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Global Supply Chain Design

John H. Vande Vate

Spring 2005

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Basics of SC Design

• EU Ports Case– Where to manufacture?

• Asia

• EU

• Central EU

• Eastern EU

– Which ports to use?– Where to locate DCs?

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Context

• Almost Greenfield study – Fixed pool points

• Aggregate study– Demand aggregated to pool points by population

and per capita income

– Products aggregated to a single product

• Time– Growth? Seasonality? Life cycle? Labor rates?

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Our Job

• Recommend a high-level supply chain design

• Provide estimates of costs for comparisons and to weigh risks

• Identify where to focus effort in more detailed assessment

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Questions

Hierarchy of costs?

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Questions

Hierarchy of costs– Raw Materials ~ €1.5 billion

– Inventory costs ~ € 30 million

– VAT ~ € 10 million

– In-bound freight (RM) ~ € 1 – 33 million

– Out-bound freight (FG) ~ € 1 – 28 million

– Labor ~ € 1.5 – 15 million

– Plant and DC leases ~ € 0.2 – 3 million

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Questions

• Hierarchy of confidence/indifference– What data are you most sure of or care the

least about

http://www.isye.gatech.edu/~jvandeva/Classes/6203/HW1

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Summary of Results

S/No Option Location(s) Costs

Subtotal Total Costs

      Tptn Real Estate Wages Inventory

1 Mfg in W.Europe Barcelona, Spain $15,241,665 $6,983,045 $17,748,337 $17,046,593 $57,019,641 $91,002,406

  Distribute fr Heart of Europe Paris, France $102,744 $3,509,762 $21,601,150 $8,769,109 $33,982,765  

2 Mfg in E.Europe Budapest,Hungary $21,592,494 $4,658,749 $27,699,845 $22,246,449 $76,197,538 $110,180,303

  Distribute fr Heart of Europe Paris,France $102,744 $3,509,762 $21,601,150 $8,769,109 $33,982,765  

3 Mfg in C.Europe Paris, France $0 $2,848,593 $86,404,600 $4,567,204 $93,820,396 $127,803,162

  Distribute fr C.Europe Paris, France $102,744 $3,509,762 $21,601,150 $8,769,109 $33,982,765  

4 Mfg in Asia Xiamen, China $1,800 $1,499,703 $9,073,206 $413,211,807 $423,786,517 $466,177,054

  Distribute fr C.Europe Paris, France $12,069,464 $3,509,762 $21,601,150 $5,210,162 $42,390,537  

5 Mfg in E Europe Budapest,Hungary $10,449,602 $4,658,749 $27,699,845 $14,020,581 $56,828,778 $133,239,830

  DC 1 Budapest,Hungary $131,129 $4,658,749 $2,315,241 $37,707,049 $44,812,168  

  DC2 Poznan, Poland $84,616 $4,418,603 $2,882,392 $24,213,274 $31,598,885  

• Chosen Option is S/No 1.

• Based on the limited scenario given, the cost is the lowest, the distribution network from the heart of Europe had been long established and is also the most reliable one.

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DC Inventory Costs

• Average Inventory FormulaThe reasoning behind this formula is the basic b*h/2 formula

for the area of a triangle. Our period is 3 days long here, so each triangle gets 1/3 of a period.

Q1/(3*2) + Q2/(3*2) + Q3/(3*2)

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Picture of the Inventory Model

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Single DC ResultMinimum Cost is to have a single DC in Antwerp.

Cost = 12,292,656

Top 3 options as follows:

Si ngl e DC Resul t

-

2, 000, 000

4, 000, 000

6, 000, 000

8, 000, 000

10, 000, 000

12, 000, 000

14, 000, 000

Antwerp Brussel s Rot terdam

Rent Labour Transpor t+Pi pel i ne

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Two DC ResultMinimum Cost is to have DCs in Antwerp (serve Milton Keynes,Paris, Madrid, Bern,Antwerp, Frankfurt)

and

Brno(serve Milan, Graz, Malmo)

Cost = 14,657,246

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Material flow map of proposed solution

Legend

: Customer locations : Assembly location : Distribution center : Supplier locations

Raw material flow in truck

Raw material flow on ship

Product flow in truck

Product flow on ship

From Shanghai

From San Francisco

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Supply chain costs of the proposed solution

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Comparison to alternatives considered

Optimal solution: Plant & DC (Prague, Czech. Rep.)

65%6%

28% Transportation related

Labor and real estate

Inventory value at plant and dc

Plant: Hubei, China & DC: Sofia, BulgariaTotal annual cost: 51,357,140 euros

2%

19%

79%

Plant & DC: Barcelona, SpainTotal annual cost: 56,030,850 euros

28%

12%

60%

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Project Results Summary

Mfg Location EDC Locations Ports Total CostScenario 1 Milan Lyon San Francisco € 23,629,490

Nancy Shanghai

Marseille Genova

Scenario 2 Prague Lille San Francisco € 22,976,934Nancy Shanghai

HamburgScenario 3 Prague Prague San Francisco € 21,216,089

ShanghaiHamburg

Scenario 4a Shanghai Lille San Francisco € 13,503,515Nancy ShanghaiMarseille Marseille

AntwerpScenario 4b Shanghai Prague San Francisco € 17,863,019

ShanghaiHamburg

Results Summary

Inventory TotalManufacturing EDC Trans. Mfg-DC Trans. DC-Customer Inventory Total

Scenario 1 € 12,268,048 € 2,923,649 € 574,550 € 622,849 € 7,240,392 € 23,629,490Scenario 2 € 9,337,530 € 2,893,529 € 893,187 € 642,545 € 9,210,142 € 22,976,934Scenario 3 € 9,337,530 € 2,793,133 € 0 € 1,173,005 € 7,912,421 € 21,216,089Scenario 4a € 1,542,615 € 2,948,983 € 3,990,671 € 528,073 € 4,493,173 € 13,503,515Scenario 4b€ 1,542,615 € 2,793,133 € 4,399,001 € 1,177,002 € 7,951,268 € 17,863,019

Cost SummaryFacilties Transportation

Cost Breakdown per Scenario

Of the possible locations for DCs, the model shows that it is more economical to place the DC's in Eastern Europe, where the land and labor are cheaper. The model also places the DCs as close as it can to the customers, to minimize transportation cost. The transportation cost via sea is less expensive per mile than by land, and therefore the model tries to maximize sea travel, while minimizing land travel.

If a network of operations was to be set for this case, we would recommend placing the manufacturing in Shanghai, and EDCs in Lille, Nancy, and Marseille. This would result in a total cost of 13.5 million Euros.

Reflections:It is most cost effective to place the manufacturing in China. This is due to lower wages, land cost, building cost, and transportation from suppliers to manufacturers. The benefits gained from having the manufacturing in China outweigh the transportation cost to the European DCs. This does not take into account the lead time, since if the demand is constant, shipments will be made in advance considering the longer transportation times. All ports used for this model have a yearly capacity (in TEU) much larger than what is being shipped to them, although any delays in moving the products from/to ships are not factored into this analysis.

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Scenario 4a

Type CitySupplier ShanghaiSupplier San FranciscoCostumer FrankfurtCostumer Milton KeynesCostumer ParisCostumer MilanCostumer MadridCostumer AntwerpCostumer GrazCostumer MalmoCostumer BernManufacturing ShanghaiDC LilleDC MarseilleDC NancyPort San FranciscoPort ShanghaiPort AntwerpPort Marseille

To ManufacturingTo DCTo PortTo Costumer