References: Supply Chain Saves the World. Boston, MA: AMR Research (2006); Supply Chain Management Strategy, Planning and Operation; S. Chopra and P. Meindl; 6th Edition; Pearson Supply Chain Management Strategy, Planning and Operation Network Design in the Supply Chain SCM-655: Global Supply Operations Strategy Summer 2016 Note: Don’t forget to go through Audio Setup Wizard. 1.System Check 2.Administrative Stuff 3.Key Concepts 4.Question & Answer

Today’s Journey Role of network design in a supply chain. Factors influencing supply chain network design decisions. Framework for making network design decisions. Optimization for facility location and capacity allocation decisions. SC Networks V5-00

Summary of Learning Objectives Understand the role of network design in a supply chain. Identify factors influencing supply chain network design decisions. Develop a framework for making network design decisions. Use optimization for facility location and capacity allocation decisions. V5-01

The Role of Network Design Facility role –What role, what processes? Facility location –Where should facilities be located? Capacity allocation –How much capacity at each facility? Market and supply allocation –What markets? Which supply sources? V5-02

The Role of Network Design Revisit design decisions after market changes, mergers, or factor cost changes V5-03

Factors Influencing Network Design Decisions Strategic factors Technological factors Macroeconomic factors –Tariffs and tax incentives –Exchange-rate and demand risk –Freight and fuel costs Political V5-04

Factors Influencing Network Design Decisions Infrastructure factors Competitive factors –Positive externalities between firms –Locating to split the market Customer response time and local presence Logistics and facility costs V5-05

Competitive Factors –Positive externalities between firms Collocation benefits all – Locating to split the market Locate to capture largest market share FIGURE 5-1 V5-06

Framework for Network Design Decisions Phase I: Define a Supply Chain Strategy/Design –Clear definition of the firm’s competitive strategy –Forecast the likely evolution of global competition –Identify constraints on available capital –Determine broad supply strategy V5-07

Framework for Network Design Decisions FIGURE 5-2 V5-08

Framework for Network Design Decisions Phase II: Define the Regional Facility Configuration –Forecast of the demand by country or region –Economies of scale or scope –Identify demand risk, exchange-rate risk, political risk, tariffs, requirements for local production, tax incentives, and export or import restrictions –Identify competitors V5-09

Framework for Network Design Decisions Phase III: Select a Set of Desirable Potential Sites –Hard infrastructure requirements –Soft infrastructure requirements Phase IV: Location Choices V5-10

Models for Facility Location & Capacity Allocation Maximize the overall profitability of the supply chain network while providing customers with the appropriate responsiveness Many trade-offs during network design Network design models used –to decide on locations and capacities –to assign current demand to facilities and identify transportation lanes V5-11

Models for Facility Location & Capacity Allocation Important information –Location of supply sources and markets –Location of potential facility sites –Demand forecast by market –Facility, labor, and material costs by site –Transportation costs between each pair of sites –Inventory costs by site and as a function of quantity –Sale price of product in different regions –Taxes and tariffs –Desired response time and other service factors V5-12

Phase II: Network Optimization Models FIGURE 5-3 V5-13

Capacitated Plant Location Model =number of potential plant locations/capacity =number of markets or demand points =annual demand from market j =potential capacity of plant i =annualized fixed cost of keeping plant i open =cost of producing and shipping one unit from plant i to market j (cost includes production, inventory, transportation, and tariffs) =quantity shipped from plant i to market j =1 if plant i is open, 0 otherwise subject to V5-14

Capacitated Plant Location Model FIGURE 5-4 V5-15

Capacitated Plant Location Model FIGURE 5-5 V5-16

Capacitated Plant Location Model FIGURE 5-5 V5-17

Capacitated Plant Location Model Constraints V5-18

Capacitated Plant Location Model FIGURE 5-6 V5-19

Capacitated Plant Location Model FIGURE 5-7 V5-20

Center-of-Gravity Method Finds location of distribution center that minimizes distribution costs Considers Location of markets Volume of goods shipped to those markets; Shipping cost (or distance) V07-26

Center-of-Gravity Method where d ix = x -coordinate of location i d iy = y -coordinate of location i Q i =Quantity of goods moved to or from location i x -coordinate of the center of gravity y -coordinate of the center of gravity V07-28

Center-of-Gravity Method TABLE 8.5Demand for Quain’s Discount Department Stores STORE LOCATION NUMBER OF CONTAINERS SHIPPED PER MONTH Chicago2,000 Pittsburgh1,000 New York1,000 Atlanta2,000 V07-29

Center-of-Gravity Method North-South East-West 120 – 90 – 60 – 30 – – |||||| Arbitrary origin Chicago (30, 120) New York (130, 130) Pittsburgh (90, 110) Atlanta (60, 40) Figure 8.3 d 1 x = 30 d 1 y = 120 Q 1 = 2,000 V07-30

Center-of-Gravity Method x -coordinate = (30)(2000) + (90)(1000) + (130)(1000) + (60)(2000) = 66.7 y -coordinate = (120)(2000) + (110)(1000) + (130)(1000) + (40)(2000) = 93.3 V07-31

Center-of-Gravity Method North-South East-West 120 – 90 – 60 – 30 – – |||||| Arbitrary origin Chicago (30, 120) New York (130, 130) Pittsburgh (90, 110) Atlanta (60, 40) Center of gravity (66.7, 93.3) + Figure 8.3 V07-32

