© 2004 Prentice-Hall, Inc. Chapter 5 Network Design in the Supply Chain Supply Chain Management (2nd Edition) 5-1

© 2004 Prentice-Hall, Inc.

Chapter 5Network Design in the Supply

Chain

Supply Chain Management(2nd Edition)

5-1


Outline

A strategic framework for facility location Multi-echelon networks Gravity methods for location Plant location models

5-2


Network Design Decisions

Facility role Facility location

Ex: Toyota, Amazon.com Capacity allocation Market and supply allocation

5-3


Factors InfluencingNetwork Design Decisions

Strategic Factors Technological Macroeconomic Political Infrastructure Competitive Customer Response Time and Local presence Logistics and facility costs

5-4


Strategic Roles of a Facility Offshore facility: Low cost facility for export

production Source Facility: Low cost facility for global

production Server Facility: Regional Production Facility Contributor Facility: Regional Production Facility

with Development Skills Outpost Facility: Regional Production Facility built to

gain local skills Lead Facility: Facility that leads in development and

process technologies


Technological Factors

Characteristics of available production technologies have a significant impact on the network design:– If production technology provide significant economies of

scale, few high capacity locations are the most effective– If facilities have lower fixed costs, many local facilities are

preferred. Flexibility of the production technology impacts the

degree of consolidation in the network:– If the production technology is inflexible, build many local

facilities– Else, build few but large facilities


Macroeconomic Factors

Tariffs and tax incentives– Tariffs: Any duties that must be paid when product,

equipment are moved across an international, state or city boundry.

– Developing countries have free trade zones Exchange rate and demand risk

– Valuable TRL and textile industry in Turkey


Infrastructure Factors

Availability of sites Availability of labor Proximity to transportation terminals,

railservice, airports, seaports, Highway access Congestion Local utilities


Competitive Factors

Positive externalities between firms– Ex: Gas stations and retail shops

Auto Repair Districts Locating to Split the market

– When firms do not control price, but compete on distance from the customer, they can maximize market share by locating close to each other and splitting the market


Ex:Locating to Split the Market Let there be two firms located at

points a and 1-b on a line segment between 0 and 1. Let the customers be located uniformly on this line.If the total demand is 1, the demand at the two firms is maximized when a=b=1/2.

Thus the market share is maximized when both firms are together, although the average distance travelled is greater than the seperate case.

2

1,

2

121

abd

bad

0 1a 1-b

2

1 ba


Service and Number of Facilities

Number of Facilities

ResponseTime

5-11


Customer

DC

Where inventory needs to be for a one week order Where inventory needs to be for a one week order response time - typical results --> 1 DCresponse time - typical results --> 1 DC


Customer

DC

Where inventory needs to be for a 5 day order Where inventory needs to be for a 5 day order response time - typical results --> 2 DCsresponse time - typical results --> 2 DCs


Customer

DC

Where inventory needs to be for a 3 day order Where inventory needs to be for a 3 day order response time - typical results --> 5 DCsresponse time - typical results --> 5 DCs


Customer

DC

Where inventory needs to be for a next day order Where inventory needs to be for a next day order response time - typical results --> 13 DCsresponse time - typical results --> 13 DCs


Customer

DC

Where inventory needs to be for a same day / next Where inventory needs to be for a same day / next day order response time - typical results --> 26 DCsday order response time - typical results --> 26 DCs


