FACILITIES PLANNING ISE310L

SESSION 13
Review, October 7, 2014

OUTLINE
Any supply chain or facilities stories or news?
New Homework
Discuss Homework names, team numbers, short titles, use
solver to learn it also, submit excel file when using solver,
Federal and state taxes, NPV, num bers in cells, conclusions,
use of others spreadsheet
Review
Chopra Chapters 1-6, and 14 (check your edition) and
cost determination, Financials from Park
Note only what we covered in each of those chapters

Geza P. Bottlik

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Review, October 7, 2014

What is a supply chain?

All the activities required to fill a customers order
Objective Maximize the overall value that is generated

Geza P. Bottlik

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Phases
Design
Decide on structure
Planning
Define operating policies for short term operations
Annual forecast
Operation
Implement operating policies

Geza P. Bottlik

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Process View
Cycles
Customer
Retailer
Distributor
Manufacturer
Supplier
Push/pull
Push : initiated by anticipation of orders
Pull : initiated by a customer order

Geza P. Bottlik

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Strategies
Employing resources to achieve objectives
Broad in scope
Long term
Coordination among all units
Marketing
Design Engineering
Manufacturing
Distribution
Sales
Field support

Geza P. Bottlik

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Performance - Introduction
Competitive Strategy set of customers needs that a
company seeks to satisfy through its products and services
All functions play a role and have their own strategies
Supply chain and competitive strategies must fit together to
form a coordinated strategy

Geza P. Bottlik

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Performance Achieving competitive fit

Competitive fit is achieved in three steps:
By understanding the uncertainties in customers needs
and the supply chain
By understanding the supply chains capabilities
By matching the strategies

Geza P. Bottlik

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Performance - Uncertainties
Quantity
Response time
Variety
Service level
Price
Rate of innovation

Geza P. Bottlik

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Performance - Responsiveness
Wide ranges of quantities
Short lead times
Large variety
Innovation
Service level
Supply uncertainty

Responsiveness comes at a cost

Geza P. Bottlik

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Performance Product Life Cycle

Demand uncertain to relatively certain
Margins from high to low
Availability essential early to capture the market
Price unimportant to important

Geza P. Bottlik

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Definitions

Facilities places where product is

Stored
Assembled
Fabricated

Inventory
Raw materials
Work in process (WIP)
Finished goods (FG)
Transportation
Spares

Facilities where services are provided

Geza P. Bottlik

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Definitions - continued

Transportation moving inventory from point to point

Ground
Road
Rail
Pipe line
Barge
Air
Ship

Information
Data
Analysis

Geza P. Bottlik

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Definitions - continued

Transportation moving inventory from point to point

Ground
Road
Rail
Pipe line
Barge
Air
Ship

Information
Data
Analysis

Geza P. Bottlik

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Framework

Geza P. Bottlik

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Facilities
Role in the chain the where of the supply chain
Role in the competitive strategy Location, location, location
Components of decisions
Location
Capacity
Operational methods
Warehousing methods
Tradeoff: Responsiveness vs. Efficiency

Geza P. Bottlik

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Inventory

Role in the supply chain alleviate mismatch between supply and

demand
Increase demand that can be satisfied
Exploit economies of scale
Definitions:
Material flow (Flow time) elapsed time between material
entering the supply chain and exiting
Throughput rate at which material moves through the
chain
Littles law: Inventory = Throughput x Flow time
Flow time is also called cycle time

Geza P. Bottlik

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Inventory - continued
Role in competitive strategy: responsiveness
Components of inventory decisions:
Cycle inventory satisfies demand between
replenishments
Safety Stock protects against variations in demand
Seasonal Inventory built up to counter demand that
exceeds capacity
Sources from whom to buy (or make)

Geza P. Bottlik

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Transportation
Role: move material
Role in competitive strategy: match required responsiveness
Components of decisions:
Mode (rail, truck, air, ship, pipeline, electronic)
Route and network selection
Sourcing
Who provides transportation services?

Geza P. Bottlik

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Information
Role: connects the members of the chain and supports daily
operations
Role in strategy: most important underpinning
Components of decisions:
Push/pull
What to share
Forecasting and planning
Pricing
Enabling technologies: Software (EDI, ERP, SCM)

Geza P. Bottlik

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Obstacles
Increasing variety
Shorter life cycles
Demanding customers
Decreasing vertical integration
Globalization

Geza P. Bottlik

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Types of Chains
Internal
Often as complex as complete chains
Good place to start integrating
Need to educate people in the organization to understand
their internal supply chains
External
Consider potential conflicts among prospective members
Find common goals
Each must think they will benefit

Geza P. Bottlik

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More on Information

EDI

Bar Coding and scanning

Data warehousing separate from operational data

Internet
Started with DARPA (Defense Advanced Research Projects
Agency)

Intranets

World Wide Web

Decision support systems

SQL, LP, Scheduling software
Definition ATP: Available to promise

Geza P. Bottlik

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Benefits of collaboration
Establishing contacts
Gaining Insight
Joint projects

Geza P. Bottlik

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Definitions
Benchmarking
Identifying, understanding and adapting outstanding
practices from other organizations to improve
performance
Logistics
Planning, implementing and controlling the flow and
storage of goods, services and information

Geza P. Bottlik

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International Chains what is different?

