Network models for Supply Chain Design

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

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
Nikes 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.

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.

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.

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

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

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

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

Customer DC

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

Customer DC

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

Customer DC

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

Customer DC

Costs and Number of Facilities

Inventory
Costs Facility costs

Transportation

Number of facilities
5-13

Cost Buildup as a Function of Facilities

Total Costs

Cost of Operations

Percent Service Level Within Promised Time

Facilities Inventory

Transportation Labor

Number of Facilities
5-14

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

SC Network design problem

Network design models can be used to locate facility and decide capacity, which wont 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.

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.
Min
i 1 n

f y c x
i i i 1 j 1 ij

ij

s.t.

x D , j 1,...,m
i 1 m ij j

x K y , i 1,...,n
j 1 n ij i i

y k;
i 1 i

y {0,1}, x
i

ij

5-17

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)

Capacitated plant location model with single sourcing

Min
i 1 n

f y D c x
i i i 1 j 1 j ij

ij

Xij; 1 if all demand

Of location j is supplied by factory j (completely)

s.t.

x
i 1 m j 1

ij

1, j 1,...,m

D x
j

ij

K y , i 1,...,n
i i

y ,x
i

ij

{0,1}

Leads into higher cost with less problem of Coordination. Let us resolve the problem.

Examples
Sunoil (pg 124-128) -- excel file Telecom_optic (132-137) --- excel file

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.
rj ; revenue from selling one unit of productin reagion j considering vergi v.b.blgesel faktrler Objective; Max

r x F y c x
j1 j i 1 ij i 1 i i j1 i 1

ij ij

Demand cons.;

x
i 1

ij

Dj

for j 1,..,m

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