Designing the Supply Chain Network Models from Chapter 4, 5 of Chopra & Meindl Byung-Hyun Ha...

Designing the Supply Chain Network

Models from Chapter 4, 5 of Chopra & Meindl

Byung-Hyun Ha

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Outline

Designing the Distribution Network in Supply Chain Factors Influencing Distribution Network Design Design Options for Distribution Network Selecting Distribution Network Design

Models for Facility Location and Capacity Allocation

Designing Distribution Network

Factors Influencing Distribution Network Design Customer needs that are met Cost of meeting customer needs

RequiredNumber of

Facilities

Response Time

Number of Facilities

Cost Inventory

Transportation

Facility

Response Time

Total Logistics Costs

Number of Facilities


Elements of customer service influenced by network structure Response time Product variety Product availability Customer experience

• Ease with which customer can place and receive order Order visibility

• Ability of customer to track their order from placement to delivery

Returnability• Ease with which customer can return unsatisfactory merchandise an

d ability of logistics network to handle such returns


Supply chain costs affected by network structure Inventories Transportation Facilities and handling Information infrastructure

Design Options for Distribution Network

Possible distribution network design Manufacturer storage with direct shipping Manufacturer storage with direct shipping and in-transit merge Distributor storage with carrier delivery Distributor storage with last mile delivery Manufacturer or distributor storage with consumer pickup Retail storage with consumer pickup

• Customers walking into store or ordering online


Manufacturer storage with direct shipping Drop-shipping, demand aggregation, postpone customization Slow-moving/low-demand/high-value items

Manufacturer

Retailer

Customers

Product Flow Information Flow

Inventory

Transportation

Facilities and handling

Information

L

H

L

H

Response time

Product variety

Product availability

Customer experience

Order visibility

Returnability

H

H

H

M

L

L


Manufacturer storage with direct shipping and in-transit merge e.g. PC from Dell along with Sony monitor low- to medium-demand and high-value items

Factories

Retailer In-Transit Merge by Carrier

Customers


Inventory

Transportation


Information

L

M

M

H

Response time

Product variety


Customer experience

Order visibility

Returnability

H

H

H

H

L

L


Distributor storage with carrier delivery High-level inventory at distributor Medium- to fast-moving items at distributor, loss of aggregation

Factories

Customers

Warehouse Storage by Distributor/Retailer


Inventory

Transportation


Information

M

L

M

M

Response time

Product variety


Customer experience

Order visibility

Returnability

M

M

M

H

M

M


Distributor storage with last mile delivery Delivering to customer’s home instead of using package carrier e.g. grocery industry, water, bag of rice at dense city

Factories

Customers

Distributor/Retailer Warehouse


Inventory

Transportation


Information

H

H

H

M

Response time

Product variety


Customer experience

Order visibility

Returnability

L

L

L

H

M

M


Manufacturer or distributor storage with consumer pickup Reusing existing pick-up site, customer participation

Factories

Retailer

Pickup Sites

Cross Dock DC

Customer Flow

Customers


Inventory

Transportation


Information

?

L

?

H

Response time

Product variety


Customer experience

Order visibility

Returnability

L

H

H

L

H

H

Selecting Distribution Network Design

Comparative performance 1: best performance

Manufacturer storage with

direct shipping


direct shipping and

in-transit merge

Distributor storage with

carrier delivery


last mile delivery

Manufacturer or distributor storage with

consumer pickup

Retail storage with

consumer pickup

Inventory

Transportation


Information

Response time

Product variety


Customer experience

Order visibility

Returnability

1

4

1

4

4

1

1

4

5

5

1

3

2

4

4

1

1

3

4

5

2

2

3

3

3

2

2

2

3

4

3

5

4

2

2

3

3

1

2

3

1

1

5

5

4

1

1

5

6

2

4

1

6

1

1

4

4

5

1

1

Selecting Distribution Network Design

Performance for different product/customer char. +2: Very suitable, …, -2: very unsuitable


