© 2004 Prentice-Hall, Inc. Chapter 5 Network Design in the Supply Chain Supply Chain Management (2nd Edition) 5-1

© 2004 Prentice-Hall, Inc. Outline u A strategic framework for facility location u Multi-echelon networks u Gravity methods for location u Plant location models 5-2

© 2004 Prentice-Hall, Inc. Network Design Decisions u Facility role u Facility location Ex: Toyota, Amazon.com u Capacity allocation u Market and supply allocation 5-3

© 2004 Prentice-Hall, Inc. Factors Influencing Network Design Decisions u Strategic Factors u Technological u Macroeconomic u Political u Infrastructure u Competitive u Customer Response Time and Local presence u Logistics and facility costs 5-4

© 2004 Prentice-Hall, Inc. Strategic Roles of a Facility u Offshore facility: Low cost facility for export production u Source Facility: Low cost facility for global production u Server Facility: Regional Production Facility u Contributor Facility: Regional Production Facility with Development Skills u Outpost Facility: Regional Production Facility built to gain local skills u Lead Facility: Facility that leads in development and process technologies

© 2004 Prentice-Hall, Inc. Technological Factors u Characteristics of available production technologies have a significant impact on the network design: –If production technology provide significant economies of scale, few high capacity locations are the most effective –If facilities have lower fixed costs, many local facilities are preferred. u Flexibility of the production technology impacts the degree of consolidation in the network: –If the production technology is inflexible, build many local facilities –Else, build few but large facilities

© 2004 Prentice-Hall, Inc. Macroeconomic Factors u Tariffs and tax incentives –Tariffs: Any duties that must be paid when product, equipment are moved across an international, state or city boundry. –Developing countries have free trade zones u Exchange rate and demand risk –Valuable TRL and textile industry in Turkey

© 2004 Prentice-Hall, Inc. Infrastructure Factors u Availability of sites u Availability of labor u Proximity to transportation terminals, railservice, airports, seaports, u Highway access u Congestion u Local utilities

© 2004 Prentice-Hall, Inc. Competitive Factors u Positive externalities between firms –Ex: Gas stations and retail shops Auto Repair Districts u Locating to Split the market –When firms do not control price, but compete on distance from the customer, they can maximize market share by locating close to each other and splitting the market

© 2004 Prentice-Hall, Inc. Ex:Locating to Split the Market u Let there be two firms located at points a and 1-b on a line segment between 0 and 1. Let the customers be located uniformly on this line. If the total demand is 1, the demand at the two firms is maximized when a=b=1/2. Thus the market share is maximized when both firms are together, although the average distance travelled is greater than the seperate case. 0 1 a1-b

© 2004 Prentice-Hall, Inc. Service and Number of Facilities Number of Facilities Response Time 5-11

© 2004 Prentice-Hall, Inc. Customer DC Where inventory needs to be for a one week order response time - typical results --> 1 DC

© 2004 Prentice-Hall, Inc. Customer DC Where inventory needs to be for a 5 day order response time - typical results --> 2 DCs

© 2004 Prentice-Hall, Inc. Customer DC Where inventory needs to be for a 3 day order response time - typical results --> 5 DCs

© 2004 Prentice-Hall, Inc. Customer DC Where inventory needs to be for a next day order response time - typical results --> 13 DCs

© 2004 Prentice-Hall, Inc. Customer DC Where inventory needs to be for a same day / next day order response time - typical results --> 26 DCs

© 2004 Prentice-Hall, Inc. Costs and Number of Facilities Costs Number of facilities Inventory Transportation Facility costs 5-17

© 2004 Prentice-Hall, Inc. Percent Service Level Within Promised Time Transportation Cost Buildup as a Function of Facilities Cost of Operations Number of Facilities Inventory Facilities Total Costs Labor 5-18

© 2004 Prentice-Hall, Inc. A Framework for Global Site Location PHASE I Supply Chain Strategy PHASE II Regional Facility Configuration PHASE III Desirable Sites PHASE IV Location Choices Competitive STRATEGY INTERNAL CONSTRAINTS Capital, growth strategy, existing network PRODUCTION TECHNOLOGIES Cost, Scale/Scope impact, support required, flexibility COMPETITIVE ENVIRONMENT PRODUCTION METHODS Skill needs, response time FACTOR COSTS Labor, materials, site specific GLOBAL COMPETITION TARIFFS AND TAX INCENTIVES REGIONAL DEMAND Size, growth, homogeneity, local specifications POLITICAL, EXCHANGE RATE AND DEMAND RISK AVAILABLE INFRASTRUCTURE LOGISTICS COSTS Transport, inventory, coordination 5-19

© 2004 Prentice-Hall, Inc. A Framework For Network Design Decisions u Define SC Strategy –Base the strategy on the competitive strategy, economies of scale or scope. u Define the regional facility configuration –Approx. no. of facilities, regions where facilities will be set up, whether a facility will produce all products of a given market, etc u Select desirable sites within a given region –Based on the analysis of infrastructure availability u Location choices –Select a precise location and capacity allocation for each facility

