3-Designing Sc Network

8/8/2019 3-Designing Sc Network

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2004 Prentice-Hall, Inc.

Network Design in the Supply

Chain

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Outline

x A strategic framework for facility location

x Multi-echelon networks

x Gravity methods for locationx Plant location models

5-2


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Network Design Decisions

x Facility role ( Role ? Which process?)

x Facility location (Where ?

x

Capacity allocation (How much capacity?x Market and supply allocation (Source of

supplies and customers)

5-3


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Factors Influencing

Network Design Decisions

x Strategic (near port, production or demandcentre?)

x Technological (Microchips, Coca Cola)

x Macroeconomic ( Taxes & Tariffs, exchange rates)x Political ( Stable/Reliable, law and order)x Infrastructure ( Rail, Road, Ports)

x Competitive ( Near or far)x Logistics and facility costs

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The Cost-Response Time Frontier

Local FG

Mix

Regional FG

Local WIP

Central FG

Central WIP

Central Raw Material and Custom production

Custom production with raw material at suppliers

Cost

Response Time HiLow

Low

Hi

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Service and Number of Facilities

Number of Facilities

Response

Time

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7/32 2004 Prentice-Hall, Inc.

Customer

DC

Where inventory needs to be for a one week orderWhere 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 orderWhere 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 orderWhere inventory needs to be for a 3 day order




Customer

DC

Where inventory needs to be for a next day orderWhere inventory needs to be for a next day order




Customer

DC

Where inventory needs to be for a same day / nextWhere 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

5-12



Percent ServicePercent Service

Level WithinLevel Within

Promised TimePromised Time

TransportationTransportation

Cost Buildup as a Function of Facilities

Costo

fOpe

ration

s

Costo

fOpe

ration

s

Number of FacilitiesNumber of Facilities

InventoryInventory

FacilitiesFacilities

Total CostsTotal Costs

LaborLabor

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A Framework for

Global Site Location

PHASE I

Supply Chain

Strategy

PHASE II

Regional Facility

Configuration

PHASE III

Desirable Sites

PHASE IV

Location Choices

COMPTITIVE STRATEGY

INTERNAL CONSTRAINTS

Capital, growth strategy,

existing network

PRODUCTION TECHNOLOGIES

Cost, Scale/Scope impact, supportrequired, flexibility

COMPETITIVE

ENVIRONMENT

PRODUCTION METHODS

Skill needs, response time

FACTOR COSTS

Labor, materials, site specific

GLOBAL COMPETITION

TARIFFS AND TAX

INCENTIVES

REGIONAL DEMANDSize, growth, homogeneity,

local specifications

POLITICAL, EXCHANGE

RATE AND DEMAND RISK

AVAILABLEINFRASTRUCTURE

LOGISTICS COSTS

Transport, inventory, coordination

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Conventional Network

CustomerCustomer

StoreStore

MaterialsMaterials

DCDC

ComponentComponentManufacturingManufacturing

VendorVendor

DCDC

FinalFinal

AssemblyAssembly

FinishedFinished

Goods DCGoods DC

ComponentsComponents

DCDC

VendorVendor

DCDC PlantPlant

WarehouseWarehouse

FinishedFinished

Goods DCGoods DC

CustomerCustomer

DCDC

CustomerCustomer

DCDC

CustomerCustomer

DCDC

CustomerCustomerStoreStore

CustomerCustomer

StoreStore

CustomerCustomer

StoreStore

CustomerCustomer

StoreStore

VendorVendor

DCDC

5-15



Tailored Network: Multi-Echelon

Finished Goods Network

RegionalRegional

FinishedFinished

Goods DCGoods DC

RegionalRegionalFinishedFinished

Goods DCGoods DC

Customer 1Customer 1

DCDC

Store 1Store 1

NationalNational

FinishedFinished

Goods DCGoods DC

Local DCLocal DC

Cross-DockCross-Dock

Local DCLocal DCCross-DockCross-Dock

Local DCLocal DC

Cross-DockCross-Dock

Customer 2Customer 2

DCDC

Store 1Store 1

Store 2Store 2

Store 2Store 2

Store 3Store 3

Store 3Store 3

5-16



Facility Location and capacity

allocation

x Information Required for design decisions:

(Data collection and aggregation techniques)

Location of supply sources and markets

Location of potential facility sites

Demand forecast by markets

By site fixed & Variable costs-facility, labor, material

Transportation costs between each pair of locations

Inventory costs by site as well as function of quantity

Sale price of product in different regions

Taxes and tariffs as product moves between locations

Desired response time and other service factors



Gravity Methods for Location

x 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

d

FFy

y

dF

d

FFx

x

yyxxd nn

1

1

1

1

22 )()(

Min + )()(22 yyxxF iii

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Network Optimization Model

(Phase-II)

x Allocating demand to production facilities

x 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

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The Solver Software

x Activate Solver, if not done already

x Input Sources of Supply

x Input Capacity of each source of supply

x Input demand points

x Input demand of each demand point

x Input cost of supply between any two pointsx Ask solver to find minimal cost solution


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Demand Allocation Model(Ph-II)

x Which market is served

by which plant?

x Which supply sources

are used by a plant?

xij = Quantity shipped from

plant site i to customer jSouces:i-n; Demand j-m,; Costs Ci-j

Objective - minmise total cost

0

..

