TOPIC FIVE: GLOBAL SITE LOCATION

1. DPS 601: GLOBAL SUPPLY CHAIN MANAGEMENT MBA PROGRAMME BY:MAGUTU O.PDepartment Of Management ScienceSchool Of BusinessSEPT DEC 2011

2. TOPIC FIVE: GLOBAL SITE LOCATION

3. Outline Objectives you should be able to do the following: • Strategic Roles of a Facility • Be aware of key locational determinants, both national/regional and site specific, and the impact they may have on prospective locational alternatives. • A strategic framework for facility location • Describe the different types of modeling approaches that may be used to gain insight into logistics/supply chain network design and facility location decision making. • Apply the simple “grid” or center-of-gravity approach to facility location. • Discuss certain ways in which transportation alternatives and transportation costs may affect the location decision.

4. Strategic Roles of a Facility • Offshore facility: Low cost facility for export production • Source Facility: Low cost facility for global production • Server Facility: Regional Production Facility • Contributor Facility: Regional Production Facility with Development Skills • Outpost Facility: Regional Production Facility built to gain local skills • Lead Facility: Facility that leads in development and process technologies

5. Key Locational Determinants: Technological Factors • Characteristics of available production technologies have a significant impact on the network design: • If production technology provide significant economies of scale, few high capacity locations are the most effective • If facilities have lower fixed costs, many local facilities are preferred. • Flexibility of the production technology impacts the degree of consolidation in the network: • If the production technology is inflexible, build many local facilities • Else, build few but large facilities

6. Key Locational Determinants: Macroeconomic Factors • Tariffs and tax incentives • Tariffs: Any duties that must be paid when product, equipment are moved across an international, state or city boundry. • Developing countries have free trade zones • Exchange rate and demand risk • Valuable TRL and textile industry in Turkey

7. Key Locational Determinants: Infrastructure Factors • Availability of sites • Availability of labor • Proximity to transportation terminals, railservice, airports, seaports, • Highway access • Congestion • Local utilities

8. Key Locational Determinants: Competitive Factors • Positive externalities between firms • Ex: Gas stations and retail shops Auto Repair Districts • Locating to Split the market • When firms do not control price, but compete on distance from the customer, they can maximize market share by locating close to each other and splitting the market

9. Key Locational Determinants: SCM Factors • SCM must consider the following trends, improved capabilities, & realities: • Consumer Expectations and Competition – power has shifted to the consumer • Globalization – capitalize on emerging markets • Government Regulations and E-Commerce – issues of Internet government regulations • Environment Implications of E-Commerce – recycling, sustainable eco-efficiency, and waste minimization

10. Key Locational Determinants: Global SCM Factors • Managing extensive global supply chains introduces many complications • Geographically dispersed members - increase replenishment transit times and inventory investment • Forecasting accuracy complicated by longer lead times and different operating practices • Exchange rates fluctuate, inflation can be high • Infrastructureissues like transportation, communication, lack of skilled labor, & scarce local material supplies • Product proliferation created by the need to customize products for each market

11. The Role of Purchasing • Purchasing role has attained increased importance since material costs represent 50-60% of cost of goods sold • Ethics considerations is a constant concern • Developing supplier relationships is essential • Determining how many suppliers to use • Developing partnerships

12. The Traditional Purchasing Process

13. The E-purchasing Process

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

15. A Framework forGlobal Site Location 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

16. Models for Facility Location and Capacity Allocation • Goal is to maximize the overall profitability while providing the appropriate responsiveness. • Managers use network design models in two different ways: • Decide on locations and capacities of facilities • Decide on the market share of each facility and identify lanes of transportation • Models are two types: • Network optimization models • Gravity models

17. The Required Inputs for the Models • Location of suppliers • Location of potential facility sites • Demand forecast by market • Facility, labor, material costs • Transportation costs between sites • Inventory costs by site and unit • Sale prices in different regions • Taxes and tariffs between locations • Desired response time and other service measures

18. Optimization Models • precise mathematical procedures that are guaranteed to find the “best,” or optimum, solution • optimization approaches essentially select an optimal course of action from a number of feasible alternatives

