locations of your warehouse and distribution centers make geographic sense? If your warehousing processes are highly manual and costly, consider warehouse automation.

3. Collect and analyze data 

Strong, reliable data on the flow of goods, from raw material procurement to manufactured products, weak/strong selling SKUs, and other performance metrics are paramount for an efficient supply chain. Businesses typically collect data via software-as-a-service (SaaS) platforms like Blue Yonder, Coupa, Logility, and Oracle SCM Cloud. In addition to internal data analytics, data from outside sources, such as reports by partners and consultants, is also valuable to supply chain network design. Data analysis provides metrics on suppliers, manufacturers, warehousing, distribution centers, transport, inventory levels, and consumer trends.

4. Optimize technology that works for your business

Enterprise resource planning (ERP) systems and smart devices can help optimize supply chain network design, but every business has different needs. For example, SOMOS runs its business on SAP, an ERP software suite, using it for the transactional side of the business—like placing purchase orders or receiving sales orders. “A lot of the modeling and the data tracking that we do is in Excel or homegrown databases that we’ve built,” Laura says. “We do not use off-the-shelf tools necessarily. We use things that we’ve created.” Technology options include:

• ERP systems like Oracle NetSuite or SAP for larger companies, or Microsoft Dynamics 365 or Odoo for smaller businesses.

• AI, blockchain technology, robotics, automation, and smart devices can contribute to supply chain network design.

• It’s possible to create bespoke tools if off-the-shelf systems are not meeting a specific need.

5. Develop twin models

A supply chain digital twin is a virtual representation of your supply chain. You can feed a digital twin real-time data to test various supply chain scenarios—sourcing, shipping, or distances between production facilities, for example—to see how the supply chain reacts. Digital twin options include platforms like Azure Digital Twins, Coupa, Sophus X, AIMMS, and Cosmic Frog. 

6. Plan for unexpected scenarios

Businesses weave contingency plans into their supply chain to prepare for challenges like natural disasters, global pandemics, or unexpected tariffs. Laura points out that while no one can predict what will happen with the weather or the economy, it’s important to look a few years ahead for your supply chain network so that if the economy changes, you can either take advantage of it or prevent it from impacting your business. To plan for more realistic or immediate “what if” risks—for example, the likelihood of fuel prices rising—use scenario planning.

7. Monitor and improve

Supply chain network design is an ongoing process, as various factors in the equation can change on a dime. “Your supply chain design should always be ever-evolving, always looking for efficiencies and cost savings,” Laura says. She adds that while there is no need to break something that’s working, “there always can be improvements. You can always save costs, especially as you grow in your supply chain.”