5 Network Design in the Supply Chain Power

5 Network Design in the Supply Chain Power. Point presentation to accompany Chopra and Meindl Supply Chain Management, 5 e Global Edition Copyright © 2013 Pearson Education. 1 -1 5 -1

Learning Objectives 1. Understand the role of network design in a supply chain. 2. Identify factors influencing supply chain network design decisions. 3. Develop a framework for making network design decisions. 4. Use optimization for facility location and capacity allocation decisions. Copyright © 2013 Pearson Education. 5 -2

Network Design Decisions • Facility role – What role, what processes? • Facility location – Where should facilities be located? • Capacity allocation – How much capacity at each facility? • Market and supply allocation – What markets? Which supply sources? Copyright © 2013 Pearson Education. 5 -3

Factors Influencing Network Design Decisions • Strategic factors • Technological factors • Macroeconomic factors – Tariffs and tax incentives – Exchange-rate and demand risk – Freight and fuel costs • Political Copyright © 2013 Pearson Education. 5 -4

Factors Influencing Network Design Decisions • Infrastructure factors • Competitive factors – Positive externalities between firms – Locating to split the market • Customer response time and local • presence Logistics and facility costs Copyright © 2013 Pearson Education. 5 -5

Strategic Roles of a Facility • 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 Copyright © 2013 Pearson Education. 5 -6

Technological Factors • 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. • 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 Copyright © 2013 Pearson Education. 5 -7

Macroeconomic Factors • 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 • Exchange rate and demand risk – Valuable TRL and textile industry in Turkey Copyright © 2013 Pearson Education. 5 -8

Infrastructure Factors • Availability of sites • Availability of labor • Proximity to transportation terminals, • • • railservice, airports, seaports, Highway access Congestion Local utilities Copyright © 2013 Pearson Education. 5 -9

Competitive Factors • Positive externalities between firms – Ex: Gas stations and retail shops Auto Repair Districts • 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 Copyright © 2013 Pearson Education. 5 -10

Ex: Locating to Split the Market • 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. 0 a 1 -b 1 Thus both firms maximize their market share when they move closer to each other, although the average distance travelled is greater than the seperate case. Copyright © 2013 Pearson Education. 5 -11

Framework for Network Design Decisions Figure 5 -2 Copyright © 2013 Pearson Education. 5 -12

Framework for Network Design Decisions • Phase I: Define a Supply Chain Strategy/Design – Clear definition of the firm’s competitive strategy – Forecast the likely evolution of global competition – Identify constraints on available capital – Determine growth strategy Copyright © 2013 Pearson Education. 5 -13

Framework for Network Design Decisions • Phase II: 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 – Forecast of the demand by country or region – Economies of scale or scope – Identify demand risk, exchange-rate risk, political risk, tariffs, requirements for local production, tax incentives, and export or import restrictions – Identify competitors Copyright © 2013 Pearson Education. 5 -14

Framework for Network Design Decisions • Phase III: Select a Set of Desirable Potential Sites – Hard infrastructure requirements – Soft infrastructure requirements • Phase IV: Location Choices –Select a precise location and capacity allocation for each facility Copyright © 2013 Pearson Education. 5 -15

Models for Facility Location and Capacity Allocation • Goal is to maximize the overall profitability while • providing the appropriate responsiveness. 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 • Models are two types: – Network optimization models – Gravity models Copyright © 2013 Pearson Education. 5 -16

Models for Facility Location and Capacity Allocation • Important information – – – – – Location of supply sources and markets Location of potential facility sites Demand forecast by market Facility, labor, and material costs by site Transportation costs between each pair of sites Inventory costs by site and as a function of quantity Sale price of product in different regions Taxes and tariffs Desired response time and other service factors Copyright © 2013 Pearson Education. 5 -17

Phase II: Capacitated Plant Location Model = number of potential plant locations/capacity = number of markets or demand points = 1 if plant i is open, 0 otherwise = annual demand from market j = quantity shipped from plant i to market j = potential capacity of plant i = annualized fixed cost of keeping plant i open = cost of producing and shipping one unit from plant i to market j (cost includes production, inventory, transportation, and tariffs) subject to Copyright © 2013 Pearson Education. Problem: There are several options to meet the demand -construct a small facility in each region to lower total transportation cost -construct a large facility to lower the total construction cost 5 -18

