Network Design in The Supply Chain - Chopra - ch05 PDF

5
Network Design in the Supply Chain at Global Level
PowerPoint presentation to accompany Jamil Chowdhury, BBA, MBA,CSCM

Chopra and Meindl Supply Chain Management, 5ePlanning Manager-Leaf Operations
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. Supply Chain
1-1
5-1 British American Tobacco Bangladesh
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, Inc. publishing as Prentice Hall. 5-2

Network Design Decisions
• Facility role
– What role should each facility play?
– What processes should be performed at each facility?
• Facility location
– Where should facilities be located? Example: Toyota, Ford
• Capacity allocation
– How much capacity should be allocated to each facility?
• Market and supply allocation
– What markets should each facility serve? Which supply sources
should feed each facility?
(How many plants, DC’s, retail stores, etc. to build?)

Factors Influencing Network Design Decisions
• Strategic factors.
– Cost leadership
– Product differentiation Example: Supply Chain of Zara
• Technological factors: Example: Coca-cola
• Macroeconomic factors
– Tariffs and tax incentives
– Exchange-rate and demand risk
– Freight and fuel costs
• Political factors
• Infrastructure factors
• Competitive factors
– Positive externalities between firms
– Locating to split the market
• Customer response time and local presence
• Logistics and facility costs

Framework for Network Design Decisions
Figure 5-2

• 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
• Phase II: Define the Regional Facility Configuration

– 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

• Phase III: Select a Set of Desirable Potential Sites

– Hard infrastructure requirements
– Soft infrastructure requirements
• Phase IV: Location Choices

Regional demand
• Forecast the demand on a region by region basis

• Need to study its
– size
– homogeneity
• Non-homogeneous demand will require a more localized network
• Frequently the final customization of a product for a particular market is
done at a local distribution center
– Labeling
– Manuals
– etc.

Production technologies and the
underlying economies
• Expensive dedicated production technologies will require large production

volumes and therefore a more centralized production network (e.g., chip
production).
• Lower fixed cost facilities can be duplicated more easily (e.g., bottling
factories).
• In case of non-homogeneous demand, technological flexibility facilitates
consolidation of production to a few manufacturing facilities.
• The more cumbersome the transfer of raw material, the closer the facility
must be to the source site (e.g., factories processing minerals)

Tariffs and Tax incentives
• Tariffs: Any duties that must be paid when products and/or equipment are moved across
international, state or city boundaries.
• High tariffs necessitate localized production.
• Presently, there is a systematic effort to open the markets to global competition through
the World Trade Organization Policies (WTO) and regional agreements (NAFTA, MERCOSUR
for S. America, ASEAN for Pacific rim, etc.)
• Tax incentives: a reduction in tariffs or taxes that countries, states and cities often
provide to encourage firms to locate their facilities in specific areas.
• Free trade zones: Areas where duties and tariffs are relaxed as long as production is used
primarily for export (e.g., Taiwan and China’s GuangZhou area) Allows companies to take
better advantage of low labor costs.
• Tax incentives can be focusing on certain
– Industries
– Technologies
– Regions
• Quotas: Limits on import volumes placed by different countries in an effort to protect
their local industry. Sometimes there is also some requirement on minimum local content.

Infrastructure factors
• Availability of skilled labor

• Availability of transportation facilities
– Ports
– Airports
– Rail
– Highways
• Availability of necessary utilities
– Power
– Water
– Sewage
– Telecommunications / IT

Political, exchange rate and demand Risks
• Political risks -- Need for:

– Well-defined rules of commerce
– Independent and clear legal systems
– Political stability
• Exchange rate risks: This risk arises from the fact that companies might incur their
costs in one currency and collect their revenues in other currencies. (e.g., Japanese
production under an expensive Yen in the late 80’s / early 90’s; the role of an
expensive EURO these days for the American economy)
• Potential protection to exchange rate risk: Build some flexible over-capacity to the
regional facilities so that production is shifted to the lower-cost regions.
• Demand risk: Comes from extensive demand fluctuation due to regional economic
crises (e.g., Asia markets between 1996-1998) Plant flexibility is also a potential
protection to this type of risk.

