(2) Facility Decisions Network Design in a Supply Chain

Facility Decisions

Network Design in a Supply Chain

CC 3.0
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Conventional Network

Vendor DC

Materials DC
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Finished Goods DC

Customer DC

Customer Store

Vendor DC

Component Manufacturing Plant Warehouse Components DC Customer DC

Customer Store

Customer Store

Vendor DC

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Customer Store Finished Goods DC

Final Assembly

Customer DC

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Customer Store

Network Design Decisions

Facility role and processes needed to be performed Facility location: strategic view Lower cost, flexibility: Toyota Responsiveness, cost-effective: Amazon

Capacity allocation
Market and supply allocation

Microsoft

Factors Influencing Network Design Decisions

Strategic roles: Off-shore facility: low-cost for export production Source facility: low-cost facility for global production (involve manufacture through oversea) Server facility: regional market supporting

Contributor facility: regional with development skills

Outpost facility: regional build to gain local skills Lead facility: lead in development and process technologies

Microsoft

Factors Influencing Network Design Decisions

Technological: availability, cost and flexibility examples: computer chips v.s. Coke Macroeconomic: tariffs and tax incentives (WTO, regional agreements, free trade zone, local content & limits)

Exchange rate and demand risk

Political: stability; legal system Infrastructure: available sites, labor availability, proximity to transportation channels, local utilities
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Factors Influencing Network Design Decisions

Competitive: Positive externalities: company tend to locate close to each other, develop appropriate infrastructure Locating to split the market: capture the largest market share
a 0 1-b 1

Customer response time and local presence

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The Cost-Response Time Frontier

Hi

Local FG Mix Regional FG

Cost

Local WIP Central FG Central WIP Central Raw Material and Custom production

Low Low

Custom production with raw material at suppliers

Response Time

Hi

Factors Influencing Network Design Decisions

Logistics and facility costs: Inventory costs Transportation costs: weight or volume Facility setup and operating costs

Cost Build-up as a function of facilities

Total Costs

Cost of Operations

Percent Service Level Within Promised Time Facilities Inventory Transportation Labor

Number of Facilities
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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 PRODUCTION METHODS Skill needs, response time PHASE III Desirable Sites GLOBAL COMPETITION TARIFFS AND TAX INCENTIVES REGIONAL DEMAND Size, growth, homogeneity, local specifications POLITICAL, EXCHANGE RATE AND DEMAND RISK AVAILABLE INFRASTRUCTURE

PHASE I Supply Chain Strategy

PHASE II Regional Facility Configuration

FACTOR COSTS Labor, materials, site specific

PHASE IV Location Choices

LOGISTICS COSTS Transport, inventory, coordination

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Tailored Network: Multi - Echelon Finished Goods Network

Regional Finished Goods DC National Finished Goods DC Regional Finished Goods DC

Local DC Cross-Dock

Store 1 Customer 1 DC Store 1 Store 2 Store 2 Store 3

Codigofonte.net Store 3

Local DC Cross-Dock

Customer 2 DC
Local DC Cross-Dock

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Information Needed for Design Decision

Location of supply sources and markets Location of potential facility site Demand forecasts by market Facility, labor, and materials cost by site Transportation costs between each pair of sites

Inventory costs by site as well as a function of quantity

Sales price of product in different regions Taxes and tariffs as product is moved between locations Desired response time and other service factors

Microsoft

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Phase II: Network Optimization Models

Decide the regions where facilities to be located by considering regional demand, tariffs, economies of scale, and aggregate factor costs Two possible alternatives: Setup facility in each region

Consolidate plants in few regions

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Phase II: Network Optimization Models

Decide the regions where facilities to be located by considering regional demand, tariffs, economies of scale, and aggregate factor costs Two possible alternatives: Setup facility in each region

Consolidate plants in few regions

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The Capacitated Plant Location Problem

n =number of potential locations/capacity m = number of markets Dj = annual demand of market j Ki = capacity of plant i fi = annualized fixed cost of keeping factory i opened Cij = cost of producing and shipping 1 unit from factory i to market j yi = 1 if plant is located at site i, 0 otherwise xij = Quantity shipped from plant site i to customer j

Min f i y cij xij

i1 i i1 j1

s.t.

x D
i1 n ij j1 ij

x K y
i

y {0,1}
i

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Phase III: Gravity Location Models

Identify potential locations in each region Geographical locations:
Plainer: Gravity location models Network: median models, center models

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Gravity Methods for Location

Ton Mile-Center Solution
x,y: Warehouse Coordinates xn, yn : Coordinates of delivery location n dn : Distance to delivery location n Fn : cost of shipping one unit for one mile Dn : Annual tonnage to delivery location n

(x xn) (y yn)
2

n 1

Dn Fn xn
n

dn
n

D F /d
i1 n n

DnFn y n

n 1 n

dn
n

Min TC dnDnFn
n 1
17

D F /d
i1 n n

Gravity Methods for Location

Dn
X=
n1 k n1

Fn Xn Fn

Dn Dn
k

Fn Yn Fn

Y=

n1

Dn
n1

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Gravity Methods for Location

Ton Mile-Center Solution
x,y: Warehouse Coordinates xn, yn : Coordinates of delivery location n dn : Distance to delivery location n Fn : cost of shipping one unit for one mile Dn : Annual tonnage to delivery location n

(x xn) (y yn)
2

n 1

Dn Fn xn
n

dn
n

D F /d
i1 n n

DnFn y n

n 1 n

dn
n

Min TC dnDnFn
n 1
19

D F /d
i1 n n

Phase IV: Network Optimization Models

Decide how market will be allocated to facilities Must consider customer service constraints in term of response time Decision should be altered on a regular basis as cost change and market evolve.

