Supply Chain Modelling and Analytics

Dr. Gopal Kumar

gopalkumar@iimraipur.ac.in

IIM Raipur
26 September 2017

Gopal Kumar (IIM Raipur) SCMA 26 September 2017 1/24

Ordering policy

A Bookstore must decide how many of next years nature

calendars to order. Each calendar costs the bookstore
7.50 and sells for 10. After a month, all unsold
calendars can be returned to the publisher for a refund of
2.50 per calendar. Bookstore believes that the number
of calendars it can sell in one month follows the
probability distribution shown below. The Bookstore
wants to develop a simulation model to help it decide
how many calendars to order. Demand Probability
100 0.30

Probability Distribution of Demand 150 0.20

200 0.30
250 0.15
300 0.05
Gopal Kumar (IIM Raipur) SCMA 26 September 2017 2/24
Ordering policy

1.96
=

1.96
Upper = +

Gopal Kumar (IIM Raipur) SCMA 26 September 2017 3/24

 Network Design Decisions

Gopal Kumar (IIM Raipur) SCMA 26 September 2017 4/24

Network Design Decisions

Facility role
What role, what processes?

Facility location
Where should facilities be located?

Capacity allocation
How much capacity at each facility?

Market and supply allocation

What markets? Which supply sources?

Gopal Kumar (IIM Raipur) SCMA 26 September 2017 5/24

Factors Influencing Network Design Decisions

Strategic factors
Technological factors
Macroeconomic factors
Tariffs and tax incentives
Exchange-rate and demand risk
Freight and fuel costs
Political
Infrastructure factors
Competitive factors
Gopal Kumar (IIM Raipur) SCMA 26 September 2017 6/24
The Cost-Response Time Frontier

.
Local FG
Hi
Mix
Regional FG

Local WIP
Cost Central FG

Central WIP

Low
Low Response Time Hi

Gopal Kumar (IIM Raipur) SCMA 26 September 2017 7/24

Service and Number of Facilities

.
Response
Time

Number of Facilities

Gopal Kumar (IIM Raipur) SCMA 26 September 2017 8/24

Framework for Network Design Decisions
Where inventory needs to be for a one week order response time - typical results --> 1 DC

Customer
DC

Gopal Kumar (IIM Raipur) SCMA 26 September 2017 9/24

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

Customer
DC

Gopal Kumar (IIM Raipur) SCMA 26 September 2017 10/24

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

Customer
DC

Gopal Kumar (IIM Raipur) SCMA 26 September 2017 11/24

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

Customer
DC

Gopal Kumar (IIM Raipur) SCMA 26 September 2017 12/24

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

Customer
DC

Gopal Kumar (IIM Raipur) SCMA 26 September 2017 13/24

Costs and Number of Facilities

Inventory

Facility costs
Costs

Transportation

Number of facilities

Gopal Kumar (IIM Raipur) SCMA 26 September 2017 14/24

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

Gopal Kumar (IIM Raipur) SCMA 26 September 2017 15/24

Framework for Network Design Decisions
.

Gopal Kumar (IIM Raipur) SCMA 26 September 2017 16/24

Models for Facility Location and Capacity Allocation
Important information
Location of supply sources and markets
Location of potential facility sites
Demand forecast by market
Facility, labor, and material costs by site
Transportation costs between each pair of sites
Inventory costs by site and as a function of quantity
Sale price of product in different regions
Taxes and tariffs
Desired response time and other service factors

Gopal Kumar (IIM Raipur) SCMA 26 September 2017 17/24

Network Optimization Models
Allocating demand to production facilities
Locating facilities and allocating capacity

Key Costs:

Fixed facility cost

Transportation cost
Production cost
Inventory cost
Coordination cost

Which plants to establish? How to configure the network?

Gopal Kumar (IIM Raipur) SCMA 26 September 2017 18/24

Network Optimization Models
.
Plant Location with Multiple Sourcing
Sun Oil

Gopal Kumar (IIM Raipur) SCMA 26 September 2017 19/24

Capacitated Plant Location Model
n = number of potential plant locations/capacity
m. = number of markets or demand points yi = 1 if plant i is open, 0 otherwise
D j = annual demand from market j xij = quantity shipped from plant
K i = potential capacity of plant i i to market j
f i = annualized fixed cost of keeping plant i open
cij = cost of producing and shipping one unit from plant i to market j (cost
includes production, inventory, transportation, and tariffs)
n n m
Min f i yi + c x ij ij
i=1 i=1 j=1

subject to
n

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

x ij
= K i yi for i = 1,...,n
j=1

yi {0,1} for i = 1,...,n, x ij 0

Gopal Kumar (IIM Raipur) SCMA 26 September 2017 20/24
Capacitated Plant Location Model
.

Gopal Kumar (IIM Raipur) SCMA 26 September 2017 21/24

Capacitated Plant Location Model
.

Gopal Kumar (IIM Raipur) SCMA 26 September 2017 22/24

Capacitated Plant Location Model
.

Gopal Kumar (IIM Raipur) SCMA 26 September 2017 23/24

 .

Thanks!

Gopal Kumar (IIM Raipur) SCMA 26 September 2017 24/24