1. Supply Chain Management
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Supply Chain Management
Lecture 7
Chapter 1

2. Outline Homework 1 Today Thursday Introduction to Excel Solver
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Outline
Homework 1
Today
Introduction to Excel Solver
Start with Chapter 5
Thursday
Chapter 5
Skipping sections
Locating to Split the Market (3e: p. 120, 4e: p. 112)
Gravity Location Models (3e: p , 4e: p )
Locating Plants and Warehouses Simultaneously (3e: p , 4e: )
Accounting for Taxes, Tariffs and Customer Requirements (3e: p , 4e p )
Start with Chapter 6?
Homework 2
Chapter 1

3. Design Options For a Distribution Network
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Design Options For a Distribution Network
Retailer
Consumers
Distributor
Warehouse
Manufacturers
Retailer
Manufacturers
Consumers
Retailer
Mergers
Consumers
Manufacturers
Distributor
Warehouse
Manufacturers
Consumers
Distributor
Warehouse
Manufacturers
Consumers
Distributor
Warehouse
Manufacturers
Consumers
Chapter 1

4. Example: Dell Network Design Decision
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Example: Dell Network Design Decision
$31
$19
$23
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5. Example: Dell Network Design Decision
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Example: Dell Network Design Decision
Chapter 1

6. What is an Optimization Problem
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What is an Optimization Problem
Generally, an optimization problem seeks a solution where decisions need to be made in a constrained or limited resource environment
Most supply chain optimization problems require matching demand and supply when one, the other, or both may be limited
An optimization problem comprises of three major components
Decision variables
Constraints
Objective
Chapter 1

7. Introduction to Excel Solver
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Introduction to Excel Solver
Installing Excel Solver
Goto Tools > Add-ins…
Select “Solver Add-in” and press OK
Opening Excel Solver
Goto Tools > Solver
Chapter 1

8. Example: Profit Maximization Problem
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Example: Profit Maximization Problem
The Windsor Glass Company is planning to launch two new products.
8 feet glass door with aluminum framing
4x6 feet window with wood framing
Management of the company wants to determine what mixture of both products would be most profitable
Chapter 1

9. Example: Profit Maximization Problem
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Example: Profit Maximization Problem
8 Feet Aluminum Frame Doors
4x6 Wood Frame Windows
Windsor Glass Company
Plant 1 (Aluminum frames)
1 hour
Plant 3
(Glass and assembly)
Profits
Excess cap. 4 hours
3 hours
$3,000
Plant 2 (Wood frames)
2 hours
$5,000
Excess cap. 18 hours
2 hours
Excess cap. 12 hours
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10. Windsor Glass Company Model
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Windsor Glass Company Model
Inputs
Decision variables
Xdoors number of batches of doors produced
Xwindows number of batches of windows produced
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11. Windsor Glass Company Model
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Windsor Glass Company Model
Objective function
Maximize 3000 Xdoors Xwindows
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12. Windsor Glass Company Model
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Windsor Glass Company Model
Constraints
Hours available in Plant 1 Xdoors  4
Hours available in Plant 2 2 Xwindows  12
Hours available in Plant 3 3 Xdoors + 2 Xwindows  18
Nonnegative production quantities Xdoors  0, Xwindows  0
Chapter 1

13. Windsor Glass Company Model
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Windsor Glass Company Model
Decision variables
Xdoors number of batches of doors produced
Xwindows number of batches of windows produced
Objective function
Maximize 3000 Xdoors Xwindows
Constraints
Xdoors <= 4 (Available hours Plant 1)
2 Xwindows <= 12 (Available hours Plant 2)
3 Xdoors + 2 Xwindows <= 18 (Available hours Plant 3)
Xdoors, Xwindows >= 0 (nonnegativity)
Chapter 1

14. Windsor Glass Company Model
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Windsor Glass Company Model
Objective function
Maximize 3000 Xdoors Xwindows
Chapter 1

15. Windsor Glass Company Model
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Windsor Glass Company Model
Constraints
0 <= 4 - Xdoors (Available hours Plant 1)
0 <= Xwindows (Available hours Plant 2)
0 <= Xdoors - 2 Xwindows (Available hours Plant 3)
Xdoors, Xwindows >= 0 (nonnegativity)
Constraints
X1 <= 4 (Available hours Plant 1)
2 X2 <= 12 (Available hours Plant 2)
3 X1 + 2 X2 <= 18 (Available hours Plant 3)
X1, X2 >= 0 (nonnegativity)
Chapter 1

