Supply Chain Management Lecture 8. Outline Today –Chapter 5 Skipping sections –Locating to Split...

Supply Chain Management

Lecture 8

Outline

• Today– Chapter 5

• Skipping sections– Locating to Split the Market (3e: p. 120, 4e: p. 112)– Gravity Location Models (3e: p. 129-131, 4e: p.120-122)– Locating Plants and Warehouses Simultaneously (3e: p. 138-139, 4e: 129-131)– Accounting for Taxes, Tariffs and Customer Requirements (3e: p. 139-140, 4e p.

131-132)

• Next week– Chapter 6

• Homework 2 – Online Friday February 5– Due Thursday February 11 before class

Announcements

• The RedPrairie Supply Chain Challenge is a virtual competition using a customized web-based version of the Littlefield Technologies game from Responsive Technologies – Students will have the opportunity to manage make-to-

order factory and make forecasting, capacity, and inventory and pricing decisions

• Registration deadline – Feb 5, 2010, 5:00pm– http://avnettechgames.com/supplychain2010

http://avnettechgames.com/supplychain2010

Announcements

• Game Day – February 20, 2010

• Awards – “Each team member will win a $1000 scholarship”

Excel Solver

Objective function

Decision variables

Constraints

Example: Dell Market Allocation

What are the decisions?

What are the constraints?

Example: Dell Facility Location

? ??

What are the decisions?

What are the constraints?


• Constraints (Satisfy demand at each market)– 0 = 15,000 - XIreland,France - XPoland,France - XRomenia,France

– 0 = 20,000 - XIreland,Germany - XPoland,Germany - XRomenia,Germany

– 0 = 13,000 - XIreland,Italy - XPoland,Italy - XRomenia,Italy

– 0 = 12,000 - XIreland,Spain - XPoland,Spain - XRomenia,Spain

– 0 = 19,000 - XIreland,UK - XPoland,UK - XRomenia,UK

Romenia Poland Ireland DemandFrance 23 19 31 15,000Germany 9 15 11 20,000Italy 23 21 40 13,000Spain 29 26 40 12,000United Kingdom 33 36 20 19,000


• Constraints (Capacity cannot be exceeded)– 0 30,000*YRomenia

- XRomenia,France - XRomenia,Germany - XRomenia,Italy - XRomenia,Spain - XRomenia,UK

– 0 30,000*YPoland - XPoland,France - XPoland,Germany - XPoland,Italy - XPoland,Spain - XPoland,UK

– 0 30,000*YIreland - XIreland,France - XIreland,Germany - XIreland,Italy - XIreland,Spain - XIreland,UK Romenia Poland Ireland Demand

France 23 19 31 15,000Germany 9 15 11 20,000Italy 23 21 40 13,000Spain 29 26 40 12,000United Kingdom 33 36 20 19,000Capacity 80,000 80,000 80,000Fixed operating cost 18,000,000.00$ 17,500,000.00$ 24,500,000.00$

Factors Influencing Network Design Decisions

• Customer response time– Maintain a balance between an inexpensive location and proximity

to customers.

• Logistics and facility costs– Inventory and facility costs increase as the number of facilities

increase– Transportation costs decrease (up to a point) as the number of

facilities increase

LogisticsCosts

Number of Facilities

Transportation Costs

Facility Costs

Logistics Costs

Inventory Costs


• Strategic factors

GlobalCustomers

Offshore<low-cost>

<exports only>Many Asian plants

Source<low-cost>

<global market>Nike plants in Korea

Regional Customers

Server<local market><avoid tariffs>

Suziki’s Indian ventureMaruti

Contributor<customization>

<development skills>Maruti

Lead<advanced technology>

Lockheed Martin’s JSF in Dallas

Outpost<access to

knowledge>Dell in Ireland

Strategic role


• Macroeconomic factors– Quotas, tariffs, and tax incentives

• Economic trade agreements: Nafta, EU, APTA, AFTZ

– Exchange rate and demand risk– Different states or countries often offer economic incentives to

companies that decide to set up shop there, including tax incentives and low-interest economic development loans

How can trade agreements influence the number of facilities in a supply chain?


• Political factors– Political stability

• Infrastructure factors– Availability of transportation terminals, labor

• Most of Amazon’s distribution centers are located near airports

• Competitive factors– Positive externalities (many stores in a mall makes it more

convenient for customers – one location for everything the customers need)


• Technological factors– Compare your supplies to the final product, considering whether

value, weight, volume or other factors change – Availability of production technologies– High or low fixed cost

• Semiconductor manufacturing takes place only in 5-6 countries worldwide (building one plant costs about 1 to 4 billion dollars)

Which products gain/lose weight in the production process?

