NETWORK DESIGN IN THE SUPPLY CHAIN

Dr. Jabir Ali Associate Professor Centre for Food and Agribusiness Management, Indian Institute of Management, Prabandh Nagar, Off Sitapur Road, Lucknow - 226013, Uttar Pradesh, India

Food Chain Structure

Economics

Technology

Primary Producer

Processing

Distribution

Retail

M A R K E T

Social/ Legal

Environment

Mapping the Agriculture Commodity Flow in Uttar Pradesh Rice & Wheat
Rice = 2.62 Million tonnes (30.9 % of MSR) Wheat = 3.88 Million tonnes (28.2% of MSR) Rice = 2.33 Million tonnes Wheat = 13.79 Million tonnes

Rice = 10.81 Million tonnes Wheat = 27.52 Million tonnes

Govt. Procurement

PDS

Consumers

Self Consumption

Production Market Surplus

Rice = 8.48 Million tonnes (78.4%) Wheat = 13.73 Million tonnes (49.9%)

Pvt. Procurement Mandi Arrival

Open Market-Leakage
Rice = 1.8 Million tonnes (21.5% of MSR) Wheat = 1.6 Million tonnes (11.3% of MSR) Rice = 4.0 Million tonnes (47.5% of MSR) Wheat = 8.3 Million tonnes (60.4% of MSR)

Spot Market

What to do with the leakage? What efficient and innovative model can we suggest for linking the farmers with the markets? It is even more critical to understand the commodity chain for perishable products such as fruits, vegetables, milk, meat etc

Network Design Decisions

Facility role
What role should each facility play? What processes to be performed at each facility?

Facility location
Where should facilities be located?

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?

Factors Influencing Network Design Decisions

Strategic

Technological
Macroeconomic Political

Infrastructure
Competitive Logistics and facility costs

Dimensions of Distribution Network Design

Customer needs that Making chain responsive Meeting customer services are met

Cost of meeting customer needs

Making the chain efficient Minimizing the cost

Factors Influencing Production and Distribution

Elements of customer service influenced by supply chain structure:

Response time: time taken for a customer to receive an order Product variety: number of different products offered Product availability: probability of having a product in stock Customer experience: ease in placing order Time to market: bring a new product to the market Order visibility: ability of customers to track their orders Returnability: ease in returning unsatisfactory merchandise Inventories Transportation Facilities and handling Information

Supply chain costs affected by supply chain structure:

Service and Number of Facilities

Response Time

Number of Facilities

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

Customer DC

Where inventory needs to be for a 5 day order response time typical results --> 2 DCs

Customer DC

Where inventory needs to be for a 3 day order response time typical results --> 5 DCs

Customer DC

Where inventory needs to be for a next day order response time typical results --> 13 DCs

Customer DC

Where inventory needs to be for a same day / next day order response time - typical results --> 26 DCs

Customer DC

Distribution network and chain costs

Changing the distribution network design affects the following supply chain costs:
Inventories

Transportation
Facilities and handling Information

Costs and Number of Facilities

Inventory
Costs Facility costs

Transportation

Number of facilities

Cost Buildup as a Function of Facilities

Total Costs

Cost of Operations

Facilities Inventory

Transportation Labor

Number of Facilities

Design Options for a Distribution Network

There are two key decisions when designing a distribution network:

Will product be delivered to the customer location or picked up from a preordained site? Will product flow through an intermediary (or intermediate location)?

Based on the choices for the two decisions, there are six distinct

distribution network designs that are classified as follows:

Manufacturer storage with direct shipping Manufacturer storage with direct shipping and in-transit merge Distributor storage with package carrier delivery Distributor storage with last mile delivery Manufacturer / distributor storage with costumer pickup Retail storage with customer pickup

Manufacturer Storage with Direct Shipping

also referred as drop shipping Manufacturer

Retailer

Customers

The biggest advantage of drop shipping is the ability to centralize inventories at the manufacturer Lower inventories by postponing customization until after the customer order Transportation costs are high with drop shipping because the average outbound distance to the end consumer Truckload (TL) or less-than-truckload (LTL) carriers Response times tend to be large

Product Flow
Information Flow

Performance Characteristics of Manufacturer Storage with Direct Shipping Network

Cost Factor
Inventory

Performance
Lower costs because of aggregation. Benefits of aggregation are highest for low-demand, highvalue items. Benefits are very large if product customization can be postponed at the manufacturer. Higher transportation costs because of increased distance and disaggregate shipping Lower facility costs because of aggregation. Some saving on handling costs if manufacturer can manage small shipments or ship from production line. Significant investment in information infrastructure to integrate manufacturer and retailer.