Competitive factors
• Positive Externalities: Instances where collocation of multiple firms benefits

all of them, since
– They share the cost of the necessary infrastructure
– And the collocation can stimulate demand for all of them
– Examples: a mall, silicon valley, industrial parks
• Locating to “split the market”: For companies that

– Do not have price control, and
– try to maximize their market share by minimizing their distance from the customer
collocation can allow each competing party to maximize their market share.

Competitive Factors
– Positive externalities between firms

• Collocation benefits all
Figure 5-1
– Locating to split the market

• Locate to capture largest market share
1– b – a 1+ b – a
d1 = a + and d2 =
2 2

Models for Facility Location and
Capacity Allocation
• Maximize the overall profitability of the supply chain network

while providing customers with the appropriate
responsiveness
• Many trade-offs during network design
• Network design models used to decide on locations and

capacities and to assign current demand to facilities

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

Cost / Responsiveness Trade-off
Cost
Total cost
SC response time
Inventory cost
Facility cost
Transportation cost
Number of Facilities
Phase II: Network Optimization Models
Figure 5-3

Capacitated Plant Location Model
n = number of potential plant locations/capacity

m = number of markets or demand points yi = 1 if plant i is open, 0 otherwise
D j = annual demand from market j xij = quantity shipped from plant i
to market j
K i = potential capacity of plant i
f i = annualized fixed cost of keeping plant i open
cij = cost of producing and shipping one unit from plant i to market j (cost includes
production, inventory, transportation, and tariffs)
n n m
Minå f i yi + å åc x ij ij
i=1 i=1 j=1
subject to
n
åx ij
= D j for j = 1,...,m
i=1
m
åx ij
= K i yi for i = 1,...,n
j=1
yi Î {0,1} for i = 1,...,n, x ij ³ 0

Figure 5-4

Figure 5-5
Figure 5-5

Phase III: Gravity Location Models
Figure 5-6
Gravity Location Model
xn, yn: coordinate location of either a market or supply source n

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
(x – x ) + ( y – y )
2 2
dn = n n

Figure 5-7

Transportation Cost Quantity in Tons Coordinates

Sources/Markets $/Ton Mile (Fn) (Dn) xn yn
Supply sources
Buffalo 0.90 500 700 1,200
Memphis 0.95 300 250 600
St. Louis 0.85 700 225 825
Markets
Atlanta 1.50 225 600 500
Boston 1.50 150 1,050 1,200
Jacksonville 1.50 250 800 300
Philadelphia 1.50 175 925 975
New York 1.50 300 1,000 1,080
k Table 5-1
Total transportation cost TC = åd D Fn n n
n=1

Figure 5-8

Figure 5-8

1. For each supply source or market n, evaluate dn
2. Obtain a new location (x’, y’) for the facility, where
k k
Dn Fn xn Dn Fn yn
å d å d
x¢ = n=1
k
n
and y¢ = n=1
k
n
Dn Fn Dn Fn
å d å d
n=1 n n=1 n
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

Phase IV: Network Optimization
Models
Demand City
Monthly Monthly
Production and Transportation Cost
Capacity Fixed Cost
per Thousand Units (Thousand $)
(Thousand (Thousand
Supply City Atlanta Boston Chicago Denver Omaha Portland Units) K $) f
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 1,925 2,400 1,450 500 950 800 27 5,000
City
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
Monthly 10 8 14 6 7 11
demand
(thousand
units) Dj
Table 5-2

Network Optimization Models
• Allocating demand to production facilities
n = number of factory locations

m = number of markets or demand points xij = quantity shipped from
D j = annual demand from market j factory i to market j
K i = capacity of factory i
cij = cost of producing and shipping one unit from factory i to market j
n m subject to
Minå å cij xij n
i=1 j=1 åx ij
= D j for j = 1,...,m
i=1
m
åx ij
= Ki for i = 1,...,n
j=1

Network Optimization Models
• Optimal demand allocation
Atlanta Boston Chicago Denver Omaha Portland
TelecomOne Baltimore 0 8 2
Memphis 10 0 12
Wichita 0 0 0
HighOptic Salt Lake 0 0 11
Cheyenne 6 7 0
Table 5-3

• Merge the companies

• Solve using location-specific costs
yi = 1 if factory i is open, 0 otherwise

xij = quantity shipped from factory i to market j
n n m
Minå f i yi + å åc x ij ij
i=1 i=1 j=1

