Typical supply chain upstream downstream

Logistics Network Configuration Configuration of the logistics network (or supply chain) may involve the following strategic decisions Determining the number of retailers, distribution centers and manufacturing facilities Determining the location of each facility Determining the size of each facility Allocating retailers to different distribution centers Determining transportation modes Determining the operation of the network (direct shipments, e.g.)

Roles of different type of facilities Manufacturing plants Responsible for manufacturing the goods for distribution Some companies may not own manufacturing plants Distribution centers Reducing lead times, increasing product availability at the retailer level (depot effect) Enabling economies of scale by consolidating shipments from the manufacturing plants. Delaying the allocation of material to retailers (joint ordering effect) Providing a second level of support for emergency orders at retailer level Consolidation point for reverse logistics Localization of goods to different countries Retailers (stores, bases) Primary access point for customers

Design options for the network Direct shipment Supplier/Plant Retailer/Base

Design options for the network Direct shipping with milk runs Supplier/Plant Retailer/Base Supplier/Plant Retailer/Base

Design options for the network Direct shipment DC Supplier/Plant Retailer/Base

Factors influencing network design Strategic factors Cost leadership Responsiveness/variety Technological factors Macroeconomic factors Tariffs and taxes Exchange rate and demand risk Political factors Infrastructure factors Competitive factors

Factors influencing network design Customer response time and local presence Logistics and facility costs Inventory costs Transportation costs Inbound versus outbound External versus internal fleet Truckload (TL) versus less than truckload (LTL) Facility costs Setup Operating costs

Number of facilities Required Number of Facilities Desired Response Time

Number of facilities Inventory Costs Number of Facilities

Number of facilities Transportation Costs Number of Facilities

Number of facilities Facility Costs Number of Facilities

Number of facilities Response time Total Logistics Costs Number of

OR models for facility decisions Facility location model minimize transportation and facility costs Vehicle routing minimize transportation and vehicle costs Location-routing: combination of facility location and vehicle routing Location-inventory minimize transportation, facility and inventory holding costs Inventory-routing minimize transportation, vehicle and inventory costs

Open questions in network design Do I need a distribution center at all? How many levels do I need in distribution? How many distribution centers do I need? What is the impact of competition on facility decisions? How many retail stores do I need?

Competitive facility location Suppose the customers are evenly distributed along a line. Suppose there are two competitors trying to locate their facilities (one each) along this line The customers will patronize the closest facility Where should the two competitors locate their facilities? Spatial competition (Hotelling) x y 1

Payoff functions x y 1

Equilibrium 1/2 1 x*,y* In equilibrium, both competitors choose the location ½ and get half of the customers Average distance traveled by the customers ¼ Competitors might locate their facilities at ¼ and ¾; average distance traveled by the customers will be 1/8 and competitors will still get half of the customers. However this can be achieved only if we can assure each vendor that the other will not start moving on him. Lessons learned Tendency towards concentration The solution of free competition may differ from that of the public interest