1. Supply Chain Management Lecture 8

2. Outline Today –Chapter 5 Skipping sections –Locating to Split the Market (3e: p. 120, 4e: p. 112) –Gravity Location Models (3e: p. 129-131, 4e: p.120-122) –Locating Plants and Warehouses Simultaneously (3e: p. 138-139, 4e: 129-131) –Accounting for Taxes, Tariffs and Customer Requirements (3e: p. 139-140, 4e p. 131-132) Next week –Chapter 6 Homework 2 –Online Friday February 5 –Due Thursday February 11 before class

3. Announcements The RedPrairie Supply Chain Challenge is a virtual competition using a customized web-based version of the Littlefield Technologies game from Responsive Technologies –Students will have the opportunity to manage make-to- order factory and make forecasting, capacity, and inventory and pricing decisions Registration deadline –Feb 5, 2010, 5:00pm –http://avnettechgames.com/supplychain2010http://avnettechgames.com/supplychain2010

4. Announcements Game Day –February 20, 2010 Awards –“Each team member will win a $1000 scholarship”

5. Excel Solver Objective function Decision variables Constraints

6. Example: Dell Market Allocation What are the decisions? What are the constraints?

7. Example: Dell Facility Location ? ? ? What are the decisions? What are the constraints?

8. Example: Dell Facility Location Constraints (Satisfy demand at each market) –0 = 15,000 - X Ireland,France - X Poland,France - X Romenia,France –0 = 20,000 - X Ireland,Germany - X Poland,Germany - X Romenia,Germany –0 = 13,000 - X Ireland,Italy - X Poland,Italy - X Romenia,Italy –0 = 12,000 - X Ireland,Spain - X Poland,Spain - X Romenia,Spain –0 = 19,000 - X Ireland,UK - X Poland,UK - X Romenia,UK

9. Example: Dell Facility Location Constraints (Capacity cannot be exceeded) –0  30,000*Y Romenia - X Romenia,France - X Romenia,Germany - X Romenia,Italy - X Romenia,Spain - X Romenia,UK –0  30,000*Y Poland - X Poland,France - X Poland,Germany - X Poland,Italy - X Poland,Spain - X Poland,UK –0  30,000*Y Ireland - X Ireland,France - X Ireland,Germany - X Ireland,Italy - X Ireland,Spain - X Ireland,UK

10. Factors Influencing Network Design Decisions Customer response time –Maintain a balance between an inexpensive location and proximity to customers. 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

11. Factors Influencing Network Design Decisions Strategic factors Global Customers Offshore Many Asian plants Source Nike plants in Korea Regional Customers Server Suziki’s Indian venture Maruti Contributor Maruti Lead Lockheed Martin’s JSF in Dallas Outpost Dell in Ireland Strategic role

12. Factors 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 How can trade agreements influence the number of facilities in a supply chain?

13. Factors 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)

14. Factors 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) Which products gain/lose weight in the production process?

15. Amazon’s Growth in Europe (in 1999)

16. Amazon’s Growth in Europe

17. European use of credit cards for online purchases

18. Amazon’s Growth in the US Amazon offered 2.5 million titles, yet stocked only 2,000 titles Amazon stocked over 200,000 titles and reduced promised delivery times Seattle, WA Opened: 1996 Closed: 2001 85,000 sq. feet Delaware Opened: 1997 220,000 sq. feet Distributor Warehouse Manufacturers Consumers Distributor Warehouse

19. Amazon’s Growth in the US Seattle, WA Opened: 1996 Closed: 2001 85,000 sq. feet Delaware Opened: 1997 220,000 sq. feet Amazon had to decide how many DCs it should have and where to locate them In 1998, Amazon expanded its product line (music, DVD) (1999: electronics, toys) (2000: health, kitchen)

20. Amazon’s Growth in the US Amazon executives turned to outside experts and used i2 Technologies’ Supply Chain Strategist software package –This software identified regions to consider for its distribution facilities based on factors such as supplier and customer locations, inbound and outbound freight rates, warehousing expenses, labor, and other cost factors –After selecting the major regions, Amazon's management narrowed its search based on additional factors such as tax rates, employment levels and the availability of suitable distribution facilities to lease