16. Windsor Glass Company Model
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Windsor Glass Company Model
Decision variables
Xdoors number of batches of doors produced
Xwindows number of batches of windows produced
Objective function
Maximize 3000 Xdoors Xwindows
Constraints
0 <= 4 - Xdoors (Available hours Plant 1)
0 <= Xwindows (Available hours Plant 2)
0 <= Xdoors - 2 Xwindows (Available hours Plant 3)
Xdoors, Xwindows >= 0 (nonnegativity)
Chapter 1

17. Windsor Glass Company Model using Excel Solver
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Windsor Glass Company Model using Excel Solver
Objective function
Decision variables
Constraints
Chapter 1

18. Windsor Glass Company Model using Excel
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Windsor Glass Company Model using Excel
Chapter 1

19. Supply Chain Network Design Decisions
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Supply Chain Network Design Decisions
Facility role
What role should each facility play? What processes are performed at each facility?
Facility location
Where should facilities be located?
Capacity allocation
How much capacity should be allocated to each facility?
Market and supply allocation
What markets should each facility serve? Which supply sources should feed each facility?
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20. Example: Dell Market Allocation
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Example: Dell Market Allocation
Decisions:
Facility location -> Where should facilities be located?
Market allocation -> What market should each facility serve?
Constraints:
Satisfy demand
Respect plant capacity
What are the decisions?
What are the constraints?
Chapter 1

21. Example: Dell Market Allocation
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Example: Dell Market Allocation
Decisions:
Facility location -> Where should facilities be located?
Market allocation -> What market should each facility serve?
Constraints:
What are the decisions?
What are the constraints?
Chapter 1

22. Example: Dell Market Allocation
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Example: Dell Market Allocation
Constraints (Satisfy demand at each market)
0 = 15,000 - XIreland,France - XPoland,France - XRomenia,France
0 = 20,000 - XIreland,Germany - XPoland,Germany - XRomenia,Germany
0 = 13,000 - XIreland,Italy - XPoland,Italy - XRomenia,Italy
0 = 12,000 - XIreland,Spain - XPoland,Spain - XRomenia,Spain
0 = 19,000 - XIreland,UK - XPoland,UK - XRomenia,UK
Chapter 1

23. Example: Dell Market Allocation
SYST 4050 Slides
Example: Dell Market Allocation
Decisions:
Facility location -> Where should facilities be located?
Market allocation -> What market should each facility serve?
Constraints:
What are the decisions?
What are the constraints?
Chapter 1

24. Example: Dell Market Allocation
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Example: Dell Market Allocation
Constraints (Capacity cannot be exceeded)
0  30, XRomenia,France - XRomenia,Germany - XRomenia,Italy - XRomenia,Spain - XRomenia,UK
0  30, XPoland,France - XPoland,Germany - XPoland,Italy - XPoland,Spain - XPoland,UK
0  30, XIreland,France - XIreland,Germany - XIreland,Italy - XIreland,Spain - XIreland,UK
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25. Example: Dell Facility Location
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Example: Dell Facility Location ? ? ?
What are the decisions?
What are the constraints?
Chapter 1

26. Example: Dell Facility Location
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Example: Dell Facility Location
Constraints (Satisfy demand at each market)
0 = 15,000 - XIreland,France - XPoland,France - XRomenia,France
0 = 20,000 - XIreland,Germany - XPoland,Germany - XRomenia,Germany
0 = 13,000 - XIreland,Italy - XPoland,Italy - XRomenia,Italy
0 = 12,000 - XIreland,Spain - XPoland,Spain - XRomenia,Spain
0 = 19,000 - XIreland,UK - XPoland,UK - XRomenia,UK
Chapter 1

27. Example: Dell Facility Location
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Example: Dell Facility Location
Constraints (Capacity cannot be exceeded)
0  30,000*YRomenia - XRomenia,France - XRomenia,Germany - XRomenia,Italy - XRomenia,Spain - XRomenia,UK
0  30,000*YPoland - XPoland,France - XPoland,Germany - XPoland,Italy - XPoland,Spain - XPoland,UK
0  30,000*YIreland - XIreland,France - XIreland,Germany - XIreland,Italy - XIreland,Spain - XIreland,UK
Chapter 1

