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SCM
SC DesignFacility Location Strategy
Prof. Metin Çakanyıldırım used various resources to prepare this document for teaching/training. To use this in your own course/training, please obtain permission from Prof. Çakanyıldırım.
If you find any inaccuracies, please contact [email protected] for corrections.Updated in Spring 2020
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SCMFrequency Decomposition
SCs are enormous It is hard to make all decisions at once Integration by smart decomposition Frequency decomposition yields several sets of
decisions such that each set is integrated within itself
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SCMFrequency Decomposition
Low frequency activity, ~ once a year, high fixed cost– R&D budget– Capacity expansion budget
Moderate frequency activity, ~ once a month– Cancellation of specific R&D projects depending on
experimental outcomes– Specific machines to purchase
High frequency activity, ~ once a day, low fixed cost– What experiments to start / continue today– What to produce
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SCM
Facility Location: Cost-Response Time FrontierAn inventory location based point of view
Local Finished Goods (FG) Inventory
Regional FG Inventory
Local WIP (work-in-process)
Central FG Inventory
Central WIP
Central Raw Material and Custom production
Custom production with raw material at suppliers
Cost
Response Time HiLow
Low
Hi7-Eleven
Sam’s Club
Regional
Central
Pull the inventory upstream
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SCM
CustomerDC
Where inventory needs to be for a one week order response time - typical results --> 1 DC
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SCM
CustomerDC
Same day / next day order response time -typical results --> 26 DCs
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SCM
Inbound & Outbound Shipping with more facilities
More facilities ⇒ More inbound shipping and less outbound shipping.Less (inbound + outbound) shipping costs with more facilities possible,
if economies of scale in transportation.
Supplier Manufacturer Customer
Add more facilities for
responsiveness Supplier Manufacturer Distributor Retailer Customer
Inboundshipment
Outboundshipment
Inbound shipment Outbound shipment
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SCMCosts and Number of Facilities
Costs
Number of facilities
Total SC Inventory
Transportation
Facility costs
No economies of scale in shipment size, SC covers a larger portion with each facility.
With economies of scale in inbound shipping to retailers.
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SCM
Transportation
Cost Build-up as a function of facilitiesC
ost o
f Ope
ratio
ns
Number of Facilities
Inventory
Facilities
Total Costs
Labor
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SCMClassification of Network Design Decisions
Facility function: Plant, DC, Warehouse:What facility performs what function
– Packaging at the manufacturer or warehouse– Should a rental computer return location run diagnostic tests on the returned
computers or should the testing be done at major warehouses? Question arising from CRU Computer Rental Case done in OPRE6302
Facility location– Starbucks opened up at UTD student apartments in 2005 but closed in 2006!
» It opened up again – Recall Japanese 7-eleven and their blanketing strategy– SMU’s experimentation with Plano campus: http://www.smu.edu/legacy .
Capacity allocation– SOM car park took 80 cars in 2005 and expanded in 2006 to take about 110 cars,
further expanded in 2009 to take about 300 cars. Supply and market allocation:
Who serves whom– By location: UT Austin serves central Texas students– By grade: UT Arlington serves undergraduate students
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SCM
Strategic Factors Influencing Location Decisions
Strategic Facilities
Global Customers
Offshore<reduced tariffs>
<for exports>VW plants in Mexico Serving Latin America
Source<low-cost>
Nike plants in Koreathen in Thailand
Regional Customers
Server<local-content>Suzuki’s Indian venture
Maruti Udyog Contributor<customization>
<development skills>Maruti Udyog
Lead facility<advanced technology>Lockheed Martin’s JSF in Dallas
Outpost facility<Learn local skills>
Ericson facility in Silicon ValleyDominion energy in Texas
Facilities in Japan; Toyota Prius
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SCMFactors Influencing Location Decisions
Customer response time and local presence Costs: Logistics, Facility and Operating – the last two drive off-shoring Taxes: “More companies with high-margin products are setting up manufacturing operations
in tax-advantaged countries to protect their profitability” Matt Jackson, Cushman & Wakefield (cushwake.com), specializes in global location strategies.