Costs and Number of Facilities

Costs

Number of facilities

Inventory

Transportation

Facility costs

5-17


Percent Service Percent Service Level Within Level Within

Promised TimePromised Time

TransportationTransportation

Cost Buildup as a Function of FacilitiesC

ost

of O

per

atio

ns

Cos

t of

Op

erat

ion

s

Number of FacilitiesNumber of Facilities

InventoryInventory

FacilitiesFacilities

Total CostsTotal Costs

LaborLabor

5-18


A Framework forGlobal Site Location

PHASE ISupply Chain

Strategy

PHASE IIRegional Facility

Configuration

PHASE IIIDesirable Sites

PHASE IVLocation Choices

Competitive STRATEGY

INTERNAL CONSTRAINTSCapital, growth strategy,existing network

PRODUCTION TECHNOLOGIESCost, Scale/Scope impact, supportrequired, flexibility

COMPETITIVEENVIRONMENT

PRODUCTION METHODSSkill needs, response time

FACTOR COSTSLabor, materials, site specific

GLOBAL COMPETITION

TARIFFS AND TAXINCENTIVES

REGIONAL DEMANDSize, growth, homogeneity,local specifications

POLITICAL, EXCHANGERATE AND DEMAND RISK

AVAILABLEINFRASTRUCTURE

LOGISTICS COSTSTransport, inventory, coordination

5-19


A Framework For Network Design Decisions

Define SC Strategy– Base the strategy on the competitive strategy, economies of

scale or scope. Define the regional facility configuration

– Approx. no. of facilities, regions where facilities will be set up, whether a facility will produce all products of a given market, etc

Select desirable sites within a given region– Based on the analysis of infrastructure availability

Location choices– Select a precise location and capacity allocation for each

facility


Conventional Network

CustomerCustomerStoreStore

MaterialsMaterialsDCDC

ComponentComponentManufacturingManufacturing

VendorVendorDCDC

Final Final AssemblyAssembly

FinishedFinishedGoods DCGoods DC

ComponentsComponentsDCDC

VendorVendorDCDC PlantPlant

WarehouseWarehouse

FinishedFinishedGoods DCGoods DC

CustomerCustomerDCDC







VendorVendorDCDC

5-21


Tailored Network: Multi-Echelon Finished Goods Network

RegionalRegionalFinishedFinished

Goods DCGoods DC

RegionalRegionalFinishedFinished

Goods DCGoods DC

Customer 1Customer 1DCDC

Store 1Store 1

NationalNationalFinishedFinished

Goods DCGoods DC

Local DCLocal DCCross-DockCross-Dock

Local DC Local DC Cross-DockCross-Dock

Local DCLocal DCCross-DockCross-Dock

Customer 2Customer 2DCDC

Store 1Store 1

Store 2Store 2

Store 2Store 2

Store 3Store 3

Store 3Store 3

5-22


Models for Facility Location and Capacity Allocation

Goal is to maximize the overall profitability while providing the appropriate responsiveness.

Managers use network design models in two different ways:– Decide on locations and capacities of facilities

– Decide on the market share of each facility and identify lanes of transportation

Models are two types:– Network optimization models

– Gravity models


The Required Inputs for the Models

Location of suppliers Location of potential facility sites Demand forecast by market Facility, labor, material costs Transportation costs between sites Inventory costs by site and unit Sale prices in different regions Taxes and tariffs between locations Desired response time and other service measures


Phase II: Network Optimization Model

The capacitated plant location modelInputs:

n: # potential plant locations/capacity

m: # markets or demand points

Dj: Annual demand from market j, j=1,2,...,m

Ki: Potential capacity of plant i, i=1,2,...,n

fi: Annualized fixed cost of keeping factory i open

cij: Cost of producing and shipping one unit from factory i to market j.

Decision variables:

Yi: 1 if plant i is open, 0 otherwise

Xij: quantity shipped from factory i to market j


The capacitated plant location model (cont’d)

niy

niyKx

mjDx

toSubject

xcyfMin

i

m

jiiij

n

ijij

n

i

n

i

m

jijijii

,...,2,1}1,0{

,...,2,1,

,...,2,1,

1

1

1 1 1


Ex: Sun Oil Company Vice president of Supply Chain decides to view the worldwide demand

in five regions: North America, South America, Europe, Asia, Africa

Demand Region

Production and Transportation Cost per 1,000,000 Units Fixed Low Fixed High

Supply Region N. America S. America Europe Asia Africa Cost ($) Capacity Cost ($) Capacity