direct shipping


direct shipping and

in-transit merge


carrier delivery


last mile delivery

Manufacturer or distributor storage with

consumer pickup

Retail storage with

consumer pickup

High-demand product

Medium-demand product

Low-demand product

Very low-demand product

Many product source

High product value

Quick desired response

High product variety

Low customer effort

-2

-1

+1

+2

-1

+2

-2

+2

+1

-1

0

0

+1

-1

+1

-2

0

+2

0

+1

+1

0

+2

+1

-1

+1

+2

+1

0

-1

-2

+1

0

+1

0

+2

-1

0

+1

+1

0

-1

-2

+2

-1

+2

+1

-1

-2

+1

-1

+2

-1

-2

Network Design in the Supply Chain

A framework for network design decision

PHASE ISupply Chain

Strategy

PHASE IIRegional Facility

Configuration

PHASE IIIDesirable Sites

PHASE IVLocation Choices

Competitive STRATEGY

INTERNAL CONSTRAINTSCapital, growth strategy,existing network

PRODUCTION TECHNOLOGIESCost, Scale/Scope impact, supportrequired, flexibility

COMPETITIVEENVIRONMENT

PRODUCTION METHODSSkill needs, response time

FACTOR COSTSLabor, materials, site specific

GLOBAL COMPETITION

TARIFFS AND TAXINCENTIVES

REGIONAL DEMANDSize, growth, homogeneity,local specifications

POLITICAL, EXCHANGERATE AND DEMAND RISK

AVAILABLEINFRASTRUCTURE

LOGISTICS COSTS Transport, inventory, coordination

Phase I: Supply Chain Strategy

A company’s competitive strategy Defining set of customer needs that it seek to satisfy through its

products and services

Value chain perspective Product development strategy/marketing and sales strategy Supply chain strategy and achieving strategic fit e.g. Wal-Mart, McMaster Carr, Dell

NewProduct

Development

Marketing and

Sales Operations Distribution Services

Finance, Accounting, Information Technology, Human Resources

The Value Chain in a Company

Network Optimization Models

Useful tools for both Phase II and Phase IV

Questions for Phase II: “What regions to source demand in and how to configure network?” given, Regional demand, tariffs, economics of scale, aggregate factor

costs Not necessary to go to detail of specific plant locations Need to also consider less quantifiable factors such as political

and regulatory climate, competition

Phase IV involves selecting specific facilities and allocating capacity within those selected, given, Fixed facility cost, transportation cost, production cost, inventory

cost, coordination cost

Phase II: Regional Facility Configuration

Capacitated plant location model Example: SunOil, a global energy company

• The world is divvied into 5 different regions: N. America, S. America, Europe, Asia, Africa

• SunOil has regional demand figures, transport costs, facility costs and capacities

• We will ignore tariffs and exchange rate fluctuations for now, and assume all demand must be met (so we can focus on minimizing costs)

Question:• Where to locate facilities to service their demand

• What size to build in the region (small or large), should they locate a facility there


Capacitated plant location model n: number of potential plant location

• As we are considering two different type plants (small, large) for each region, n = 10

m: number of markets Dj: demand from market j

Ki: capacity of plant i

fi: fixed cost of keeping plant i open

cij: variable cost of sourcing market j from plant i

yi = 1 if plant is located at site i, = 0 otherwise

xij: quantity shipped from plant i to market j

niy

niyKx

mjDx

ts

xcyf

i

ii

m

jij

j

n

iij

n

i

m

jijij

n

iii

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,,1for

,,1for

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Phase III: Desirable Sites

Gravity methods for location x, y: Warehouse Coordinates

xn, yn: Coordinates of delivery location n

Dn: Quantity to be shipped to delivery location n

Fn: Annual tonnage to delivery location n

k

nnnn

nnn

FDd

yyxxd

1

22

min

)()(

Limitions?

Phase IV: Location Choices

Network optimization model Example: TelecomOne merged with High Optic

• They have plants in different cities and service several regions

• Supply cities

• Baltimore (capacity 18K), Cheyenne (24K), Salt Lake City (27K), Memphis (22K) and Wichita (31K)

• Monthly regional demands

• Atlanta (demand 10K), Boston (6K), Chicago (14K), Denver (6K), Omaha (7K)

• They will consider consolidating facilities


Network optimization model n: number of plant location m: number of markets Dj: demand from market j

Ki: capacity of plant i

cij: variable cost of sourcing market j from plant i

xij: quantity shipped from plant i to market j

0

,,1for

,,1for

..

min

1

1

1 1

ij

i

m

jij

j

n

iij

n

i

m

jijij

x

niKx

mjDx

ts

xc


Considering additional layers: simultaneously locating plants and DCs

suppliers plantsDCs

customer1

customer2

customer3

..

min1 11 11 111

ts

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Designing the Supply Chain Network Models from Chapter 4, 5 of Chopra & Meindl Byung-Hyun Ha...

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