In 2012, encouraged by Turkish tax incentives, Hyundai planned expansion of its Izmit Assembly Plant. See www.hyundai.com.tr.
Technology / Infrastructure– Availability and economies of scale (fixed operational costs)
» Semiconductor manufacturing only in 5-6 countries worldwide– electricity, phone lines, suppliers
Macroeconomic / Politic– Tariffs, exchange rate volatility, economic volatility. Economic communities: Nafta, EU, Pacific Rim, Efta
Competitive– Positive externalities
» Nissan in India develops car suppliers which can also supply Suzuki in India.» Toyota City, Shopping Malls» DFW Telecom corridor hosting Alcatel, Ericsson, Nortel, …
– Negative externalities, see the next slide
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SCM
Negative externality:Market Splitting by Hotelling’s Model
Captured byfirm at 𝑎𝑎
Captured byfirm at 𝑏𝑏
Middle ground is equally split
Single firm for the entire market0 1
A line to represent a market and customer– Locations– Preferences, e.g., sugar content in coke
0 1
Market split with two competing firms
𝑎𝑎 𝑏𝑏
If a person cannot find exactly what s/he prefers, s/he buys closest alternative. Locations & preferences are uniform over the line: Amount of customers in any
line segment depends linearly only on the length of that segment.
If 𝑎𝑎 locates first, where should 𝑏𝑏 locate afterwards to maximize market share?– a) at 0; b) immediately left of 𝑎𝑎; c) immediately right of 𝑎𝑎; d) midpoint between 𝑎𝑎 and 1; e) at 1
If 𝑎𝑎 estimates how 𝑏𝑏 will locate from the answer above, where should 𝑎𝑎 locate first to maximize market share?
– a) at 0; b) midpoint between 0 and 𝑏𝑏; c) immediately left of 𝑏𝑏; d) immediately right of 𝑏𝑏; – e) midpoint between 𝑏𝑏 and 1; f) at 1/2; f) at 1
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SCMSteps of Comparing Locations
1. Draw up a list of possible locations 2. Define the decision criteria
– Six common criteria used by companies» 1. Cost of operating – tax incentives from local/federal governments» 2. Availability of the skills» 3. Sales potential in the adjacent markets» 4. Risk of doing the business» 5. Attractiveness of living environments» 6. Quality of infrastructure
3. Collect data for each location 4. Weight the criteria
» Fortisbank of Belgium, wants to enter new large markets, gives highest weight to 3.» Citibank, wants a location for a captive IT center, gives the highest weight to 4.
Find risk data at– Economist intelligence unit: www.eiu.com– UN Development Program: http://hdr.undp.org/statistics/data/
5. Rank locations according to weighted sum of their scores 6. Assess the dynamics of the labor pool
» Availability of skilled labor: Top tier universities in large U.S. cities (e.g., Dallas?).Source: McKinsey Global Institute on HBR Jun. 2006 p.91
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SCMSummary
Frequency decomposition of activities A strategic framework for facility
location– Classification– Factors– Steps
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SCM
Factors Influencing Fulfilment Location Decision at Amazon
Customer Response Time ↓ in the number of fulfillment centers Outbound Transportation Cost ↓ in the number of fulfillment centers Sales Taxes ↑ in the number of fulfillment centers
– 1992 Supreme Court Ruling: An online seller is required to collect sales tax on a customer’s behalf if the seller has a warehouse, DC or fulfillment center in the customer’s state of residence.
Trading off advantages of low response time and transportation cost against the disadvantage of high taxes, Amazon seems to have decided that advantages outweigh the disadvantage.
Darker states havemore households.
Numbers are (weighted)sales taxes.
Sour
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