19. Simulation Models: • Simulation is defined as “the process of designing a model of a real system and conducting experiments with this model for the purpose either of understanding the behavior of the system or of evaluating various strategies within the limits imposed by a criterion or set of criteria for the operation of the system

20. Heuristic Models • Heuristic models are able to accommodate broad problem definitions, but they do not provide an optimum solution. • The use of a heuristic approach can help to reduce a problem to a manageable size and search automatically through various alternatives in an attempt to find a better solution. • To reduce the number of location alternatives, the decision maker should incorporate into the heuristic program site characteristics considered to be optimal.

21. Potential Supply Chain Modeling Pitfalls to Avoid • Short-term horizon • Too little or too much detail • Thinking in two dimensions • Using published costs • Inaccurate or incomplete costs • Use of erroneous analytical techniques • Lack of appropriate robustness analysis

22. 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

23. The Grid Technique • Advantages • The grid technique’s strengths are in its simplicity and its ability to provide a starting point for location analysis. • The grid technique also provides a starting point for making a location decision. • Limitations • It is a static approach, and the solution is optimum for only one point in time. • The technique assumes linear transportation rates, whereas actual transportation rates increase with distance but less than proportionally. • The technique does not consider the topographic conditions.

24. Other Transportation Factors: • Commercial Zone is a specific blanket area, the transportation definition of a particular city or town. • Foreign Trade Zone (FTZ) is a geographic area into which importers can enter a product and hold it without paying duties—and only paying duties or customs when is it shipped into U.S. customs territory. • Transit Privilege permits the shipper to stop a shipment in transit and to perform some function that physically changes the product’s characteristic.

25. 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?

26. 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

27. 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

28. Capacity Investment Strategies • Speculative Strategy • Single sourcing • Hedging Strategy • Match revenue and cost exposure • Flexible Strategy • Excess total capacity in multiple plants • Flexible technologies

29. Summary of Learning Objectives • 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

30. TOPIC SIX: TRANSPORTATION IN THE GLOBAL SUPPLY CHAIN

31. Outline • The role of transportation in the supply chain • Factors affecting transportation decisions • Modes of transportation and their performance characteristics • Design options for a transportation network • Trade-offs in transportation design • Tailored transportation • Routing and scheduling in transportation • Making transportation decisions in practice

32. Outline The Fundamentals of Transportation The interrelatedness of transportation, logistics & warehousing Legal Forms of Transportation Modes of Transport Intermodal Transportation Transportation Pricing Transportation Security Transportation Regulation & Deregulation Factors Influencing Choice Transportation Mode Contract Terms Logistics Management Issues Warehousing & Distribution Importance & Types of Warehouses Risk Pooling & Warehouse Location

33. The Fundamentals of Transportation The Objective of Transportation Maximize value to firm through negotiation to provide profit contribution Make sure service is provided effectively Satisfy customer needs

34. Legal Forms of Transportation • Transportation service companies are classified legally as either common, contract, exempt, or private carriers. • Common carriers- offer transportation services to all shippers at published rates between designated locations without discrimination. • Contract carriers- not bound to serve the general public. Contract carriers serve specific customers under contractual agreements. • Exempt carriers- exempt from regulation of services & rates & if they transport certain exempt products like produce, livestock, coal, or newspapers. • Private carrier- not subject to economic regulation & typically transports goods for the company owning the carrier.

35. Transportation Physical distribution managers must ALSO decide on which mode of transport is Best to distribute Products to the Customers.

36. Modes Of Transport • Available modes of transport are: -Road transport (cars, trucks), -Railway transport, -Water transport (ships), -Air transport, and -Pipelines (oil, natural gas).

37. Modes Of Transport • Air transport is very expensive and limited in Space availability. • Therefore, It is usually preferred for small-quantity, high-value products, which require fast delivery (e.g., highly fragile electronic parts).

38. Modes Of Transport • On the contrary, Water or Railway transportation is slower BUT cheaper. Therefore, they are used for carrying Large Quantities of raw materials (e.g., coal and iron).

