Supply Chain Management (3rd Edition)

Chapter 5 Network Design in the Supply Chain

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Outline
A strategic framework for facility location Multi-echelon networks Gravity methods for location Plant location models

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Network Design Decisions

Facility role Facility location Capacity allocation Market and supply allocation

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Factors Influencing Network Design Decisions

Strategic Technological Macroeconomic Political Infrastructure Competitive Logistics and facility costs
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The Cost-Response Time Frontier

Hi
Local FG
Mix Regional FG Local WIP

Cost

Central FG Central WIP Central Raw Material and Custom production Custom production with raw material at suppliers

Low
Low
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Response Time

Hi
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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 --> 1 DC

Customer DC

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Where inventory needs to be for a 5 day order response time - typical results --> 2 DCs

Customer DC

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Where inventory needs to be for a 3 day order response time - typical results --> 5 DCs

Customer DC

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Where inventory needs to be for a next day order response time - typical results --> 13 DCs

Customer DC

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Where inventory needs to be for a same day / next day order response time - typical results --> 26 DCs

Customer DC

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Costs and Number of Facilities

Inventory
Costs Facility costs

Transportation

Number of facilities
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Cost Buildup as a Function of Facilities

Total Costs

Cost of Operations

Percent Service Level Within Promised Time

Facilities Inventory

Transportation Labor

Number of Facilities
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A Framework for Global Site Location

Competitive STRATEGY GLOBAL COMPETITION INTERNAL CONSTRAINTS Capital, growth strategy, existing network PRODUCTION TECHNOLOGIES Cost, Scale/Scope impact, support required, flexibility

PHASE I Supply Chain Strategy

TARIFFS AND TAX INCENTIVES

COMPETITIVE ENVIRONMENT

PHASE II Regional Facility Configuration

REGIONAL DEMAND Size, growth, homogeneity, local specifications POLITICAL, EXCHANGE RATE AND DEMAND RISK

PHASE III Desirable Sites

PRODUCTION METHODS Skill needs, response time FACTOR COSTS Labor, materials, site specific

AVAILABLE INFRASTRUCTURE

PHASE IV Location Choices

LOGISTICS COSTS Transport, inventory, coordination

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Conventional Network
Vendor DC Materials DC

Finished Goods DC

Customer DC

Customer Store

Vendor DC

Component Manufacturing Plant Warehouse Components DC Customer DC

Customer Store Customer Store

Customer Store Customer DC Customer Store
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Vendor DC Final Assembly

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Finished Goods DC

Tailored Network: Multi-Echelon Finished Goods Network

Regional Finished Goods DC Local DC Cross-Dock Customer 1 DC Local DC Cross-Dock Customer 2 DC Local DC Cross-Dock Store 1 Store 1 Store 2 Store 2 Store 3 Store 3

National Finished Goods DC

Regional Finished Goods DC

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Gravity Methods for Location

Ton Mile-Center Solution
x,y: Warehouse Coordinates xn, yn : Coordinates of delivery
location n

dn : Distance to delivery
location n

Fn : Annual tonnage to delivery

location n

Min

d n Dn F n

( x x n) ( y y n) D nx F d x D nF d D ny F d y D nF d
n

n 1

n 1

n 1

n 1

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Network Optimization Models

Allocating demand to production facilities Locating facilities and allocating capacity
Key Costs:

Fixed facility cost Transportation cost Production cost Inventory cost Coordination cost
Which plants to establish? How to configure the network?
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Demand Allocation Model

Which market is served by which plant? Which supply sources are used by a plant? xij = Quantity shipped from plant site i to customer j
Min cij xij
i 1 j 1 n m

s.t.

x
i 1 m j 1

ij

D j , j 1,...,m
i

x K
ij

, i 1,...,n

ij

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Plant Location with Multiple Sourcing

yi = 1 if plant is located at site i, 0 otherwise xij = Quantity shipped from plant site i to customer j
Min
i 1 n

f y c x
i i i 1 j 1 ij

ij

s.t.

x D , j 1,...,m
i 1 n ij j

x K y , i 1,...,n
j 1 m ij i i

y k ; y {0,1}
i 1 i i
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Plant Location with Single Sourcing

yi = 1 if plant is located at site i, 0 otherwise xij = 1 if market j is supplied by factory i, 0 otherwise
Min
i 1 n

f y D j c x
i i i 1 j 1 ij

ij

s.t.

x
i 1 n j 1

ij

1, j 1,...,m

D j x K y , i 1,...,n
ij i i

xij, y {0,1}
i

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Summary of Learning Objectives

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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