Chapter 5 Network Design in the Supply Chain

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Outline
The Role of Network Design in the Supply Chain Factors Influencing Network Design Decisions Framework for Network Design Decisions Models for Facility Location and Capacity Allocation The Role of IT in Network Design Making Network Design Decisions in Practice

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Network Design Decisions

Facility role Facility location Capacity allocation Market and supply allocation

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Factors Influencing Network Design Decisions

Strategic Technological Macroeconomic Political Infrastructure Competitive Logistics and facility costs
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The Cost-Response Time Frontier

Hi
Local FG
Mix Regional FG Local WIP

Cost

Central FG Central WIP Central Raw Material and Custom production Custom production with raw material at suppliers

Low
Low Response Time Hi
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Service and Number of Facilities

Response Time

Number of Facilities
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Costs and Number of Facilities

Inventory
Costs Facility costs

Transportation

Number of facilities
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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
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Framework for Network Design Decisions

Phase I Supply Chain Strategy Phase II Regional Facility Configuration Phase III Desirable Sites Phase IV Location Choices

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A Framework for Network Design Decisions

Competitive STRATEGY GLOBAL COMPETITION INTERNAL CONSTRAINTS Capital, growth strategy, existing network PRODUCTION TECHNOLOGIES Cost, Scale/Scope impact, support required, flexibility

PHASE I Supply Chain Strategy

TARIFFS AND TAX INCENTIVES

COMPETITIVE ENVIRONMENT

PHASE II Regional Facility Configuration

REGIONAL DEMAND Size, growth, homogeneity, local specifications POLITICAL, EXCHANGE RATE AND DEMAND RISK

PHASE III Desirable Sites

PRODUCTION METHODS Skill needs, response time FACTOR COSTS Labor, materials, site specific

AVAILABLE INFRASTRUCTURE

PHASE IV Location Choices

LOGISTICS COSTS Transport, inventory, coordination

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Conventional Network
Vendor DC Materials DC

Finished Goods DC

Customer DC

Customer Store

Vendor DC

Component Manufacturing Plant Warehouse Components DC Customer DC

Customer Store Customer Store

Customer Store Customer DC Customer Store
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Vendor DC Final Assembly

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Finished Goods DC

Tailored Network: Multi-Echelon Finished Goods Network

Regional Finished Goods DC Local DC Cross-Dock Customer 1 DC Local DC Cross-Dock Customer 2 DC Local DC Cross-Dock Store 1 Store 1 Store 2 Store 2 Store 3 Store 3

National Finished Goods DC

Regional Finished Goods DC

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Gravity Methods for Location

Ton Mile-Center Solution
x,y: Warehouse Coordinates xn, yn : Coordinates of delivery
location n

dn : Distance to delivery
location n

Fn : Annual tonnage to delivery

location n

Min

d n Dn F n

( x x n) ( y y n) Dn x F d x Dn F d Dn y F d y Dn F d
n

n 1

n 1

n 1

n 1

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Models for Facility Location and Capacity Allocation

Phase II
Capacitated Plant location model

Phase III
Gravity location models

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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?
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Demand Allocation Model

Which market is served by which plant? Which supply sources are used by a plant? xij = Quantity shipped from plant site i to customer j
Min cij xij
i 1 j 1 n m

s.t.

x
i 1 m j 1

ij

D j , j 1,...,m
i

x K
ij

, i 1,...,n

ij

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Plant Location with Multiple Sourcing

yi = 1 if plant is located at site i, 0 otherwise xij = Quantity shipped from plant site i to customer j
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 n ij j

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

y k ; y {0,1}
i 1 i i
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Plant Location with Single Sourcing

yi = 1 if plant is located at site i, 0 otherwise xij = 1 if market j is supplied by factory i, 0 otherwise
Min
i 1 n

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

ij

s.t.

x
i 1 n j 1

ij

1, j 1,...,m

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

xij, y {0,1}
i

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The Role of IT in Network Design

IT systems help with network design by:
1. Making the modeling of the network design problems easier 2. Containing high-performance optimization technologies 3. Allowing for what-if scenarios 4. Interfacing with planning and operational software

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Making Network Design Decisions In Practice

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

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SOCIO ECONOMIC FACTORS IN CHOICE OF FACILITY LOCATION

What role do socio-economic factors play in the selection of the facility location? How do state policies aimed at promoting balanced regional development, shape the supply chain network designs?

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JAIPUR RUGS
How has Jaipur Rugs knitted together the traditional skills of widely dispersed rural workforce, through innovative adaptation of supply chain practices that best fit the Indian socio economic conditions to bring quality products to the international market and ensure fair returns to the artisans?

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Summary of Learning Objectives

What is the role of network design decisions in the supply chain? What are the factors influencing supply chain network design decisions? Describe a strategic framework for facility location. How are the following optimization methods used for facility location and capacity allocation decisions?
Gravity methods for location Network optimization models
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