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Demand Allocation Model

Which market is served by which plant? Which supply sources are used by a plant?

n =number of potential locations/capacity

m = number of markets Dj = annual demand of market j

Min c ij xij
i 1 j 1

s.t.

Ki = capacity of plant i
Cij = cost of producing and shipping 1 unit from factory i to market j xij = Quantity shipped from plant site i to customer j

x D
i 1
m

ij

x K
j 1 ij

ij

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The Capacitated Plant Location Problem

n =number of potential locations/capacity m = number of markets Dj = annual demand of market j Ki = capacity of plant i fi = annualized fixed cost of keeping factory i opened Cij = cost of producing and shipping 1 unit from factory i to market j yi = 1 if plant is located at site i, 0 otherwise xij = Quantity shipped from plant site i to customer j

Min f i y cij xij

i1 i i1 j1

s.t.

x D
i1 n ij j1 m ij

x K y
i i1 i i

y k; y {0,1}

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Capacitated Plant Location with Single Sourcing

yi = 1 if plant is located at site i, 0 otherwise xij = 1 if market j is supplied from plant site i, 0 otherwise
Min f i y D j
i 1 i i 1 j 1 n n m

c x
ij

ij

s.t.

x
i1

ij

x D K y
j 1
n

ij

y k; x , y {0,1}
i 1 i ij i

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Location Allocation Decisions

Plants Warehouses Markets

1 2

Which plants to establish? Which warehouses to establish? How to configure the network?
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Locate Plants and Warehouses Simultaneously

n =number of potential locations/capacity m = number of markets or demand points l = number of suppliers t = number of potential warehouse locations DJ = annual demand of market j Ki = capacity of plant i Sh = supply capacity at supplier h We = potential warehouse capacity at site e Fi = annualized fixed cost of keeping factory i opened fe = annualized fixed cost of keeping warehouse e opened Chi = cost of shipping 1 unit from supply source h to factory i Cie = cost of producing and shipping 1 unit from factory i to warehouse e Cej = cost of shipping 1 unit from warehouse e to market j

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Locate Plants and Warehouses Simultaneously

supplier

manufactory plant

warehouse

customer market

(l)

(n)

(t)

(m)

Sh

Ki

We

Dj

l= m n t D K S W =number = = number = capacity number supply annual potential of capacity demand of of suppliers potential warehouse markets plant at of i warehouse locations/capacity supplier market or capacity demand j h locations at points site e iJ h e

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Locate Plants and Warehouses Simultaneously

supplier

manufactory plant

warehouse

customer market

(l)
Chi
Sh

(n)
Cie
Ki Fi

(t)
Cej
We fe

(m)

Dj

f C = = annualized cost of shipping producing fixed cost 1 and unit ofshipping from keeping supply warehouse 1 warehouse unit source from e to he F = annualized fixed cost of keeping factory ito e iej hi ie opened factory market ij to warehouse e opened

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Locate Plants and Warehouses Simultaneously

yi = 1 if factory is located at side i ye = 1 if warehouse is located at side e xej = quantity shipped from warehouse e to market j per year xie = quantity shipped from factory i to warehouse e per year xhi = quantity shipped from supplier h to factory i per year

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Locate Plants and Warehouses Simultaneously

supplier

manufactory plant

warehouse

customer market

(l)
xhj Chi

(n)
yi xie Cie

(t)
ye xej Cej

(m)

Sh

Ki Fi

We fe

Dj

yi = 1 if factory is located at side i ye = 1 if warehouse is located at side e xej = quantity shipped from warehouse e to market j per year xie = quantity shipped from factory i to warehouse e per year xhi = quantity shipped from supplier h to factory i per year

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Locate Plants and Warehouses Simultaneously

Min Fi y i fe y e c hi x hi c ie x ie c ej x ej
i 1 e 1 h 1 i 1 i 1 e 1 e 1 j 1 n t l n n t t m

supplier

manufactory plant

warehouse

customer market

(l)
xhj Chi Sh

(n)
yi
Ki Fi xie Cie

(t)
ye
We fe xej Cej

(m)

Dj

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Locate Plants and Warehouses Simultaneously

x
i1 l h 1 t

hi

Sh
t

for h 1,, l 0 for i 1,, n for i 1,, n 0 for e 1,, t for e 1,, t j 1,, m

x x
hi e 1

ie

x
e 1 n i1 m

ie

K i yi
m ej

x x
ie j1

x
j1 t

ej

We y e Dj for

x
e 1
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ej

Accounting for Taxes, Tariffs, and Customer Requirements

If rj is the revenue form selling one unit in market j, the objective function of the capacitated plant location model can be modified as

Max rj x ij f i y c ij x ij
j 1 i 1 i 1 i i 1 j 1

Also the constraint related to demand is modified as

x D
i1 ij

Customer preferences and requirements can be modeled in terms of modes of transportation.

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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

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