Network Design in Supply Chain

6/2/2017

(Ch. 5)

TECH 492/592 –Manufacturing Distribution Applications

July 3, 2017

Today

•Topics–Ch. 5: Network design in supply chain•Except pages 121 –132 •Handouts–TECH -492-592_2017Su -0703_Ch5 -Figure_5 -3_to_Figure_5 -7.xlsx •Assignments / Announcements (Due) –Assignment 3 (Due 7/3, 11:59 PM ) •Question in the slide –Quiz 1 (Due 7/3, 11:59 PM) –Read Ch. 5 –Assignment 4 (Due 7/10, 11:59 PM) •Questions in the next slide•Submit Excel file/sheet with all necessary conditions for Solver –so that Solver can be checked –Suggestions for Assignment 4•Start immediately, email any questions•Read hints in the following slides•Use Excel 2010 or 2013•Modify the Solver model in “ TECH-492-592_2017Su -0703_Ch5 -Figure_5 -3_to_Figure_5 -7.xlsx” •Use simplex method –choose “Simplex LP” method from the dropdown menu of “Select a Solving Method:”

Assignment 4

•Read Ch. 5 Exercise 2 “DryIce , Inc.” •Assume that the company now faces the increased demand below (instead of the demand described in the original problem)–New demand at each market region•East : 200,000 •South : 700,000 •Midwest : 200,000 •West : 100,000 •Production costs, transport costs, and fixed costs of plants are same as those in Table 5 -6 •Questions–(1-1) Where should DryIce build its plants and how large should they be? –(1-2) How much units should DryIce transport to each market region from each plant?–Submit Excel files/sheet with all necessary conditions for Solver to run optimization –so that Solver models can be checked

Hints for Assignment 4

•Modify the provided Excel template for the assignment–Enter the data of the problem in the template in the unit of: •$1,000 for facility cost •$ per unit for cost of air conditioner •1,000 units for demand –For example:•Fixed cost of New York 200,000 -capacity plant would be $6,000 instead of $6,000,000 •Demand in South would be 180 instead of 180,000 –In Solver, change the ranges of:•Variables in “ By Changing Variable Cells: ” box •Constraints in “ Subject to the Constraints: ” box because the number of markets and the number of production sites are different from template •First run with the demand given in the original problem–If you set up Excel solver correctly, you should get the results similar to those in the next slide •Then run the Solver with the demand in the Assignment 4 slide

Hints for Assignment 4

•Cost data are not shown below

Some Basics about Excel

•Cell–Cell is defined by a row and a column of spread sheet –Row is specified by a number –Column is specified by an alphabet –If cell is described as “B14”, the cell is at the intersection of column “B” and row “14”•“$B$14” is essentially same as “B14” –We can enter a number, text, formula, or logic statement in a cell–If we enter a formula or a logic statement , we need to start the entry with “ =” signDecision Variables

Low Capacity

Plants

High Capacity

Plants

Supply Region East South Midwest W est (1=open) (1=open)

New York 0 0 0 0 0 0

Atlanta 110 180 110 0 0 1

Chicago 0 0 0 0 0 0

San Diego 0 0 10 100 1 0

Constraints

Supply Region Excess Capacity

New York 0

Atlanta 0

Chicago 0

San Diego 90

East South Midwest W est

Unmet Demand 0 0 0 0

Objective Function

Cost = 129,480 $ in units of $1,000

Demand Region - Production Allocation (1000 Units) 6/2/2017

Some Basics about Excel

•If cells are defined as “ B14:B18 ”, –We are referring to all the cells between and including B14and B18(and any data in these cells) –These cells are:B14B15B16 B17 B18 •If cells are defined as “ B14:F14 ”, –We are referring to all the cells between and including B14and F14 (and any data in these cells) –These cells are:B14, C14, D14, E14, F14 •If cells are defined as “ B14:H18 ”, –We are referring to all the cells in the rectangular area between and including B14and H18(and any data in these cells ) –These cells are:B14, C14, D14, E14, F14, G14, H14B15, C15, D15, E15, F15, G15, H15B16, C16, D16, E16, F16, G16, H16B17, C17, D17, E17, F17, G17, H17B18, C18, D18, E18, F18, G18, H18

