Design in the Supply Chain Spring, 2014 Supply Chain Management: Strategy, Planning, and Operation Chapter 5 Byung-Hyun Ha

1 Contents  Role of network design in supply chain  Factors influencing network design decisions  Framework for network design decisions  Models for facility location and capacity allocation  Role of IT in network design  Distribution network in practice

2 Role of Network Design in Supply Chain  Implementing planned network type  Facility role e.g., Toyota, Honda  Flexibility costs!  Facility location e.g., Toyota assembly plant in U.S. when Yen strengthened  Capacity allocation Allocating much vs. less  Capacity costs!  Market and supply allocation  Never-ending efforts due to change  Firms grow or shrink.  Companies merge.

3 Factors Influencing Design Decision  Strategic factors  Efficiency vs. responsiveness  Possible strategic roles of various facilities Offshore facility Low-cost facility for export production Source facility Low-cost facility for global production Server facility Regional production facility Contributor facility Regional production facility with development skills Outpost facility Regional production facility built to gain local skills Lead facility Facility that leads in development and process technologies

4 Factors Influencing Design Decision  Technological factors  Macroeconomic factors  Tariffs and tax incentives e.g., free trade zone  Exchange rate and demand risk  Overcapacity costs!  Political factors  Infrastructure factors

5 Factors Influencing Design Decision  Competitive factors  Hotelling’s law ( Competing on distance? Competing on price?  Social cost or benefit?  Customer response time and local presence  Logistics and facility costs  Total logistics costs = inventory + transportation + facility costs Minimum cost network regarding responsiveness ab

6 A Framework for Network Design Decisions 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

7 Facility Location and Capacity Allocation  Phase II: Capacitated plant location model  Input n: number of plants m: number of markets D j : annual demand from market j K i : potential capacity of plant i f i : annualized fixed cost of plant i c ij : cost of producing and shipping one unit from plant i to market j  Decision x ij : quantity shipped from plant i to j y i = 1, if plant i is open; 0, otherwise  Objective min. (total fixed and variable costs)

8 Facility Location and Capacity Allocation  Phase III: Gravity location model  Input n: number of markets and supply sources (x i, y i ): location of either market or supply source i F i : cost of shipping one unit for one mile to or from location i D i : quantity to be shipped to or from location i  Decision (x, y): facility location d i : distance to or from location i  Objective  Iterative method for the optimal location Weber problem

9 Facility Location and Capacity Allocation  Phase III: Gravity location model (cont’d)  Example of Table 5-1

10 Facility Location and Capacity Allocation  Phase IV: Demand allocation  Input n: number of plants m: number of markets D j : annual demand from market j K i : capacity of plant i c ij : cost of producing and shipping one unit from plant i to market j  Decision x ij : quantity shipped from plant i to j  Objective min. (total variable costs)

11 Facility Location and Capacity Allocation  Phase IV: Locating plant with single source  Input n: number of plants m: number of markets D j : annual demand from market j K i : potential capacity of plant i f i : annualized fixed cost of plant i c ij : cost of producing and shipping one unit from plant i to market j  Decision y i = 1, if plant i is open; 0, otherwise z ij = 1, if market j is supplied by plant i; 0, otherwise  Objective min. (total fixed and variable costs)

12 Facility Location and Capacity Allocation  Other models  Locating plants and warehouses simultaneously  Accounting for taxes, tariffs, and customer requirements ...

13 Role of IT in Network Design  Network design solutions  Making the modeling of the network design problems easier  Containing high-performance optimization technologies  Allowing for “what-if” scenarios  Interfacing with planning and operational software  Decision-support systems!

14 Distribution Network in Practice  Do not underestimate the life span of facilities  Do not underestimate the cultural implications  e.g., Ford Lincoln Mark VIII  Do not ignore quality of life issues  Focus on tariffs and tax incentives when locating facilities