Network design

Network Design in the Supply Chain

Dr. Ch. V. V. S. N. V. PrasadAssistant Professor in Management

23/4/19MF F421: SUPPLY CHAIN MANAGEM

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Learning Objectives The Role of Network Design in the Supply

Chain Factors Influencing Network Design Decisions Framework for Network Design Decisions Models for Facility Location and Capacity

Allocation

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Network Design Decisions Facility role Facility location Capacity allocation Market and supply allocation

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Network Design Decisions Facility role: What role should each facility

play? What processes are performed at each facility?

–Decisions concerning the role of each facility are significant because they determine the amount of flexibility the supply chain has in changing the way it meets demand

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Network Design Decisions Facility location: Where should facilities be

located?–Facility location decisions have a long-term

impact on a supply chain's performance because it is very expensive to shut down a facility or move it to a different location.

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Network Design Decisions Capacity allocation: How much capacity

should be allocated to each facility?–Allocating too much capacity to a location results

in poor utilization, and as a result, higher costs. –Allocating too little capacity results in poor

responsiveness if demand is not satisfied, or high cost if demand is filled from a distant facility.

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Network Design Decisions Market and supply allocation: What markets

should each facility serve? Which supply sources should feed each facility?

–It affects total production, inventory, and transportation costs incurred by the supply chain

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Factors InfluencingNetwork Design Decisions

Strategic Technological Macroeconomic Political Infrastructure Competitive Logistics and facility costs

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Strategic Factors Competitive strategy

–Firms focusing on cost leadership will tend to find the lowest-cost location for their manufacturing facilities, even if that means locating very far from the markets they serve.

•Cheap land/labor, nearness to raw material –Firms focusing on responsiveness will tend to locate

facilities closer to the market and may select a high-cost location if this choice allows the firm to react quickly to changing market needs.

•Good infrastructure and nearness to market–Convenience Vs Discount stores

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Strategic roles for 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 If production technology displays significant economies of

scale, a few high-capacity locations are most effective.–Manufacture of Chips

If facilities have lower fixed costs, many local facilities are preferred because this helps lower transportation costs.

–Coco- Cola Flexibility of Production Technology

–If production technology is very inflexible and product requirements vary from one country to another, a firm has to set up local facilities to serve the market in each country.

–Flexibility of the production technology affects the degree of consolidation.

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Macro Economic Factors Tariffs and Tax incentives

–Tariffs refer to any duties that must be paid when product or equipment are moved across international, state, or city boundaries.

–If a country has a very high tariff, companies either do not serve the local market or setup manufacturing plants within the country to save on duties.

–High tariffs lead to more production locations within a supply chain network, with each location having a lower allocated capacity.

–Tax incentives are a reduction in tariffs or taxes that countries, states, and cities often provide to encourage firms to locate their facilities in specific areas.

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Macro Economic Factors Exchange Rate and demand risks

–Fluctuation in exchange rates has significant impact on the profits of any supply chain serving global markets.

–An effective way to do this is to build some over capacity in the network and make the capacity flexible so that it can be used to supply different markets.

–Companies must also take into account fluctuations in demand caused by fluctuations in the economics of different countries.

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Political Factors The political stability of the country under

consideration plays a significant role in the location choice.

Countries with independent and clear legal systems is always preferred.

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Infrastructure Factors Availability of sites, labor availability, proximity to

transportation terminals, rail service, proximity to airports and seaports, highway access, congestion, and local utilities.

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Competitive Factors A fundamental decision firm’s make is to whether their

facilities close to their competitors or far from them. Positive Externalities Between Firms

–Positive externalities are the instances where the collocation of the multiple firms benefits all of them.

–It also lead to the competitors locating close to each other. Locating to Split the Market

–When there are no PEs, firms locate to be able to capture the largest possible share of the market.

–When firms do not control price but compete on the distance from customer, they can maximize market share by locating close to each other and splitting the market.

