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Network Design in the Supply

Chain

© 2004 Prentice-Hall, Inc. 5-1


Outline
◆ A strategic framework for facility location
◆ Multi-echelon networks
◆ Gravity methods for location
◆ Plant location models

© 2004 Prentice-Hall, Inc. 5-2


Network Design Decisions
◆ Facility role ( Role ? Which process?)
◆ Facility location (Where ?
◆ Capacity allocation (How much capacity?
◆ Market and supply allocation (Source of
supplies and customers)

© 2004 Prentice-Hall, Inc. 5-3


Factors Influencing
Network Design Decisions
◆ Strategic (near port, production or demand
centre?)
◆ Technological (Microchips, Coca Cola)
◆ Macroeconomic ( Taxes & Tariffs, exchange rates)
◆ Political ( Stable/Reliable, law and order)
◆ Infrastructure ( Rail, Road, Ports)
◆ Competitive ( Near or far)
◆ Logistics and facility costs

© 2004 Prentice-Hall, Inc. 5-4


The Cost-Response Time Frontier

Hi Local FG
Mix
Regional FG

Local WIP
Cost Central FG

Central WIP

Central Raw Material and Custom production

Custom production with raw material at suppliers


Low
Low Response Time Hi

© 2004 Prentice-Hall, Inc. 5-5


Service and Number of Facilities
Response
Time

Number of Facilities

© 2004 Prentice-Hall, Inc. 5-6


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

Customer
DC

© 2004 Prentice-Hall, Inc.


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

Customer
DC

© 2004 Prentice-Hall, Inc.


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

Customer
DC

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

Customer
DC

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

Customer
DC

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Costs and Number of Facilities

Inventory

Costs Facility costs

Transportation

Number of facilities

© 2004 Prentice-Hall, Inc. 5-12


Cost Buildup as a Function of Facilities
Total Costs
Cost of Operations

Percent Service
Level Within
Promised Time
Facilities
Inventory
Transportation
Labor

Number of Facilities
© 2004 Prentice-Hall, Inc. 5-13
A Framework for
Global Site Location
GLOBAL COMPETITION
COMPTITIVE STRATEGY
PHASE I
Supply Chain
INTERNAL CONSTRAINTS Strategy
Capital, growth strategy, TARIFFS AND TAX
existing network INCENTIVES

PRODUCTION TECHNOLOGIES REGIONAL DEMAND


Cost, Scale/Scope impact, support PHASE II Size, growth, homogeneity,
required, flexibility
Regional Facility local specifications
Configuration
COMPETITIVE
ENVIRONMENT POLITICAL, EXCHANGE
RATE AND DEMAND RISK

PHASE III
Desirable Sites AVAILABLE
INFRASTRUCTURE
PRODUCTION METHODS
Skill needs, response time

FACTOR COSTS PHASE IV LOGISTICS COSTS


Labor, materials, site specific Location Choices Transport, inventory, coordination

© 2004 Prentice-Hall, Inc. 5-14


Conventional Network

Materials Customer
Vendor Finished Customer
DC Store
DC Goods DC DC

Customer
Component Store
Vendor Manufacturing
DC Plant Customer Customer
Warehouse DC Store
Components
DC Customer
Vendor Store
DC Finished
Customer
Goods DC
Final DC Customer
Assembly Store

© 2004 Prentice-Hall, Inc. 5-15


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

Store 3

© 2004 Prentice-Hall, Inc. 5-16


Facility Location and capacity
allocation
◆ Information Required for design decisions:
(Data collection and aggregation techniques)
– Location of supply sources and markets
– Location of potential facility sites
– Demand forecast by markets
– By site fixed & Variable costs-facility, labor, material
– Transportation costs between each pair of locations
– Inventory costs by site as well as function of quantity
– Sale price of product in different regions
– Taxes and tariffs as product moves between locations
– Desired response time and other service factors

© 2004 Prentice-Hall, Inc.


Gravity Methods for Location
◆ Ton Mile-Center Solution 2 2
d n = ( x − x n) + ( y − y n)
– x,y: Warehouse Coordinates
n
– xn, yn : Coordinates of delivery ∑ xi F i
location n i =1 Fi
– dn : Distance to delivery location x= di
n
n ∑ Fi
– Fn : Annual tonnage to delivery i =1 di
location n n yi F i

i =1 Fi
y= di
∑ 2 ( − y )2
Min F i ( xi − x) + y i n
∑ Fi
i =1 di
© 2004 Prentice-Hall, Inc. 5-18
Network Optimization Model
(Phase-II)

◆ 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?

© 2004 Prentice-Hall, Inc. 5-19


The Solver Software
◆ Activate Solver, if not done already
◆ Input Sources of Supply
◆ Input Capacity of each source of supply
◆ Input demand points
◆ Input demand of each demand point
◆ Input cost of supply between any two points
◆ Ask solver to find minimal cost solution

© 2004 Prentice-Hall, Inc.