N. America 81 92 101 130 115 6,000 10 9,000 20

S. America 117 77 108 98 100 4,500 10 6,750 20

Europe 102 105 95 119 111 6,500 10 9,750 20

Asia 115 125 90 59 74 4,100 10 6,150 20

Africa 142 100 103 105 71 4,000 10 6,000 20

Demand 12 8 14 16 7


Gravity Methods for Location

Ton Mile-Center Solution– x,y: Warehouse Coordinates

– xn, yn : Coordinates of delivery

location n

– dn : Distance to delivery

location n

– Fn : Annual tonnage to delivery

location n

n

i i

i

n

i

i

i

ii

n

i i

i

n

i

i

i

ii

n

dF

dF

Fy

y

dF

dF

Fx

x

yyxxd nn

1

1

1

1

22 )()(

Min )()( 22 yyxxF iii

5-28


Network Optimization Models

Allocating demand to production facilities Locating facilities and allocating capacity

Which plants to establish? How to configure the network?

Key Costs:

• Fixed facility cost• Transportation cost• Production cost• Inventory cost• Coordination cost

5-29


Demand Allocation Model

Which market is served by which plant?

Which supply sources are used by a plant?

xij = Quantity shipped from plant site i to customer j

0

..

1

1

1 1

x

Kx

Dx

ts

xcMin

ij

i

m

jij

j

n

iij

n

i

m

jijij

5-30


Plant Location with Multiple Sourcing

yi = 1 if plant is located at site i, 0 otherwise

xij = Quantity shipped from plant site i to customer j

}1,0{;

..

1

1

1

1 11

yky

yKx

Dx

ts

xcyfMin

i

m

ii

ii

n

jij

j

n

iij

n

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m

jijiji

n

ii

5-31


Value of Adding 0.1 Million Pounds Capacity (1982)

Mexico $0

Canada $8,300

Venezuela $36,900

Frankfurt $22,300

Gary $25,200

Sunchem $0

Should be evaluated as an option and priced accordingly.

5-32


Evaluating Facility Investments: AM Tires

Dedicated Plant Flexible PlantPlantFixed Cost Variable Cost Fixed Cost Variable Cost

US 100,000 $1 million/yr. $15 / tire $1.1 million/ year

$15 / tire

Mexico50,000

4 millionpesos / year

110 pesos /tire

4.4 millionpesos / year

110 pesos /tire

U.S. Demand = 100,000; Mexico demand = 50,0001US$ = 9 pesos

Demand goes up or down by 20 percent with probability 0.5 andexchange rate goes up or down by 25 per cent with probability 0.5.

5-33


AM Tires

RU=100RM=50

E=9

Period 0 Period 1 Period 2

RU=120RM = 60E=11.25

RU=120RM = 60E=6.75

RU=120RM = 40E=11.25

RU=120RM = 40E=6.75

RU=80RM = 60E=11.25

RU=80RM = 60E=6.75

RU=80RM = 40E=11.25

RU=80RM = 40E=6.75

RU=144RM = 72E=14.06

RU=144RM = 72E=8.44

RU=144RM = 48E=14.06

RU=144RM = 48E=8.44

RU=96RM = 72E=14.06

RU=96RM = 72E=8.44

RU=96RM = 48E=14.06

RU=96RM = 48E=8.44

5-34


AM TiresFour possible capacity scenarios:• Both dedicated• Both flexible• U.S. flexible, Mexico dedicated• U.S. dedicated, Mexico flexible

For each node, solve the demand allocation model. Plants Markets

U.S.

Mexico

U.S.

Mexico

5-35


Facility Decision at AM Tires

Plant ConfigurationUnited States Mexico

NPV

Dedicated Dedicated $1,629,319Flexible Dedicated $1,514,322

Dedicated Flexible $1,722,447Flexible Flexible $1,529,758

5-36


Capacity Investment Strategies

Speculative Strategy– Single sourcing

Hedging Strategy– Match revenue and cost exposure

Flexible Strategy– Excess total capacity in multiple plants– Flexible technologies

5-37


Summary of Learning Objectives

What is the role of network design decisions in the supply chain?

What are the factors influencing supply chain network design decisions?

Describe a strategic framework for facility location.

How are the following optimization methods used for facility location and capacity allocation decisions?– Gravity methods for location– Network optimization models

5-38

Documents

© 2004 Prentice-Hall, Inc. Chapter 5 Network Design in the Supply Chain Supply Chain Management (2nd Edition) 5-1