39. Modes Of Transport

40. Modes Of Transport • There may be some limitations on these modes of transport, as well. • For example, only Gas and Liquids can be conveniently transported by Pipelines. • Similarly, very large products (such as building sections) would not fit in most Aircrafts.

41. Motor Carriers Motor Carriers (trucks)- most flexible mode of transportation & carries > 80% of U.S. freight. Competes w/rail & air for short-to-medium hauls. • Less-than-truckload (LTL) & truck-load (TL)carriers. LTL carriers move small shipments & fees are higher. • General freight carriers carry the majority of goods shipped & include common carriers. • Specialized carriers transport liquid petroleum, household goods, building materials, & other specialized items.

42. Rail Carriers Rail Carriers- compete when the distance is long & the shipments are heavy or bulky. • Rail slow & inflexible, but have begun purchasing motor carriers & can thus offer point-to-point pickup & delivery service known as trailer-on-flatcar (TOFC) service. • Rail companies use each other’s rail cars. Keeping track of rail cars & getting them where needed can be problematic. • Railroad infrastructure & aging equipment are also problems for the railroads.

43. Air Carriers Air Carriers- Expensive relative to other modes but fast. Air carriers transport about 5 % of U.S. freight. • Airlines cannot carry extremely heavy or bulky cargo. • For light, high value goods over long distances quickly. Most small cities & towns do not have airports. • Half of the goods transported by air are carried by freight–only airlines, FedEx.

44. Water Carriers Water Carriers- Inexpensive, slow & inflexible. Includes inland waterway, coastal & intercoastal, & deep-sea. • Inland waterway transportation is used for heavy, bulky, low-value materials (e.g., coal, grain). • Competes w/rail & pipeline. • Water carriers are paired w/trucks for door-to-door delivery. • Supertankers are +1,500 ft long & 200 ft wide.

45. Pipeline Carriers Pipeline Carriers- Limited in variety they can carry. • Little maintenance once pipeline is running. • Materials hauled in a liquid or gaseous state.

46. Intermodal Transportation Intermodal Transportation Combinations of the various transportation modes, is becoming a popular method. • Trailer-on-flatcar (TOFC), container-on-flatcar (COFC), piggy-back service. The same containers can be placed on board containerships & airliners. • RO-ROs or roll-on-roll-offcontainerships truck trailers & containers to be directly driven on & off the ship, without the use of cranes.

47. Transportation Pricing Transportation Pricing • Cost-of-service pricing- varies based on fixed & variable costs. • Value-of-Service Pricing- services priced at market bearing competitive levels. • Terms of Sale- includes transportation FOB (free on board) destination. • Pricing Negotiation- Since deregulation, negotiating prices has become more common. • Rate Categories- Classified asline haul rates, class rates, exception rates, commodity rates, & miscellaneous rates.

48. Transportation Security Transportation Security • Particularly important regarding airline security since Sept. 11 2001 • Aviation & Transportation Security Act (2001)- Transportation Security Administration (TSA) to oversee transportation security which oversees 429 US airports • Department of Homeland Security (DHS) (2003) created to provide overall U.S. security leadership. • Not all measures have improved security as envisioned

49. Transportation Regulation & Deregulation • Pro-Regulation tends to assure adequate transportation service throughout the country while protecting consumers from monopoly pricing, safety, & liability. • Con- Deregulation encourages competition & allows prices to adjust as demand & negotiations dictate. • Today, U.S. transportation industry remains essentially deregulated

50. Transportation Regulation • Granger laws (1870s)- regulate the RRs. • Interstate Commerce Act of 1887- Created the Interstate Commerce Commission (ICC). • Transportation Act of 1920- Changes to IC Act. • Motor Carrier Act of 1935- brought motor carriers under ICC control. • Transportation Act of 1940- established ICC control over domestic water transportation. • Federal Aviation Act of 1958 created air traffic & safety regulations & national airport system. • Department of Transportation Act 1966- Coordination of all transportation-related matters.