Transportation Facilities & Handling Information

Service Factor
Response Time Product variety

Performance
Long response time of one to two weeks because of increased distance and two stages for order processing. Response time may vary by product, thus complicating receiving. Easy to provide a very high level of variety

Product availability
Customer experience Time to market Order visibility Returnability

Easy to provide a high level of product availability because of aggregation at manufacturer

Good in terms of home delivery but can suffer if order from several manufacturers is sent as partial shipments Fast, with the product available as soon as the first unit is produced. More difficult but also more important from a customer service perspective. Experience and difficult to implement

In-Transit Merge Network

Factories

Retailer

In-Transit Merge by Carrier

Customers

In-transit merge combines pieces of orders from different locations to provide single delivery to consumers

Product Flow Information Flow

Performance Characteristics of In-Transit Merge

Cost Factor Inventory Transportation Facilities & Handling Information Service Factor Response Time Product variety Product availability Customer experience Time to market Order visibility Returnability Performance Similar to drop- shipping. Somewhat lower-transportation costs than drop-shipping. Handling costs higher than drop-shipping at carrier; receiving costs lower at customer. Investment is somewhat higher than for drop-shipping. Performance Similar to drop-shipping; may be marginally higher. Similar to drop-shipping. High Similar to drop-shipping. High level of product availability Better than drop-shipping because a single delivery has to be received. Similar to drop-shipping. Fast Similar to drop-shipping. Difficult Similar to drop-shipping. Difficult

Distributor Storage with Carrier Delivery

Factories

Warehouse Storage by Distributor/Retailer

Customers

Inventory is held at distributor/ retailers and package carriers are used to deliver the product to customer

Product Flow Information Flow

Performance Characteristics of Distributor Storage with Carrier Delivery

Cost Factor Inventory Transportation Facilities & Handling Performance Higher than manufacturer storage. Difference is not large for faster-moving items. Lower than manufacturer storage. Reduction is highest for faster-moving items. Somewhat higher than manufacturer storage. The difference can be large for very slow- moving items.

Information
Service Factor Response Time

Simpler infrastructure compared to manufacturer storage.

Performance Faster than manufacturer storage.

Product variety Product availability

Customer experience Time to market Order visibility Returnability

Lower than manufacturer storage. Higher cost to provide the same level of availability as manufacturer storage.
Better than manufacturer storage with drop-shipping. Higher than manufacturer storage Easier than manufacturer storage Easier than manufacturer storage

Distributor Storage with Last Mile Delivery

Factories

Distributor/Retailer Warehouse

Customers

Product Flow
Inventory is held at distributor/ retailers and they deliver the product to customer

Information Flow

Performance Characteristics of Distributor Storage with Last-Mile Delivery

Cost Factor Inventory Transportation Facilities & Handling Information Service Factor Response Time Product variety Product availability Customer experience Time to market Order visibility Returnability Performance Higher than distributor storage with package carrier delivery. Very high cost given minimal scale economies. Higher than any other distribution option. Facility costs higher than manufacturer storage or distributor storage with package carrier delivery, but lower than a chain of retail stores Similar to distributor storage with package carrier delivery. Performance Very quick. Same day to next-day delivery. Somewhat less than distributor storage with package carrier delivery but larger than retail stores. More expensive to provide availability than any other option except retail stores. Very good, particularly for bulky items. Slightly higher than distributor storage with package carrier delivery Less of an issue and easier to implement than manufacturer storage or distributor storage with package carrier delivery Easier to implement than other options. Harder and more expensive than a retail network

