Facility Decisions Network Design in a Supply Chain

Facility Decisions Network Design in a Supply Chain 1

Outline u The Role of Distribution in the Supply Chain u Factors Influencing Distribution Network Design u Design Options for a Distribution Network u The Value of Distributors in the Supply Chain u Distribution Networks in Practice u Summary of Learning Objectives 2

The Role of Distribution in the Supply Chain u Distribution: the steps taken to move and store a product from the supplier stage to the customer stage in a supply chain u Distribution directly affects cost and the customer experience and therefore drives profitability u Choice of distribution network can achieve supply chain objectives from low cost to high responsiveness u Examples: Wal-Mart, Dell, Proctor & Gamble, Grainger 3

Factors Influencing Distribution Network Design u Distribution network performance evaluated along two dimensions at the highest level: – Customer needs that are met – Cost of meeting customer needs u Distribution network design options must therefore be compared according to their impact on customer service and the cost to provide this level of service 4

Factors Influencing Distribution Network Design u Elements structure: – – – of customer service influenced by network Response time Product variety Product availability Customer experience Order visibility Returnability u Supply chain costs affected by network structure: – Inventories – Transportation – Facilities and handling 5

Service and Number of Facilities (Fig. 4. 1) Number of Facilities Response Time 6

The Cost-Response Time Frontier High Local FG Mix Regional FG Local WIP Cost Central FG Central WIP Central Raw Material and Custom production with raw material at suppliers Low Response Time High 7

Inventory Costs and Number of Facilities (Fig. 4. 2) Inventory Costs Number of facilities 8

Transportation Costs and Number of Facilities (Fig. 4. 3) Transportation Costs Number of facilities 9

Facility Costs and Number of Facilities (Fig. 4. 4) Facility Costs Number of facilities 10

Total Costs Related to Number of Facilities Total Costs Facilities Inventory Transportation Number of Facilities 11

Variation in Logistics Costs and Response Time with Number of Facilities (Fig. 4. 5) Response Time Total Logistics Costs Number of Facilities 12

Design Options for a Distribution Network u Manufacturer Storage with Direct Shipping and In -Transit Merge u Distributor Storage with Carrier Delivery u Distributor Storage with Last Mile Delivery u Manufacturer or Distributor Storage with Consumer Pickup u Retail Storage with Consumer Pickup u Selecting a Distribution Network Design 13

Manufacturer Storage with Direct Shipping (Fig. 4. 6) Manufacturer Retailer Customers Product Flow Information Flow 14

In-Transit Merge Network (Fig. 4. 7) Factories Retailer In-Transit Merge by Carrier Customers Product Flow Information Flow 15

Distributor Storage with Carrier Delivery (Fig. 4. 8) Factories Warehouse Storage by Distributor/Retailer Customers Product Flow Information Flow 16

Distributor Storage with Last Mile Delivery (Fig. 4. 9) Factories Distributor/Retailer Warehouse Customers Product Flow Information Flow 17

Manufacturer or Distributor Storage with Customer Pickup (Fig. 4. 10) Factories Retailer Cross Dock DC Pickup Sites Customer Flow Product Flow Information Flow 18

Comparative Performance of Delivery Network Designs (Table 4. 7) Response Time Retail Storage with Customer Pickup Manufacturer Storage with Direct Shipping Manufacturer Storage with In. Transit Merge Distributor Storage with Package Carrier Delivery Distributor storage with last mile delivery Manufacturer storage with pickup 2 4 1 4 4 3 Product Variety 4 1 1 2 3 1 Product Availability 4 1 1 2 3 1 Customer Experience 5 4 3 2 1 5 Order Visibility 1 5 4 3 2 6 Returnability 1 5 5 4 3 2 Inventory 4 1 1 2 3 1 Transportation 1 4 3 2 5 1 Facility & Handling 6 1 2 3 4 5 Information 1 4 4 3 2 5 19

Linking Product Characteristics and Customer Preferences to Network Design Retail Storage with Customer Pickup High demand product Medium demand product Low demand product Very low demand product Many product sources High product value Quick desired response High product variety Low customer effort Manufacturer Storage with Direct Shipping Manufacturer Storage with In. Transit Merge Distributor Storage with Package Carrier Delivery Distributor storage with last mile delivery Manufacturer storage with pickup +2 -2 -1 0 +1 0 0 -1 +1 0 +1 -1 +1 -2 +2 +1 0 -2 +1 +1 -1 -1 +2 +1 0 -1 +2 +1 +1 0 -2 +2 -2 -2 -1 +1 -2 -1 +2 0 +1 0 +2 -2 +1 +2 +2 +2 -1 20

The Value of Distributors in the Supply Chain u Distributing Consumer Goods in India u Distributing MRO Products u Distributing Electronic Components 21

