1. Recent Advances in The Management of Logistics Networks December 2006 Dr. Richard Pibernik Professor of Supply Chain Management MIT-Zaragoza International Logistics Program rpibernik@zlc.edu.es

2. © Zaragoza Logistics Center2 Zaragoza Logistics hub of high-speed railway, highway exchanges, and an airport accommodating the world's largest cargo planes 60% of Spains GDP and 20 million consumers within 300 kilometers (200 miles) Host city for World Expo 2008 New high speed railway station Ebro river flows past the Basilica University of Zaragoza

3. © Zaragoza Logistics Center3 Zaragoza Logistics Park 13-million square meter (3200 acre) complex of distribution centers, transportation, dry port, and intermodal services

4. © Zaragoza Logistics Center4 Zaragoza Logistics Park Over 100 companies under contract, representing over 5,000 jobs Phase 1 development complete with over 20 companies already operating: Zara, Imaginarium, MemorySet, & DHL Phase 2 underway, rail/intermodal yard construction started

5. © Zaragoza Logistics Center5 Zaragoza Logistics Center (ZLC) Created by the Government of Aragón and industry partners as a research institute associated with the University of Zaragoza Partnership with the MIT CTL to create the MIT-Zaragoza International Logistics Program Spain Ministry of Education & Science named ZLC to lead the National Center of Excellence in Integrated Logistics

6. © Zaragoza Logistics Center6 MIT-Zaragoza Mission Deliver world class education and perform leading-edge research in logistics & supply chain management. Impact industry and society via outreach. Support the economic growth of the Aragón region. Create a new model for academia-industry-government cooperation.

7. © Zaragoza Logistics Center7 World class education MIT-Zaragoza Master of Logistics & Supply Chain Management (ZLOG) Full-time, 9 month, professional degree taught in English Joint MLOG-ZLOG module at MIT and in Spain during IAP Builds upon MITs top-ranked graduate programs in supply chain management Degree from University of Zaragoza, Certificate from MIT MIT-Zaragoza Ph.D. in Logistics and Supply Chain Management Coursework in Zaragoza and at MIT

8. © Zaragoza Logistics Center8 Leading-edge research Hired six full-time faculty members in three years Countries: Argentina, Germany, India, Spain, Turkey, US Degrees: Harvard Business School, Georgia Tech, Goethe-University Frankfurt, Univ. of Washington, Univ. of Zaragoza, Univ. of Alabama and IIT-Delhi One open position to be filled this year; one adjunct faculty member Visiting faculty Harvard, Dartmouth, Syracuse, London Business School, Lund (Sweden), Instituto de Empresa (Madrid), INCAE (Costa Rica), Mannheim (Germany), Cologne (Germany) 3 full time research staff with a PhD

9. © Zaragoza Logistics Center9 Research Focus: Management of Logistics Networks Design of global supply chains (e.g. in high-tech industries) Design and integration of logistics parks Distribution network design Humanitarian supply chains (HIV/Malaria treatment) Cash Logistics network design But also: new technologies in logistics (e.g. Auto-ID) Future of Supply Chain Research (SC2020 Project) In the following: some examples of research projects

10. © Zaragoza Logistics Center10 Global Supply Chains in the High-Tech Industry Forces: globalization, outsourcing, product proliferation, customer demands, communication capabilities, etc. Examples: high tech, fashion, etc. Product design, network design, and coordination capabilities drive competitive advantage VMI with major supplier Logistics Services Provider Contract Manufacturer Other suppliers Joint product design team Alliance with competitor who complementary services Global Procurement Plant for specialized products Risk pooling contract with major customer 3PL warehouse Other customers Joint venture in an emerging market Strategic carrier Supply intermediary Collaborative forecasting team

11. © Zaragoza Logistics Center11 Case Study: Telecommunications Industry How does the OEM strategically invest in and allocate capacities among partners and locations? Focus on the circuit pack supply chain Bell Labs Ireland: Lou Manzione MIT-Zaragoza Faculty: Richard Pibernik, Jarrod Goentzel MIT-Zaragoza Students: Joseph Pruett, Brett Thiessen Note: Pictures of equipment captured from the internet by the presenter are representative, but not the actual products studied

12. © Zaragoza Logistics Center12 Specialized Testing and Remanufacturing Manufacturing (Assembly) Testing Delivery Remanufacturing Self-Embedded Testing could be developed Sourcing

13. © Zaragoza Logistics Center13 Strategic Deployment Among Partners 1.00 0.17 0.19 0.25 0.12 0.04 Test Sets: $1-2 million each Should the OEM develop a self-testable product?