Figure 5-9

Figure 5-10
Figure 5-10

Figure 5-11

Capacitated Model With Single Sourcing
• Market supplied by only one factory

• Modify decision variables
yi = 1 if factory i is open, 0 otherwise

xij = 1 if market j is supplied by factory i, 0 otherwise
n n m
Minå f i yi + å å D j cij xij
i=1 i=1 j=1
subject to
n
åx ij
= 1 for j = 1,...,m
i=1
m
åD x i ij
£ K i yi for i = 1,...,n
j=1
xij , yi Î {0,1}
Figure 5-12

• Optimal network configuration with single sourcing

Open/
Closed Atlanta Boston Chicago Denver Omaha Portland
Baltimore Closed 0 0 0 0 0 0
Cheyenne Closed 0 0 0 0 0 0
Salt Lake Open 0 0 0 6 0 11
Memphis Open 10 8 0 0 0 0
Wichita Open 0 0 14 0 7 0
Table 5-4

Locating Plants and Warehouses Simultaneously
Figure 5-13

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

• Goal is to identify plant and warehouse locations and

quantities shipped that minimize the total fixed and variable
costs
Yi = 1 if factory is located at site i, 0 otherwise

Ye = 1 if warehouse is located at site e, 0 otherwise
xej = quantity shipped from warehouse e to market j
xie = quantity shipped from factory at site i to warehouse e
xhi = quantity shipped from supplier h to factory at site i
n t l n t m
Minå Fi yi + å f e ye + å å chi xie + å å cej xej
i=1 e=1 h=1 i=1 e=1 j=1

subject to
n m
åx hi
£ Sh for h = 1,...,l åx ej
£ We ye for e = 1,...,t
i=1 j=1
l t t
åx hi
– å xie ³ 0 for i = 1,...,n åx ej
= D j for j = 1,...,m
h=1 e=1 e=1
t
åx ie
£ Ki yi for i = 1,...,n yi , ye Î {0,1},xej ,xie ,xhi ³ 0
e=1
n m
åx – åx ie ej
³ 0 for e = 1,...,t
i=1 j=1

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
m n n n m
Maxå rj å xij – å Fi yi – å å cij xij
j=1 i=1 i=1 i=1 j=1
åx ij
£ D j for j = 1,...,m
i=1

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

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

Thank You

Network Design in The Supply Chain - Chopra - ch05 PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Network Design in The Supply Chain - Chopra - ch05 PDF

Uploaded by

Copyright:

Available Formats

5

Network Design in the Supply Chain at Global Level

PowerPoint presentation to accompany Jamil Chowdhury, BBA, MBA,CSCM

1. Understand the role of network design in a supply chain.

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-2

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-3

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-4

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-5

• Phase I: Define a Supply Chain Strategy/Design

• Phase II: Define the Regional Facility Configuration

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-6

• Phase III: Select a Set of Desirable Potential Sites

• Phase IV: Location Choices

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-7

• Forecast the demand on a region by region basis

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-8

• Expensive dedicated production technologies will require large production

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-9

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-10

• Availability of skilled labor

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-11

• Political risks -- Need for:

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-12

• Positive Externalities: Instances where collocation of multiple firms benefits

• Locating to “split the market”: For companies that

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-13

– Positive externalities between firms

– Locating to split the market

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-14

• Maximize the overall profitability of the supply chain network

• Many trade-offs during network design

• Network design models used to decide on locations and

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-15

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-16

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-18

n = number of potential plant locations/capacity

yi Î {0,1} for i = 1,...,n, x ij ³ 0

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-20

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-22

xn, yn: coordinate location of either a market or supply source n

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-24

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-25

Transportation Cost Quantity in Tons Coordinates

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-26

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-27

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-28

3. If the new location (x’ , y’ ) is almost the same as

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-29

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-30

• Allocating demand to production facilities

n = number of factory locations

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-31

• Optimal demand allocation

Atlanta Boston Chicago Denver Omaha Portland

HighOptic Salt Lake 0 0 11

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-32

• Merge the companies

yi = 1 if factory i is open, 0 otherwise

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-33

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-34

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-36

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 5-37

• Market supplied by only one factory