MIDDLE EAST TECHNICAL UNIVERSITY

I E 418 SUPPLY CHAIN MANAGEMEN T

Homework #1
Onur Ylmaz 1627868

May 2, 2012

a)
Prior to merger, two companies can be considered as two different networks. With this reasoning, a mathematical model like below is constructed for both A-fon and B-fon: Sets: j i Parameters: Dj : Demand of location j : Demand locations : Production facilities

Capi : Capacity of plant i cij : Total variable cost between production plant i to demand location j This is calculated by (Variable Production Cost) + (Transportation Cost) + (Percentage Duty) x [(Variable Production Cost) + (Transportation Cost) + (Fixed Cost per Capacity Unit) ] fixi : Fixed cost of facility i

Decision Variables: xij : Amount of phone produced in plant i and sent to demand location j

Objective Function: min Constraints: xij = Dj xij Capi xij integer and non-negative for all j for all i z = xij * cij + fixi

Assumptions: There is no transshipment point in this network; all shipments are made between production facility and demand locations. As it is never mentioned, it is assumed that there is no chance of warehousing for items; therefore exact number of items is sent to demand locations. Import duties will be applied on the price of item, in other words it will be applied on the total of (Variable Production Cost) + (Transportation Cost) + (Fixed Cost per Unit Capacity)

In order to demonstrate, table of cij (Total variable cost between production plant i to demand location j) can be given as following:

DEMAND LOCATIONS N.America A - EU A - N.America FROM A - S.America B - EU B - N.America B -Rest-of-Asia & Aus 7,875 6,5 7,184 7,875 6,5 7,36 S.America 10,24 9,4 6,3 10,24 9,4 9,64 EU 7 7,48 7,52 7 7,48 7,168 nonEU 9,03 9,145 9,295 9,03 9,145 8,34 Japan 8,312 7,688 7,728 8,312 7,688 6,648 Rest-of-Asia 10,494 10,25 10,47 10,494 10,25 6 Africa 10,5 10,875 10,875 10,5 10,875 9,75

Table a.1: Total variable cost table cij

Using this mathematical model and Excel Solver, for A-fon the following network design is found to be optimal:
DEMAND LOCATIONS N.America EU FROM N.America S.America 1.000.0000 S.America 4.000.000 EU 20.000.000 nonEU 3.000.000 Japan 2.000.000 Rest-of-Asia 2.000.000 Africa 1.000.000

Table a.2: Number of phones sent (A-fon)

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As it can be seen, facility in EU is serving for EU market and uses it full capacity. However, other facilities are working below its maximum capacity, for instance N.America is not using 3.000.000 and S.America is not using 5.000.000 of their capacities. Also, it can be said that these two facilities are serving all other markets other than EU. With this network design, total minimum cost is found to be $ 564.386.000,00.

Using the same mathematical model and Excel Solver, for B-fon the following network design is found to be optimal:
DEMAND LOCATIONS N.America EU FROM N.America S.America
12.000.000 -

S.America
1.000.000 -

EU
4.000.000 -

nonEU
8.000.000 -

Japan
7.000.000

Rest-of-Asia
3.000.000

Africa
1.000.000 -

Table a.2: Number of phones sent (B-fon)

In this design, EU and N.America facilities do not use 7.000.000 of their capacities, which is close to half of their total capacity. Facilities and the markets they serve can be seen from the table provided above. This design resulted a total minimum cost of $ 512.676.000,00 To sum up, prior to merger, these two companies are working with the minimum total cost of $ 1.077.062.000,00. The worksheets used for solving these models are provided in the Excel workbook uploaded to METU-Online.

b)
After the merger, there will be more plants and more demand markets which means more flexibility. Since it is not clearly mentioned, this problem will be solved firstly considering that scaling back is available and then considering that scaling back is not available. Considering the merger, demand parameters are combined for the same location and table of Dj can be given as:

N.America

S.America

EU

nonEU

Japan

Rest-of-Asia 5.000.000

Africa 2.000.000

22.000.000 5.000.000

24.000.000 11.000.000 9.000.000 Table b.1: Demand levels Dj

In addition, for each current facility, a new facility is added for its scaled-back situation and it made a total of 12 production facility. With their scaled-back capacity and scaled back fixed-costs, new total variable cost values are calculated and it can be given as following:
DEMAND LOCATIONS A-EU A - N.America S.America B - EU B - N.America B - Rest-of-Asia A-EU A - N.America S.America B EU B - N.America B - Rest-of-Asia N.America S.America EU nonEU Japan Rest-of-Asia Africa 7,875 10,24 7 9,03 8,312 10,494 10,5 6,5 9,4 7,48 9,145 7,688 10,25 10,875 7,184 6,3 7,52 9,295 7,728 10,47 10,875 7,875 10,24 7 9,03 8,312 10,494 10,5 6,5 9,4 7,48 9,145 7,688 10,25 10,875 7,36 9,64 7,168 8,34 6,648 6 9,75 7,935 10,64 7 9,33 8,392 10,934 11 6,5 9,8 7,56 9,445 7,768 10,69 11,375 7,184 6,3 7,52 9,295 7,728 10,47 10,875 7,935 10,64 7 9,33 8,392 10,934 11 6,5 9,8 7,56 9,445 7,768 10,69 11,375 7,36 9,64 7,168 8,34 6,648 6 9,75 Table b.2: Total variable cost table cij

SCALED BACK

NORMAL

A new binary decision variable, yi, is created for facilities, which shows whether or not the facility is used. In order to implement this binary variable, decision variables, objective function and constraints are changed as following:

Decision Variables: xij yi : Amount of phone produced in plant i and sent to demand location j : 1 if the facility is used, 0 otherwise

Objective Function: min z = xij * cij + fixi * yi

Constraints: xij = Dj xij Capi M * yi xij yi + yi+6 = 1 for all j for all i for all i for i = 1,2,3,4,5,6 facility is used xij integer and non-negative yi binary Ensuring usage decision variable Ensuring that either normal or scaled back

Using the provided mathematical model and Excel Solver, the following network design is found to be optimal when scale-back availability is considered:

DEMAND LOCATIONS
N.America NORMAL A - S.America B - EU B - N.America A-EU SCALED A - N.America B - Rest-of-Asia 12.000.000 10.000.000 S.America 5.000.000 EU 0 nonEU 0 Japan 3.000.000 0 Rest-of-Asia 5.000.000 Africa 2.000.000 -

14.000.000 4.000.000 0 10.000.000 -

7.000.000 1.000.000 5.000.000

Table b.3: Number of phones sent

As can be seen, facility in N. America and EU which belongs to A-fon prior to merger and facility Rest-of-Asia which belongs to B-fon prior to merger are chosen to be scaled down. Facilities and the markets they serve can be checked from the table provided above. With this network design total minimum cost is found to be $ 1.007.747.000,00

Secondly when no scale-back availability is considered, following constraints are added to the same model and it is solved again: yi = 0 yi = 6 for i = 7,8,9,10,11,12 No scaled-back facility will be used for all i No shut-down

In this model, where no scaling back is available, optimal network design is found to be as following:

DEMAND LOCATIONS N.America A-EU A - N.America S.America B - EU B - N.America B - Rest-of-Asia 16.000.000 6.000.000 S.America 5.000.000 EU 7.000.000 0 0 17.000.000 0 0 nonEU 11.000.000 0 0 0 0 0 Japan 0 4.000.000 0 0 5.000.000 5.000.000 Rest-of-Asia 0 0 0 0 0 5.000.000 Africa 2.000.000 0 0 0 0 0