Some Basics about Excel

•“SUM ” function

–SUM function adds the number in the cells

specified in the parenthesis immediately after “SUM”

–For example, “ =SUM(B14:B18) ” calculates sum of the numbers in cells “B14:B18”

–This means that we are adding the numbers in cells

B14 , B15, B16, B17, and B18

Some Basics about Excel •“SUMPRODUCT ” function –SUMPRODUCT function takes two sets of cells specified in the parenthesis immediately after “SUMPRODUCT”–These two sets of cells are separated by “ ,” in the parenthesis –For example, “=SUMPRODUCT(B14:F18, B4:F8) ” refers to two sets of cells –B14:F18 and B4:F8 •The sizes of two sets of cells have to be the same –same number of column and same number of row First set of cells Second set of cells B14 C14 D14 E14 F14 B4 C4 D4 E4 F4 B15 C15 D15 E15 F15 B5 C5 D5 E5 F5 B16 C16 D16 E16 F16 B6 C6 D6 E6 F6 B17 C17 D17 E17 F17 B7 C7 D7 E7 F7 B18 C18 D18 E18 F18 B8 C8 D8 E8 F8 –Then SUMPRODUCT function first multiply numbers in the corresponding cells and then add the multiplied numbers (i.e., products ) –For example, “=SUMPRODUCT(B14:F18 , B4:F8) ” calculates the following products and add them up B14 ×B4 C14 ×C4 D14 ×D4 E14 ×E4 F14 ×F4 B15 ×B5 C15 ×C5 D15 ×D5 E15 ×E5 F15 ×F5 B16 ×B6 C16 ×C6 D16 ×D6 E16 ×E6 F16 ×F6 B17 ×B7 C17 ×C7 D17 ×D7 E17 ×E7 F17 ×F7 B18 ×B8 C18 ×C8 D18 ×D8 E18 ×E8 F18 ×F8 –In the above example, •“B14:F18” may be transportation cost per unit from each supply region to each demand market •“B4:F8” may be the number of units transported from each supply region to each demand market •Then each product is the transportation cost to transfer required units from each supply region to each demand market •The sum of the all products is the total transpiration cost to transfer required units from all supply region to all demand market

Some Basics about Solver •Constraints•“$B$22:$B$26≥0 ” –Same as “ B22:B26≥ 0” and this means that all the numbers calculated in cells “B22:B26” have to be zero or positive B22≥0B23≥0B24≥0B25≥0B26≥0 –Use this constraints to set that capacity has to be larger than supply •Capacity –Supply ≥ 0 •“$B$28:$F$28=0 ” –Same as “B28:F28=0” and this means that all the numbers calculated in cells “B28:F28” have to be zero B28=0, C28=0, D28=0, E28=0, F28=0 –Use this constraints to make sure that there is no excess supply •Supply –Demand = 0 •“$G$14:$H$18=binary ” choose “ bin” after “Cell Reference” –Same as “G14:H18=binary” and this means that all numbers in cells “G14:H18” are either zero or one (binary ) –Use this constraints to describe whether or not we build facility •1 if facility is built•0 if facility is not built

Solver Installation

•Excel 2010, 2013–Click the File tab, and then click Options –Click Add -Ins, and then in the “ Manage ” box, select Excel Add -ins –Click Go –In the “ Add -Ins available ”box , select the Solver Add -in check box, and then click OK –Tip: If Solver Add -in is not listed in the Add -Ins available box, click Browse to locate the add -in •If you get prompted that the Solver add -in is not currently installed on your computer, click Yes to install it –After you load the Solver add -in, the Solver command is available in the Analysis group on the Data tab

Topics: Network Design in Supply

Chain

•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

•Making network design decisions in practice

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall. 6/2/2017

Supply Chain Network Design

•Design of supply chain network

–Significantly impacts supply chain performance (responsiveness and efficiency)

•Network design decisions

–Determine supply chain configuration and constraints

•Supply chain designers can only manipulate:

–Supply chain drivers within the constraints to reduce supply chain cost or increase supply chain responsiveness

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

The Role of Network Design in

the Supply Chain

Supply Chain Network Design

Decisions

•Supply chain network design consists of the following four decisions

1. Assignment of facility role –What processes should each facility perform?

2. Location of manufacturing, storage, or transportation -related facility

3. Allocation of capacity for each facility

4. Allocation of market and supply –What markets should each facility serve?–Which facilities should each supply source feed?