Amazon’s Growth in Europe

(in 1999)


European use of credit cards for online purchases

Amazon’s Growth in the US

Amazon offered 2.5 million titles, yet stocked only 2,000 titles

Amazon stocked over 200,000 titles and reduced promised delivery times

Seattle, WAOpened: 1996Closed: 200185,000 sq. feet

DelawareOpened: 1997220,000 sq. feet

DistributorWarehouse

Manufacturers

Consumers





Amazon had to decide how many DCs it should have and where to locate them

In 1998, Amazon expanded its product line (music, DVD) (1999: electronics, toys) (2000: health, kitchen)


• Amazon executives turned to outside experts and used i2 Technologies’ Supply Chain Strategist software package– This software identified regions to consider for its

distribution facilities based on factors such as supplier and customer locations, inbound and outbound freight rates, warehousing expenses, labor, and other cost factors

– After selecting the major regions, Amazon's management narrowed its search based on additional factors such as tax rates, employment levels and the availability of suitable distribution facilities to lease



Fernley, NVOpened: 1999322,560 sq. feet


Coffeyville, KSOpened: 1999750,000 sq. feet

Lexington, KYOpened: 1999600,000 sq. feet

Cambellsville, KYOpened: 1999770,000 sq. feet

Mc DonoughOpened: 1999Closed: 2001800,000 sq. feet

“This has been the fastest expansion of distribution in peacetime history”


• Evolution of fulfillment cost as a percentage of revenue

Quarter Fulfillment cost2000 / 1 17.3%2000 / 2 15.1%2000 / 3 15.1%2000 / 4 13.5%2001 / 1 14.1%2001 / 2 12.8%2001 / 3 12.8%2001 / 4 9.8%2002 / 1 10.6%2002 / 2 10.7%2002 / 3 10.6%2002 / 4 8.9%

Retailer

Manufacturers

Consumers


Manufacturers

Consumers


Network Optimization Problems

• Market and supply allocation– Demand allocation

• Facility location (and capacity allocation) – Capacitated plant location model

• Facility location 1-source (and capacity allocation)– Capacitated plant location model with single sourcing

Demand Allocation

D1

D2

D3

D4

D5

K1

K2

K3

c11

c12c13

m demand pointsn supply points

Demand Allocation

• Which market is served by which plant?– Given m demand points, j=1..m with

demands Dj – Given n supply points, i=1..n with capacity

Ki – Each unit of shipment from supply point i

to demand point j costs cij

• Serve markets from supply points to demand points– xij = quantity shipped from plant site i to

customer j

0

..

1

1

1 1

x

Kx

Dx

xc

ij

i

m

jij

j

n

iij

n

i

m

jijij

ts

Min

3e: p. 132-133, 4e: p. 123-125

Capacitated Plant Location

Romenia

Poland

Ireland

France

Germany

Italy

Spain

United Kingdom

D1

D2

D3

D4

D5

K1

K2

K3

c11

c12c13

m demand pointsn supply pointsWhich supply point

operates?

y1 = yes or no

y2 = yes or no

y3 = yes or no


• Which market is served by which plant?– None of the plants are open, a cost

fi is paid to open plant i – yi = 1 if plant is located at site i, 0

otherwise– xij = quantity shipped from plant site

i to customer j

}1,0{

..

1

1

1 11

y

yKx

Dx

xcyf

i

ii

m

jij

j

n

iij

n

i

m

jijiji

n

ii

ts

Min

3e: p. 133-135, 4e: p. 125-128

Capacitated Plant Location With Single Source (each customer has exactly one supplier)

Romenia

Poland

Ireland

France

Germany

Italy

Spain

United Kingdom

D1

D2

D3

D4

D5

K1

K2

K3

c11

c12c13

m demand pointsn supply pointsWhich supply point

operates?

y1 = yes or no

y2 = yes or no

y3 = yes or no


• Which market is served by which plant?– None of the plants are open, a

cost fi is paid to open plant i

– yi = 1 if plant is located at site i, 0 otherwise

– xij = 1 if market j is supplied by factory i, 0 otherwise

}1,0{,

1

..

,

1

1

1 11

jii

ii

m

jj ij

n

iij

n

i

m

jijj iji

n

ii

xy

ts

Min

yKxD

x

xcDyf

3e: p. 135-137, 4e: p. 128-129

Example – SunOil

• SunOil, a manufacturer of petrochemical products with worldwide sales, needs to decide the regions in which facilities are to be located

12

8

14 16

7

Dj = annual demand from market j

Example – SunOil Capacitated Plant Location Model


cij = cost of producing and shipping one million units from plant i to market j


Ki = capacity of plant i

1020

1020

1020

1020

1020


fi = annualized fixed cost of keeping plant i open

$6000$9000

$4500$6750

$4000$6000

$4100$6150

$6500$9750


• Which market is served by which plant?– None of the plants are open, a cost

fi is paid to open plant i – yi = 1 if plant is located at site i, 0

otherwise– xij = quantity shipped from plant site

i to customer j

}1,0{

..

1

1

1 11

y

yKx

Dx

xcyf

i

ii

m

jij

j

n

iij

n

i

m

jijiji

n

ii

ts

Min

3e: p. 133-135, 4e: p. 125-128


Dj – ∑ni=1 xij = 0 for all j = 1, …, m (unmet demand)

7


1020

Kiyi – ∑mj=1 xij 0 for all i = 1, …, n (excess capacity)


• Which market is served by which plant?– None of the plants are open, a

cost fi is paid to open plant i

– yi = 1 if plant is located at site i, 0 otherwise

– xij = 1 if market j is supplied by factory i, 0 otherwise

}1,0{,

1

..

,

1

1

1 11

jii

ii

m

jj ij

n

iij

n

i

m

jijj iji

n

ii

xy

ts

Min

yKxD

x

xcDyf

3e: p. 135-137, 4e: p. 128-129

Example – SunOil Single Source Model

xij = 1 if market j is supplied by plant i, 0 otherwiseyi = 1 if plant i is open, 0 otherwise

Making Network Design Decisions in Practice

• Computer models versus sound judgment– Most facility location decisions are based on tariffs and

tax incentives

Supply Chain Management Lecture 8. Outline Today –Chapter 5 Skipping sections –Locating to Split...

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