© 2004 Prentice-Hall, Inc. Conventional Network CustomerStore MaterialsDC ComponentManufacturing VendorDC Final Assembly Finished Goods DC ComponentsDC VendorDC PlantWarehouse Finished CustomerDC CustomerDC CustomerDC CustomerStore CustomerStore CustomerStore CustomerStore VendorDC 5-21

© 2004 Prentice-Hall, Inc. Tailored Network: Multi-Echelon Finished Goods Network RegionalFinished Goods DC RegionalFinished Customer 1 DC Store 1 NationalFinished Goods DC Local DC Cross-Dock Cross-Dock Cross-Dock Customer 2 DC Store 1 Store 2 Store

© 2004 Prentice-Hall, Inc. Models for Facility Location and Capacity Allocation u Goal is to maximize the overall profitability while providing the appropriate responsiveness. u Managers use network design models in two different ways: –Decide on locations and capacities of facilities –Decide on the market share of each facility and identify lanes of transportation u Models are two types: –Network optimization models –Gravity models

© 2004 Prentice-Hall, Inc. The Required Inputs for the Models u Location of suppliers u Location of potential facility sites u Demand forecast by market u Facility, labor, material costs u Transportation costs between sites u Inventory costs by site and unit u Sale prices in different regions u Taxes and tariffs between locations u Desired response time and other service measures

© 2004 Prentice-Hall, Inc. Phase II: Network Optimization Model The capacitated plant location model Inputs: n: # potential plant locations/capacity m: # markets or demand points Dj: Annual demand from market j, j=1,2,...,m Ki: Potential capacity of plant i, i=1,2,...,n fi: Annualized fixed cost of keeping factory i open cij: Cost of producing and shipping one unit from factory i to market j. Decision variables: Yi: 1 if plant i is open, 0 otherwise Xij: quantity shipped from factory i to market j

© 2004 Prentice-Hall, Inc. The capacitated plant location model (cont’d)

© 2004 Prentice-Hall, Inc. Ex: Sun Oil Company u Vice president of Supply Chain decides to view the worldwide demand in five regions: North America, South America, Europe, Asia, Africa Demand Region Production and Transportation Cost per 1,000,000 UnitsFixedLowFixedHigh Supply RegionN. AmericaS. AmericaEuropeAsiaAfricaCost ($)CapacityCost ($)Capacity N. America , ,00020 S. America , ,75020 Europe , ,75020 Asia , ,15020 Africa , ,00020 Demand

© 2004 Prentice-Hall, Inc. Gravity Methods for Location u Ton Mile-Center Solution –x,y: Warehouse Coordinates –x n, y n : Coordinates of delivery location n –d n : Distance to delivery location n –F n : Annual tonnage to delivery location n Min 5-28

© 2004 Prentice-Hall, Inc. Network Optimization Models u Allocating demand to production facilities u Locating facilities and allocating capacity Which plants to establish? How to configure the network? Key Costs: Fixed facility cost Transportation cost Production cost Inventory cost Coordination cost 5-29

© 2004 Prentice-Hall, Inc. Demand Allocation Model u Which market is served by which plant? u Which supply sources are used by a plant? x ij = Quantity shipped from plant site i to customer j 5-30

© 2004 Prentice-Hall, Inc. Plant Location with Multiple Sourcing u y i = 1 if plant is located at site i, 0 otherwise u x ij = Quantity shipped from plant site i to customer j 5-31

© 2004 Prentice-Hall, Inc. Value of Adding 0.1 Million Pounds Capacity (1982) Should be evaluated as an option and priced accordingly. 5-32

© 2004 Prentice-Hall, Inc. Evaluating Facility Investments: AM Tires U.S. Demand = 100,000; Mexico demand = 50,000 1US$ = 9 pesos Demand goes up or down by 20 percent with probability 0.5 and exchange rate goes up or down by 25 per cent with probability

© 2004 Prentice-Hall, Inc. AM Tires 5-34

© 2004 Prentice-Hall, Inc. AM Tires Four possible capacity scenarios: Both dedicated Both flexible U.S. flexible, Mexico dedicated U.S. dedicated, Mexico flexible For each node, solve the demand allocation model. PlantsMarkets U.S. Mexico U.S. Mexico 5-35

© 2004 Prentice-Hall, Inc. Facility Decision at AM Tires 5-36

© 2004 Prentice-Hall, Inc. Capacity Investment Strategies u Speculative Strategy –Single sourcing u Hedging Strategy –Match revenue and cost exposure u Flexible Strategy –Excess total capacity in multiple plants –Flexible technologies 5-37

© 2004 Prentice-Hall, Inc. Summary of Learning Objectives u What is the role of network design decisions in the supply chain? u What are the factors influencing supply chain network design decisions? u Describe a strategic framework for facility location. u How are the following optimization methods used for facility location and capacity allocation decisions? –Gravity methods for location –Network optimization models 5-38