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

1. Facility Role Decisions

•Facility role decisions determine flexibility of a supply chain in satisfying demand–Flexible facility or–Dedicated facility •Example: Toyota–Before 1997, each plant served only its local market –During Asian recession in 1990s, Toyota’s Asian plants had idle capacity; however, Toyota could not use the idle capacity to serve non -Asian markets because the plants were inflexibility –After 1997, Toyota added flexibility to each plant to be able to serve markets other than its local market •Example: Honda–Honda designed its US plants to be capable of producing both SUVs and cars in the same plant –Honda could effectively utilize plant capacity when SUV demand dropped but small car demand did not drop in 2008 (Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

2. Facility Location Decisions

•Facility location decisions –Have a long-term impact on making a supply chain responsive while keeping its cost low–Once built, it is very expensive to shut down a facility or move it to a different location •Example: Toyota–Toyota built its first US assembly plant in Lexington, Kentucky in 1988 and has used the plant since then–When the yen strengthened and cars produced in Japan was too expensive to be exported, the US plant enabled Toyota to cost -competitively provide cars to the US market –Lexington plant enabled Toyota to be responsive to the US market while keeping cost low (e.g., transportation) •Example : Amazon –Amazon initially had a single warehouse in Seattle–As demand increased, it became more difficult to cost-effectively supply books nationwide–Amazon added warehouses in other US locations

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

3. Capacity Allocation Decisions

•Capacity allocation impacts both responsiveness and cost of a supply chain –Allocating too much capacity •High responsiveness•Excess capacity, low utilization, and as a result, a higher cost –Allocating too little capacity •Poor responsiveness if demand is not satisfied •Low inventory cost•High transportation cost if demand is filled from a distant facility •Changing capacity allocation–Easier than changing location–Capacity decisions tend to stay in place for several years

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall. 6/2/2017

4. Market and Supply Source

Allocation Decisions

•Allocations of market and supply source –Significantly impact supply chain performance •Affects –Total production –Inventory–Transportation costs incurred by the supply chain to satisfy customer demand –Should be reviewed and revised if market conditions or plant capacities change•Market allocation can only be changed if: –Facilities are flexible enough to serve different markets •Supply source allocation can only be changed if: –Facilities are flexible enough to receive supplies from different sources •Example: Amazon–Amazon built additional warehouses so that each market is supplied from the closest warehouse•To lower cost (e.g., transportation) and improve responsiveness of its supply chain (Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Revisions of Supply Chain Network

Design Decisions

•Network design decisions should be revisited as a company grows or when two companies merge •When two companies merge:–There are often redundancies and differences in markets they serve –Consolidating some facilities and changing the location and role of others can often: •Reduce cost •Improve responsiveness of the supply chain •Network design decisions may also need to be revisited if:–Factors that impact cost and responsiveness of a supply chain change significantly •Example : P&G –In 2008, P&G announced that it would rethink distribution network due to increase in the oil cost–The old distribution network was implemented when the “cost of oil was $10 per barrel”

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Factors Influencing Network

Design Decisions

Factors Influencing Network Design

Decisions

•There is a wide variety of factors that influence network design decisions

•These factors may be classified into:–Strategic factors –Technological factors –Macroeconomic factors –Political factors –Infrastructure factors –Competitive factors –Customer response time and local presence –Logistic and facility costs

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Strategic Factors:

Competitive strategy

•Company’s competitive strategy–Has a significant impact on supply chain network design decisions •Company that focuses on efficiency –Tends to find low-cost locations for its manufacturing facilities even if the facilities are very far from the markets they serve–Example: Many apparel manufacturers in 1980s moved their manufacturing out to low -cost countries •Company that focuses on responsiveness –Tends to locate facilities close to the market even if it is a high -cost location as far as the company can react quickly to the changing market needs –Example: Zara, Spanish apparel manufacturer, has a large fraction of its manufacturing capacity in Portugal and Spain despite their high costs–The local capacity allows Zara to quickly respond to changing fashion trends in Europe

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Strategic Factors:

Competitive strategy

•Example: Convenience store chains–Competitive strategy: provide easy access to customers (high responsiveness ) –Network design: cover an area by locating many small stores •2015: 154,195 stores in US (4,732 in IL) •Example: Discount stores such as Sam’s Club–Competitive strategy: provide products with low prices –Network design: locate few large stores to reduce cost even though customers need to travel many miles to the store •2015: 655 stores in US •Each store covers an area that may be covered by many convenience stores

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall. (Source) http://www.nacsonline.com/research/factsheets/scopeofindustry/pages/industrystorecount.aspx 6/2/2017

Strategic Factors:

Global Supply Chain Network

•Global supply chain networks

–Need to be supported by facilities in various countries, each of which plays different role

•Example: Nike

–Facilities in China and Indonesia focus on cost and produce mass -market lower -priced shoes

–Facilities in Korea and Taiwan focus on responsiveness and produce high -priced new designs

–The above differentiation allow Nike to fulfill a wide variety of demands in the most profitable manner

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Strategic Factors:

Role of Facility in Global Supply Chain

Network •Strategic roles of various facilities in a global

supply chain network may be classified in to

the following categories

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Category Description

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

Strategic Factors:

Offshore Facility

•Offshore facility

–Low -cost facility for export production

–Serves as a low -cost supply source for markets located outside of the country where the facility is located

–Should have low labor costs to facilitate low cost production

•Example

–Facilities located in Asian developing counties serve as offshore facilities •Developing countries may waive import tariffs (for materials) if all the outputs from the facilities are exported

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Strategic Factors:

Source Facility

•Source facility–Low -cost facility for global production –Serves as a primary supply source for the entire global network –Tends to be located in places where: •Production costs are relatively low•Infrastructure is well developed•Skilled workforce is available •Good offshore facilities migrate overtime into source facilities•Example–Many Chinese and Indian apparel manufacturers are transforming into source facilities since the reduction of apparel quotas in 2005

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Strategic Factors :

Server Facility

•Server facility–Regional production facility –Serves as a supply source for the market where it is located •Server facility is built to benefit from:–Tax incentives, satisfy local requirements, avoid tariff barriers, or avoid high logistics cost •Example–Suzuki partnered with the Indian government to set up Maruti Udyog in late 1970s –Maruti was set up as a sever facility that produce cars only for the Indian market–Suzuki could avoid high tariffs on imported cars

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Strategic Factors:

Contributor Facility

•Contributor facility–Regional production facility with development skills –Serves as a source to supply the market where the facility is located ; in addition, the facility is expected to be capable of: •Product customization•Process improvements•Product modifications•Product development •Well -managed server facilities become contributor facilities over time•Example–Suzuki’s Maruti facility in India today develops many new products for both the Indian and the overseas market–Maruti facility has become a contributor facility from a server facility

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall. 6/2/2017

Strategic Factors:

Outpost Facility

•Outpost facility–Regional production facility built to gain local skills –Located to gain knowledge or skills that may exist within a certain region–Serves as a source of knowledge and skills for the entire network–Given its location, an outpost facility also serves as a server facility

•Example–Many global companies have set up outpost production facilities in Japan despite high operation costs

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Strategic Factors:

Lead Facility

•Lead facility

–Facility that leads in development and process technologies

–A lead facility creates: •New products•New processes •New technologies

for the entire network

–Located in areas with good access to a skilled workforce and technological resources