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Socioeconomic Factors Balanced regional development

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Customer Response Time and Local Presence

A large response time require few locations and can focus on increasing the capacity of each location.

A short response times need to locate close to them.

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Logistics and Facility cost inventory, transportation, and facility costs

–Inventory and facility costs increase as the number of facilities increases

–Transportation costs decrease as the number of facilities is increased

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Service and Number of Facilities

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Number of Facilities

ResponseTime


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Costs and Number of Facilities

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Costs

Number of facilities

Inventory

Transportation

Facility costs


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Cost Buildup as a Function of Facilities

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Percent Service Level Within

Promised Time

TransportationCost

of O

pera

tions

Number of Facilities

Inventory

Facilities

Total Costs

Labor


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Framework for Network Design Decisions

Phase I – Supply Chain Strategy Phase II – Regional Facility Configuration Phase III – Desirable Sites Phase IV – Location Choices

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A Framework forNetwork Design Decisions

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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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Phase I – Define a firm's broad supply chain design strategy in terms of Wide variety, Lead time, High service level, Innovative products, Cost, Capacity utilization

–Competitive strategy–Global competition–Internal Constraints

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Phase II – Identify regions where facilities will be located, their potential roles, and their approximate capacity.

Number of facilities in each region and their role–Forecast of the demand by country –Economies of scale or scope –Identify demand risk, exchange-rate risk, and political

risk–Tax and tariff information–Competition in each region

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Phase III – Select a set of desirable potential sites within each region

–Infrastructure availability•Hard infrastructure : Availability of suppliers, transportation services, communication, warehousing infrastructure•Soft infrastructure: Availability of skilled work force, community receptivity to business and industry

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Phase IV – Select a precise location and capacity allocation for each facility

–Expected Margin–Demand in each market–Logistics and facility costs–Taxes and tariffs

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Models for Facility Location and Capacity Allocation

Information–Location of supply sources and markets–Location of potential facility sites–Demand forecast by market–Facility, labor, and material costs by site–Transportation costs between each pair of sites–Inventory costs by site and as a function of quantity–Sale price of product in different regions–Taxes and tariffs–Desired response time and other service factors

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Factor Rating Model

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Labor pool and climateProximity to suppliersWage ratesCommunity environmentProximity to customersShipping modesAir service

LOCATION FACTOR

.30

.20

.15

.15

.10

.05

.05

WEIGHT

80100

6075658550

Site 1

65919580909265

Site 2

90757280956590

Site 3

SCORES (0 TO 100)

Weighted Score for “Labor pool and climate” for Site 1 = (0.30)(80) = 24


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Factor Rating Model

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24.0020.00

9.0011.25

6.504.252.50

77.50

Site 1

19.5018.2014.2512.00

9.004.603.25

80.80

Site 2

27.0015.0010.8012.00

9.503.254.50

82.05

Site 3

WEIGHTED SCORES

Site 3 has the highest factor rating


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Center of Gravity Technique Locate facility at center of geographic area Based on weight and distance traveled

establish grid-map of area Identify coordinates and weights shipped for

each location

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Center of Gravity Technique

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where,x, y =coordinates of new facility at center of gravityxi, yi =coordinates of existing facility iWi =annual weight shipped from facility i

n

Wi

i = 1

xiWi

i = 1

n

x =

n

Wi

i = 1

yiWi

i = 1

n

y =

x1 x2 x3 x

y2

y

y1

y3

1 (x1, y1), W1

2 (x2, y2), W2

3 (x3, y3), W3


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A B C D

x 200 100 250 500y 200 500 600 300Wt 75 105 135 60

y

700

500

600

400

300

200

100

0 x700500 600400300200100

A

B

C

D

(135)

(105)

(75)

(60)

Miles

Mil

es


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x = = = 238n Wi

i = 1

xiWii = 1

n

n

Wii = 1

yiWii = 1

n

y = = = 444(200)(75) + (500)(105) + (600)(135) + (300)(60)