21. Amazon’s Growth in the US Seattle, WA Opened: 1996 Closed: 2001 85,000 sq. feet Fernley, NV Opened: 1999 322,560 sq. feet Delaware Opened: 1997 220,000 sq. feet Coffeyville, KS Opened: 1999 750,000 sq. feet Lexington, KY Opened: 1999 600,000 sq. feet Cambellsville, KY Opened: 1999 770,000 sq. feet Mc Donough Opened: 1999 Closed: 2001 800,000 sq. feet “This has been the fastest expansion of distribution in peacetime history”

22. Amazon’s Growth in the US Evolution of fulfillment cost as a percentage of revenue Retailer Manufacturers Consumers Distributor Warehouse Manufacturers Consumers Distributor Warehouse

23. Network Optimization Problems Market and supply allocation –Demand allocation Facility location (and capacity allocation) –Capacitated plant location model Facility location 1-source (and capacity allocation) –Capacitated plant location model with single sourcing

24. Demand Allocation D1D1 D2D2 D3D3 D4D4 D5D5 K1K1 K2K2 K3K3 c 11 c 12 c 13 m demand pointsn supply points

25. Demand Allocation Which market is served by which plant? –Given m demand points, j=1..m with demands D j –Given n supply points, i=1..n with capacity K i –Each unit of shipment from supply point i to demand point j costs c ij Serve markets from supply points to demand points –x ij = quantity shipped from plant site i to customer j 3e: p. 132-133, 4e: p. 123-125

26. Capacitated Plant Location Romenia Poland Ireland France Germany Italy Spain United Kingdom D1D1 D2D2 D3D3 D4D4 D5D5 K1K1 K2K2 K3K3 c 11 c 12 c 13 m demand pointsn supply points Which supply point operates? y 1 = yes or no y 2 = yes or no y 3 = yes or no

27. Capacitated Plant Location Which market is served by which plant? –None of the plants are open, a cost f i is paid to open plant i –y i = 1 if plant is located at site i, 0 otherwise –x ij = quantity shipped from plant site i to customer j 3e: p. 133-135, 4e: p. 125-128

28. Capacitated Plant Location With Single Source (each customer has exactly one supplier) Romenia Poland Ireland France Germany Italy Spain United Kingdom D1D1 D2D2 D3D3 D4D4 D5D5 K1K1 K2K2 K3K3 c 11 c 12 c 13 m demand pointsn supply points Which supply point operates? y 1 = yes or no y 2 = yes or no y 3 = yes or no

29. Capacitated Plant Location With Single Source (each customer has exactly one supplier) Which market is served by which plant? –None of the plants are open, a cost f i is paid to open plant i –y i = 1 if plant is located at site i, 0 otherwise –x ij = 1 if market j is supplied by factory i, 0 otherwise 3e: p. 135-137, 4e: p. 128-129

30. Example – SunOil SunOil, a manufacturer of petrochemical products with worldwide sales, needs to decide the regions in which facilities are to be located

31. 12 8 14 16 7 D j = annual demand from market j Example – SunOil Capacitated Plant Location Model

32. c ij = cost of producing and shipping one million units from plant i to market j

33. Example – SunOil Capacitated Plant Location Model K i = capacity of plant i 10 20

34. Example – SunOil Capacitated Plant Location Model f i = annualized fixed cost of keeping plant i open $6000 $9000 $4500 $6750 $4000 $6000 $4100 $6150 $6500 $9750

35. Capacitated Plant Location Which market is served by which plant? –None of the plants are open, a cost f i is paid to open plant i –y i = 1 if plant is located at site i, 0 otherwise –x ij = quantity shipped from plant site i to customer j 3e: p. 133-135, 4e: p. 125-128

36. Example – SunOil Capacitated Plant Location Model D j – ∑ n i=1 x ij = 0for all j = 1, …, m (unmet demand) 7

37. Example – SunOil Capacitated Plant Location Model 10 20 K i y i – ∑ m j=1 x ij  0for all i = 1, …, n (excess capacity)

38. Capacitated Plant Location With Single Source (each customer has exactly one supplier) Which market is served by which plant? –None of the plants are open, a cost f i is paid to open plant i –y i = 1 if plant is located at site i, 0 otherwise –x ij = 1 if market j is supplied by factory i, 0 otherwise 3e: p. 135-137, 4e: p. 128-129

39. Example – SunOil Single Source Model x ij = 1 if market j is supplied by plant i, 0 otherwise y i = 1 if plant i is open, 0 otherwise

40. Making Network Design Decisions in Practice Computer models versus sound judgment –Most facility location decisions are based on tariffs and tax incentives