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Technological Factors

•Characteristics of available production technologies –Have a significant impact on supply chain network design decisions •Production technology that displays significant economies of scale –A few high -capacity facilities are most effective –Example: facilities of computer chip manufacturers (such as semiconductor companies) require very large investment costs•Companies need to produce a large quantity of products so that investment cost per product is reduced •Facility with a lower fixed cost –Many local facilities are preferred because local facilities lead to lower transportation costs–Example: bottling facilities of Coca -Cola do not require large fixed costs; thus, Coca -Cola sets up many bottling facilities worldwide with each facility serving local market to reduce transportation costs •Flexible production technology–Enables companies to consolidate manufacturing in a few large facilities that serve multiple products/markets

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Macroeconomic Factors

•Macroeconomic factors are economic factors

that are external to companies

–Companies cannot control these factors

•Macroeconomic factors include:

–Tariffs and tax incentives

–Exchange rate and demand risk

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Macroeconomic Factors:

Tariffs and Tax Incentives

•Tariffs–Duties on products and equipment that are imported across international, state, or city boundaries–High tariffs lead to localization with small capacity •Companies either do not serve the local market or set up manufacturing facilities within the country to avoid duties –Low tariffs lead to consolidation with large capacity •Global companies can supply a market within a country from facilities located outside that country •Tax incentives –Reductions of tariffs or taxes provided by countries, states, or cities •To encourage companies to locate their facilities in specific areas –Example •General Motors’ Saturn facility in Tennessee•BMV’s US factory in Spartanburg, South Carolina (Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Macroeconomic Factors:

Tariffs and Tax Incentives

•Free trade zones –Areas in which duties and tariffs are relaxed •As long as production is used primarily for export –Global companies locate their facilities in these areas to exploit low labor costs in the areas –Example: Free trade zone near Guangzhou in China •Countries may reduce or waive tariffs for “high -tech” products to encourage companies to bring in state -of-the-art technologies –Example: Motorola’s large manufacturing plant in China •Countries may also require minimum requirements on local content and limits on import–Example : Until 2004, US limited the import of apparel from various countries (set a limit on import from each country)•Companies developed suppliers in many countries to avoid reaching the limit from any single country•After quota was removed in 2005, companies started to consolidate apparel manufacturing primarily in China and India

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall. 6/2/2017

Macroeconomic Factors:

Exchange Rate and Demand Risk

•Exchange rates have significant impacts on the profitability of a supply chain that serves global markets–Example: exchange rate fluctuated between 102 and 132 Yen/$ between 2002 and 2004–Lower Yen/$ (appreciation of Yen against $, i.e., stronger Yen)•Production in Japan: same cost in Yen larger cost in $ decrease in profit margin•Export from US: lower price in Yen for the same price in $ of products produced in US easier to sell/export US products in Japan •Import to US: higher price in $ for the same price in Yen of products/materials produced in Japan more expensive to buy/import Japanese products/materials –1-cent rise in euro (appreciation of euro) cost BMW and Mercedes approximately $75M each per year •Supply chain network strategy to account for exchange -rate fluctuation–Build local facilities (server facilities) –Build overcapacity into the network and make the capacity flexible so that companies can alter production flow and supply different markets (Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Macroeconomic Factors:

Exchange Rate and Demand Risk

•Companies also need to account for fluctuations in demand •Supply chain network strategy to account for demand fluctuation–Make manufacturing facilities flexible to be able to supply demand from other countries •Example: Toyota–Toyota had assembly facilities in Asia that were only capable of producing products for the local market –After Asian financial crisis, Toyota made the facilities more flexible so that Asian facilities can produce products for non -Asian markets

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Macroeconomic Factors:

Exchange Rate and Demand Risk

•Exchange rates have significant impacts on the profitability of a supply chain that serves global marketsExample•Exchange rate fluctuated between 102 and 132 Yen/$ between 2002 and 2004–Lower Yen/$ (appreciation of Yen against $, i.e., stronger Yen)•Production in Japan: same cost in Yen larger cost in $ decrease in profit margin•Export from US: lower price in Yen for the same price in $ of products produced in US easier to sell/export US products in Japan •Import to US: higher price in $ for the same price in Yen of products/materials produced in Japan more expensive to buy/import Japanese products/materials –1-cent rise in euro (appreciation of euro) cost BMW and Mercedes approximately $75M each per year •Supply chain network strategy to account for exchange -rate fluctuation –Build local facilities (server facilities) –Build overcapacity into the network and make the capacity flexible so that companies can alter production flow and supply different markets (Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Buy material from JapanSell product in US

