Supply Chain Management

1
Supply Chain Management

• Lecture 7

2
Outline

• Today
• Chapter 5
• Skipping the following sections
• Locating to Split the Market (p. 120)
• Gravity Location Models (p. 129, 130, 131)
• Locating Plants and Warehouses Simultaneously (p.
  138, 139)
• Accounting for Taxes, Tariffs and Customer
  Requirements (p. 139, 140)
• Thursday
• Chapter 6
• Homework 2 will be posted tomorrow
• Due Tuesday September 22 before class

3
Example Dell Network Design Decision
4
Factor Influencing Network Design Decisions

• Customer response time
• 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

Logistics Costs
Logistics Costs
Facility Costs
Inventory Costs
Transportation Costs
Number of Facilities
5
Factor Influencing Network Design Decisions

• Macroeconomic factors
• Quotas, tariffs, and tax incentives
• Economic trade agreements Nafta, EU, APTA, AFTZ
• Exchange rate and demand risk

How can trade agreements influence the number of
facilities in a supply chain?
6
Factor Influencing Network Design Decisions

• Political factors
• Political stability
• Infrastructure factors
• Availability of transportation terminals, labor
• Most of Amazons 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)

Should you locate your facility close to your
competitors or far from them?
7
Factor Influencing Network Design Decisions

• Strategic factors

Strategic role
GlobalCustomers
Regional Customers
Lead ltadvanced technologygt Lockheed Martins JSF
in Dallas
Outpost ltaccess to knowledgegt Dell in Ireland
Offshore ltlow-costgt ltexports onlygt Many Asian
plants
Server ltlocal-contentgt Suzikis Indian
venture Maruti Udyog
Source ltlow-costgtltglobal marketgt Nike plants in
Korea
Contributor ltcustomizationgt ltdevelopment
skillsgt Maruti Udyog
8
Factor Influencing Network Design Decisions

• Technological factors
• 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?
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Amazons Growth in Europe
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Amazons Growth in Europe
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Amazons Growth in Europe
European use of credit cards for online purchases
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Amazons 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
13
Amazons Growth in the US
Amazon had to decide how many DCs it should have
and where to locate them
14
Amazons Growth in the US

• 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

15
Amazons Growth in the US
This has been the fastest expansion of
distribution in peacetime history
16
Comparing Facility Locations by Network
Optimization Problems

• Facility location
• Capacity allocation
• Market and supply allocation

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Market and Supply Allocation
m demand points
n supply points
c11
c12
c13
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Market Allocation Model

• Which market is served by which plant?
• Given m demand points, j1..m with demands Dj
• Given n supply points, i1..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

See also page 132, 133
19
Example SunOil

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

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Example SunOil Capacitated Plant Location Model
12
16
14
7
8
Dj annual demand from market j
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Example SunOil Capacitated Plant Location Model
10
10
20
10
10
Ki capacity of plant i
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Example SunOil Capacitated Plant Location Model
cij cost of producing and shipping one million
units from plant i to market j
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Example SunOilCapacitated Plant Location Model

• Inputs

cij cost of producing and shipping
Dj annual demand from market j
Ki capacity of plant i
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Example SunOilCapacitated Plant Location Model

• Decision variables

xij quantity shipped from plant i to market j
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Example SunOil Capacitated Plant Location Model
10
Ki ?mj1 xij gt 0 for all i 1, , n (excess
capacity)
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Example SunOilCapacitated Plant Location Model

• Constraints

Ki - ?j xij lt 0 for all i 1, , n
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Example SunOil Capacitated Plant Location Model
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Dj ?ni1 xij 0 for all j 1, , m (unmet
demand)
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Example SunOilCapacitated Plant Location Model

• Constraints

Dj - ?i xij 0 for all j 1, , m
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Example SunOil Capacitated Plant Location Model
2
10
12
16
10
14
4
2
20
7
8
10
10
Total Cost4,397
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Capacitated Plant Location
Which supply point operates?
m demand points
n supply points
France
c11
y1 yes or no
c12
Romenia
c13
Germany
y2 yes or no
Poland
Italy
Spain
y3 yes or no
Ireland
United Kingdom
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Capacitated Plant Location

• 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

See also page 133, 134, 135
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Example SunOil Capacitated Plant Location Model
1020
1020
1020
1020
1020
Ki capacity of plant i
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Example SunOil Capacitated Plant Location Model
65009750
60009000
41006150
40006000
45006750
fi annualized fixed cost of keeping plant i open
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Example SunOilCapacitated Plant Location Model

• Inputs

cij cost of producing and shipping
Dj annual demand from market j
Ki capacity of plant i
fi fixed cost of keeping plant i open
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Example SunOilCapacitated Plant Location Model

• Decision variables

xij quantity shipped from plant i to market j
yi 1 if plant i is open, 0 otherwise
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Example SunOil Capacitated Plant Location Model
1020
Kiyi ?mj1 xij gt 0 for all i 1, , n (excess
capacity)
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Example SunOilCapacitated Plant Location Model

• Constraints

Kiyi - ?j xij lt 0 for all i 1, , n
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Example SunOilCapacitated Plant Location Model

• Objective function

Minimize ?i ?j cijxij ?i fiyi
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Example SunOil Capacitated Plant Location Model
12
16
14
4
2
10
20
7
8
20
20
Total Cost23,751
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Capacitated Plant Location With Single Source
(each customer has exactly one supplier)

• 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

Can a plant satisfy the demand of two or more
customers in this model?
See also page 135, 136, 137
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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
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Example SunOilSingle Source Model

• Decision variables

xij 1 if market j is supplied by plant i, 0
otherwise
yi 1 if plant i is open, 0 otherwise
43
Example SunOil Single Source Model
12
16
14
7
8
1020
?mj1 Djxij Kiyi lt 0 for all i 1, , n
(plant capacity)
44
Example SunOil Single Source Model
8
?ni1 xij 1 for all j 1, , m (unmet demand)
45
Example SunOil Single Source Model
12
12
16
14
14
1020
7
8
1020
8
Total Cost25,313
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Making Network Design Decisions in Practice

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