Design in the Supply Chain Spring, 2014 Supply Chain Management: Strategy, Planning, and Operation...

Design in the Supply Chain

Spring, 2014

Supply Chain Management:Strategy, Planning, and Operation

Chapter 5

Byung-Hyun Ha

2

Contents

Role of network design in supply chain

Factors influencing network design decisions

Framework for network design decisions

Models for facility location and capacity allocation

Role of IT in network design

Distribution network in practice

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Role of Network Design in Supply Chain

Implementing planned network type Facility role

• e.g., Toyota, Honda

Flexibility costs!

Facility location• e.g., Toyota assembly plant in U.S. when Yen strengthened

Capacity allocation• Allocating much vs. less

Capacity costs!

Market and supply allocation

Never-ending efforts due to change Firms grow or shrink. Companies merge.

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Factors Influencing Design Decision

Strategic factors Efficiency vs. responsiveness Possible strategic roles of various facilities

• Offshore facility

• Low-cost facility for export production

• Source facility

• Low-cost facility for global production

• Server facility

• Regional production facility

• Contributor facility

• Regional production facility with development skills

• Outpost facility

• Regional production facility built to gain local skills

• Lead facility

• Facility that leads in development and process technologies

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Technological factors

Macroeconomic factors Tariffs and tax incentives

• e.g., free trade zone

Exchange rate and demand risk Overcapacity costs!

Political factors

Infrastructure factors

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Competitive factors Hotelling’s law (http://en.wikipedia.org/wiki/Hotelling's_law)

• Competing on distance?

• Competing on price?

Social cost or benefit?

Customer response time and local presence

Logistics and facility costs Total logistics costs = inventory + transportation + facility costs

• Minimum cost network regarding responsiveness

a b

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A Framework for Network Design Decisions

PHASE ISupply Chain

Strategy

PHASE IIRegional Facility

Configuration

PHASE IIIDesirable Sites

PHASE IVLocation Choices

COMPETITIVE STRATEGY

INTERNAL CONSTRAINTSCapital, growth strategy,existing network

PRODUCTION TECHNOLOGIESCost, Scale/Scope impact, supportrequired, flexibility

COMPETITIVEENVIRONMENT

PRODUCTION METHODSSkill needs, response time

FACTOR COSTSLabor, materials, site specific

GLOBAL COMPETITION

TARIFFS AND TAXINCENTIVES

REGIONAL DEMANDSize, growth, homogeneity,local specifications

POLITICAL, EXCHANGERATE AND DEMAND RISK

AVAILABLEINFRASTRUCTURE

LOGISTICS COSTSTransport, inventory, coordination

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Facility Location and Capacity Allocation

Phase II: Capacitated plant location model Input

• n: number of plants

• m: number of markets

• Dj: annual demand from market j

• Ki: potential capacity of plant i

• fi: annualized fixed cost of plant i

• cij: cost of producing and shipping one unit from plant i to market j

Decision• xij: quantity shipped from plant i to j

• yi = 1, if plant i is open; 0, otherwise

Objective• min. (total fixed and variable costs)

}1,0{

,,1,

,,1,s.t.

min.

1

1

1 11

i

ii

n

iij

j

n

iij

n

i

m

jijij

n

iii

y

niyDx

mjDx

xcyf

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Phase III: Gravity location model Input

• n: number of markets and supply sources

• (xi, yi): location of either market or supply source i

• Fi: cost of shipping one unit for one mile to or from location i

• Di: quantity to be shipped to or from location i

Decision• (x, y): facility location

• di: distance to or from location i

Objective

Iterative method for the optimal location• Weber problem

• http://en.wikipedia.org/wiki/Weber_problem

22 )()( iii yyxxd

n

iiii FDdTC

1

min.

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Phase III: Gravity location model (cont’d) Example of Table 5-1

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Phase IV: Demand allocation Input




• Ki: capacity of plant i


Decision• xij: quantity shipped from plant i to j

Objective• min. (total variable costs)

0

,,1,

,,1,s.t.

min.

1

1

1 1

ij

i

n

iij

j

n

iij

n

i

m

jijij

x

niKx

mjDx

xc

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Phase IV: Locating plant with single source Input




• Ki: potential capacity of plant i

• fi: annualized fixed cost of plant i


Decision• yi = 1, if plant i is open; 0, otherwise

• zij = 1, if market j is supplied by plant i; 0, otherwise

Objective• min. (total fixed and variable costs)

}1,0{,

,,1,

,,1,1s.t.

min.

1

1

1 11

iji

ii

n

iijj

n

iij

n

i

m

jijijj

n

iii

zy

niyKzD

mjz

zcDyf

13


Other models Locating plants and warehouses simultaneously Accounting for taxes, tariffs, and customer requirements ...

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Role of IT in Network Design

Network design solutions Making the modeling of the network design problems easier Containing high-performance optimization technologies Allowing for “what-if” scenarios Interfacing with planning and operational software

Decision-support systems!

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Distribution Network in Practice

Do not underestimate the life span of facilities

Do not underestimate the cultural implications e.g., Ford Lincoln Mark VIII

Do not ignore quality of life issues

Focus on tariffs and tax incentives when locating facilities

Design in the Supply Chain Spring, 2014 Supply Chain Management: Strategy, Planning, and Operation...

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