Facility Location Models

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Facility Location Models

• August 23, 2006 Briggs Session 1
• www.kelley.iu.edu/briggsc/e730_lect1.ppt

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Outline

• Developing a framework for solving facility
  location problems
• Deriving and applying models from that framework
• Making network design decisions in practice

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But first Some Location Trivia.

• Can you name these places

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Which table is bigger?
Rulers
Source Shepard (1990)
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Developing a Framework (Process) for Solving
Facility Location Problems

• What decisions have to be made?

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Location Allocation Decisions
Plants
Warehouses
Markets
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Which plants to establish? Which warehouses to
establish? How to configure the network?
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Types of Network Design Decisions

• Facility role
• What role should each facility play? What
  processes are performed at each facility?
• Facility location
• Where should facilities be located?
• Capacity allocation
• How much capacity should be allocated to each
  facility?
• Market and supply allocation
• What markets should each facility serve? Which
  supply sources should feed each facility?

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Developing a Framework (Process) for Solving
Facility Location Problems

• What decisions have to be made?
• What factors influence those decisions?

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Factors Influencing Network Design Decisions

• Strategic
• What is the differentiator?
• Technological
• Does production technologies result in economies
  of scale?
• Is the cost of production technology prohibitive?
• Is production technology inflexible?
• Does product requirements differ significantly by
  region?
• Macroeconomic
• Taxes
• Tariffs
• Incentives
• Exchange Rates

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Factors Influencing Network Design Decisions

• Political
• Stability
• Formal/Informal legal system
• Infrastructure
• Roads, utilities, labor, access to ports
• Competitive
• Locate close to a competitor? Positive/Negative
  externalities?
• Customer Response Time and Local Presence
  (related to)
• Logistics and facility costs (for example)

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Service and Number of Facilities
Response Time
Number of Facilities
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Where inventory needs to be for a one week order
response time - typical results --gt 1 DC
Customer
DC
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Where inventory needs to be for a 5 day order
response time - typical results --gt 2 DCs
Customer
DC
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Where inventory needs to be for a 3 day order
response time - typical results --gt 5 DCs
Customer
DC
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Where inventory needs to be for a next day order
response time - typical results --gt 13 DCs
Customer
DC
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Where inventory needs to be for a same day / next
day order response time - typical results --gt 26
DCs
Customer
DC
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Costs and Number of Facilities
Costs
Number of facilities
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Cost Build-up as a function of facilities
Percent Service Level Within Promised Time
Transportation
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Put these components together and a framework for
solving network location decisions emerges.
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A Framework for Solving Facility Location
Decisions
GLOBAL COMPETITION
Competitive STRATEGY
PHASE I Supply Chain Strategy
INTERNAL CONSTRAINTS Capital, growth
strategy, existing network
TARIFFS AND TAX INCENTIVES
PRODUCTION TECHNOLOGIES Cost, Scale/Scope impact,
support required, flexibility
REGIONAL DEMAND Size, growth, homogeneity, local
specifications
PHASE II Regional Facility Configuration
COMPETITIVE ENVIRONMENT
POLITICAL, EXCHANGE RATE AND DEMAND RISK
PHASE III Desirable Sites
AVAILABLE INFRASTRUCTURE
PRODUCTION METHODS Skill needs, response time
PHASE IV Location Choices
FACTOR COSTS Labor, materials, site specific
LOGISTICS COSTS Transport, inventory,
coordination
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Questions about this Framework

• What are the strengths?
• What are the problems?
• Does it pass the good model criteria?

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Modeling the facility location problem
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Gravity Methods for Location (1)

• Mile-Center Solution
• x,y Warehouse Coordinates
• xn, yn Coordinates of delivery location n
• dn Distance to delivery location n

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A Simple Gravity Method

• A company has three factories. The x- and
  y-coordinates for each factory are shown below
• Factory 1 (6, 1)
• Factory 2 (1,3)
• Factory 3 (4,1)
• The company wants to locate a warehouse at a
  point that minimizes the sum of the squared
  distances of the plants from the warehouse.
• Where should the warehouse be located?

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A Simple Gravity Method

• A company has three factories. The x- and
  y-coordinates for each factory are shown below
• Factory 1 (6, 1), Factory 2 (1,3), Factory 3
  (4,1)

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Gravity Methods for Location (2)

• Ton-Center Solution
• x,y Warehouse Coordinates
• xn, yn Coordinates of delivery location n
• Fn Annual tonnage to delivery location n

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Making the Facility Location Decision in Practice
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Sometimes theory differs from reality

• The challenge

• The challenger

• The results

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A Real Facility Location Problem

• Your company manufactures chairs and tables in
  Bloomington, Indiana, and distributes those
  chairs across the United States.
• The product is historically manufactured in North
  America (four locations), but increasingly a mix
  of the product is being manufactured in SE Asia
  and Mexico.
• When product is imported from abroad, it much be
  grouped into orders and shipped out. This
  currently happens at your mixing center in
  Bloomington.
• Your company is responsible for shipping complete
  orders to customers in North America.
• Should your company change its current mixing
  center configuration?
• How do you know?

Based on an actual MBA student project, Supply
Chain Global Management Academy. Names and
facts changed to protect both the innocent and
the guilty.
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The current situation
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Two Solutions 1
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Two Solutions 2
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Making Network Design Decisions In Practice

• Dont underestimate the life span of facilities
• Dont gloss over the cultural implications/issues
• Dont ignore the big picture issues(i.e.
  quality of life, existing infrastructure, etc..)
• Make sure that ALL the components are included in
  the financial model (including things like
  tariffs and incentives.)

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Summary

• Factors influencing facility decisions
• A strategic framework for facility location
• Gravity methods for location
• Network optimization models
• Value capacity as a real option
• Making network design decisions in practice

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For Tomorrow

• Read Chapter 6
• Read Leading a Supply Chain Turnaround
• Form teams, and work on the Sportsstuff.com case
  (Chopra )Turn-in a hardcopy of your answers to
  the Sportsstuff.com problem. (Assume a single
  linear inventory cost.)

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