Distribution Networks in Practice u The ownership structure of the distribution network can have as big as an impact as the type of distribution network u The choice of a distribution network has very long -term consequences u Consider whether an exclusive distribution strategy is advantageous u Product, price, commoditization, and criticality have an impact on the type of distribution system preferred by customers 22

Summary of Learning Objectives u What are the key factors to be considered when designing the distribution network? u What are the strengths and weaknesses of various distribution options? u What roles do distributors play in the supply chain? 23

Outline u. A strategic framework for facility location u Multi-echelon networks u Gravity methods for location u Plant location models 24

Network Design Decisions u Facility role - flexibility of Toyota since 1997 u Facility location - Amazon. com : a single warehouse in Seattle u Capacity allocation - Allocating too much poor utilization - Allocating too little poor responsiveness, high cost u Market and supply allocation - Amazon. com : built new warehouses due to grown markets 25

Factors Influencing Network Design Decisions u Strategic – Cost vs. Responsiveness ex) Apparel producers, Convenience stores, Discount stores u Technological – Economies of scale few high-capacity locations ex) Manufacturer of computer chips – Lower fixed costs many local facilities ex) Bottling plants for Coca-Cola u Macroeconomic – Tariffs, Tax incentives, Exchange rate and Demand risk u Political 26

Factors Influencing Network Design Decisions (continued) u Infrastructure – availability of sites & labor – proximity to transportation terminals, rail service, airports and seaports – highway access, congestion, local utilities u Competitive – Close vs. Far ex) Retail stores in a mall, Supermarkets u Logistics and facility costs 27

The Cost-Response Time Frontier Hi Local FG Mix Regional FG Local WIP Cost Central FG Central WIP Central Raw Material and Custom production with raw material at suppliers Low Response Time Hi 28

Service and Number of Facilities Response Time Number of Facilities 29

Where inventory needs to be… u …for a 1 week order response time [1 DC] u …for a 5 day order response time [2 DCs] u …for a 3 day order response time [5 DCs] u …etc 30

Costs and Number of Facilities Inventory Facility costs Costs Transportation Number of facilities 31

Cost Build-up as a function of facilities Cost of Operations Total Costs Percent Service Level Within Promised Time Facilities Inventory Transportation Labor Number of Facilities 32

A Framework for Global Site Location Competitive STRATEGY INTERNAL CONSTRAINTS Capital, growth strategy, existing network PRODUCTION TECHNOLOGIES Cost, Scale/Scope impact, support required, flexibility COMPETITIVE ENVIRONMENT GLOBAL COMPETITION PHASE I Supply Chain Strategy PHASE II Regional Facility Configuration REGIONAL DEMAND Size, growth, homogeneity, local specifications POLITICAL, EXCHANGE RATE AND DEMAND RISK PHASE III Desirable Sites PRODUCTION METHODS Skill needs, response time FACTOR COSTS Labor, materials, site specific TARIFFS AND TAX INCENTIVES PHASE IV Location Choices AVAILABLE INFRASTRUCTURE LOGISTICS COSTS Transport, inventory, coordination 33

Conventional Network Vendor DC Materials DC Finished Goods DC Customer Store Component Manufacturing Customer DC Plant Warehouse Components DC Final Assembly Customer Store Finished Goods DC Customer Store Customer DC Customer Store 34 5 -34

Tailored Network: Multi - Echelon Finished Goods Network Regional Finished Goods DC National Finished Goods DC Local DC Cross-Dock Store 1 Customer 1 DC Local DC Cross-Dock Customer 2 DC Regional Finished Goods DC Local DC Cross-Dock Store 1 Store 2 Store 3 35

Network Optimization Models u Allocating demand to production facilities u Locating facilities and allocating capacity Key Costs: • Fixed facility cost • Transportation cost • Production cost • Inventory cost • Coordination cost Which plants to establish? How to configure the network? 36

Demand Allocation Model u Which market is served by which plant? u Which supply sources are used by a plant? xij = Quantity shipped from plant site i to customer j 37

Plant Location with Multiple Sourcing u yi = 1 if plant is located at site i, 0 otherwise u xij = Quantity shipped from plant site i to customer j 38

Capacity Investment Strategies u Speculative Strategy – Single sourcing u Hedging Strategy – Match revenue and cost exposure u Flexible Strategy – Excess total capacity in multiple plants – Flexible technologies 39

Summary u Factors influencing facility decisions u A strategic framework for facility location u Gravity methods for location u Network optimization models u Value capacity as a real option 40

Summary of Learning Objectives u What is the role of network design decisions in the supply chain? u What are the factors influencing supply chain network design decisions? u Describe a strategic framework for facility location. u How are the following optimization methods used for facility location and capacity allocation decisions? – Gravity methods for location – Network optimization models 41 5 -41