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Supply Chain Management

Supply Chain Management. Lecture 8. Outline. Today Chapter 5 Skipping sections Locating to Split the Market (3e: p. 120, 4e: p. 112) Gravity Location Models (3e: p. 129-131, 4e: p.120-122) Locating Plants and Warehouses Simultaneously (3e: p. 138-139, 4e: 129-131)

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Supply Chain Management

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  1. Supply Chain Management Lecture 8

  2. Outline • Today • Chapter 5 • Skipping sections • Locating to Split the Market (3e: p. 120, 4e: p. 112) • Gravity Location Models (3e: p. 129-131, 4e: p.120-122) • Locating Plants and Warehouses Simultaneously (3e: p. 138-139, 4e: 129-131) • Accounting for Taxes, Tariffs and Customer Requirements (3e: p. 139-140, 4e p. 131-132) • Next week • Chapter 6 • Homework 2 • Online Friday February 5 • Due Thursday February 11 before class

  3. Announcements • The RedPrairieSupply Chain Challenge is a virtual competition using a customized web-based version of the Littlefield Technologies game from Responsive Technologies • Students will have the opportunity to manage make-to-order factory and make forecasting, capacity, and inventory and pricing decisions • Registration deadline • Feb 5, 2010, 5:00pm • http://avnettechgames.com/supplychain2010

  4. Announcements • Game Day • February 20, 2010 • Awards • “Each team member will win a $1000 scholarship”

  5. Excel Solver Objective function Decision variables Constraints

  6. Example: Dell Market Allocation What are the decisions? What are the constraints?

  7. Example: Dell Facility Location ? ? ? What are the decisions? What are the constraints?

  8. Example: Dell Facility Location • Constraints (Satisfy demand at each market) • 0 = 15,000 - XIreland,France- XPoland,France - XRomenia,France • 0 = 20,000 - XIreland,Germany - XPoland,Germany - XRomenia,Germany • 0 = 13,000 - XIreland,Italy - XPoland,Italy - XRomenia,Italy • 0 = 12,000 - XIreland,Spain - XPoland,Spain - XRomenia,Spain • 0 = 19,000 - XIreland,UK - XPoland,UK - XRomenia,UK

  9. Example: Dell Facility Location • Constraints (Capacity cannot be exceeded) • 0  30,000*YRomenia - XRomenia,France - XRomenia,Germany - XRomenia,Italy - XRomenia,Spain - XRomenia,UK • 0  30,000*YPoland - XPoland,France - XPoland,Germany - XPoland,Italy - XPoland,Spain - XPoland,UK • 0  30,000*YIreland - XIreland,France - XIreland,Germany - XIreland,Italy - XIreland,Spain - XIreland,UK

  10. Logistics Costs Logistics Costs Facility Costs Inventory Costs Transportation Costs Number of Facilities Factors Influencing Network Design Decisions • Customer response time • Maintain a balance between an inexpensive location and proximity to customers. • Logistics and facility costs • Inventory and facility costs increase as the number of facilities increase • Transportation costs decrease (up to a point) as the number of facilities increase

  11. Factors Influencing Network Design Decisions • Strategic factors Strategic role GlobalCustomers Regional Customers Lead <advanced technology> Lockheed Martin’s JSF in Dallas Outpost <access to knowledge> Dell in Ireland Offshore <low-cost> <exports only> Many Asian plants Server <local market><avoid tariffs> Suziki’s Indian venture Maruti Source <low-cost><global market> Nike plants in Korea Contributor <customization> <development skills> Maruti

  12. Factors Influencing Network Design Decisions • Macroeconomic factors • Quotas, tariffs, and tax incentives • Economic trade agreements: Nafta, EU, APTA, AFTZ • Exchange rate and demand risk • Different states or countries often offer economic incentives to companies that decide to set up shop there, including tax incentives and low-interest economic development loans How can trade agreements influence the number of facilities in a supply chain?

  13. Factors Influencing Network Design Decisions • Political factors • Political stability • Infrastructure factors • Availability of transportation terminals, labor • Most of Amazon’s distribution centers are located near airports • Competitive factors • Positive externalities (many stores in a mall makes it more convenient for customers – one location for everything the customers need)

  14. Factors Influencing Network Design Decisions • Technological factors • Compare your supplies to the final product, considering whether value, weight, volume or other factors change • Availability of production technologies • High or low fixed cost • Semiconductor manufacturing takes place only in 5-6 countries worldwide (building one plant costs about 1 to 4 billion dollars) Which products gain/lose weight in the production process?

