Designing the Supply Chain Network

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Designing the Supply Chain Network

• Models from Chapter 4, 5 of Chopra Meindl
• Byung-Hyun Ha
• bhha_at_pusan.ac.kr

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Outline

• Designing the Distribution Network in Supply
  Chain
• Factors Influencing Distribution Network Design
• Design Options for Distribution Network
• Selecting Distribution Network Design
• Models for Facility Location and Capacity
  Allocation

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Designing Distribution Network

• Factors Influencing Distribution Network Design
• Customer needs that are met
• Cost of meeting customer needs

Required Number of Facilities
Response Time
Cost
Inventory
Transportation
Facility
Number of Facilities
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Designing Distribution Network

• Elements of customer service influenced by
  network structure
• Response time
• Product variety
• Product availability
• Customer experience
• Ease with which customer can place and receive
  order
• Order visibility
• Ability of customer to track their order from
  placement to delivery
• Returnability
• Ease with which customer can return
  unsatisfactory merchandise and ability of
  logistics network to handle such returns

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Designing Distribution Network

• Supply chain costs affected by network structure
• Inventories
• Transportation
• Facilities and handling
• Information infrastructure

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Design Options for Distribution Network

• Possible distribution network design
• Manufacturer storage with direct shipping
• Manufacturer storage with direct shipping and
  in-transit merge
• Distributor storage with carrier delivery
• Distributor storage with last mile delivery
• Manufacturer or distributor storage with consumer
  pickup
• Retail storage with consumer pickup
• Customers walking into store or ordering online

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Design Options for Distribution Network

• Manufacturer storage with direct shipping
• Drop-shipping, demand aggregation, postpone
  customization
• Slow-moving/low-demand/high-value items

Inventory Transportation Facilities and handling Information L H L H
Response time Product variety Product availability Customer experience Order visibility Returnability H H H M L L
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Design Options for Distribution Network

• Manufacturer storage with direct shipping and
  in-transit merge
• e.g. PC from Dell along with Sony monitor
• low- to medium-demand and high-value items

Inventory Transportation Facilities and handling Information L M M H
Response time Product variety Product availability Customer experience Order visibility Returnability H H H H L L
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Design Options for Distribution Network

• Distributor storage with carrier delivery
• High-level inventory at distributor
• Medium- to fast-moving items at distributor, loss
  of aggregation

Inventory Transportation Facilities and handling Information M L M M
Response time Product variety Product availability Customer experience Order visibility Returnability M M M H M M
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Design Options for Distribution Network

• Distributor storage with last mile delivery
• Delivering to customers home instead of using
  package carrier
• e.g. grocery industry, water, bag of rice at
  dense city

Inventory Transportation Facilities and handling Information H H H M
Response time Product variety Product availability Customer experience Order visibility Returnability L L L H M M
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Design Options for Distribution Network

• Manufacturer or distributor storage with consumer
  pickup
• Reusing existing pick-up site, customer
  participation

Inventory Transportation Facilities and handling Information ? L ? H
Response time Product variety Product availability Customer experience Order visibility Returnability L H H L H H
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Selecting Distribution Network Design

• Comparative performance
• 1 best performance

Manufacturer storage with direct shipping Manufacturer storage with direct shipping and in-transit merge Distributor storage with carrier delivery Distributor storage with last mile delivery Manufacturer or distributor storage with consumer pickup Retail storage with consumer pickup
Inventory Transportation Facilities and handling Information Response time Product variety Product availability Customer experience Order visibility Returnability 1 4 1 4 4 1 1 4 5 5 1 3 2 4 4 1 1 3 4 5 2 2 3 3 3 2 2 2 3 4 3 5 4 2 2 3 3 1 2 3 1 1 5 5 4 1 1 5 6 2 4 1 6 1 1 4 4 5 1 1
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Selecting Distribution Network Design

• Performance for different product/customer char.
• 2 Very suitable, , -2 very unsuitable

Manufacturer storage with direct shipping Manufacturer storage with direct shipping and in-transit merge Distributor storage with carrier delivery Distributor storage with last mile delivery Manufacturer or distributor storage with consumer pickup Retail storage with consumer pickup
High-demand product Medium-demand product Low-demand product Very low-demand product Many product source High product value Quick desired response High product variety Low customer effort -2 -1 1 2 -1 2 -2 2 1 -1 0 0 1 -1 1 -2 0 2 0 1 1 0 2 1 -1 1 2 1 0 -1 -2 1 0 1 0 2 -1 0 1 1 0 -1 -2 2 -1 2 1 -1 -2 1 -1 2 -1 -2
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Network Design in the Supply Chain

• A framework for network design decision

Competitive STRATEGY
GLOBAL COMPETITION
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
LOGISTICS COSTS Transport, inventory,
coordination
FACTOR COSTS Labor, materials, site specific
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Phase I Supply Chain Strategy

• A companys competitive strategy
• Defining set of customer needs that it seek to
  satisfy through its products and services
• Value chain perspective
• Product development strategy/marketing and sales
  strategy
• Supply chain strategy and achieving strategic fit
• e.g. Wal-Mart, McMaster Carr, Dell

Finance, Accounting, Information Technology,
Human Resources
New Product Development
Marketing and Sales
Operations
Distribution
Services
The Value Chain in a Company
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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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Phase II Regional Facility Configuration

• Capacitated plant location model
• Example SunOil, a global energy company
• 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)
• Question
• Where to locate facilities to service their
  demand
• What size to build in the region (small or
  large), should they locate a facility there

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Phase II Regional Facility Configuration

• Capacitated plant location model
• n number of potential plant location
• As we are considering two different type plants
  (small, large) for each region, n 10
• m number of markets
• Dj demand from market j
• Ki capacity of plant i
• fi fixed cost of keeping plant i open
• cij variable cost of sourcing market j from
  plant i
• yi 1 if plant is located at site i, 0
  otherwise
• xij quantity shipped from plant i to market j

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Phase II Regional Facility Configuration
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Phase III Desirable Sites

• Gravity methods for location
• x, y Warehouse Coordinates
• xn, yn Coordinates of delivery location n
• Dn Quantity to be shipped to delivery location n
• Fn Annual tonnage to delivery location n

Limitions?
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Phase IV Location Choices

• Network optimization model
• Example TelecomOne merged with High Optic
• They have plants in different cities and service
  several regions
• Supply cities
• Baltimore (capacity 18K), Cheyenne (24K), Salt
  Lake City (27K), Memphis (22K) and Wichita (31K)
• Monthly regional demands
• Atlanta (demand 10K), Boston (6K), Chicago (14K),
  Denver (6K), Omaha (7K)
• They will consider consolidating facilities

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Phase IV Location Choices

• Network optimization model
• n number of plant location
• m number of markets
• Dj demand from market j
• Ki capacity of plant i
• cij variable cost of sourcing market j from
  plant i
• xij quantity shipped from plant i to market j

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Phase IV Location Choices

• Considering additional layers simultaneously
  locating plants and DCs

DCs
suppliers
plants
customer1
customer2
customer3