28. Supply Chain Network Design Decisions
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Supply Chain Network Design Decisions
Site location matters. Indeed, it has become a more critical decision for supply chain leaders as supply chains have stretched, companies have expanded, and transportation costs have soared. Today, a poor location decision can have much greater and more immediate effects on operating efficiencies and cash flow.
Yet it is surprising how few of the executives responsible for the location of a new distribution center (DC) or production facility can explain the basic principles behind choosing the location. In fact, it is alarming that more and more business leaders are relying on the results of sophisticated computer analyses to make their location decisions without fully understanding the underlying logic—or its potential impact on their supply chains
Source: John T. Mentzer -- Supply Chain Management Review, 5/1/2008
Chapter 1

29. Factor Influencing Network Design Decisions
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Factor Influencing Network Design Decisions
Customer response time
Maintain a balance between an inexpensive location and proximity to customers. Don't get too close, or go too far away
Local FG Inventory
Regional FG Inventory
Central FG Inventory
Custom production and Central Raw Material
Custom production and raw material at suppliers
High
Low
Cost
Response time
Central WIP Inventory
Regional WIP Inventory
Pull
Push
Chapter 1

30. Factor Influencing Network Design Decisions
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Factor Influencing Network Design Decisions
Logistics and facility costs
Inventory and facility costs increase as the number of facilities increase
Transportation costs decrease (up to a point) as the number of facilities increase
Logistics
Costs
Number of Facilities
Transportation Costs
Facility Costs
Logistics Costs
Inventory Costs
Chapter 1

31. Factor Influencing Network Design Decisions
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Factor Influencing Network Design Decisions
Strategic factors
Strategic role
Global Customers
Regional Customers
Lead
<advanced technology>
Lockheed Martin’s JSF in Dallas
Outpost
<access to knowledge>
Dell in Ireland
Offshore
<low-cost>
<exports only>
Many Asian plants
Server
<local market> <avoid tariffs>
Suziki’s Indian venture
Maruti
Source
<low-cost> <global market>
Nike plants in Korea
Contributor
<customization>
<development skills>
Maruti
Chapter 1

32. Factor Influencing Network Design Decisions
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Factor Influencing Network Design Decisions
Macroeconomic factors
Quotas, tariffs, and tax incentives
Economic trade agreements: Nafta, EU, APTA, AFTZ
Exchange rate and demand risk
Different states or countries often offer economic incentives to companies that decide to set up shop there, including tax incentives and low-interest economic development loans
Technological factors
* High fixed costs (less facilities) – Intel Semiconductor manufacturing
* Low fixed costs (more facilities) - Coca Cola bottling
Macroeconomic factors
* Trade agreements (NAFTA, EU, APTA–Asian Pacific Trade Agreement, AFTZ–African Free Trade Zone) have led to consolidation
* End of quotas has led to consolidation of apparel manufacturing in China
* Flexible facilities (capacity) can help reduce the effect of exchanges rates
Political factors *
Infrastructure factors
* Amazon distribution centers are all close to airports
How can trade agreements influence the number of facilities in a supply chain?
Chapter 1

33. Factor Influencing Network Design Decisions
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Factor Influencing Network Design Decisions
Political factors
Political stability
Infrastructure factors
Availability of transportation terminals, labor
Most of Amazon’s distribution centers are located near airports
Competitive factors
Positive externalities (many stores in a mall makes it more convenient for customers – one location for everything the customers need)
Should you locate your facility close to your competitors or far from them?
Chapter 1

34. Factor Influencing Network Design Decisions
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Factor Influencing Network Design Decisions
Technological factors
Compare your supplies to the final product, considering whether value, weight, volume or other factors change
Availability of production technologies
High or low fixed cost
Semiconductor manufacturing takes place only in 5-6 countries worldwide (building one plant costs about 1 to 4 billion dollars)
Technological factors
* High fixed costs (less facilities) – Intel Semiconductor manufacturing
* Low fixed costs (more facilities) - Coca Cola bottling
Macroeconomic factors
* Trade agreements (NAFTA, EU, APTA–Asian Pacific Trade Agreement, AFTZ–African Free Trade Zone) have led to consolidation
* End of quotas has led to consolidation of apparel manufacturing in China
* Flexible facilities (capacity) can help reduce the effect of exchanges rates
Political factors *
Infrastructure factors
* Amazon distribution centers are all close to airports
Which products gain/lose weight in the production process?
Chapter 1