14. © Zaragoza Logistics Center14 Component Suppliers Assembling & Testing Warehouses Europe CALA E.Asia ME/A Customer Regions Test Capability Assemble Self Tested Product NA S.Asia Assemble Standard Product Remanufacturing flow Example Network Design

15. © Zaragoza Logistics Center15 Supply and Demand Complications Demand can be very volatile, based on a handful of large contracts Assembly requests outside a range around the contracted amount result in penalties Assembly cannot always occur in low cost regions due to local content requirements New products/processes are deployed frequently and can strongly impact the test yield Yield at different locations

16. © Zaragoza Logistics Center16 Parameters 30 month horizon Cost parameters, yield and demand scenarios based on realistic data Assembly quantity allocations among partners is given Costs are relative to assembly in USA

17. © Zaragoza Logistics Center17 Model Model fixed costs of test set installation and variable costs of material flow Use a MIP with the following objective function:

18. © Zaragoza Logistics Center18 Results for Test Set Deployment Despite additional shipping costs, it is not optimal to deploy test sets at each location, but instead at four locations Cost of completely centralizing test sets is >10% above the optimal

19. © Zaragoza Logistics Center19 Impact of Self-Embedded Testing If the incremental cost for self-testing (as a percent of COGS) is < 1.5%, then self-testing is deployed at all manufacturing partners > 6.5%, then conventional testing is deployed as in our previous scenarios 3.5% to 6.5%, then a small amount of self-testable product is produced to balance supply and demand while avoiding the fixed investment for an additional conventional test set 1.5% to 3.5%, then it is optimal to deploy a mixed testing strategy with self-testing capabilities in high cost regions and conventional testing in low cost regions

20. © Zaragoza Logistics Center20 Transportation Cost Analysis Malaysia (large assembly site) Mexico (close to US demand) Global shipping cost increases shifts testing from China to… Step changes reflect redeployment of test sets – the OEM can adjust testing capacity in discrete increments across its partners

21. © Zaragoza Logistics Center21 Labor Cost Analysis Labor cost increases in Asia shifts Malaysia testing to… China, which retains comparative advantage as labor cost increases simultaneously in both locations

22. © Zaragoza Logistics Center22 Volatile commodity and labor prices impact the total supply chain Energy Cost Transportation costs Material costs (e.g., oil-based materials) Production operating costs Packaging costs Other Commodities Labor Cost Land Cost Want lowest total landed cost Facility Labor Raw Materials Production Inventory Transportation Duties/Taxes Network Effects are complex

23. © Zaragoza Logistics Center23 Investment Targets for R&D Provides incremental cost targets for product R&D investment decision R&D cost relative to 4.1% of total operational cost (over 30 months) can be made to achieve an incremental cost of 3.0% of COGS R&D cost relative to 19.5% of total operational cost (over 30 months) can be made to achieve an incremental cost of 1.5% of COGS

24. © Zaragoza Logistics Center24 Long-term Research Project Supply Chain 2020 is a pioneering project mapping innovations to successful supply chains as far into the future as the year 2020. Phase I –Define excellent supply chains –Identify principles that drive excellent supply chain practices Phase II –Create scenarios of the future: technology, regulation, consumer expectations, environmental pressures, etc. –Determine how future supply chains should be designed to be excellent in various scenarios –Create a roadmap of actions organizations should take in order to be prepared Collaborators Industry Advisory Council European Advisory Council Academic Partners

25. © Zaragoza Logistics Center25 Supply Chain 2020 Advisory Council

26. © Zaragoza Logistics Center26 Zaragoza Supply Chain Summit 2007 Susan Hockfield President, MIT LaVerne H. Council CIO, Johnson & Johnson Robert A. Willett CIO, Best Buy CEO, Best Buy International Robert W. Moffat Sr. VP, Integrated Supply Chain, IBM Diego del Alcázar President, Instituto de Empresa Presidents of the Cotec Foundations of Spain, Portugal, and Italy http://www.zlc.edu.es/summit07 March 21-22, 2007 Zaragoza, Spain Theme: Supply Chain Innovation More questions? goentzel@mit.edu