Chapter 5 Network Design in the Supply Chain Supply Chain Management (5th Edition) Chapter 5 Network Design in the Supply Chain 5-1

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

Network Design Decisions Facility role Facility location Capacity allocation Market and supply allocation 5-4

Factors Influencing Network Design Decisions Strategic e.g. Foxconn, Zara, Costco Technological e.g. Coca-Cola Macroeconomic e.g. Taxes, exchange rates Political (GPRI) Infrastructure Competitive Logistics and facility costs e.g. Amazon 5-5

Service and Number of Facilities Response Time Notes: Number of Facilities 5-6

Inventory Costs and Number of Facilities Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities. Number of facilities

Facility Costs and Number of Facilities (Fig. 4.4) Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities. Number of facilities

Transportation Costs and Number of Facilities (Fig. 4.3) Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities. Number of facilities

Total Costs Related to Number of Facilities Inventory Notes: Total costs decrease and then increase as we increase the number of facilities. The responsiveness improves as we increase the number of facilities. A supply chain should always operate above the lowest cost point. Operating beyond that point makes sense if the revenue generated from better responsiveness exceeds the cost of better responsiveness. Transportation Number of Facilities

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

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

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

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

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

A Framework for Global Site Location 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 Notes: PHASE III Desirable Sites AVAILABLE INFRASTRUCTURE PRODUCTION METHODS Skill needs, response time FACTOR COSTS Labor, materials, site specific PHASE IV Location Choices LOGISTICS COSTS Transport, inventory, coordination 5-16

Conventional Network Materials DC Vendor DC Finished Goods DC Customer Store Customer Store Component Manufacturing Vendor DC Customer Store Plant Warehouse Customer DC Components DC Customer Store Notes: Vendor DC Finished Goods DC Final Assembly Customer DC Customer Store 5-17

Tailored Network: Multi-Echelon Finished Goods Network Local DC Cross-Dock Store 1 Regional Finished Goods DC Customer 1 DC Store 1 Local DC Cross-Dock Store 2 National Finished Goods DC Customer 2 DC Store 2 Local DC Cross-Dock Notes: Regional Finished Goods DC Store 3 Store 3 5-18

Facility planning and design Locating a single facility – simple methods

Outline Preference Matrix Gravity method

Location Preference matrix Health-Watch A new health facility is to be located in Erie, the following table (see next slide) show all the information related to factors and their scores (1- poor, 5= excellent) for the potential site. How good is this site?

Preference matrix Six steps: Develop a list of relevant factors. Assign a weight to each factor reflecting its relative importance to the firm. Develop a rating scale for the factors. Score each location on each factor based on the scale. Multiply the scores by the weights for each factor and total the weighted scores for each location. Make a recommendation based on the maximum point score, considering other [quantitative?] factors.

Location Health-Watch North Erie Scranton State College Pittsburgh Harrisburg Philadelphia Scranton Uniontown State College Example 9.1

Location Health-Watch Location Factor Weight Score North Erie Pittsburgh Harrisburg Philadelphia Scranton Uniontown State College Location Factor Weight Score Total Patient miles per month 25 4 Facility utilization 20 3 Average time per emergency trip 20 3 Expressway accessibility 15 4 Land and construction costs 10 1 Employee preference 10 5 Example 9.1

Location Health-Watch Location Factor Weight Score Weighted Score North Erie Pittsburgh Harrisburg Philadelphia Scranton Uniontown State College Weighted Score Location Factor Weight Score Total Patient miles per month 25 4 Facility utilization 20 3 Average time per emergency trip 20 3 Expressway accessibility 15 4 Land and construction costs 10 1 Employee preference 10 5 Example 9.1

Location Health-Watch Weighted Score Location Factor Weight Score North Erie Pittsburgh Harrisburg Philadelphia Scranton Uniontown State College Weighted Score Location Factor Weight Score Total Patient miles per month 25 4 Facility utilization 20 3 Average time per emergency trip 20 3 Expressway accessibility 15 4 Land and construction costs 10 1 Employee preference 10 5 WS = (25 x 4) Example 9.1

Location Health-Watch Weighted Score Location Factor Weight Score North Erie Pittsburgh Harrisburg Philadelphia Scranton Uniontown State College Weighted Score Location Factor Weight Score Total Patient miles per month 25 4 Facility utilization 20 3 Average time per emergency trip 20 3 Expressway accessibility 15 4 Land and construction costs 10 1 Employee preference 10 5 WS = (25 x 4) + (20 x 3) Example 9.1

Location Health-Watch Weighted Score Location Factor Weight Score North Erie Pittsburgh Harrisburg Philadelphia Scranton Uniontown State College Weighted Score Location Factor Weight Score Total Patient miles per month 25 4 Facility utilization 20 3 Average time per emergency trip 20 3 Expressway accessibility 15 4 Land and construction costs 10 1 Employee preference 10 5 WS = (25 x 4) + (20 x 3) + (20 x 3) Example 9.1

Location Health-Watch Weighted Score Location Factor Weight Score North Erie Pittsburgh Harrisburg Philadelphia Scranton Uniontown State College Weighted Score Location Factor Weight Score Total Patient miles per month 25 4 Facility utilization 20 3 Average time per emergency trip 20 3 Expressway accessibility 15 4 Land and construction costs 10 1 Employee preference 10 5 WS = (25 x 4) + (20 x 3) + (20 x 3) + (15 x4) + (10 x 1) + (10 x 5) Example 9.1

Location Health-Watch Weighted Score Location Factor Weight Score North Erie Pittsburgh Harrisburg Philadelphia Scranton Uniontown State College Weighted Score Location Factor Weight Score Total Patient miles per month 25 4 Facility utilization 20 3 Average time per emergency trip 20 3 Expressway accessibility 15 4 Land and construction costs 10 1 Employee preference 10 5 WS = 340 Example 9.1

Center of gravity method An intuitive but non-optimal approach, because it does not minimize the travel distances from each location to the service facility. Center of gravity solution could serve as a starting point for the previous, rather tedious, method.

Location Health-Watch Center of Gravity Approach North B A C E G F D (2.5, 4.5) [2] (2.5, 2.5) [5] (5, 2) [7] (7, 2) [20] (9, 2.5) [14] (8, 5) [10] (5.5, 4.5) x (miles) East 1 2 3 4 5 6 7 8 9 10 y (miles) Example 9.4

Location Health-Watch Center of Gravity Approach North B A C E G F D (2.5, 4.5) [2] (2.5, 2.5) [5] (5, 2) [7] (7, 2) [20] (9, 2.5) [14] (8, 5) [10] (5.5, 4.5) x (miles) East 1 2 3 4 5 6 7 8 9 10 y (miles) Census Population Tract (x,y) (l) lx ly A (2.5, 4.5) 2 B (2.5, 2.5) 5 C (5.5, 4.5) 10 D (5, 2) 7 E (8, 5) 10 F (7, 2) 20 G (9, 2.5) 14 Example 9.4

Location Health-Watch Center of Gravity Approach North B A C E G F D (2.5, 4.5) [2] (2.5, 2.5) [5] (5, 2) [7] (7, 2) [20] (9, 2.5) [14] (8, 5) [10] (5.5, 4.5) x (miles) East 1 2 3 4 5 6 7 8 9 10 y (miles) Census Population Tract (x,y) (l) lx ly A (2.5, 4.5) 2 5 B (2.5, 2.5) C (5.5, 4.5) D (5, 2) E (8, 5) F (7, 2) G (9, 2.5) Example 9.4

Location Health-Watch Center of Gravity Approach North B A C E G F D (2.5, 4.5) [2] (2.5, 2.5) [5] (5, 2) [7] (7, 2) [20] (9, 2.5) [14] (8, 5) [10] (5.5, 4.5) x (miles) East 1 2 3 4 5 6 7 8 9 10 y (miles) Census Population Tract (x,y) (l) lx ly A (2.5, 4.5) 2 5 9 B (2.5, 2.5) C (5.5, 4.5) D (5, 2) E (8, 5) F (7, 2) G (9, 2.5) Example 9.4

Location Health-Watch Center of Gravity Approach North B A C E G F D (2.5, 4.5) [2] (2.5, 2.5) [5] (5, 2) [7] (7, 2) [20] (9, 2.5) [14] (8, 5) [10] (5.5, 4.5) x (miles) East 1 2 3 4 5 6 7 8 9 10 y (miles) Census Population Tract (x,y) (l) lx ly A (2.5, 4.5) 2 5 9 B (2.5, 2.5) C (5.5, 4.5) D (5, 2) E (8, 5) F (7, 2) G (9, 2.5) Example 9.4

Location Health-Watch Center of Gravity Approach North B A C E G F D (2.5, 4.5) [2] (2.5, 2.5) [5] (5, 2) [7] (7, 2) [20] (9, 2.5) [14] (8, 5) [10] (5.5, 4.5) x (miles) East 1 2 3 4 5 6 7 8 9 10 y (miles) Census Population Tract (x,y) (l) lx ly A (2.5, 4.5) 2 5 9 B (2.5, 2.5) 5 12.5 12.5 C (5.5, 4.5) 10 55 45 D (5, 2) 7 35 14 E (8, 5) 10 80 50 F (7, 2) 20 140 40 G (9, 2.5) 14 126 35 Example 9.4