  15. (in 1999) Amazon’s Growth in Europe

  16. Amazon’s Growth in Europe

  17. Amazon’s Growth in Europe European use of credit cards for online purchases

  18. Manufacturers DelawareOpened: 1997220,000 sq. feet Seattle, WAOpened: 1996Closed: 200185,000 sq. feet Distributor Warehouse Distributor Warehouse Consumers Amazon’s Growth in the US Amazon offered 2.5 million titles, yet stocked only 2,000 titles Amazon stocked over 200,000 titles and reduced promised delivery times

  19. DelawareOpened: 1997220,000 sq. feet Seattle, WAOpened: 1996Closed: 200185,000 sq. feet Amazon’s Growth in the US In 1998, Amazon expanded its product line (music, DVD) (1999: electronics, toys) (2000: health, kitchen) Amazon had to decide how many DCs it should have and where to locate them

  20. Amazon’s Growth in the US • Amazon executives turned to outside experts and used i2 Technologies’ Supply Chain Strategist software package • This software identified regions to consider for its distribution facilities based on factors such as supplier and customer locations, inbound and outbound freight rates, warehousing expenses, labor, and other cost factors • After selecting the major regions, Amazon's management narrowed its search based on additional factors such as tax rates, employment levels and the availability of suitable distribution facilities to lease

  21. DelawareOpened: 1997220,000 sq. feet Seattle, WAOpened: 1996Closed: 200185,000 sq. feet Fernley, NVOpened: 1999322,560 sq. feet Lexington, KYOpened: 1999600,000 sq. feet Mc DonoughOpened: 1999Closed: 2001800,000 sq. feet Coffeyville, KSOpened: 1999750,000 sq. feet Cambellsville, KYOpened: 1999770,000 sq. feet Amazon’s Growth in the US “This has been the fastest expansion of distribution in peacetime history”

  22. Manufacturers Manufacturers Retailer Distributor Warehouse Distributor Warehouse Consumers Consumers Amazon’s Growth in the US • Evolution of fulfillment cost as a percentage of revenue

  23. Network Optimization Problems • Market and supply allocation • Demand allocation • Facility location (and capacity allocation) • Capacitated plant location model • Facility location 1-source (and capacity allocation) • Capacitated plant location model with single sourcing

  24. D1 K1 D2 K2 D3 D4 K3 D5 Demand Allocation n supply points m demand points c11 c12 c13

  25. Which market is served by which plant? Given m demand points, j=1..m with demands Dj Given n supply points, i=1..n with capacity Ki Each unit of shipment from supply point i to demand point j costs cij Serve markets from supply points to demand points xij = quantity shipped from plant site i to customer j Demand Allocation 3e: p. 132-133, 4e: p. 123-125

  26. D1 K1 D2 K2 D3 D4 K3 D5 Capacitated Plant Location Which supply point operates? n supply points m demand points c11 France y1 = yes or no c12 Romenia c13 Germany y2 = yes or no Poland Italy Spain y3 = yes or no Ireland United Kingdom

  27. Which market is served by which plant? None of the plants are open, a cost fi is paid to open plant i yi = 1 if plant is located at site i, 0 otherwise xij = quantity shipped from plant site i to customer j Capacitated Plant Location 3e: p. 133-135, 4e: p. 125-128

  28. D1 K1 D2 K2 D3 D4 K3 D5 Capacitated Plant Location With Single Source (each customer has exactly one supplier) Which supply point operates? n supply points m demand points c11 France y1 = yes or no c12 Romenia c13 Germany y2 = yes or no Poland Italy Spain y3 = yes or no Ireland United Kingdom

  29. Capacitated Plant Location With Single Source (each customer has exactly one supplier) • Which market is served by which plant? • None of the plants are open, a cost fi is paid to open plant i • yi = 1 if plant is located at site i, 0 otherwise • xij = 1 if market j is supplied by factory i, 0 otherwise 3e: p. 135-137, 4e: p. 128-129

  30. Example – SunOil • SunOil, a manufacturer of petrochemical products with worldwide sales, needs to decide the regions in which facilities are to be located

  31. Example – SunOil Capacitated Plant Location Model 12 16 14 7 8 Dj = annual demand from market j

  32. Example – SunOil Capacitated Plant Location Model cij = cost of producing and shipping one million units from plant i to market j

  33. Example – SunOil Capacitated Plant Location Model 1020 1020 1020 1020 1020 Ki = capacity of plant i

  34. Example – SunOil Capacitated Plant Location Model $6500$9750 $6000$9000 $4100$6150 $4000$6000 $4500$6750 fi = annualized fixed cost of keeping plant i open

  35. Which market is served by which plant? None of the plants are open, a cost fi is paid to open plant i yi = 1 if plant is located at site i, 0 otherwise xij = quantity shipped from plant site i to customer j Capacitated Plant Location 3e: p. 133-135, 4e: p. 125-128

  36. Example – SunOil Capacitated Plant Location Model 7 Dj – ∑ni=1 xij = 0 for all j = 1, …, m (unmet demand)

  37. Example – SunOil Capacitated Plant Location Model 1020 Kiyi – ∑mj=1 xij 0 for all i = 1, …, n (excess capacity)

  38. Capacitated Plant Location With Single Source (each customer has exactly one supplier) • Which market is served by which plant? • None of the plants are open, a cost fi is paid to open plant i • yi = 1 if plant is located at site i, 0 otherwise • xij = 1 if market j is supplied by factory i, 0 otherwise 3e: p. 135-137, 4e: p. 128-129

  39. Example – SunOil Single Source Model xij = 1 if market j is supplied by plant i, 0 otherwiseyi = 1 if plant i is open, 0 otherwise

  40. Making Network Design Decisions in Practice • Computer models versus sound judgment • Most facility location decisions are based on tariffs and tax incentives

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