Table b.4: Number of phones sent

And the total minimum cost is found to be $1.066.822.000,00. As it is expected, when scaling back availability is given, total cost decreased. Although it must be mention that, in both cases of part B, total cost is less than the total cost of part A. Merging two companies and increasing the flexibility of demand and production shipments lead the network design to be more cost efficient. The worksheets used for solving these models are provided in the Excel workbook uploaded to METU-Online.

c)
When both scaling back and shut down options are available after the merger, model provided in part B will be used with the constraints given below:

Objective Function: min z = xij * cij + fixi * yi + Fixed Costs in Shut-Down where Fixed Costs in Shut-Down is defined as following: [ 1 - ( yi + yi+6 ) ] * fixi * 0,2 where i is element of {1,2,3,4,5,6}

Since first 6 facilities are the normal (not-scaled) facilities, this will ensure that in the case of not-scaled and scaled facilities are not used it will be counted as shut down and related costs will be added.

Constraints: xij = Dj xij Capi M * yi xij yi + yi+6 1 for all j for all i for all i for i = 1,2,3,4,5,6 Ensuring usage decision variable Ensuring that either normal or scaled back

facility is used or never used xij integer and non-negative yi binary

Using this model and Excel Solver, the following results are found to be optimal:

DEMAND LOCATIONS N.America A-EU NORMAL A - N.America A - S.America B - EU B - Rest-of-Asia 20.000.000 2.000.000 S.America 5.000.000 EU 20.000.000 4.000.000 nonEU Japan 3.000.000 Rest-of-Asia 5.000.000 Africa 2.000.000 -

11.000.000 1.000.000 5.000.000

Table c.1: Number of phones sent

In this network design, production facility in North America which belongs to B-fon prior to merger is shut down. Rest of the facilities is sending the mentioned amounts as shown in the table above. In this situation total unused capacity is decreased to 2.000.000. In addition, this design yielded the minimum cost when it is compared to other former parts. This design, where 5 facilities serve all demand locations, is resulted with a minimum cost of $988.934.000,00. In addition it must be mentioned that, none of the facilities are scaled down in this lowest cost network design. The worksheet used for solving this model is provided in the Excel workbook uploaded to METU-Online.

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d)
Assuming that there is no implicit cost of closing or scaling down of a facility and explicit calculated costs are the only parameters that will be important in making decisions, the network design with the minimum cost should be chosen. When compared;
Total Cost Part A Part B No - Merge Merge, No Scale Back Merge, Scale Back Part C Merge, Shut Down, Scale Back $ 1.077.062.000,00. $1.066.822.000,00 $ 1.007.747.000,00 $988.934.000,00

As mentioned, when the minimum cost criterion is used for decision making, network design provided in Part C should be used, where the facility in North America which belongs to B-fon prior to merger is shut down. Details of this design can be gathered from Table c.1.

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e)

Considering many number of differences, the model used in this model will be presented from scratch. In this model, similar to other models, dummy facilities will be added. Summary of plants can be given as following: From 1 to 6 From 7 to 12 From 13 to 18 From 19 to 24 nonEU Warehouse nonEU Warehouse EU Warehouse EU Warehouse Normal Sized Scaled Back Normal Sized Scaled Back

For those plants, cij values are calculated so that transportation costs will be equal to sum of (production plant warehouse) and (warehouse demand location). Sets: j i k Parameters: Dj : Demand of location j : Demand locations : Production facilities : Warehouse location

Capi : Capacity of plant i cij fixi : Total variable cost between production plant i to demand location j : Fixed cost of facility i

