© 2004 prentice-hall, inc. chapter 5 network design in the supply chain supply chain management...
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© 2004 Prentice-Hall, Inc.
Chapter 5Network Design in the Supply
Chain
Supply Chain Management(2nd Edition)
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© 2004 Prentice-Hall, Inc.
Outline
A strategic framework for facility location Multi-echelon networks Gravity methods for location Plant location models
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Network Design Decisions
Facility role Facility location
Ex: Toyota, Amazon.com Capacity allocation Market and supply allocation
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Factors InfluencingNetwork Design Decisions
Strategic Factors Technological Macroeconomic Political Infrastructure Competitive Customer Response Time and Local presence Logistics and facility costs
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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
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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
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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
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Infrastructure Factors
Availability of sites Availability of labor Proximity to transportation terminals,
railservice, airports, seaports, Highway access Congestion Local utilities
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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
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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
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Service and Number of Facilities
Number of Facilities
ResponseTime
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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
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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
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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
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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
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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
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Costs and Number of Facilities
Costs
Number of facilities
Inventory
Transportation
Facility costs
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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
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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
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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
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Conventional Network
CustomerCustomerStoreStore
MaterialsMaterialsDCDC
ComponentComponentManufacturingManufacturing
VendorVendorDCDC
Final Final AssemblyAssembly
FinishedFinishedGoods DCGoods DC
ComponentsComponentsDCDC
VendorVendorDCDC PlantPlant
WarehouseWarehouse
FinishedFinishedGoods DCGoods DC
CustomerCustomerDCDC
CustomerCustomerDCDC
CustomerCustomerDCDC
CustomerCustomerStoreStore
CustomerCustomerStoreStore
CustomerCustomerStoreStore
CustomerCustomerStoreStore
VendorVendorDCDC
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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
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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
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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
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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
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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
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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
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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
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i
n
i
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dF
dF
Fy
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dF
dF
Fx
x
yyxxd nn
1
1
1
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22 )()(
Min )()( 22 yyxxF iii
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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
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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
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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
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jijiji
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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.
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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.
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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
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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
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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
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Capacity Investment Strategies
Speculative Strategy– Single sourcing
Hedging Strategy– Match revenue and cost exposure
Flexible Strategy– Excess total capacity in multiple plants– Flexible technologies
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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
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