© 2004 Prentice-Hall, Inc. Chapter 5 Network Design in a Supply Chain Supply Chain Management (2nd Edition) 5-1.

© 2004 Prentice-Hall, Inc.

Chapter 5Network Design in a Supply Chain

Supply Chain Management(2nd Edition)

5-1


Outline

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

5-2


Network Design Decisions

Facility role Facility location Capacity allocation Market and supply allocation

5-3


Factors InfluencingNetwork Design Decisions

Strategic Technological Macroeconomic Political Infrastructure Competitive Logistics and facility costs

5-4


The Cost-Response Time Frontier

Local FG

Mix

Regional FG

Local WIP

Central FG

Central WIP

Central Raw Material and Custom production

Custom production with raw material at suppliers

Cost

Response Time HiLow

Low

Hi

5-5


Service and Number of Facilities

Number of Facilities

ResponseTime

5-6


Costs and Number of Facilities

Costs

Number of facilities

Inventory

Transportation

Facility costs

5-12


Percent Service Percent Service Level Within Level Within

Promised TimePromised Time

TransportationTransportation

Cost Buildup as a Function of FacilitiesC

ost

of O

per

atio

ns

Cos

t of

Op

erat

ion

s

Number of FacilitiesNumber of Facilities

InventoryInventory

FacilitiesFacilities

Total CostsTotal Costs

LaborLabor

5-13


A Framework forGlobal Site Location

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

5-14


Tailored Network: Multi-Echelon Finished Goods Network

RegionalRegionalFinishedFinished

Goods DCGoods DC

RegionalRegionalFinishedFinished

Goods DCGoods DC

Customer 1Customer 1DCDC

Store 1Store 1

NationalNationalFinishedFinished

Goods DCGoods DC

Local DCLocal DCCross-DockCross-Dock

Local DC Local DC Cross-DockCross-Dock

Local DCLocal DCCross-DockCross-Dock

Customer 2Customer 2DCDC

Store 1Store 1

Store 2Store 2

Store 2Store 2

Store 3Store 3

Store 3Store 3

5-16


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 : Annual tonnage to delivery

location n

n

i i

i

n

i

i

i

ii

n

i i

i

n

i

i

i

ii

n

dF

dF

Fy

y

dF

dF

Fx

x

yyxxd nn

1

1

1

1

22 )()(

Min )()( 22 yyxxF iii

5-17


Network Optimization Models

Allocating demand to production facilities Locating facilities and allocating capacity

Which plants to establish? How to configure the network?

Key Costs:

• Fixed facility cost• Transportation cost• Production cost• Inventory cost• Coordination cost

5-18


Demand Allocation Model

Which market is served by which plant?

Which supply sources are used by a plant?

xij = Quantity shipped from plant site i to customer j

0

..

1

1

1 1

x

Kx

Dx

ts

xcMin

ij

i

m

jij

j

n

iij

n

i

m

jijij

5-19


Plant Location with Multiple Sourcing

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

1 11

yky

yKx

Dx

ts

xcyfMin

i

m

ii

ii

n

jij

j

n

iij

n

i

m

jijiji

n

ii

5-20


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.

5-21


Evaluating Facility Investments: AM Tires

Dedicated Plant Flexible PlantPlantFixed Cost Variable Cost Fixed Cost Variable Cost

US 100,000 $1 million/yr. $15 / tire $1.1 million/ year

$15 / tire

Mexico50,000

4 millionpesos / year

110 pesos /tire

4.4 millionpesos / year

110 pesos /tire

U.S. Demand = 100,000; Mexico demand = 50,0001US$ = 9 pesos

Demand goes up or down by 20 percent with probability 0.5 andexchange rate goes up or down by 25 per cent with probability 0.5.

5-22


AM Tires

RU=100RM=50

E=9

Period 0 Period 1 Period 2

RU=120RM = 60E=11.25

RU=120RM = 60E=6.75

RU=120RM = 40E=11.25

RU=120RM = 40E=6.75

RU=80RM = 60E=11.25

RU=80RM = 60E=6.75

RU=80RM = 40E=11.25

RU=80RM = 40E=6.75

RU=144RM = 72E=14.06

RU=144RM = 72E=8.44

RU=144RM = 48E=14.06

RU=144RM = 48E=8.44

RU=96RM = 72E=14.06

RU=96RM = 72E=8.44

RU=96RM = 48E=14.06

RU=96RM = 48E=8.44

5-23


AM TiresFour 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.

Mexico

U.S.

Mexico

5-24


Facility Decision at AM Tires

Plant ConfigurationUnited States Mexico

NPV

Dedicated Dedicated $1,629,319Flexible Dedicated $1,514,322

Dedicated Flexible $1,722,447Flexible Flexible $1,529,758

5-25


Capacity Investment Strategies

Speculative Strategy– Single sourcing

Hedging Strategy– Match revenue and cost exposure

Flexible Strategy– Excess total capacity in multiple plants– Flexible technologies

5-26


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

5-27

© 2004 Prentice-Hall, Inc. Chapter 5 Network Design in a Supply Chain Supply Chain Management (2nd Edition) 5-1.

Documents

dc slide

dcs slide

outline u

customer dc

dc store

tailored network

global site location

chain strategy phase