Chopra_ch05_09_Network Models for Supply Chain Design

7/31/2019 Chopra_ch05_09_Network Models for Supply Chain Design

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Network design decision

Facility role; production, storage, cross-docking, processes performed andproducts produced (flexibility) Toyota before 97, factories serving local needs. In Asian crisis late 90s, Asian

factory experienced idle capacity that could not be used to produce for othermarkets. Afterwards, Toyoda added flexibility to their plants so that they can serveother markets.

Facility location

Very costly to open or close a plant Toyota opened its first US plant in Lexington, Kentucky in 88. This decisionprovided Toyota a low cost production option, especially when yen is strengthenedagainst dollar, and responsiveness.

Amazon had to increase the number of warehouses to 6 to be cost effective insupplying books throughout US.

Facility capacity

Allocating too little or too much capacity is costly Capacity decisions would not change for years.

Facility allocation to markets and supply sources has Significant impact on performance Must be reconsidered on a regular basis Amazon had to consider new allocations as it increased the number of facilities in

order to reduce the costs


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Factors influencing network designdecisions

Strategic factors Convenience stores; many facilities for

responsiveness

Discount stores; few large facilities foreffectiveness (low cost)

Different locations playing different role Nikes facilities in china and Indonesia produces

lower priced shoes for mass markets, while itsfacilities in Korea and Taiwan focuses onresponsiveness and produce higher-priced newdesign, with high variability.


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Technological factors

Production technologies with high economies of scaleand high investment (micro-chips); few high-capacity

facility Technologies with low fixed investment cost and low

economies of scale; many close-to-market facilities,e.g. Cocacola bottling plants all over the world

Potential flexibility of the technology determines if wecan have few plants that will serve the entire market.


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Macro economic factors;

Taxes, tariffs, incentives, exchange rates

Tariffs are coming down because of regional

arrangements (NAFT, EU) Free-trade zones; production is exported, tar,ffs and

taxes are reduced

BMW located its US plant in North Carolina becouse

of tax incentives offered by this state. China waives tariffs entirely for high-tech products.

Some countries places limit on minimum loca content.


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Political factors rap diye rap rap would not attract foreign investment

Political stability, clear legal system, signinginternational treatments.

Infrastructure Availability of sites, closeness to transportation

options (seaports, rail, airports), availability of labor,local utilities

Example; Many companies located their factories inChina near Shanghai, Tianjin or GuangZuo, althoughthe labor and land costs are not the lowest in theseplaces


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Competitive factors;

Should the location be close to competitors orfar from them

Positive externalities; locating together helps allthe companies, e.g. Retail stores locing together ina mall

Locating to capture the market; Locating close to

the market to capture a large share, when pricesby the firms in the market are comparable


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Customer response time and local presence

Convenience stores must locate close to customerwhile the discount stores do not need to be close,

customers are ready to travel to buy larger quantitieswith lower prices.

With faster transportation options, facilities can beconsolidated and away from customers.

Logistics and facility costs; Inventory, transportation and facility cost should be

considered together


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Customer

DC

Where inventory needs to be for a 5 day order

response time - typical results --> 2 DCs


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Customer

DC

Where inventory needs to be for a 3 day order



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Customer

DC

Where inventory needs to be for a next day order



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Customer

DC

Where inventory needs to be for a same day / next

day order response time - typical results --> 26 DCs


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Costs and Number of Facilities

Costs

Number of facilities

Inventory

Transportation

Facility costs

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Percent Service

Level Within

Promised Time

Transportation

Cost Buildup as a Function of Facilities

CostofOpe

rations

Number of Facilities

Inventory

Facilities

Total Costs

Labor

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SC Network design problem

Objective is to identify the regions to locate the facilities, potential roleof the facilities, and their capacities. Objective should be maximizingoverall profitability or minimizing the cost while maintaining targetresponsiveness.

Needs forecasting the demand by regions Homogenous customer requirements across regions allows consolidated

facilities Identifying if the economies of scale is significant (e.g. Semiconductor

industry, huge economies of scale, larger facilities). Consider differentcapacity options when the conomies of scale is significant.

Evaluating demand, exchange-rate, political risks for different regionsand taxes and tariffs.

Examine competitors in each region, to be close or far away fromcompetitors

Determine desired response time for each region


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SC Network design problem

Network design models can be used to locate facility anddecide capacity, which wont change in years. Thesemodels can also be used to assign current demand toavailable facilities and to the available transportationoptions, at least on an annual base.

Information for network configuration decision; Location ofsupply sources, markets, and potential sites for facilities,demand forecast by markets, facility, labor, and materialcost by site, transportation cost between sites, inventorycosts for each site, sale price of product for each regions,

desired response time and other service factors, taxes,tariff. Output; number of facilities in each region, what markets

that the facilities will serve.


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Capacitated Plant Location withMultiple Sourcing

Considers onlytransportation andproduction costs

yi = 1 if plant is located atsite i, 0 otherwise

xij = Quantity shipped fromplant site i to market j

fi = Annualized fixed costof keeping plant i open.

cij=cost of producing andshipping (transportation,tariffs) one unit fromfactory i ot market j

Dj= Annual demand formarket j

Ki = Capacity of plant i.

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Single Sourcing

Some times companies want a singlesourcing

A factory (warehouse) serves only a single

demand point. (A demand point can beserved by more than one factory)

Reduces the complexity of coordinating thenetwork

Reduces the flexibility needs for factories(warehouses)


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Capacitated plant location model with singlesourcing

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Leads into higher cost with less problem of

Coordination. Let us resolve the problem.


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Examples

Sunoil (pg 124-128) -- excel file

Telecom_optic (132-137) --- excel file


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Profit maximization, taxes, tariffsetc.

Market prices, taxes, tariffs would depend on theregion, in general.

Profit maximization is more appropriate in thiscase. Profit maximization also makes sure thatwe do not satifying unprofitable demand.

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Practical issues in network designdecisions

Do not underestimate the life-span of thefacilities

Do not ignore the cultural issues andimplications

Do not ignore the quality of life issues

Focus on tax and tariffs and incentives

Chopra_ch05_09_Network Models for Supply Chain Design

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