Capacitated Plant Location Model Sun Oil Company • Figure 5 -4 Vice president of Supply Chain decides to view the worldwide demand in five regions: North America, South America, Europe, Asia, Africa Copyright © 2013 Pearson Education. 5 -19

Capacitated Plant Location Model Figure 5 -5 Copyright © 2013 Pearson Education. 5 -20

Capacitated Plant Location Model Figure 5 -5 Copyright © 2013 Pearson Education. 5 -21

Capacitated Plant Location Model Figure 5 -6 Copyright © 2013 Pearson Education. 5 -22

Capacitated Plant Location Model Figure 5 -7 Copyright © 2013 Pearson Education. 5 -23

Phase III: Gravity Location Model Consider the problem of locating a new facility among k facilities in supply chain. Where should it be located, i. e. , the what should be the (x, y) coordinates of this new location? xn, yn: coordinate location of either a market or supply source n=1, 2, . . . k Fn: cost of shipping one unit for one mile between the facility and either market or supply source n Dn: quantity to be shipped between facility and market or supply source n (x, y) is the location selected for the facility, the distance dn between the facility at location (x, y) and the supply source or market n is given by Total transportation cost to minimize = Copyright © 2013 Pearson Education. 5 -24

Gravity Location Model Transportation Cost $/Ton Mile (Fn) Quantity in Tons (Dn) Buffalo 0. 90 Memphis St. Louis Sources/Markets Coordinates xn yn 500 700 1, 200 0. 95 300 250 600 0. 85 700 225 825 Atlanta 1. 50 225 600 500 Boston 1. 50 1, 050 1, 200 Jacksonville 1. 50 250 800 300 Philadelphia 1. 50 175 925 975 New York 1. 50 300 1, 080 Supply sources Markets Table 5 -1 Total transportation cost Copyright © 2013 Pearson Education. 5 -25

Gravity Location Model Figure 5 -8 Copyright © 2013 Pearson Education. 5 -26

Gravity Location Model Figure 5 -8 Copyright © 2013 Pearson Education. 5 -27

Gravity Location Model The gravity model can also be solved using the following iterative procedure: 1. For each supply source or market n, evaluate dn 2. Obtain a new location (x’, y’) for the facility, where 3. If the new location (x’ , y’ ) is almost the same as (x, y) stop. Otherwise, set (x, y) = (x’ , y’ ) and go to step 1 Copyright © 2013 Pearson Education. 5 -28

Phase IV: Network Optimization Models Supply City Demand City Production and Transportation Cost per Thousand Units (Thousand $) Monthly Capacity (Thousand Units) K Monthly Fixed Cost (Thousand $) f Atlanta Boston Chicago Denver Omaha Portland Baltimore 1, 675 400 985 1, 630 1, 160 2, 800 18 7, 650 Cheyenne 1, 460 1, 940 970 100 495 1, 200 24 3, 500 Salt Lake City 1, 925 2, 400 1, 450 500 950 800 27 5, 000 Memphis 380 1, 355 543 1, 045 665 2, 321 22 4, 100 Wichita 922 1, 646 700 508 311 1, 797 31 2, 200 10 8 14 6 7 11 Monthly demand (thousand units) Dj Table 5 -2 Telecom. One: capacity 71, 000 units/month; demand 32, 000 units/month High. Optic: capacity 51, 000 units/month; demand 24, 000 units/month Producers of fiberoptic telecommunications equipment Copyright © 2013 Pearson Education. 5 -29

Network Optimization Models • Allocating demand to production facilities = number of factory locations (3 or 2) = number of markets or demand points (3 or 3) = annual demand from market j xij = quantity shipped from factory i to market j = capacity of factory i = cost of producing and shipping one unit from factory i to market j subject to Problem: Decide how markets are allocated to the facilities. Response time should be considered. Copyright © 2013 Pearson Education. 5 -30