Demand Allocation Model(Ph-II)
n m
◆ Which market is served Min ∑ ∑ cij xij
by which plant? i =1 j =1
◆ Which supply sources s.t.
are used by a plant? n
xij = Quantity shipped from ∑ xij = D j
i =1
plant site i to customer j m
Souces:i-n; Demand j-m,; Costs Ci-j ∑ xij ≤ K i
Objective - minmise total cost j =1

xij ≥ 0

© 2004 Prentice-Hall, Inc. 5-21


Capacity allocation model example
T r a n sp o r ta ti o n M o d e l (se l e c t H e l p sh e e t fo r i n fo rm a Cti olena )r

C o st: T o : A B C D E C a p a c i ty
F ro m : 1 100 190 150 155 110 80
2 111 179 140 140 110 1 4 0T o ta l S u p p l y
5 129 162 135 130 95 140 440
4 132 115 132 128 95 70
5 200 170 100 146 145 1 0 T o ta l D e m a n d
De m a nd 100 100 170 30 40 440
S o l u ti o nT :o : A B C D E Row S um
M o d e l I n p u ts a re e n te re d
F ro m : 1 0 0 0 0 0 0
i n sh a d e d a r e a
2 0 0 0 0 0 0
3 0 0 0 0 0 0
4 0 0 0 0 0 0 T o ta l C o st
5 0 0 0 0 0 0 0
C o lS u m 0 0 0 0 0

O p ti m a l so l u ti o n
re tu r n e d h e r e

© 2004 Prentice-Hall, Inc.


Plant Location with Multiple Sourcing
◆ yi = 1 if plant is located n n m
Min ∑ f i y i + ∑ ∑ cij xij
at site i, 0 otherwise i =1 i =1 j =1
◆ xij = Quantity shipped s.t.
from plant site i to n
customer j ∑ xij = D j
i =1
n
∑ xij ≤ K i y i
j =1
m
∑ y i ≤ k ; y i ∈{0,1}
i =1

© 2004 Prentice-Hall, Inc. 5-23


Optional Assignment
◆ Try Sun Oil Co. solution- pages 110 to115
◆ Try locating Sources of supply- plant-
warehouse- market simultaneously solution
pages125-126

© 2004 Prentice-Hall, Inc.


X Value of Adding 0.1 Million
Pounds Capacity (1982)
Mexico $0
Canada $8,300
Venezuela $36,900
Frankfurt $22,300
Gary $25,200
Sunchem $0

Should be evaluated as an option and priced accordingly.


© 2004 Prentice-Hall, Inc. 5-25
X Evaluating Facility Investments:
AM Tires

P lant D edicated P lant F lexible P lant


F ixed C ost V ariable C ost F ixed C ost V ariable C os
U S 100,000 $1 m illion/yr. $15 / tire $1.1 m illion $15 / tire
/ year
M exico 4 m illion 110 pesos / 4.4 m illion 110 pesos /
50,000 pesos / year tire pesos / year tire
U.S. Demand = 100,000; Mexico demand = 50,000
1US$ = 9 pesos

Demand goes up or down by 20 percent with probability 0.5 and


exchange rate goes up or down by 25 per cent with probability 0.5.
© 2004 Prentice-Hall, Inc. 5-26
X AM Tires
Perio d 0 Perio d 1 Perio d 2
RU=144
RM = 72
E=14.06
RU=120
RM = 60 RU=144
E=11.25 RM = 72
E=8.44
RU=120
RM = 60 RU=144
E=6 .75 RM = 48
E=14.06
RU=120
RM = 40 RU=144
E=11.25 RM = 48
E=8.44
RU=100 RU=120
RM=50 RM = 40 RU=96
E=9 E=6 .75 RM = 72
E=14.06
RU=80
RM = 60 RU=96
E=11.25 RM = 72
E=8.44
RU=80
RM = 60 RU=96
E=6 .75 RM = 48
E=14.06
RU=80
RM = 40 RU=96
E=11.25 RM = 48
E=8.44
RU=80
RM = 40
© 2004 Prentice-Hall, Inc. E=6 .75 5-27
X AM Tires
Four possible capacity scenarios:
• Both dedicated
• Both flexible
• U.S. flexible, Mexico dedicated
• U.S. dedicated, Mexico flexible

For each node, solve the demand allocation model.


Plants Markets
U.S. U.S.

Mexico Mexico

© 2004 Prentice-Hall, Inc. 5-28


X Facility Decision at AM Tires

Plant Configuration NPV


United States Mexico
Dedicated Dedicated $1,629,319
Flexible Dedicated $1,514,322
Dedicated Flexible $1,722,447
Flexible Flexible $1,529,758

© 2004 Prentice-Hall, Inc. 5-29


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

© 2004 Prentice-Hall, Inc. 5-30


X Network Design under uncertain
Environment
◆ Discounted Cash flow analysis
◆ Decision Tree Analysis

© 2004 Prentice-Hall, Inc.


Summary of Learning Objectives
◆ What is the role of network design decisions in the supply
chain?
◆ What are the factors influencing supply chain network
design decisions?
◆ Describe a strategic framework for facility location.
◆ How are the following optimization methods used for
facility location and capacity allocation decisions?
– Gravity methods for location
– Network optimization models
Decision under uncertain environment is taken by using discounted
cash flows and decision tree technique

© 2004 Prentice-Hall, Inc. 5-32