Dr' Cholette DS855 Fall 2006

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Dr. CholetteDS855 Fall 2006
Network Design in the Supply Chain
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Outline

• A strategic framework for facility location
• Multi-echelon networks
• Plant location models

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Network Design Decisions

• While designing the network (In which phase?), we
  need to consider
• Number and location of facilities
• Facility role
• Capacity allocation
• Market and supply allocation
• What are some questions we would associate with
  each of these aspects of our network?

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Factors to Consider in Network Design

• Strategic
• Evaluate tradeoffs place manufacturing close to
  market -vs.- low cost?
• (not in book, but relevant) Should we co-locate
  facilities with vendors/suppliers?
• Technological Do production technologies have
  significant economies of scale?
• Macroeconomic
• Tariffs and tax incentives (i.e. free trade
  zones)
• Exchange rate and demand risk
• Political Stability, clear legal system and
  regulations important for corporations
• Infrastructure
• Will local infrastructure support a manufacturing
  facility?
• Labor availability (especially skilled)
• Competitive
• Locate near or far from rivals? Are there
  positive externalities? Splitting the market?

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Classifications of Manufacturing Facilities

• In order from lowest cost to highest value, and
  their strategic roles
• Offshore (Low cost facility for export
  production)
• Source (Low-cost facility for global production)
• Server (Regional production facility)
• Contributor (Regional production facility with
  development skills)
• Outpost (Regional production facility used to
  gain local expertise)
• Lead (Model facility that leads the firm in
  development of new products or technologies)

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Where inventory needs to be for a one week order
response time - typical results --gt 1 DC
Customer
DC
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Where inventory needs to be for a 5 day order
response time - typical results --gt 2 DCs
Customer
DC
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Where inventory needs to be for a 3 day order
response time - typical results --gt 5 DCs
Customer
DC
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Where inventory needs to be for a next day order
response time - typical results --gt 13 DCs
Customer
DC
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Where inventory needs to be for a same day / next
day order response time - typical results --gt 26
DCs
Customer
DC
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Chapter 4 Costs and Number of Facilities
Costs
Number of facilities
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Cost Buildup as a Function of Facilities
High
Total Costs
Percent Service Level Within Promised Time
Transportation
Level of Service
Cost of Operations
Inventory
Facilities
Low
Number of Facilities
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Conventional Network
Customer Store
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Tailored Network Multi-Echelon Finished Goods
Network
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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
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Network Optimization Models

• Useful tools for both Phase II and Phase IV
• Questions for Phase II What regions to source
  demand in and how to configure network? given
• Regional demand, tariffs, economics of scale,
  aggregate factor costs
• Not necessary to go to detail of specific plant
  locations
• Need to also consider less quantifiable factors
  such as political and regulatory climate,
  competition
• Phase IV involves selecting specific facilities
  and allocating capacity within those selected
  given
• Fixed facility cost, Transportation cost,
  Production cost, Inventory cost, Coordination
  cost

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Example Using Network Models for Phase II
Decisions

• SunOil, a global energy company, needs to
  determine
• where to locate facilities to service their
  demand
• what size to build in the region (small or
  large), should they locate a facility there
• The world is divvied into 5 different regions
  N.America, S.America, Europe, Asia, Africa
• SunOil has regional demand figures, transport
  costs, facility costs and capacities
• We will ignore tariffs and exchange rate
  fluctuations for now, and assume all demand must
  be met (so we can focus on minimizing costs)
• What analytic tool are we likely to use?
• What is the twist that we need to consider?

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Capacitated Plant Location Model

• n the number of potential sites
• As we are considering two different type plants
  (small, large) for each region, n 10
• m regions with demand
• Dj demand in region j
• Ki capacity at plant I
• fi fixed cost of keeping plant i open
• cij variable cost of sourcing region j from plant
  i
• yi 1 if plant is located at site i,
• 0 otherwise
• xij Quantity shipped from site i to region j

• Can we do this with a pure LP?
• When would a simple LP be acceptable?

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Excel Example SUNOIL

• Download network-MIP.xls in the Additional
  course materials directory to find the Sun Oil
  Example

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Gravity Methods for LocationPotentially Useful
in Phase III

• 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
But before you pull out your calculator
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Gravity Location Models Limitations Professor
Opinion, not in Textbook

• Assumes that all distances have identical
  per-mile costs
• This ignores limitations of existing ground
  transport network, topography, inter-state/country
  transit taxes and regulations
• Costs of setting up a new facility is often
  prohibitive compared to revamping an existing
  facility (even if in a less desirable location)
• Especially pertinent given economic and
  less-quantifiable costs of shutting down
  facilities
• The problems I have encountered personally have
  been to consolidate or revamp facilities, never
  to set up a completely new installation
• For this class, you can assume that you will be
  provided with a finite number of site locations,
  and that you will be given all cost parameters
  ci,j for transit between location i and j

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Example- Using A Network Model to Model a Phase
IV Decision

• TelecomOne has merged with High Optic. They have
  plants in different cities and service several
  regions. They would like to figure out how to
  service all demand while keeping costs low
• The supply cities are Baltimore (capacity 18K),
  Cheyenne (24K), Salt Lake City (27K), Memphis
  (22K) and Wichita (31K)
• They have the following monthly regional demands
• 10K in Atlanta
• 6K in Boston
• 14K in Chicago Book uses 12 K, not 14K for
  Chicago and their results in table 5.3 5.4 are
  wrong
• 6K in Denver although their spreadsheet
  inserts are okay
• 7K in Omaha
• They will consider consolidating facilities
• What sort of tool are we likely to use?

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Demand Allocation Model

• Answers the question of
• Which market is served by which plant?
• Decision variables
• xij Quantity shipped from plant site i to
  customer j
• Can solve as a simple LP, see page 2 under
  network-MIP.xls
• But what if we also have the option of not using
  all facilities.

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Allocating Demand to Production Facilities

• Decision variables
• yi 1 if plant is located at site i, 0 otherwise
• xij Quantity shipped from plant site i to
  customer j
• See Sheet 3 of network-MIP.xls
• Look familiar?

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Considering Additional LayersSimultaneously
Locating Plants and DCs

• Now add cost to transport from suppliers, as well
  as the plant and DC/Warehouse costs

DCs
suppliers
plants
customer1
customer2
customer3
Etc (beyond the scope of this class)
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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 framework for making network design
  decisions
• How are the network optimization methods used for
  facility location and capacity allocation
  decisions?

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