Phase III: Gravity Location Models x n, y n :coordinate location of either a market or supply source n F n :cost of shipping one unit for one mile between the facility and either market or supply source n D n :quantity to be shipped between facility and market or supply source n ( x, y ) is the location selected for the facility, the distance d n between the facility at location ( x, y ) and the supply source or market n is given by V5-21

Gravity Location Model TABLE 5-1 Sources/Markets Transportation Cost $/Ton Mile ( F n ) Quantity in Tons ( D n ) Coordinates xnxn ynyn Supply sources Buffalo ,200 Memphis St. Louis Markets Atlanta Boston ,0501,200 Jacksonville Philadelphia New York ,0001,080 Total transportation cost V5-22

Gravity Location Model FIGURE 5-8 V5-23

Gravity Location Model FIGURE 5-8 V5-24

Gravity Location Model For each supply source or market n, evaluate dn Obtain a new location (x’, y’) for the facility, where If the new location (x’, y’ ) is almost the same as (x, y) stop. Otherwise, set (x, y) = (x’, y’ ) and go to step 1 V5-25

Phase IV: Network Optimization Models Supply City Demand City Production and Transportation Cost per Thousand Units (Thousand $) Monthly Capacity (Thousand Units) K Monthly Fixed Cost (Thousand $) f AtlantaBostonChicagoDenverOmahaPortland Baltimore1, ,6301,1602,800187,650 Cheyenne1,4601, ,200243,500 Salt Lake City 1,9252,4001, ,000 Memphis3801, , ,321224,100 Wichita9221, ,797312,200 Monthly demand (thousand units) D j TABLE 5-2 V5-26

Network Optimization Models Allocating demand to production facilities =number of factory locations =number of markets or demand points =annual demand from market j =capacity of factory i =cost of producing and shipping one unit from factory i to market j x ij =quantity shipped from factory i to market j subject to V5-27

Network Optimization Models Optimal demand allocation AtlantaBostonChicagoDenverOmahaPortland TelecomOneBaltimore082 Memphis10012 Wichita000 HighOpticSalt Lake0011 Cheyenne670 TABLE 5-3 V5-28

Capacitated Plant Location Model Merge the companies Solve using location-specific costs y i =1 if factory i is open, 0 otherwise x ij =quantity shipped from factory i to market j V5-29

Capacitated Plant Location Model FIGURE 5-9 V5-30

Capacitated Plant Location Model FIGURE 5-10 V5-31

Capacitated Plant Location Model FIGURE 5-10 V5-32

Capacitated Plant Location Model V5-33 FIGURE 5-11

Capacitated Plant Location Model FIGURE 5-12 V5-34

Capacitated Model With Single Sourcing Market supplied by only one factory Modify decision variables y i =1 if factory i is open, 0 otherwise x ij =1 if market j is supplied by factory i, 0 otherwise subject to V5-35

Capacitated Model With Single Sourcing Optimal network configuration with single sourcing Open/ ClosedAtlantaBostonChicagoDenverOmahaPortland BaltimoreClosed CheyenneClosed Salt LakeOpen MemphisOpen WichitaOpen TABLE 5-4 V5-36

Locating Plants and Warehouses Simultaneously FIGURE 5-13 V5-37

Locating Plants and Warehouses Simultaneously Model inputs m =number of markets or demand points n =number of potential factory locations l =number of suppliers t =number of potential warehouse locations D j =annual demand from customer j K i =potential capacity of factory at site i S h =supply capacity at supplier h W e =potential warehouse capacity at site e F i =fixed cost of locating a plant at site i f e =fixed cost of locating a warehouse at site e c hi =cost of shipping one unit from supply source h to factory i c ie =cost of producing and shipping one unit from factory i to warehouse e c ej =cost of shipping one unit from warehouse e to customer j V5-38

Locating Plants and Warehouses Simultaneously Goal is to identify plant and warehouse locations and quantities shipped that minimize the total fixed and variable costs y i =1 if factory is located at site i, 0 otherwise y e =1 if warehouse is located at site e, 0 otherwise x ej =quantity shipped from warehouse e to market j x ie =quantity shipped from factory at site i to warehouse e x hi =quantity shipped from supplier h to factory at site i V5-39

Locating Plants and Warehouses Simultaneously subject to V5-40

Accounting for Taxes, Tariffs, & Customer Rqmts. A supply chain network should maximize profits after tariffs and taxes while meeting customer service requirements Modified objective and constraint V5-41

Making Network Design Decisions In Practice Do not underestimate the life span of facilities Do not gloss over the cultural implications Do not ignore quality-of-life issues Focus on tariffs and tax incentives when locating facilities V5-42

Summary of Key Principles Understand the role of network design in a supply chain Identify factors influencing supply chain network design decisions Develop a framework for making network design decisions Use optimization for facility location and capacity allocation decisions V5-44

Wrap-Up Questions – Module 05 McMaster-Carr sells maintenance, repair, and operations equipment from five warehouses in the United States. WW Grainger sells products from more than 350 retail locations, supported by several warehouses. In both cases, customers place orders using the Web or on the phone. Discuss the pros and cons of the two strategies. Consider a firm such as Dell, with very few production facilities worldwide. List the pros and cons of this approach and why it may or may not be suitable for the computer industry. V5-46

Wrap-Up Questions – Module 05 Consider a firm such as Ford, with more than 150 facilities worldwide. List the pros and cons of having many facilities and why it may or may not be suitable for the automobile industry. Amazon.com has built new warehouses as it has grown. How does this change affect various cost and response times in the Amazon.com supply chain? V5-46