Supply Chain Management

1
Supply Chain Management

• Lecture 8

2
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

3
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, 500pm
• http//avnettechgames.com/supplychain2010

4
Announcements

• Game Day
• February 20, 2010
• Awards
• Each team member will win a 1000 scholarship

5
Excel Solver
Objective function
Decision variables
Constraints
6
Example Dell Market Allocation
What are the decisions?
What are the constraints?
7
Example Dell Facility Location
?
?
?
What are the decisions?
What are the constraints?
8
Example Dell Facility Location

• 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

9
Example Dell Facility Location

• Constraints (Capacity cannot be exceeded)
• 0 ? 30,000YRomenia - XRomenia,France -
  XRomenia,Germany - XRomenia,Italy -
  XRomenia,Spain - XRomenia,UK
• 0 ? 30,000YPoland - XPoland,France -
  XPoland,Germany - XPoland,Italy - XPoland,Spain -
  XPoland,UK
• 0 ? 30,000YIreland - XIreland,France -
  XIreland,Germany - XIreland,Italy -
  XIreland,Spain - XIreland,UK

10
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

11
Factors 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 marketgtltavoid tariffsgt Suzikis
Indian venture Maruti
Source ltlow-costgtltglobal marketgt Nike plants in
Korea
Contributor ltcustomizationgt ltdevelopment
skillsgt Maruti
12
Factors Influencing Network Design Decisions

• 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?
13
Factors 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)

14
Factors Influencing Network Design Decisions

• 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?
15
Amazons Growth in Europe
16
Amazons Growth in Europe
17
Amazons Growth in Europe
European use of credit cards for online purchases
18
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
19
Amazons Growth in the US
In 1998, Amazon expanded its product line (music,
DVD) (1999 electronics, toys) (2000 health,
kitchen)
Amazon had to decide how many DCs it should have
and where to locate them
20
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

21
Amazons Growth in the US
This has been the fastest expansion of
distribution in peacetime history
22
Amazons Growth in the US

• Evolution of fulfillment cost as a percentage of
  revenue

23
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

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Demand Allocation
m demand points
n supply points
c11
c12
c13
25
Demand Allocation

• 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

3e p. 132-133, 4e p. 123-125
26
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
27
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

3e p. 133-135, 4e p. 125-128
28
Capacitated Plant Location With Single Source
(each customer has exactly one supplier)
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
29
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

3e p. 135-137, 4e p. 128-129
30
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
cij cost of producing and shipping one million
units from plant i to market j
33
Example SunOil Capacitated Plant Location Model
1020
1020
1020
1020
1020
Ki capacity of plant i
34
Example SunOil Capacitated Plant Location Model
65009750
60009000
41006150
40006000
45006750
fi annualized fixed cost of keeping plant i open
35
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

3e p. 133-135, 4e p. 125-128
36
Example SunOil Capacitated Plant Location Model
7
Dj ?ni1 xij 0 for all j 1, , m (unmet
demand)
37
Example SunOil Capacitated Plant Location Model
1020
Kiyi ?mj1 xij ? 0 for all i 1, , n (excess
capacity)
38
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

3e p. 135-137, 4e p. 128-129
39
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
40
Making Network Design Decisions in Practice

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