Manufacturer or Distributor Storage with Customer Pickup

Factories

Retailer

Cross Dock DC

Pickup Sites

Customers Customer Flow Product Flow Information Flow

Performance Characteristics of Network with Consumer Pickup Sites

Cost Factor Inventory Transportation Facilities & Handling Performance Can match any other option, depending on the location of inventory. Lower than the use of package carriers, especially if using an existing delivery network. Facility costs can be very high if new facilities have to be built. Costs are lower of existing facilities are used. The increase in handling cost at the pickup site can be significant. Significant investment in infrastructure required. Performance Similar to package carrier delivery with manufacturer or distributor storage. Same-day delivery possible for items stored locally at pickup site. Similar to other manufacturer or distributor storage options. Similar to other manufacturer or distributor storage options. Lower than other options because of the lack of home delivery. In areas with high density of population, loss of convenience may be small. Similar to manufacturer storage options. Difficult to manufacturer storage options. Somewhat easier given that pickup location can handle returns.

Information Service Factor Response Time

Product variety Product availability Customer experience

Time to market Order visibility Returnability

Performance Characteristics of Local Storage at Consumer Pickup Sites

Cost Factor Performance

Inventory
Transportation Facilities & Handling Information Service Factor

Higher than all other options.

Lower than all other options. Higher than other options. The increase in handling cost at the pickup site can be significant for online and phone orders Some investment in infrastructure required for online and phone orders. Performance

Response Time
Product variety Product availability Customer experience Time to market Order visibility Returnability

Same-day (immediate) pickup possible for items stored locally at pickup site.
Lower than all other options. More expensive to provide than all other options. Related to whether shopping is viewed as a positive or negative experience by customer. Highest among distribution options. Trivial for in-store orders. Difficult, but essential, for online and phone orders. Easier than order options given that pickup location can handle returns.

PHASES IN SUPPLY CHAIN NETWORK DESIGN

A Framework for Global Site Location

Competitive STRATEGY GLOBAL COMPETITION

INTERNAL CONSTRAINTS Capital, growth strategy, existing network PRODUCTION TECHNOLOGIES Cost, Scale/Scope impact, support required, flexibility

PHASE I Supply Chain Strategy

TARIFFS AND TAX INCENTIVES

COMPETITIVE ENVIRONMENT

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

AVAILABLE INFRASTRUCTURE

PHASE IV Location Choices

LOGISTICS COSTS Transport, inventory, coordination

Models for Facility Location and Capacity Allocation

Goal: maximize the overall profitability of the resulting supply chain

network while providing customers with the appropriate responsiveness Trade-off: between revenue and costs Information required:

Location of supply sources and markets Location of potential facility sites Demand forecast by market Facility, labour and material costs by sites 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

Network Optimization Models

Allocating demand to production facilities 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?

Network Optimization Model-Data Requirement

Network Optimization Model requires following data

inputs:
n=number of potential plant locations/ capacity m=number of markets or demand points Dj=annual demand from market j Ki=potential capacity of plant i fi=annualized fixed cost of keeping factory i open cij=cost of producing and shipping one unit from factory i to market j yi=1 if plant i is open, 0 otherwise xij=quantity shipped from plant i to market j

Demand Allocation and Supply Source Model

Which market is served by which plant? Which supply sources are used by a plant? Objective: minimization of cost of meeting demand
Min cij xij
i 1 j 1 n m

s.t.

x D ,
i 1 m ij j

For j 1,...,m

Demand at each regional market be satisfied No plant can supply more than its capacity

x K
j 1 ij

yi, For i 1,...,n

yi 0,1 For i 1,........, n, xij 0

Plant is either open or closed

Case: SunOil Inputs-Costs, Capabilities, Demands

Supply Region Demand Region, Production and transportation cost per 1000000 units (000 USD) Fixed cost ($) Low capacity Fixed cost ($) High capacity

N. America
N. America S. America Europe Asia Africa Demand 81 117 102 115 142 12

S. America
92 77 105 125 100 8

Europe

Asia

Africa

101 108 95 90 103 14

130 98 119 59 105 16

115 100 111 74 71 7

6000 4500 6500 4100 4000

10 10 10 10 10

9000 6750 9750 6150 6000

20 20 20 20 20

Worksheet