1

1

1 1

=

=

=

= =

x

Kx

Dx

ts

xcMin

ij

i

m

jij

j

n

iij

n

i

m

jijij

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Capacity allocation model example

T r a n sp o r t a t io n M o d e l ( se l e c t H e l p sh e e t f

C o st: T o : A B C D E C a p a c i ty

F r o m : 1 1 0 0 1 9 0 1 5 0 1 5 5 1 1 0 8 0

2 1 1 1 1 7 9 1 4 0 1 4 0 1 1 0 1 4 0T o t a l S u p p l y

5 1 2 9 1 6 2 1 3 5 1 3 0 9 5 1 4 0 4 4 0

4 1 3 2 1 1 5 1 3 2 1 2 8 9 5 7 0

5 2 0 0 1 7 0 1 0 0 1 4 6 1 4 5 1 0 T o ta l D e m a n d

D e m a n d 1 0 0 1 0 0 1 7 0 3 0 4 0 4 4 0

S o l u t i o n :T o : A B C D E R o w S u m

F r o m : 1 0 0 0 0 0 0

2 0 0 0 0 0 0

3 0 0 0 0 0 0

4 0 0 0 0 0 0 T o t a l C o st

5 0 0 0 0 0 0 0

C o l S u m 0 0 0 0 0

C le a r

M o d e l In p u t s a r e e n

i n sh a d e d a r e a

O p ti m a l s o l u ti

r e tu r n e d h e r e


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Plant Location with Multiple Sourcing

x yi = 1 if plant is located

at site i, 0 otherwise

x xij = Quantity shipped

from plant site i tocustomer j

}1,0{;

..

1

1

1

1 11

=

+

=

=

=

= ==

yky

yKx

Dx

ts

xcyfMin

i

m

ii

ii

n

j ij

j

n

iij

n

i

m

jijiji

n

ii

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Optional Assignment

x Try Sun Oil Co. solution- pages 110 to115

x Try locating Sources of supply- plant-

warehouse- market simultaneously solution

pages125-126


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X Value of Adding 0.1 Million

Pounds Capacity (1982)

Mexico $0

Canada $8,300

Venezuela $36,900Frankfurt $22,300

Gary $25,200

Sunchem $0

Should be evaluated as an option and priced accordingly.

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X Evaluating Facility Investments:

AM Tires

D edicated P lan t F lex ib le P lan tPlant

F ix ed C o st V a ria ble C o st F ix ed C o st V a ria ble C o

U S 100,000 $1 m illion /yr. $15 / tire $1 .1 m illion

/ year

$1 5 / t ire

Mexico50,000

4 m illionpeso s / yea r

110 p esos /tire

4.4 m illionpesos / year

110 pesos /tire

U.S. Demand = 100,000; Mexico demand = 50,000

1US$ = 9 pesos

Demand goes up or down by 20 percent with probability 0.5 and

exchange rate goes up or down by 25 per cent with probability 0.5.

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X AM Tires

RU=100

RM=50

E=9

Period 0 Period 1 Period 2

RU=120

RM = 60

E=11.25

RU=120

RM = 60

E=6.75

RU=120

RM = 40

E=11.25

RU=120

RM = 40

E=6.75

RU=80

RM = 60

E=11.25

RU=80

RM = 60

E=6.75

RU=80

RM = 40

E=11.25

RU=80

RM = 40

E=6.75

RU=144

RM = 72

E=14.06

RU=144

RM = 72

E=8.44

RU=144RM = 48

E=14.06

RU=144

RM = 48

E=8.44

RU=96

RM = 72

E=14.06

RU=96

RM = 72

E=8.44

RU=96

RM = 48

E=14.06

RU=96

RM = 48

E=8.44

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X AM Tires

Four 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

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X Facility Decision at AM Tires

Plant ConfigurationUnited States Mexico

NPV

Dedicated Dedicated $1,629,319Flexible Dedicated $1,514,322Dedicated Flexible $1,722,447

Flexible Flexible $1,529,758

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x Capacity Investment Strategies

x Speculative Strategy

Single sourcing

x

Hedging StrategyMatch revenue and cost exposure

x Flexible Strategy

Excess total capacity in multiple plantsFlexible technologies

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X Network Design under uncertain

Environment

x Discounted Cash flow analysis

x Decision Tree Analysis


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Summary of Learning Objectives

x What is the role of network design decisions in the supplychain?

x What are the factors influencing supply chain networkdesign decisions?

x Describe a strategic framework for facility location.x How are the following optimization methods used for

facility location and capacity allocation decisions? Gravity methods for location

Network optimization models

Decision under uncertain environment is taken by using discountedcash flows and decision tree technique

Documents

3-Designing Sc Network