75 + 105 + 135 + 60

(200)(75) + (100)(105) + (250)(135) + (500)(60)

75 + 105 + 135 + 60


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Load Distance Technique Compute (Load x Distance) for each site Choose site with lowest (Load x Distance) Distance can be actual or straight-line

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Load Distance Technique

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li di

i = 1

n

LD =

LD = load-distance value

li = load expressed as a weight, number of trips or unitsbeing shipped from proposed site and location i

di = distance between proposed site and location i

di = (xi - x)2 + (yi - y)2

(x,y) = coordinates of proposed site

(xi , yi) = coordinates of existing facility

where,

where,


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Load Distance TechniqueLoad Distance Technique

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Potential SitesSite X Y1 360 1802 420 4503 250 400

SuppliersA B C D

X 200 100 250 500Y 200 500 600 300Wt 75 105 135 60

Compute distance from each site to each supplier

= (200-360)2 + (200-180)2dA = (xA - x1)2 + (yA - y1)2Site 1 = 161.2

= (100-360)2 + (500-180)2dB = (xB - x1)2 + (yB - y1)2 = 412.3

dC = 434.2 dD = 184.4


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Load Distance Technique

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Site 2 dA = 333 dC = 226.7dB = 323.9 dD = 170

Site 3 dA = 206.2 dC = 200dB = 180.4 dD = 269.3

Compute load-distance

i = 1

n

li diLD =

Site 1 = (75)(161.2) + (105)(412.3) + (135)(434.2) + (60)(434.4) = 125,063

Site 2 = (75)(333) + (105)(323.9) + (135)(226.7) + (60)(170) = 99,791

Site 3 = (75)(206.2) + (105)(180.3) + (135)(200) + (60)(269.3) = 77,555*

* Choose site 3


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Capacitated Plant Location Model

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Gravity Location Model

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k

n n

n

k

n n

nn

k

n n

n

k

n n

nn

n

dFDd

FyDd

FDd

FxD

yyxxd

n

n

y

n

n

x

nn

1

1

1

1

22 )()(Ton Mile-Center Solutionx,y: Warehouse Coordinatesxn, yn : Coordinates of delivery

location ndn : Distance to delivery location n

D n : quantity of shipping to location n

Fn : cost of shipping one unit to

location n FDd nn nMin


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Network Optimization Models 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

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Demand Allocation Model

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c11

c12c13

m demand pointsn supply points


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Demand Allocation Model 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

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Demand Allocation Model

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0

,...,1,

,...,1,

..

1

1

1 1

x

Kx

Dx

xc

ij

i

m

jij

j

n

iij

n

i

m

jijij

ni

mj

ts

Min


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Capacitated Plant Location

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Romenia

Poland

Ireland

K1

K2

K3

c11

c12c13

m demand pointsn supply points

y1 = yes or no

y2 = yes or no

y3 = yes or no


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Plant Location with Multiple Sourcing

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}1,0{;

,...,1,

,...,1,

..

1

1

1

1 11

yy

yKx

Dx

xcyf

i

m

ii

ii

n

jij

j

n

iij

n

i

m

jijiji

n

ii

k

ni

mj

ts

Min

yi = 1 if plant is located at site i, 0 otherwisexij = Quantity shipped from plant site i to customer j

Which market is served by which plant?


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Plant Location with Single Sourcing

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}1,0{

,...,1,

,...,1,1

..

,1

1

1 11

yx

yKxD

x

xcDyf

ij

nij

mj

ts

jMin

i

ii

n

jij

n

iij

n

i

m

jijiji

n

iiyi = 1 if plant is located

at site i, 0 otherwisexij = 1 if market j is supplied by factory i, 0 otherwise


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Locating Plants and Warehouses Simultaneously

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Summary 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

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Network design

Documents

facility costs

lowcost facility

source facility

contributor facility

distant facility

facility play

regional production

facility location decisions