Chapter 5 Network Design in the Supply Chain

1. Chapter 5Network Design in the Supply Chain Supply Chain Management(2nd Edition) 5-1

2. Outline • A strategic framework for facility location • Multi-echelon networks • Gravity methods for location • Plant location models 5-2

3. Network Design Decisions • Facility role • Facility locationEx: Toyota, Amazon.com • Capacity allocation • Market and supply allocation 5-3

4. Factors InfluencingNetwork Design Decisions • Strategic Factors • Technological • Macroeconomic • Political • Infrastructure • Competitive • Customer Response Time and Local presence • Logistics and facility costs 5-4

5. 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

6. 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

7. 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

8. Infrastructure Factors • Availability of sites • Availability of labor • Proximity to transportation terminals, railservice, airports, seaports, • Highway access • Congestion • Local utilities

9. 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

10. 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. 0 a 1-b 1

11. Service and Number of Facilities Response Time Number of Facilities 5-11

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

13. Where inventory needs to be for a 5 day order response time - typical results --> 2 DCs Customer DC

14. Where inventory needs to be for a 3 day order response time - typical results --> 5 DCs Customer DC

15. Where inventory needs to be for a next day order response time - typical results --> 13 DCs Customer DC

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

17. Inventory Facility costs Transportation Costs and Number of Facilities Costs Number of facilities 5-17

18. Cost Buildup as a Function of Facilities Total Costs Percent Service Level Within Promised Time Cost of Operations Facilities Inventory Transportation Labor Number of Facilities 5-18

19. A Framework forGlobal Site Location GLOBAL COMPETITION Competitive STRATEGY PHASE I Supply Chain Strategy INTERNAL CONSTRAINTS Capital, growth strategy, existing network TARIFFS AND TAX INCENTIVES PRODUCTION TECHNOLOGIES Cost, Scale/Scope impact, support required, flexibility REGIONAL DEMAND Size, growth, homogeneity, local specifications PHASE II Regional Facility Configuration COMPETITIVE ENVIRONMENT POLITICAL, EXCHANGE RATE AND DEMAND RISK PHASE III Desirable Sites AVAILABLE INFRASTRUCTURE PRODUCTION METHODS Skill needs, response time PHASE IV Location Choices FACTOR COSTS Labor, materials, site specific LOGISTICS COSTS Transport, inventory, coordination 5-19

20. 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

21. Materials DC Customer DC Finished Goods DC Vendor DC Customer Store Component Manufacturing Vendor DC Customer DC Customer Store Plant Warehouse Components DC Customer Store Vendor DC Finished Goods DC Customer DC Final Assembly Customer Store Conventional Network Customer Store 5-21

22. Local DC Cross-Dock Store 1 Regional Finished Goods DC Customer 1 DC Store 1 Local DC Cross-Dock National Finished Goods DC Store 2 Customer 2 DC Local DC Cross-Dock Store 2 Regional Finished Goods DC Store 3 Store 3 Tailored Network: Multi-Echelon Finished Goods Network 5-22

23. 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

24. 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

25. Phase II: Network Optimization Model The capacitated plant location model Inputs: 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

26. The capacitated plant location model (cont’d)

27. 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

28. 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 Min 5-28

29. Network Optimization Models • Allocating demand to production facilities • Locating facilities and allocating capacity • Key Costs: • Fixed facility cost • Transportation cost • Production cost • Inventory cost • Coordination cost Which plants to establish? How to configure the network? 5-29

30. 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 Demand Allocation Model 5-30

31. 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 5-31

32. Value of Adding 0.1 Million Pounds Capacity (1982) Should be evaluated as an option and priced accordingly. 5-32

33. Evaluating Facility Investments: AM Tires 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. 5-33

34. AM Tires 5-34

35. 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. PlantsMarkets U.S. U.S. Mexico Mexico 5-35

36. Facility Decision at AM Tires 5-36

37. 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

38. 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