SC%20Design%20Facility%20Location%20Strategy

1
SC Design Facility Location Strategy
2
Frequency Decomposition

• SCs are enormous
• It is hard to make all decisions at once
• Integration by smart decomposition
• Frequency decomposition yields several sets of
  decisions such that each set is integrated within
  itself

3
Frequency Decomposition

• Low frequency activity, once a year, high fixed
  cost
• RD budget
• Capacity expansion budget
• Moderate frequency activity, once a month
• Cancellation of specific RD projects depending
  on experimental outcomes
• Specific machines to purchase
• High frequency activity, once a day, low fixed
  cost
• What experiments to start / continue today
• What to produce

4
Facility Location The Cost-Response Time
FrontierAn inventory location based point of view
7-Eleven
Regional
Hi
Local Finished Goods (FG) Inventory
Regional FG Inventory
Cost
Local WIP (work-in-process)
Central
Sams Club
Central FG Inventory
Central WIP
Central Raw Material and Custom production
Custom production with raw material at suppliers
Low
Pull the inventory upstream
Low
Response Time
Hi
5
Where inventory needs to be for a one week order
response time - typical results --gt 1 DC
Customer
DC
6
3 day order response time - typical results --gt 5
DCs
Customer
DC
7
Same day / next day order response time - typical
results --gt 26 DCs
Customer
DC
8
Inbound and outbound shipping with more
facilities
Supplier
Manufacturer
Customer
Inbound shipment
Outbound shipment
Add more facilities for responsiveness
Inbound shipment
Outbound shipment
More inbound shipping and less outbound shipping
with more facilities. Less (inbound outbound)
shipping costs with more facilities possible,
if economies of scale in transportation.
9
Costs and Number of Facilities
Costs
Number of facilities
No economies of scale in shipment size, SC
covers a larger portion with each facility. With
economies of scale in inbound shipping to
retailers.
10
Cost Build-up as a function of facilities
Total Costs
Cost of Operations
Facilities
Inventory
Transportation
Labor
Number of Facilities
11
Classification of Network Design Decisions

• Facility function Plant, DC, Warehouse
• What facility performs what function
• Packaging at the manufacturer or warehouse
• Should a rental computer return location run
  diagnostic tests on the returned computers or
  should the testing be done at major warehouses?
• Question arising from CRU Computer Rental Case
  done in OPRE6302
• Facility location
• Starbucks opened up at UTD student apartments in
  2005 but closed in 2006!
• Recall Japanese 7-eleven and their blanketing
  strategy
• SMUs experimentation with Plano campus
  http//www.smu.edu/legacy .
• Capacity allocation
• SOM car park took 80 cars in 2005 and expanded in
  2006 to take about 110 cars,
• further expanded in 2009 to take about 300
  cars.
• Supply and market allocation
• Who serves whom
• By location UT Austin serves central Texas
  students
• By grade UT Arlington serves undergraduate
  students

12
Strategic Factors Influencing Location Decisions

• Strategic Facilities

Lead facility ltadvanced technologygt Lockheed
Martins JSF in Dallas
Global Customers
Regional Customers
Outpost facility ltLearn local skillsgt Facilities
in Japan Toyota Prius
Server ltlocal-contentgt Suzikis Indian
venture Maruti Udyog
Offshore ltreduced tariffsgt ltfor exportsgt VW
plants in Mexico Serving Latin America
Contributor ltcustomizationgt ltdevelopment
skillsgt Maruti Udyog
Source ltlow-costgt Nike plants in Korea
13
Factors Influencing Location Decisions

• Customer response time and local presence
• Operating costs main driver for offshoring
• Technological,
• Availability and economies of scale (fixed
  operational costs)
• Semiconductor manufacturing takes place only in
  5-6 countries worldwide
• Infrastructure, electricity, phone lines,
  suppliers
• Macroeconomic / Politic
• Tariffs, exchange rate volatility, economic
  volatility
• Economic communities Nafta, EU, Pacific Rim,
  Efta
• Stability
• Logistics and facility costs
• Competitive
• Positive externalities
• Nissan in India develops car suppliers which can
  also supply Suziki in India.
• DFW Telecom corridor hosting Alcatel, Ericsson,
  Nortel,
• Toyota City, Shopping Malls
• Negative externalities, see the next slide

14
Negative externalityMarket Splitting by
Hotellings Model

• 0 a b
  1

1-a-b
a
b

• Suppose customers (preferences, e.g. sugar
  content in coke)
• are uniformly distributed over 0,1
• How much does firm at a get, how about firm at b
  
• by locating as above?
• - If a locates first, where should b locate?
• - If a estimates how b will locate in response
  to as location, where should a locate?

15
Steps of Comparing Locations According to
McKinsey Global Institute on HBR Jun. 2006 p.91

• 1. Draw up a list of possible locations
• 2. Define the decision criteria
• Six common criteria used by companies
• 1. Cost of operating tax incentives from
  local/federal governments
• 2. Availability of the skills
• 3. Sales potential in the adjacent markets
• 4. Risk of doing the business
• 5. Attractiveness of living environments
• 6. Quality of infrastructure
• 3. Collect data for each location
• 4. Weight the criteria
• Fortisbank of Belgium, wants to enter new large
  markets, gives highest weight to 3.
• Citibank, wants a location for a captive IT
  center, gives the highest weight to 4.
• Find risk data at
• Economist intelligence unit www.eiu.com
• UN Development Program http//hdr.undp.org/statis
  tics/data/
• 5. Rank locations according to weighted sum of
  their scores
• 6. Assess the dynamics of the labor pool
• Availability of skilled labor Top tier
  universities in large U.S. cities (e.g., Dallas?).

16
Summary

• Frequency decomposition of activities
• A strategic framework for facility location
• Classification
• Factors
• Steps