Make product in USSell in Japan

Macroeconomic Factors:

Exchange Rate and Demand Risk

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Political Factors

•Political stability of a country is important in

the choice in facility locations

•Examples

–Rules of commerce and ownership need to be

clearly defined

–Independent and clear legal systems need to be

established

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Infrastructure Factors

•Availability of good infrastructure is an important requirement to locate facilities

•Key infrastructure elements include:

–Availability of sites

–Availability of labor

–Proximity to transportation terminal

–Rail service

–Proximity to airports and seaports

–Highway access

–Low congestion

–Local utilities (Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall. Import US perspective

US sales Profit

Yen $ Yen $ $ (US sales - Japan cost)

Current 100 1 100 1 2 1

Exchange rate Japan cost Import US perspective

US sales Profit

Yen $ Yen $ $ (US sales - Japan cost)

Current 100 1 100 1 2 1

Weaker $ 50 1 100 2 2 0

Exchange rate Japan cost Import US perspective

US sales Profit

Yen $ Yen $ $ (US sales - Japan cost)

Current 100 1 100 1 2 1

Weaker $ 50 1 100 2 2 0

Stronger $ 200 1 100 0.5 2 1.5

Exchange rate Japan cost Export US perspective

US cost Profit

Yen $ $ Yen $ (Japan sales - US cost)

Current 100 1 1 200 2 1

Japan sales Exchange rate Export US perspective

US cost Profit

Yen $ $ Yen $ (Japan sales - US cost)

Current 100 1 1 200 2 1

Weaker $ 50 1 1 200 4 3

Japan sales Exchange rate Export US perspective

US cost Profit

Yen $ $ Yen $ (Japan sales - US cost)

Current 100 1 1 200 2 1

Weaker $ 50 1 1 200 4 3

Stronger $ 200 1 1 200 1 0

Japan sales Exchange rate 6/2/2017

Competitive Factors

•Competitors’ strategies , sizes , and locations

–Decide whether to locate facilities close to or far

from competitors

•Competitive factors include:

–Positive externalities between firms

–(Locating to split the market )

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Competitive Factors:

Positive Externalities between Firms

•Positive externality–“Consequence of an economic activity that benefit unrelated third parties”–Collocation of multiple companies benefits all of them •Results in competitors locating near each other

Example

•Retail stores located close to each other in a mall –Collocation increases the overall demand •Benefits all parties –Customers only need to trip to one location •Customers find everything they are looking for •Increases the total number of customers who visit the mall •Increases the demand for all stores located in the mall (Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall. (Source) http://www.investopedia.com/terms/e/externality.asp

Competitive Factors:

Positive Externalities between Firms

Example

•Presence of competitors lead to the

development of appropriate infrastructure in

a developing area

–Suzuki was the first company that built a manufacturing facility in India •Created a local supplier network

–Suzuki’s competitors have also built assembly facilities in India •Due to well -established supplier base •It was more effective to build cars in India rather than to import cars to India (Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Customer Response Time and Local

Presence

•Companies that target customers who value short response time –Locate close to the customers –Use fast mode of transportation

Example

•Convenience store vs. discounter –Convenience store chains •Compete on responsiveness •Locate many stores distributed in an area –Customers do not need to travel long distance –Discounters such as Sam’s club•Compete on low prices rather than responsiveness •Locate few large stores in an area (Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Customer Response Time and Local

Presence

Example

•W.W . Grainger vs. McMaster -Carr

–W.W. Grainger •About 400 facilities nationwide –Provide same -day delivery of MRO products •Targets to be responsive

–McMaster -Carr •Five facilities nationwide –Provides next -day delivery •Targets customers who are willing to wait for next -day delivery

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Customer Response Time and Local

Presence

•In some cases, it is important to locate

facilities close to the customers

–Even if fast transportation helps a company to be responsive

Example

•Coffee shops

–Coffee shops attract customers near the shops

–No fast mode of transportation helps coffee shops to attract customers far from the shops

