Facility Location Models

1. Facility Location Models August 23, 2006 Briggs Session 1 www.kelley.iu.edu/briggsc/e730_lect1.ppt

2. Outline • Developing a framework for solving facility location problems • Deriving and applying models from that framework • Making network design decisions in practice

3. But first… Some Location Trivia. • Can you name these places:

7. A B Which table is bigger? Rulers Source: Shepard (1990)

8. Customer Store Materials DC Customer DC Finished Goods DC Vendor DC Customer Store Component Manufacturing Vendor DC Customer DC Customer Store Plant Warehouse Components DC Customer Store Vendor DC Finished Goods DC Customer DC Final Assembly Customer Store Developing a Framework (Process) for Solving Facility Location Problems • What decisions have to be made?

9. Types of Network Design Decisions • Facility role • What role should each facility play? What processes are performed at each facility? • Facility location • Where should facilities be located? • Capacity allocation • How much capacity should be allocated to each facility? • Market and supply allocation • What markets should each facility serve? Which supply sources should feed each facility?

10. Developing a Framework (Process) for Solving Facility Location Problems • What decisions have to be made? • What factors influence those decisions?

11. Factors Influencing Network Design Decisions • Strategic • What is the differentiator? • Technological • Does production technologies result in economies of scale? • Is the cost of production technology prohibitive? • Is production technology inflexible? • Does product requirements differ significantly by region? • Macroeconomic • Taxes • Tariffs • Incentives • Exchange Rates

12. Factors Influencing Network Design Decisions • Political Stability Formal/Informal legal system • Infrastructure • Roads, utilities, labor, access to ports • Competitive • Locate close to a competitor? Positive/Negative externalities? • Customer Response Time and Local Presence (related to…) • Logistics and facility costs (for example…)

13. Service and Number of Facilities Response Time Number of Facilities

14. Where inventory needs to be for a one week order response time - typical results --> 1 DC Customer DC

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

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

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

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

19. Inventory Facility costs Transportation Costs and Number of Facilities Costs Number of facilities

20. Total Costs Cost of Operations Facilities Inventory Labor Number of Facilities Cost Build-up as a function of facilities Percent Service Level Within Promised Time Transportation

21. Put these components together and a framework for solving network location decisions emerges.

22. A Framework for Solving Facility Location Decisions GLOBAL COMPETITION Competitive STRATEGY PHASE I Supply Chain Strategy INTERNAL CONSTRAINTS Capital, growth strategy, existing network TARIFFS AND TAX INCENTIVES PRODUCTION TECHNOLOGIES Cost, Scale/Scope impact, support required, flexibility REGIONAL DEMAND Size, growth, homogeneity, local specifications PHASE II Regional Facility Configuration COMPETITIVE ENVIRONMENT POLITICAL, EXCHANGE RATE AND DEMAND RISK PHASE III Desirable Sites AVAILABLE INFRASTRUCTURE PRODUCTION METHODS Skill needs, response time PHASE IV Location Choices FACTOR COSTS Labor, materials, site specific LOGISTICS COSTS Transport, inventory, coordination

23. Questions about this Framework • What are the strengths? • What are the problems? • Does it pass the “good model” criteria?

24. Modeling the facility location problem

25. A Simple Gravity Method • A company has three factories. The x- and y-coordinates for each factory are shown below: • Factory 1: (6, 1) • Factory 2: (1,3) • Factory 3: (4,1) • The company wants to locate a warehouse at a point that minimizes the sum of the squared distances of the plants from the warehouse. • Where should the warehouse be located?

26. A Simple Gravity Method • A company has three factories. The x- and y-coordinates for each factory are shown below: • Factory 1: (6, 1), Factory 2: (1,3), Factory 3: (4,1)

27. Making the Facility Location Decision in Practice

28. Sometimes theory differs from reality… • The challenge… • The challenger… • The results…

29. A Real Facility Location Problem…* • Your company manufactures chairs and tables in Bloomington, Indiana, and distributes those chairs across the United States. • The product is historically manufactured in North America (four locations), but increasingly a mix of the product is being manufactured in SE Asia and Mexico. • When product is imported from abroad, it much be grouped into orders and shipped out. This currently happens at your mixing center in Bloomington. • Your company is responsible for shipping complete orders to customers in North America. • Should your company change its current mixing center configuration? • How do you know? *Based on an actual MBA student project, Supply Chain & Global Management Academy. Names and facts changed to protect both the innocent and the guilty.

30. The current situation…

31. Two Solutions… #1

32. Two Solutions… #2

33. Making Network Design Decisions In Practice • Don’t underestimate the life span of facilities • Don’t gloss over the cultural implications/issues • Don’t ignore the “big picture” issues…(i.e. quality of life, existing infrastructure, etc..) • Make sure that ALL the components are included in the financial model (including things like tariffs and incentives.)

34. Summary • Factors influencing facility decisions • A strategic framework for facility location • Gravity methods for location • Network optimization models • Value capacity as a real option • Making network design decisions in practice

35. For Tomorrow • Read Chapter 6 • Read “Leading a Supply Chain Turnaround” • Form teams, and work on the Sportsstuff.com case (Chopra )Turn-in a hardcopy of your answers to the Sportsstuff.com problem. (Assume a single linear inventory cost.)

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