Network Optimization Models • Optimal demand allocation Telecom. One High. Optic Atlanta Boston Chicago Denver Omaha Portland Baltimore 0 8 2 Memphis 10 0 12 Wichita 0 0 0 Salt Lake 0 0 11 Cheyenne 6 7 0 Solve seperately: Telecom. One Variable cost=$14, 886, 000 Fixed cost=$13, 950, 000 Total cost=$ 28, 836, 000 Copyright © 2013 Pearson Education. Table 5 -3 High. Optic Variable cost=$12, 865, 000 Fixed cost=$8, 500, 000 Total cost=$ 21, 365, 000 Total Cost =$50, 201, 000 5 -31

Capacitated Plant Location Model • Merge the companies as Telecom. Optic • Response time? • Solve using location-specific costs yi = xij = 1 if factory i is open, 0 otherwise quantity shipped from factory i to market j subject to Copyright © 2013 Pearson Education. 5 -32

Capacitated Plant Location Model Figure 5 -9 Copyright © 2013 Pearson Education. 5 -33

Capacitated Plant Location Model Figure 5 -10 Copyright © 2013 Pearson Education. 5 -34

Capacitated Plant Location Model Figure 5 -10 Copyright © 2013 Pearson Education. 5 -35

Capacitated Plant Location Model Figure 5 -11 Copyright © 2013 Pearson Education. 5 -36

Capacitated Model With Single Sourcing Close the plants in Salt Lake and Wichita Optimal total cost: $47, 401, 000 Copyright © 2013 Pearson Education. Figure 5 -12 5 -37

Capacitated Model With Single Sourcing • • • Each market is supplied by only one factory Lower complexity and less flexibility requirement from each facility Modify decision variables yi = 1 if factory i is open, 0 otherwise xij = 1 if market j is supplied by factory i, 0 otherwise subject to Copyright © 2013 Pearson Education. 5 -38

Capacitated Model With Single Sourcing • Optimal network configuration with single sourcing Open/ Closed Atlanta Boston Chicago Denver Omaha Portland Baltimore Closed 0 0 0 Cheyenne Closed 0 0 0 Salt Lake Open 0 0 0 6 0 11 Memphis Open 10 8 0 0 Wichita Open 0 0 14 0 7 0 Table 5 -4 Optimal total cost: $49, 717, 000 $2. 3 million higher than the merged case! Copyright © 2013 Pearson Education. 5 -39

Locating Plants and Warehouses Simultaneously Figure 5 -13 Copyright © 2013 Pearson Education. 5 -40

Locating Plants and Warehouses Simultaneously • Model inputs m n l t Dj Ki Sh We Fi fe chi cie cej = = = = number of markets or demand points number of potential factory locations number of suppliers number of potential warehouse locations annual demand from customer j potential capacity of factory at site i supply capacity at supplier h potential warehouse capacity at site e fixed cost of locating a plant at site i fixed cost of locating a warehouse at site e cost of shipping one unit from supply source h to factory i cost of producing and shipping one unit from factory i to warehouse e cost of shipping one unit from warehouse e to customer j Copyright © 2013 Pearson Education. 5 -41

Locating Plants and Warehouses Simultaneously • Goal is to identify plant and warehouse locations and quantities shipped that minimize the total fixed and variable costs Yi Ye xej xie xhi = = = Copyright © 2013 Pearson Education. 1 if factory is located at site i, 0 otherwise 1 if warehouse is located at site e, 0 otherwise quantity shipped from warehouse e to market j quantity shipped from factory at site i to warehouse e quantity shipped from supplier h to factory at site i 5 -42

Locating Plants and Warehouses Simultaneously subject to Copyright © 2013 Pearson Education. 5 -43

Accounting for Taxes, Tariffs, and Customer Requirements • A supply chain network should maximize profits • after tariffs and taxes while meeting customer service requirements Modified objective and constraint Copyright © 2013 Pearson Education. 5 -44

Making Network Design Decisions In Practice • Do not underestimate the life span of • • • facilities Do not gloss over the cultural implications Do not ignore quality-of-life issues Focus on tariffs and tax incentives when locating facilities Copyright © 2013 Pearson Education. 5 -45

Summary of Learning Objectives 1. Understand the role of network design in a supply chain 2. Identify factors influencing supply chain network design decisions 3. Develop a framework for making network design decisions 4. Use optimization for facility location and capacity allocation decisions Copyright © 2013 Pearson Education. 5 -46

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2013 Pearson Education. 5 -47