1. SC Design Facility Location Strategy

2. Frequency Decomposition
SCs are enormous
It is hard to make all decisions at once
Integration by smart decomposition
Frequency decomposition yields several sets of decisions such that each set is integrated within itself

3. Frequency Decomposition
Low frequency activity, ~ once a year, high fixed cost
R&D budget
Capacity expansion budget
Moderate frequency activity, ~ once a month
Cancellation of specific R&D projects depending on experimental outcomes
Specific machines to purchase
High frequency activity, ~ once a day, low fixed cost
What experiments to start / continue today
What to produce

4. Facility Location: The Cost-Response Time Frontier An inventory location based point of view
7-Eleven
Regional Hi
Local Finished Goods (FG) Inventory
Regional FG Inventory
Cost
Local WIP (work-in-process)
Central
Central FG Inventory
Sam’s Club
Central WIP
Notes:
Central Raw Material and Custom production
Low
Custom production with raw material at suppliers
Pull the inventory upstream
Low
Response Time Hi

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

6. 3 day order response time - typical results --> 5 DCs
Customer DC

7. Same day / next day order response time - typical results --> 26 DCs
Customer DC

8. Inbound and outbound shipping with more facilities
Supplier
Manufacturer
Customer
Add more
facilities for
responsiveness
Inbound shipment
Outbound shipment
Supplier
Manufacturer
Distributor
Retailer
Customer
Notes:
Inbound shipment
Outbound shipment
More inbound shipping and less outbound shipping with more facilities.
Less (inbound + outbound) shipping costs with more facilities possible,
if economies of scale in transportation.

9. Costs and Number of Facilities
Total SC Inventory
Facility costs
Transportation
Costs
Notes:
Number of facilities
No economies of scale in shipment size,
SC covers a larger portion with each facility.
With economies of scale in inbound shipping to retailers.

10. Cost Build-up as a function of facilities
Total Costs
Cost of Operations
Facilities
Inventory
Transportation
Notes:
Labor
Number of Facilities

11. Classification of Network Design Decisions
Facility function: Plant, DC, Warehouse:
What facility performs what function
Packaging at the manufacturer or warehouse
Should a rental computer return location run diagnostic tests on the returned computers or should the testing be done at major warehouses?
Question arising from CRU Computer Rental Case done in OPRE6302
Facility location
Starbucks opened up at UTD student apartments in 2005 but closed in 2006!
Recall Japanese 7-eleven and their blanketing strategy
SMU’s experimentation with Plano campus: .
Capacity allocation
SOM car park took 80 cars in 2005 and expanded in 2006 to take about 110 cars,
further expanded in 2009 to take about 300 cars.
Supply and market allocation:
Who serves whom
By location: UT Austin serves central Texas students
By grade: UT Arlington serves undergraduate students
Boeing headquarters located in Chicago as opposed to Dallas.
American airlines located in Dallas.

12. Strategic Factors Influencing Location Decisions
Strategic Facilities
Lead facility
<advanced technology>
Lockheed Martin’s JSF in Dallas
Global Customers
Regional Customers
Outpost facility
<Learn local skills>
Facilities in Japan; Toyota Prius
Server
<local-content>
Suziki’s Indian venture
Maruti Udyog
Offshore
<reduced tariffs>
<for exports>
VW plants in Mexico
Serving Latin America
Contributor
<customization>
<development skills>
Maruti Udyog
Source
<low-cost>
Nike plants in Korea

13. Factors Influencing Location Decisions
Customer response time and local presence
Operating costs – main driver for offshoring
Technological,
Availability and economies of scale (fixed operational costs)
Semiconductor manufacturing takes place only in 5-6 countries worldwide
Infrastructure, electricity, phone lines, suppliers
Macroeconomic / Politic
Tariffs, exchange rate volatility, economic volatility
Economic communities: Nafta, EU, Pacific Rim, Efta
Stability
Logistics and facility costs
Competitive
Positive externalities
Nissan in India develops car suppliers which can also supply Suziki in India.
DFW Telecom corridor hosting Alcatel, Ericsson, Nortel, …
Toyota City, Shopping Malls
Negative externalities, see the next slide

14. Negative externality: Market Splitting by Hotelling’s Model
a b
1-a-b a b
Suppose customers (preferences, e.g. sugar content in coke)
are uniformly distributed over [0,1]
How much does firm at a get, how about firm at b
by locating as above?
- If a locates first, where should b locate?
- If a estimates how b will locate in response to a’s location, where should a locate?

15. Steps of Comparing Locations
Steps of Comparing Locations According to McKinsey Global Institute on HBR Jun p.91
1. Draw up a list of possible locations
2. Define the decision criteria
Six common criteria used by companies
1. Cost of operating – tax incentives from local/federal governments
2. Availability of the skills
3. Sales potential in the adjacent markets
4. Risk of doing the business
5. Attractiveness of living environments
6. Quality of infrastructure
3. Collect data for each location
4. Weight the criteria
Fortisbank of Belgium, wants to enter new large markets, gives highest weight to 3.
Citibank, wants a location for a captive IT center, gives the highest weight to 4.
Find risk data at
Economist intelligence unit:
UN Development Program:
5. Rank locations according to weighted sum of their scores
6. Assess the dynamics of the labor pool
Availability of skilled labor: Top tier universities in large U.S. cities (e.g., Dallas?).

16. Summary Frequency decomposition of activities
A strategic framework for facility location
Classification
Factors
Steps
Notes: