Facility Decisions

1
Facility Decisions

• Network Design in a Supply Chain

2
Outline

• The Role of Distribution in the Supply Chain
• Factors Influencing Distribution Network Design
• Design Options for a Distribution Network
• The Value of Distributors in the Supply Chain
• Distribution Networks in Practice
• Summary of Learning Objectives

3
The Role of Distributionin the Supply Chain

• Distribution the steps taken to move and store a
  product from the supplier stage to the customer
  stage in a supply chain
• Distribution directly affects cost and the
  customer experience and therefore drives
  profitability
• Choice of distribution network can achieve supply
  chain objectives from low cost to high
  responsiveness
• Examples Wal-Mart, Dell, Proctor Gamble,
  Grainger

4
Factors InfluencingDistribution Network Design

• Distribution network performance evaluated along
  two dimensions at the highest level
• Customer needs that are met
• Cost of meeting customer needs
• Distribution network design options must
  therefore be compared according to their impact
  on customer service and the cost to provide this
  level of service

5
Factors InfluencingDistribution Network Design

• Elements of customer service influenced by
  network structure
• Response time
• Product variety
• Product availability
• Customer experience
• Order visibility
• Returnability
• Supply chain costs affected by network structure
• Inventories
• Transportation
• Facilities and handling
• Information

6
Service and Number of Facilities (Fig. 4.1)
Number of Facilities
Response Time
7
The Cost-Response Time Frontier
High
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
High
Low
Response Time
8
Inventory Costs and Numberof Facilities (Fig.
4.2)
Inventory Costs
Number of facilities
9
Transportation Costs andNumber of Facilities
(Fig. 4.3)
Transportation Costs
Number of facilities
10
Facility Costs and Numberof Facilities (Fig. 4.4)
Facility Costs
Number of facilities
11
Total Costs Related to Number of Facilities
Total Costs
Total Costs
Facilities
Inventory
Transportation
Number of Facilities
12
Variation in Logistics Costs and Response Time
with Number of Facilities (Fig. 4.5)
Response Time
Total Logistics Costs
Number of Facilities
13
Design Options for a Distribution Network

• 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
• Selecting a Distribution Network Design

14
Manufacturer Storage withDirect Shipping (Fig.
4.6)
Manufacturer
Retailer
Customers
Product Flow
Information Flow
15
In-Transit Merge Network (Fig. 4.7)
Factories
In-Transit Merge by Carrier
Retailer
Customers
Product Flow
Information Flow
16
Distributor Storage withCarrier Delivery (Fig.
4.8)
Factories
Warehouse Storage by Distributor/Retailer
Customers
Product Flow
Information Flow
17
Distributor Storage withLast Mile Delivery (Fig.
4.9)
Factories
Distributor/Retailer Warehouse
Customers
Product Flow
Information Flow
18
Manufacturer or Distributor Storage with Customer
Pickup (Fig. 4.10)
Factories
Cross Dock DC
Retailer
Pickup Sites
Customers
Customer Flow
Product Flow
Information Flow
19
Comparative Performance of Delivery Network
Designs (Table 4.7)

Manufacturer storage with pickup
Distributor storage with last mile delivery
Distributor Storage with Package Carrier Delivery
Manufacturer Storage with In-Transit Merge
Manufacturer Storage with Direct Shipping
Retail Storage with Customer Pickup
Response Time
1
2
3
4
4
4
Product Variety
1
1
1
2
3
4
Product Availability
2
3
1
1
1
4
5
Customer Experience
1
2
3
4
5
5
Order Visibility
1
2
3
4
6
Returnability
1
2
3
4
5
5
Inventory
1
1
1
2
3
4
Transportation
1
1
2
3
4
5
Facility Handling
1
2
3
4
5
6
3
Information
1
2
4
4
5
20
Linking Product Characteristics and Customer
Preferences to Network Design
2
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-1
-2
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1
0
0
0
-1
1
1
1
0
-1
-1
2
1
1
0
-2
-2
2
1
1
0
-1
-1
2
1
1
0
-1
-2
2
1
-1
-2
-2
-2
2
2
1
0
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1
-1
-2
21
The Value of Distributorsin the Supply Chain

• Distributing Consumer Goods in India
• Distributing MRO Products
• Distributing Electronic Components

22
Distribution Networks in Practice

• The ownership structure of the distribution
  network can have as big as an impact as the type
  of distribution network
• The choice of a distribution network has very
  long-term consequences
• Consider whether an exclusive distribution
  strategy is advantageous
• Product, price, commoditization, and criticality
  have an impact on the type of distribution system
  preferred by customers

23
Summary of Learning Objectives

• What are the key factors to be considered when
  designing the distribution network?
• What are the strengths and weaknesses of various
  distribution options?
• What roles do distributors play in the supply
  chain?

24
Outline

• A strategic framework for facility location
• Multi-echelon networks
• Gravity methods for location
• Plant location models

25
Network Design Decisions

• Facility role
• - flexibility of Toyota since 1997
• Facility location
• - Amazon.com a single warehouse in Seattle
• Capacity allocation
• - Allocating too much ? poor utilization
• - Allocating too little ? poor
  responsiveness, high cost
• Market and supply allocation
• - Amazon.com built new warehouses due to
  grown markets

26
Factors Influencing Network Design Decisions

• Strategic Cost vs. Responsiveness
• ex) Apparel producers, Convenience stores,
  Discount stores
• Technological
• Economies of scale ? few high-capacity
  locations
• ex) Manufacturer of computer chips
• Lower fixed costs ? many local facilities
• ex) Bottling plants for Coca-Cola
• Macroeconomic
• Tariffs, Tax incentives, Exchange rate and
  Demand risk
• Political

27
Factors Influencing Network Design Decisions
(continued)

• Infrastructure
• availability of sites labor
• proximity to transportation terminals, rail
  service, airports and seaports
• highway access, congestion, local utilities
• Competitive Close vs. Far
• ex) Retail stores in a mall, Supermarkets
• Logistics and facility costs

28
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
Hi
Low
Response Time
29
Service and Number of Facilities
Response Time
Number of Facilities
30
Where inventory needs to be

• for a 1 week order response time 1 DC
• for a 5 day order response time 2 DCs
• for a 3 day order response time 5 DCs
• etc

31
Costs and Number of Facilities
Costs
Number of facilities
32
Cost Build-up as a function of facilities
Percent Service Level Within Promised Time
Transportation
33
A Framework for Global 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
34
Conventional Network
Customer Store
5-34
35
Tailored Network Multi - Echelon Finished Goods
Network
36
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?
37
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

38
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

39
Capacity Investment Strategies

• Speculative Strategy
• Single sourcing
• Hedging Strategy
• Match revenue and cost exposure
• Flexible Strategy
• Excess total capacity in multiple plants
• Flexible technologies

40
Summary

• Factors influencing facility decisions
• A strategic framework for facility location
• Gravity methods for location
• Network optimization models
• Value capacity as a real option

41
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

5-41
42
Location Allocation Decisions
Plants
Warehouses
Markets
1
2
Which plants to establish? Which warehouses to
establish? How to configure the network?
43
Plant Location with Single Sourcing

• yi 1 if plant is located at site i, 0 otherwise
• xij 1 if market j is supplied from plant site
  i, 0 otherwise

44
Conventional Network
45
Gravity Methods for Location

• Ton-Center Solution
• x,y Warehouse Coordinates
• xn, yn Coordinates of delivery location n
• Fn Annual tonnage to delivery location n

Min