Decision Variables: xij yi zk : Amount of phone produced in plant i and sent to demand location j : 1 if the facility is use; 0 otherwise : 1 if the warehouse is opened in k; 0 otherwise
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Objective Function: min z = xij * cij + fixi + Fixed Costs in Shut-Down where Fixed Costs in Shut-Down is defined as following: [ 1 - ( yi + yi+6 ) ] * fixi * 0,2 {1,2,3,4,5,6,13,14,15,16,17,18} Constraints: xij = Dj xij Capi M * yi xij for all j for all i for all i, M sufficiently large positive number Ensuring usage decision variable yi + yi+6 1 for i = 1,2,3,4,5,6,12,13,14,15,16,17,18 Ensuring that either normal or scaled back facility is used or never used z1 + z2 = 1 zk * M yi Warehouse is opened in either EU or nonEU where i is represents the facilities related to k; for instance if k is Europe than the facilities 13 to facilities 24 will be considered and with the same approach if k is nonEurope first 12 facility will be considered. This will ensure, if the warehouse is opened facilities that work with that warehouse will be operating. M sufficiently large positive number xij integer and non-negative yi, zk binary Assumptions: All plants can directly meet the demand of their own regions without sending phones to the warehouse. where i is element of

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Capacities of the warehouses are not considered in calculations; with the same approach fixed cost per unit capacity of the warehouses are not added to calculations of import duties.

EU EU and nonEU nonEU transportation costs are not decreased when a warehouse is opened to related region since these are not inbound type of transportation.

Using this mathematical model and Excel Solver, it is found that warehouse should be opened in EU region and the facility in EU which belongs to A-fon prior to merger should be shut down. In addition, facility in S.America, which belongs to A-fon, should be scaled back. Rest of the facilities should be serving the demand locations with the provided amounts in the table below:

DEMAND LOCATIONS N.America A - N.America NORMAL B EU B - N.America B- Rest-of-Asia SD A - S.America 2.000.000 0 20.000.000 S.America 5.000.000 EU 4.000.000 20.000.000 nonEU Japan Rest-of-Asia 5.000.000 0 Africa 2.000.000 0

8.000.000 4.000.000 3.000.000 0 5.000.000

Table e.1: Number of phones sent (SD: Scaled Down)

This model yielded a total minimum cost of $ 1.037.596.000,00 and since it is larger than the one found in part C, which is the minimum cost found after the merger, opening is a warehosue does not decrease total costs. In other words, when the decrease in the inbound transportation costs (from plants to the warehouse) are compared to opening a warehouse and its additional 20 million cost, new warehouse did not help to decrease total cost. Since, a notopening alternative is not given, the network design summarized in Table e.1 is the best solution.

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f)

In this step, with the same approach, four dummy production facilities are added for Rest-of-Asia plant. One for adding 10 million capacities, one for adding 20 million capacities are added to EU-warehouse and nonEU-warehouse facility set. In addition, for Rest-of-Asia facility, usage constraint is changed so that only one of the dummy facilities is selected or facility is never used:

y (Rest-of-Asia - Normal ) + y (Rest-of-Asia - Scaled Down ) + y (Rest-of-Asia - Added 10 million ) + y (Rest-of-Asia - Added 20 million ) 1

This model is used for finding the optimal cost values for three scenarios and the following cost values are found:

Minimum Cost Value (z*) Scenario 1: Scenario 2: Scenario 3:

1.031.287.466,67 1.172.788.800,00 1.182.684.773,33

Using this z* values and minimize-maximum-regret model (P2 in the lecture notes) the following network design is found to be optimal:

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DEMAND LOCATIONS N.America S.America 5.000.000 EU 10.000.000 3.840.461 10.000.000 159.540 nonEU 11.000.000 Japan 9.000.000 Rest-of-Asia 5.000.000 Africa 2.000.000

N SCALED

A - N.America A - EU B - S.America B - EU RestOfAsia Added 20 M

20.000.000 2.000.000

Table f.1: Number of phones sent (N.: Normal Facility, *: Newly added capacity)

In this network design, N. America facility, which belongs to B-fon, is shut down. In addition, 20 million of capacity is added to Rest of Asia facility and warehouse is opened to EU region. Both of the facilities in EU and the facility in S. America which belongs to B-fon are scaled back. Total cost of this minmax regret model is found to be $ 1.031.287.466,67 The worksheets used for solving these models are provided in the Excel workbook uploaded to METU-Online.

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