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall. 6/2/2017

Logistic and Facility Costs

•Total logistic costs are sum of:

–Inventory cost

–Transportation cost

–Facility cost

•Logistics and facility costs change with:

–Number of facilities

–Locations

–Capacities

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Logistic and Facility Costs

•As the number of facilities increase , –Inventory and facility costs increase –Transportation costs decrease and vise versa•If the number of facilities increases to a point where inbound economies of scale are lost –Transportation costs increase –Because economies of scale in transporting products from manufacturing facilities to warehouses are lost Example•Amazon vs. Barnes & Noble–Amazon has fewer facilities than Barnes & Noble•Lower inventory and facility costs•Higher transportation costs –Barnes & Noble has about 700 stores nationwide (Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Logistic and Facility Costs

•Supply chain network design–Influenced by the transformation occurring at each facility

•If there is a significant reduction of material weight or volume as a result of processing material at a facility –May be better to locate the facility closer to the supply source than to the customer

Example

•Steel making–Amount of output (iron) is a small fraction of the amount of ore used–Locating the steel factory close to the supply sources is preferred •Reduces the distance that the large quantity of ore travel (Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Framework for Network Design

Decisions

Framework for Network Design

Decisions

•Goal of designing a supply chain network

–Maximize company’s profit while satisfying customer needs in terms of demand and responsiveness

•Supply chain network design decisions are made

in the following four phases

–Phase I: Define a supply chain strategy/design

–Phase II: Define the regional facility configuration

–Phase III: Select a set of desirable potential sites

–Phase IV: Select locations

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

•

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

1: Target customer needs

2: Local or global competitors 3: Acquisition, new, partnering 6/2/2017

Phase I: Define a Supply Chain

Strategy/Design

•Objective of Phase I–Define company’s broad supply chain design •Stages in the supply chain to be included •Whether each supply chain function will be performed in-house or outsourced •Phase I starts with specifying: –Competitive strategy •A set of customer needs that the supply chain aims to satisfy –Capabilities of the supply chain network •For supporting the competitive strategy •Supply chain designers –Forecast likely evolution of global competition •Identify whether competitors in each market will be local or global players –Identify whether growth will be accomplished by acquiring existing facilities, building new facilities, or partnering •Identify constraints on available capital •Based on above, supply chain designers determine broad supply chain network design–Stages , potential regions , capacities , and roles of facilities

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

•

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

1: Demand forecast

2: Consolidated or regional facilities

3: Macro economic factors

4: Regional competitors

5: Overall logistic costs in the region

Phase II: Define the Regional Facility

Configuration

•Objective of Phase II –Identify regions to locate facility, potential facility roles , approximate capacities •Phase II starts with:–Forecast of demand by country •Sizeof demand •Whether customer requirements are homogeneous or variable across different countries •Supply chain designers –Identify whether economies of scale or scope can play a significant role in reducing costs (by consolidated facilities) with given available production technologies –Identify macroeconomic factors for each regional market •Demand risk •Exchange -rate risk •Political risk•Regional tariffs•Requirements for local production•Tax incentives•Export or import restriction –Identify competitors in each region –Decide to locate facility close to or far from competitor ’s facilities •Use network design models to identify regional facility configuration (Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Large consolidated facilities Flexible or small dedicated facilities

•

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

1: Requirements for production method 2: Analyze infrastructure

Phase III: Select a Set of Desirable

Potential Sites

•Objective of Phase III–Select a set of desirable potential sites within each region •Based on the availability of infrastructure to support the desired production methodologies •Hard infrastructure requirements include: –Availability of suppliers –Transportation services –Communication–Utilities–Warehousing infrastructure •Soft infrastructure requirements include: –Availability of skilled workforce–Workforce turnover–Community receptivity to business and industry •Potential sites of facilities within each region (Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

•

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

1: Estimated cost 1: Estimated cost 2: Maximum profit 6/2/2017

Phase IV: Select the Location

•Objective of Phase IV–Select •Precise locations•Capacity for each facility –Restricted to the sites selected in Phase III •Supply chain designers–Select network design that maximizes total profit while taking into account: •Expected profit margin•Demand in each market•Various logistics and facility costs at each location •Tax and tariff at each location •Precise locations and capacities

