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Facility Decisions

Network Design in a SupplyChain

CC3.0

(2)Facility Decisions Network Design in a Supply Chain

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Conventional Network

Customer

Store

CustomerStore

Customer

Store

Customer

Store

Customer

StoreMaterials

DC

Final

Assembly

Component

Manufacturing

Components

DC

Plant

Warehouse

Finished

Goods DC

Finished

Goods DC

Customer

DC

Customer

DC

Customer

DC

Vendor

DC

Vendor

DC

Vendor

DC

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Facility role and processes needed to be performed

Facility location: strategic view

Lower cost, flexibility: Toyota

Responsiveness, cost-effective: Amazon

Capacity allocation

Market and supply allocation

Network Design Decisions

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Strategic roles:Off-shore facility: low-cost for export production

Source facility: low-cost facility for global production

(involve manufacture through oversea)

Server facility: regional market supporting

Contributor facility: regional with development skills

Outpost facility: regional build to gain local skills

Lead facility: lead in development and process

technologies

Factors Influencing NetworkDesign Decisions

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Technological: availability, cost and flexibilityexamples: computer chips v.s. Coke

Macroeconomic:

tariffs and tax incentives (WTO, regional agreements,

free trade zone, local content & limits)

Exchange rate and demand risk

Political:

stability; legal system

Infrastructure:

available sites, labor availability, proximity to

transportation channels, local utilities


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Competitive:

Positive externalities: company tend to locate close to each

other, develop appropriate infrastructure

Locating to split the market: capture the largest market share

Customer response time and local presence

0 1

1-ba


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Local FG

Custom production with raw

material at suppliers

Cost

Response Time HiLow

Low

Hi

The Cost-Response TimeFrontier

Mix

Regional FG

Local WIP

Central FG

Central WIP

Central Raw Material and

Custom production

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Logistics and facility costs:Inventory costs

Transportation costs: weight or volume

Facility setup and operating costs


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Inventory

Percent Service

Level Within

Promised Time

Total Costs

Labor

Transportation

Facilities

Number of Facilities

Inventory

Percent Service

Level Within

Promised Time

Total Costs

Labor

Transportation

Facilities

Cost Build-up as a function offacilities

CostofOperations

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A Framework for Global SiteLocation

GLOBAL COMPETITION

TARIFFS AND TAX

INCENTIVES

REGIONAL DEMAND

Size, growth, homogeneity,local specifications

POLITICAL, EXCHANGE

RATE AND DEMAND RISK

AVAILABLE

INFRASTRUCTURE

LOGISTICS COSTS

Transport, inventory, coordination

Competitive STRATEGY

INTERNAL CONSTRAINTS

Capital, growth strategy,

existing network

PRODUCTION TECHNOLOGIES

Cost, Scale/Scope impact, supportrequired, flexibility

COMPETITIVE

ENVIRONMENT

PRODUCTION METHODS

Skill needs, response time

FACTOR COSTS

Labor, materials, site specific

PHASE I

Supply Chain

Strategy

PHASE IIRegional Facility

Configuration

PHASE III

Desirable Sites

PHASE IV

Location Choices

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Regional

Finished

Goods DC

RegionalFinished

Goods DC

Customer 1

DC

Store 1

National

Finished

Goods DC

Local DC

Cross-Dock

Local DCCross-Dock

Local DC

Cross-Dock

Customer 2

DC

Store 1

Store 2

Store 2

Store 3

Store 3

Tailored Network: Multi - EchelonFinished Goods Network

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Location of supply sources and markets Location of potential facility site

Demand forecasts by market

Facility, labor, and materials cost by site

Transportation costs between each pair of sites

Inventory costs by site as well as a function of quantity

Sales price of product in different regions

Taxes and tariffs as product is moved between locations

Desired response time and other service factors

Information Needed for DesignDecision

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Decide the regions where facilities to be located byconsidering regional demand, tariffs, economies of

scale, and aggregate factor costs

Two possible alternatives:

Setup facility in each region

Consolidate plants in few regions

Phase II: Network OptimizationModels

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Decide the regions where facilities to be located byconsidering regional demand, tariffs, economies of

scale, and aggregate factor costs

Two possible alternatives:

Setup facility in each region

Consolidate plants in few regions

Phase II: Network OptimizationModels

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{0,1}

s.t.

Min

y

yKx

Dx

xcyf

i

ii

n

1jij

j

n

1i

ij

n

1i

m

1jijiji

n

1ii

n =number of potentiallocations/capacity

m = number of markets

Dj= annual demand of marketj

Ki= capacity of plant i

fi= annualized fixed cost ofkeeping factory iopened

Cij= cost of producing andshipping 1 unit from factory itomarketj

yi= 1 if plant is located at site i, 0

otherwise xij= Quantity shipped from plant

site ito customerj

The Capacitated PlantLocation Problem

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Identify potential locations in each region Geographical locations:

Plainer: Gravity location models

Network: median models, center models

Phase III: Gravity Location Models

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Ton Mile-Center Solutionx,y: Warehouse

Coordinates

xn, yn : Coordinates ofdelivery location n

dn : Distance to deliverylocation n

Fn : cost of shipping oneunit for one mile

Dn : Annual tonnage to

delivery location n

Minnn

k

1n

n FDdTC

Gravity Methods for Location

n

n

1i

nn

k

1nn

nnn

n

n

1i

nn

k

1nn

nnn

22

n

/dFD

dyFD

y

/dFD

dxFD

x

nn )y(y)x(xd

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k

1n

Dn XnFn

X=

k

1n Dn Fn

k

1n

Dn YnFn

Y=

k

1n

Dn Fn

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Ton Mile-Center Solutionx,y: Warehouse

Coordinates

xn, yn : Coordinates ofdelivery location n

dn : Distance to deliverylocation n

Fn : cost of shipping oneunit for one mile

Dn : Annual tonnage to

delivery location n

Minnn

k

1n

n FDdTC


n

n

1i

nn

k

1nn

nnn

n

n

1i

nn

k

1nn

nnn

22

n

/dFD

dyFD

y

/dFD

dxFD

x

nn )y(y)x(xd

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Decide how market will be allocated to facilities Must consider customer service constraints in term of response

time

Decision should be altered on a regular basis as cost change

and market evolve.