Greater geographic and time distances
Diversity of demand and supply conditions
Wage rates
Taxes
Incentives
Political climates
Exchange rates
Special laws

Geza P. Bottlik

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Cycle time

Definition the total elapsed time required to complete a process

(e.g. 4 years to get an engineering degree, one month to build an
airplane)
Littles Law: Cycle time = Work in process/Throughput

Causes of long cycle times:

Waiting
Old processes that dont add value
Serial vs. parallel, external vs. internal
Repeated activities
Batching
Excessive controls

Geza P. Bottlik

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Measuring Performance
What should measuring performance accomplish?
Basis for understanding the system
Influence behavior in the system
Provide information about results
Provide information that will initiate actions to improve
the system
Create accountability in individual operations
The concept of Supply Chain Management requires that
overall performance be measured, but intermediate points
must also be measured to insure accountability

Geza P. Bottlik

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Measuring Performance (continued)

Typical internal measures
% orders on time
Inventory turns
Cycle time
Costs/Goods sold
Aging of orders

Geza P. Bottlik

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Measuring Performance (continued)

Typical supply chain measurements
Cycle time
% orders on time (service level) or fill rate
Order aging
Comparisons to competitors (Bench marking)
Responsiveness to changes in demand
End items sold/Total costs
Market Share

Geza P. Bottlik

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Review, October 7, 2014

Chapter 4 Designing the distribution network in a Supply

Chain
Move and store product between stages
The structure of the network influences:
Response time
Variety of products
Availability of products
Customers experience
Visibility of orders
Returnability

Geza P. Bottlik

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Some basic relationships in a supply network

Lower response times require more facilities
Inventory costs increase with the number of facilities
Transportation costs decrease with the number of facilities
Total logistics costs vary parabolically with the number of
facilities there is an optimum number of facilities

Geza P. Bottlik

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Major types of distribution networks

Definition: Inventory Turns = Annual Sales/ average inventory

Manufacturing Storage with direct shipping (drop)

Manufacturing Storage with direct shipping and in transit merge
Distributor Storage with carrier delivery
Distributor Storage with Last Mile delivery (not carrier)
Manufacturer/Distributor Storage with customer pickup
Retail Storage with customer pickup

Geza P. Bottlik

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Models
Capacitated Plant Location
Gravity location model
Allocation of demand

Geza P. Bottlik

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Capacitated Plant Location Model

Geza P. Bottlik

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Discounted Cash Flow

Money earned in the future is worth less today

Present Value = Future Value /( 1 + interest rate/period)^ # of periods

Example1:

I lend someone $1000 for two years at 4% interest, compounded annually. How
much do they have to pay me back four years from now?
F = P(1+I)^n = 1000(1+.04)^2 = $1081.60

Example2:

A company will make a $5000 profit 3 years from now. How much should they invest
now to break even at a 10% Minimum Attractive Rate of Return (MARR)?
P = F/(1+I)^n = 5000/(1+.1)^3 = $3756.57

Geza P. Bottlik

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Chapter 14 Sourcing Decisions

Assessing suppliers
Selecting suppliers - Single or multiple
Contracts
Design Collaboration
Procurement Process

Geza P. Bottlik

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Definitions
Cost of Goods Sold total expenditures to obtain or
manufacture the product. This does not include Sales and
administrative costs.
Safety Inventory Inventory held to protect against
variations in demand and lead time
Cycle Inventory Inventory held to account for lot sizing
Landed Cost Purchase Price plus transportation in
Bullwhip effect accentuation of variations in demand as we
go up the chain
Replenishment lead time time from ordering to receipt

Geza P. Bottlik

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Adding up the costs (example)

A plant generates 270,000 earned hours (established by
standards for each of the products produced). 85% efficiency
is assumed.
The cost of an hour of labor, including benefits, is $30
Indirect labor totals $30M
Materials cost $70M
Material overhead costs are $4M
What is the cost of a product containing 0.8 hours of
standard labor and $20 of material?
We first calculate the total labor rate as
(30,000,000+270,000*30/0.85)/270,000=$146.40/hour

Geza P. Bottlik

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Adding up the costs (example continued)

Material overhead = $4M/$70M= 5.7%

Direct and indirect labor =0.8* $146.40=$117.12
Material
=$20.00
Material Overhead= 0.057*20
=$1.14
Total Cost
=$138.26
We can separate the direct and indirect labor into:
Direct labor = 0.8*30 =$24
Indirect
=$93.12
And you can see why everyone attacks overhead
If you are independent, the profit would add another 10% or
so. It is very dependent on the industry and level of
investment

Geza P. Bottlik

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Cost Distribution

Geza P. Bottlik

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