Location Health-Watch Center of Gravity Approach North B A C E G F D (2.5, 4.5) [2] (2.5, 2.5) [5] (5, 2) [7] (7, 2) [20] (9, 2.5) [14] (8, 5) [10] (5.5, 4.5) x (miles) East 1 2 3 4 5 6 7 8 9 10 y (miles) Census Population Tract (x,y) (l) lx ly A (2.5, 4.5) 2 5 9 B (2.5, 2.5) 5 12.5 12.5 C (5.5, 4.5) 10 55 45 D (5, 2) 7 35 14 E (8, 5) 10 80 50 F (7, 2) 20 140 40 G (9, 2.5) 14 126 35 Totals 68 453.5 205.5 Example 9.4

Location Health-Watch x* = y* = Center of Gravity Approach North B A C D (2.5, 4.5) [2] (2.5, 2.5) [5] (5, 2) [7] (7, 2) [20] (9, 2.5) [14] (8, 5) [10] (5.5, 4.5) x (miles) East 1 2 3 4 5 6 7 8 9 10 y (miles) x* = y* = Census Population Tract (x,y) (l) lx ly A (2.5, 4.5) 2 5 9 B (2.5, 2.5) 5 12.5 12.5 C (5.5, 4.5) 10 55 45 D (5, 2) 7 35 14 E (8, 5) 10 80 50 F (7, 2) 20 140 40 G (9, 2.5) 14 126 35 Totals 68 453.5 205.5 Example 9.4

Location Health-Watch 453.5 x* = 68 205.5 y* = Center of Gravity Approach Health-Watch North B A C E G F D (2.5, 4.5) [2] (2.5, 2.5) [5] (5, 2) [7] (7, 2) [20] (9, 2.5) [14] (8, 5) [10] (5.5, 4.5) x (miles) East 1 2 3 4 5 6 7 8 9 10 y (miles) 453.5 68 205.5 x* = y* = Census Population Tract (x,y) (l) lx ly A (2.5, 4.5) 2 5 9 B (2.5, 2.5) 5 12.5 12.5 C (5.5, 4.5) 10 55 45 D (5, 2) 7 35 14 E (8, 5) 10 80 50 F (7, 2) 20 140 40 G (9, 2.5) 14 126 35 Totals 68 453.5 205.5 Example 9.4

Location Health-Watch 453.5 x* = 68 205.5 y* = Center of Gravity Approach Health-Watch North B A C E G F D (2.5, 4.5) [2] (2.5, 2.5) [5] (5, 2) [7] (7, 2) [20] (9, 2.5) [14] (8, 5) [10] (5.5, 4.5) x (miles) East 1 2 3 4 5 6 7 8 9 10 y (miles) 453.5 68 205.5 x* = y* = Census Population Tract (x,y) (l) lx ly A (2.5, 4.5) 2 5 9 B (2.5, 2.5) 5 12.5 12.5 C (5.5, 4.5) 10 55 45 D (5, 2) 7 35 14 E (8, 5) 10 80 50 F (7, 2) 20 140 40 G (9, 2.5) 14 126 35 Totals 68 453.5 205.5 Example 9.4

Location Health-Watch x* = 6.67 y* = 3.02 Center of Gravity Approach North B A C E G F D (2.5, 4.5) [2] (2.5, 2.5) [5] (5, 2) [7] (7, 2) [20] (9, 2.5) [14] (8, 5) [10] (5.5, 4.5) x (miles) East 1 2 3 4 5 6 7 8 9 10 y (miles) x* = 6.67 y* = 3.02 Census Population Tract (x,y) (l) lx ly A (2.5, 4.5) 2 5 9 B (2.5, 2.5) 5 12.5 12.5 C (5.5, 4.5) 10 55 45 D (5, 2) 7 35 14 E (8, 5) 10 80 50 F (7, 2) 20 140 40 G (9, 2.5) 14 126 35 Totals 68 453.5 205.5 Example 9.4

Location Health-Watch x* = 6.67 y* = 3.02 Center of Gravity Approach North B A C E G F D (2.5, 4.5) [2] (2.5, 2.5) [5] (5, 2) [7] (7, 2) [20] (9, 2.5) [14] (8, 5) [10] (5.5, 4.5) x (miles) East 1 2 3 4 5 6 7 8 9 10 y (miles) x* = 6.67 y* = 3.02 Example 9.4

Location Health-Watch x* = 6.67 y* = 2.96 Center of Gravity Approach North B A C E G F D (2.5, 4.5) [2] (2.5, 2.5) [5] (5, 2) [7] (7, 2) [20] (9, 2.5) [14] (8, 5) [10] (5.5, 4.5) x (miles) East 1 2 3 4 5 6 7 8 9 10 y (miles) x* = 6.67 y* = 2.96 Figure 9.6

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 Notes: Min 5-45

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 Notes: Which plants to establish? How to configure the network? 5-46

Demand Allocation Model 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 5-47

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 Notes: 5-48

Plant Location with Single Sourcing yi = 1 if plant is located at site i, 0 otherwise xij = 1 if market j is supplied by factory i, 0 otherwise Notes: 5-49

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 Notes: 5-50