Chapter 5 Network Design in the Supply Chain

1. Chapter 5Network Design in the Supply Chain 5-1

2. Outline • The Role of Network Design in the Supply Chain • Factors Influencing Network Design Decisions • Framework for Network Design Decisions • Models for Facility Location and Capacity Allocation • The Role of IT in Network Design • Making Network Design Decisions in Practice 5-2

3. Network Design Decisions • Facility role • Facility location • Capacity allocation • Market and supply allocation 5-3

4. Factors InfluencingNetwork Design Decisions • Strategic • Technological • Macroeconomic • Political • Infrastructure • Competitive • Logistics and facility costs 5-4

5. 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 Quick ship Hi Slow ship Response Time 5-5

6. Mid-term Service and Number of Facilities Response Time slow 10 weeks quick 1 day 1 facility 100 facility Number of Facilities many few 5-6

7. Mid-term Inventory Facility costs Transportation Costs and Number of Facilities high Costs low many Number of facilities few 5-7

8. Mid-term Cost Buildup as a Function of Facilities Total Costs Percent Service Level Within Promised Time Cost of Operations Facilities Inventory Transportation Labor Number of Facilities 5-8

9. Supply / Demand

10. Supply / Demand Mid-term

11. Optimized network

12. Optimization of Network Mid-term

13. Framework for Network Design Decisions • Phase I – Supply Chain Strategy • Phase II – Regional Facility Configuration • Phase III – Desirable Sites • Phase IV – Location Choices 5-13

14. A Framework forNetwork Design 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 5-14

15. 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 Conventional Network Customer Store 5-15

16. Local DC Cross-Dock Store 1 Regional Finished Goods DC Customer 1 DC Store 1 Local DC Cross-Dock National Finished Goods DC Store 2 Customer 2 DC Local DC Cross-Dock Store 2 Regional Finished Goods DC Store 3 Store 3 Tailored Network: Multi-Echelon Finished Goods Network 5-16

17. 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 5-17

18. Models for Facility Location and Capacity Allocation • Phase II • Capacitated Plant location model • Phase III • Gravity location models 5-18

19. 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? 5-19

20. 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 Demand Allocation Model 5-20

21. 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 5-21

22. 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 5-22

23. The Role of IT in Network Design • IT systems help with network design by: • Making the modeling of the network design problems easier • Containing high-performance optimization technologies • Allowing for “what-if” scenarios • Interfacing with planning and operational software 5-23

24. Making Network Design Decisions In Practice • Do not underestimate the life span of facilities • Do not gloss over the cultural implications • Do not ignore quality of life issues • Focus on tariffs and tax incentives when locating facilities 5-24

25. 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 5-25