Phase IV: NetworkOptimization Models

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n

1i

m

1j ijijxcMin

0x

Kx

ij

i

m

1jij

Dx jn

1iij

Which market is served by which plant? Which supply sources are used by a plant?

Demand Allocation Model

n =number of potential

locations/capacity




Cij= cost of producing and shipping

1 unit from factory ito marketj

xij= Quantity shipped from plant

site i to customerj

s.t.

n

1i

m

1j ijijxcMin

0x

Kx

ij

i

m

1jij

Dx jn

1iij

s.t.

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n =number of potentiallocations/capacity




fi= annualized fixed cost of keepingfactory iopened

Cij= cost of producing and shipping

1 unit from factory ito marketj

yi= 1 if plant is located at site i, 0

otherwise

xij= Quantity shipped from plant site

ito customerj

{0,1}k;

s.t.

Min

yy

yKx

Dx

xcyf

i

m

1ii

ii

n

1jij

j

n

1i

ij

n

1i

m

1jijiji

n

1ii

The Capacitated Plant LocationProblem

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1n

1iijx

yKDx iijn

1j

ij

{0,1},k; yxy iijn

1ii

s.t.

yi = 1 if plant is located at site i, 0 otherwise xij = 1 if marketjis supplied from plant site i, 0 otherwise

Capacitated Plant Location withSingle Sourcing

1n

1iijx

yKDx iijn

1j

ij

{0,1},k; yxy iijn

1ii

s.t.

n

1i

m

1jij

iji

n

1ii xcDyf jMin

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Which plants to establish? Which warehouses to establish?How to configure the network?

Plants Warehouses

1

2

Markets

Location Allocation Decisions

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n =number of potential locations/capacity m = number of markets or demand points

l= number of suppliers

t= number of potential warehouse locations

DJ= annual demand of market j

Ki= capacity of plant i Sh = supply capacity at supplierh

We = potential warehouse capacity at site e

Fi = annualized fixed cost of keeping factory iopened

fe= annualized fixed cost of keeping warehouse e opened

Chi= cost of shipping 1 unit from supply source h to factory i Cie= cost of producing and shipping 1 unit from factory ito

warehouse e

Cej= cost of shipping 1 unit from warehouse e to marketj

Locate Plants and WarehousesSimultaneously

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supplier manufactory customer

( l ) ( n ) ( t ) ( m )

warehouse

plant market

Sh Ki We Dj

l= number of suppliers m = number of markets or demand points n =number of potential locations/capacity t= number of potential warehouse locations DJ= annual demand of market j Ki= capacity of plant i Sh = supply capacity at supplierh We = potential warehouse capacity at site e

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( l ) ( n ) ( t ) ( m )

warehouse

plant market

Sh Ki We DjFi fe

Fi = annualized fixed cost of keeping factory i

opened

fe= annualized fixed cost of keeping warehouse e

opened

Chi= cost of shipping 1 unit from supply source h to

factory i

Cie= cost of producing and shipping 1 unit from

factory ito warehouse e

Cej= cost of shipping 1 unit from warehouse e to

marketj

CejCieChi

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yi= 1 if factory is located at side i ye = 1 if warehouse is located at side e

xej= quantity shipped from warehouse e to market jper year

xie = quantity shipped from factory ito warehouse e per year

xhi= quantity shipped from supplierh to factory iper year


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( l ) ( n ) ( t ) ( m )

warehouseplant market

Sh Ki We DjFi fe

CejCieChi

yi= 1 if factory is located at side i

ye = 1 if warehouse is located at side e

xej= quantity shipped from warehouse e to market jper year

xie = quantity shipped from factory ito warehouse e per year

xhi= quantity shipped from supplierh to factory iper year

yi ye xejxiexhj

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ej

t

1e

m

1j

ej

n

1i

t

1e

ieiehi

l

1h

n

1i

hi

t

1e

eei

n

1i

i xcxcxcyfyFMin



( l ) ( n ) ( t ) ( m )

warehouseplant market

Sh Ki We DjFi fe

CejCieChi

yi ye xejxiexhj

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m,1,jforDx

t,1,eforyWx

t,1,efor0xx

n,1,iforyKx

n,1,ifor0xx

l,1,hforSx

j

t

1e

ej

ee

m

1j

ej

m

1j

ej

n

1i

ie

ii

t

1e

ie

t

1e

ie

l

1h

hi

h

n

1i

hi


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Ifrjis the revenue form selling one unit in market j, the objectivefunction of the capacitated plant location model can be modified

as

Also the constraint related to demand is modified as

Customer preferences and requirements can be modeled in

terms of modes of transportation.

n

1i

m

1jijiji

n

1ii

m

1j

n

1i

ijj xcyfxrMax

Dx jn

1iij

Accounting for Taxes, Tariffs, andCustomer Requirements

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Do not underestimate the life span of facilities

Do not gloss over the cultural implications

Do not ignore quality of life issues

Focus on tariffs and tax incentives when locating facilities

Making Network DesignDecisions in Practice

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