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

•

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Models for Facility Location and

Capacity Allocation

Models for Facility Location and

Capacity Allocation

•Models that may be used in Phase II, III, and IV of

network design decisions will be discussed in this

section

–We will cover Phase II: Network Optimization Models in Section 5.4 pages 117 –120

•Read page 117 -120 (Section 5.4, Phase II:

Network Optimization Models )of the textbook

for the examples of Excel models and the step -by-

step use of Solver for model optimization

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Models for Facility Location and

Capacity Allocation

•Facility location and capacity allocation decisions should be based on maximizing the overall profitability (minimize cost) while satisfying customer needs and constrains•Network design models are used in two different situations•First, models are used to decide on:–Locations of facilities –Capacity of each facility •Second, models are used to:–Assign current demand to the available facilities –(Identify which product will be transported) –(Identify which transportation mode will be used)

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Models for Facility Location and

Capacity Allocation

•Ideally, the following information should be available in making network design decisions–Location of supply sources and markets –Location of potential facility sites –Demand forecast by market –Facility , labor , and material costs by site –Transportation costs between each pair of sites –Inventory costs by site –Sale prices of products in different regions –Taxes and tariffs –Desired response time and other service factors

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall. 6/2/2017

Phase II: Network Optimization

Models

Capacitated Plant Location Model

•During Phase II, supply chain designers identify regions to locate new facilities•Decision maker–SunOil –manufacturer of petrochemical products with worldwide sales •Decisions–Decide regions to locate facilities to meet demand while minimizing transportation cost and facility cost•There are five regions: North America, South America, Europe, Asia, and Africa –Set up facility in each region •Advantages: lower transportation cost, avoid duties•Disadvantages: small size of each plant which may not exploit economies of scale –Consolidate plants in just a few regions •Advantages: economies of scale•Disadvantages: higher transportation cost, duties (Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Capacitated Plant Location Model

•Data

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Demand of each region ( Dj) in 1,000,000 units

Cost in unit of $1,000 of producing 1 million units in one region to meet demand of another region (Cij)

Example: it costs $92,000 to produce 1 million units in North America and sell them in South America ( Cij)

Fixed cost of low capacity plant ( fi) in unit of $1,000

Capacity of low capacity plant ( Ki) in 1,000,000 units

Fixed cost of high capacity plant (fi)

Capacity of high capacity plant (Ki)

Plant location ( i) Market ( j)

Capacitated Plant Location Model

•Decision variables =1if plant iis open, 0otherwise =quantity shipped from plant ito market j

•Parameters =index for each plant (i=1 for North America, etc.) =index for each market (j=1 for North America etc.) =total number of plant ( n=5 in this example) =total number of market (m=5 in this example) =demand of market j =capacity of plant i =fixed cost of plant i =variable cost of producing and shipping one unit from plant i to market j

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

Capacitated Plant Location Model

•Problem

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.

+ =1

Subject to

= for =1,…,

≤for =1,…,

∈{0,1}for =1,…,

≥0

Problem is to minimize the total cost (fixed cost + variable cost) of setting up and operating the plant

Total fixed cost Total variable cost

Total production in each plant (sum of xijfor each plant i) should be at most the capacity of the plant ( kiyi=Ki if yi=1 and kiyi=0 if yi=0)

Total production for market j (sum of xijfor each market j) must be equal to its demand Dj

Each plant iis either open (1) or closed (0)

Production cannot be negative

Capacitated Plant Location Model

•Optimize the model in the provided Excel

sheet using Solver

–File: TECH -492 -592_2017Su -0703_Ch5 -Figure_5 - 3_to_Figure_5 -7.xlsx

•Follow instructions in page 119 and Figure 5 -3

through Figure 5 -7of the textbook

(Source) Supply Chain Management: Strategy, Planning, and Operation. Sunil Chopra and Peter Meindl. (2013) 5th Edition. Boston, MA: Pearson Prentice-Hall.