1. Network models for Supply Chain Design

2. Network design decision
Facility role; production, storage, cross-docking, processes performed and products produced (flexibility)
Toyota before ’97, factories serving local needs. In Asian crisis late ‘90s, Asian factory experienced idle capacity that could not be used to produce for other markets. Afterwards, Toyoda added flexibility to their plants so that they can serve other markets.
Facility location
Very costly to open or close a plant
Toyota opened its first US plant in Lexington, Kentucky in ’88. This decision provided Toyota a low cost production option, especially when yen is strengthened against dollar, and responsiveness.
Amazon had to increase the number of warehouses to 6 to be cost effective in supplying books throughout US.
Facility capacity
Allocating too little or too much capacity is costly
Capacity decisions would not change for years.
Facility allocation to markets and supply sources
has Significant impact on performance
Must be reconsidered on a regular basis
Amazon had to consider new allocations as it increased the number of facilities in order to reduce the costs

3. Factors influencing network design decisions
Strategic factors
Convenience stores; many facilities for responsiveness
Discount stores; few large facilities for effectiveness (low cost)
Different locations playing different role
Nike’s facilities in china and Indonesia produces lower priced shoes for mass markets, while its facilities in Korea and Taiwan focuses on responsiveness and produce higher-priced new design, with high variability.

4. Factors influencing network design decisions
Technological factors
Production technologies with high economies of scale and high investment (micro-chips); few high-capacity facility
Technologies with low fixed investment cost and low economies of scale; many close-to-market facilities, e.g. Cocacola bottling plants all over the world
Potential flexibility of the technology determines if we can have few plants that will serve the entire market.

5. Factors influencing network design decisions
Macro economic factors;
Taxes, tariffs, incentives, exchange rates
Tariffs are coming down because of regional arrangements (NAFT, EU)
Free-trade zones; production is exported, tar,ffs and taxes are reduced
BMW located its US plant in North Carolina becouse of tax incentives offered by this state.
China waives tariffs entirely for “high-tech” products.
Some countries places limit on minimum loca content.

6. Factors influencing network design decisions
Political factors –
“rap diye rap rap” would not attract foreign investment
Political stability, clear legal system, signing international treatments.
Infrastructure
Availability of sites, closeness to transportation options (seaports, rail, airports), availability of labor, local utilities
Example; Many companies located their factories in China near Shanghai, Tianjin or GuangZuo, although the labor and land costs are not the lowest in these places

7. Factors influencing network design decisions
Competitive factors;
Should the location be close to competitors or far from them
Positive externalities; locating together helps all the companies, e.g. Retail stores locing together in a mall
Locating to capture the market; Locating close to the market to capture a large share, when prices by the firms in the market are comparable

8. Factors influencing network design decisions
Customer response time and local presence
Convenience stores must locate close to customer while the discount stores do not need to be close, customers are ready to travel to buy larger quantities with lower prices.
With faster transportation options, facilities can be consolidated and away from customers.
Logistics and facility costs;
Inventory, transportation and facility cost should be considered together

9. Where inventory needs to be for a 5 day order response time - typical results --> 2 DCs
Customer DC

10. Where inventory needs to be for a 3 day order response time - typical results --> 5 DCs
Customer DC

11. Where inventory needs to be for a next day order response time - typical results --> 13 DCs
Customer DC

12. Where inventory needs to be for a same day / next day order response time - typical results --> 26 DCs
Customer DC

13. Costs and Number of Facilities
Inventory
Facility costs
Costs
Transportation
Notes:
Number of facilities
5-13

14. Cost Buildup as a Function of Facilities
Total Costs
Percent Service Level Within Promised Time
Cost of Operations
Facilities
Inventory
Notes:
Transportation
Labor
Number of Facilities
5-14

15. SC Network design problem
Objective is to identify the regions to locate the facilities, potential role of the facilities, and their capacities. Objective should be maximizing overall profitability or minimizing the cost while maintaining target responsiveness.
Needs forecasting the demand by regions
Homogenous customer requirements across regions allows consolidated facilities
Identifying if the economies of scale is significant (e.g. Semiconductor industry, huge economies of scale, larger facilities). Consider different capacity options when the conomies of scale is significant.
Evaluating demand, exchange-rate, political risks for different regions and taxes and tariffs.
Examine competitors in each region, to be close or far away from competitors
Determine desired response time for each region

16. SC Network design problem
Network design models can be used to locate facility and decide capacity, which won’t change in years. These models can also be used to assign current demand to available facilities and to the available transportation options, at least on an annual base.
Information for network configuration decision; Location of supply sources, markets, and potential sites for facilities, demand forecast by markets, facility, labor, and material cost by site, transportation cost between sites, inventory costs for each site, sale price of product for each regions, desired response time and other service factors, taxes, tariff.
Output; number of facilities in each region, what markets that the facilities will serve.

17. Capacitated Plant Location with Multiple Sourcing
Considers only transportation and production costs
yi = 1 if plant is located at site i, 0 otherwise
xij = Quantity shipped from plant site i to market j
fi = Annualized fixed cost of keeping plant i open.
cij=cost of producing and shipping (transportation, tariffs) one unit from factory i ot market j
Dj= Annual demand for market j
Ki = Capacity of plant i.
Notes:
5-17

18. Single Sourcing Some times companies want a single sourcing
A factory (warehouse) serves only a single demand point. (A demand point can be served by more than one factory)
Reduces the complexity of coordinating the network
Reduces the flexibility needs for factories (warehouses)

19. Capacitated plant location model with single sourcing
Xij; 1 if all demand
Of location j is
supplied by factory j
(completely)
Leads into higher cost with less problem of
Coordination. Let us resolve the problem.

20. Examples Sunoil (pg 124-128) -- excel file
Telecom_optic ( ) --- excel file

21. Profit maximization, taxes, tariffs etc.
Market prices, taxes, tariffs would depend on the region, in general.
Profit maximization is more appropriate in this case. Profit maximization also makes sure that we do not satifying unprofitable demand.

22. Practical issues in network design decisions
Do not underestimate the life-span of the facilities
Do not ignore the cultural issues and implications
Do not ignore the quality of life issues
Focus on tax and tariffs and incentives