Supply Chain Management
(2nd Edition)
Chapter 5
Network Design in a Supply Chain
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5-1
Outline
 A strategic
framework for facility location
 Multi-echelon networks
 Gravity methods for location
 Plant location models
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5-2
Network Design Decisions
 Facility
role
 Facility location
 Capacity allocation
 Market and supply allocation
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5-3
Factors Influencing
Network Design Decisions
 Strategic
 Technological
 Macroeconomic
 Political
 Infrastructure
 Competitive
 Logistics
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and facility costs
5-4
The Cost-Response Time Frontier
Local FG
Hi
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
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Response Time
Hi
5-5
Service and Number of Facilities
Response
Time
Number of Facilities
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5-6
Costs and Number of Facilities
Inventory
Facility costs
Costs
Transportation
Number of facilities
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5-12
Cost Buildup as a Function of Facilities
Cost of Operations
Total Costs
Percent Service
Level Within
Promised Time
Facilities
Inventory
Transportation
Labor
Number of Facilities
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5-13
A Framework for
Global Site Location
Competitive STRATEGY
INTERNAL CONSTRAINTS
Capital, growth strategy,
existing network
PRODUCTION TECHNOLOGIES
Cost, Scale/Scope impact, support
required, flexibility
COMPETITIVE
ENVIRONMENT
GLOBAL COMPETITION
PHASE I
Supply Chain
Strategy
PHASE II
Regional Facility
Configuration
PRODUCTION METHODS
Skill needs, response time
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REGIONAL DEMAND
Size, growth, homogeneity,
local specifications
POLITICAL, EXCHANGE
RATE AND DEMAND RISK
PHASE III
Desirable Sites
FACTOR COSTS
Labor, materials, site specific
TARIFFS AND TAX
INCENTIVES
PHASE IV
Location Choices
AVAILABLE
INFRASTRUCTURE
LOGISTICS COSTS
Transport, inventory, coordination
5-14
Tailored Network: Multi-Echelon
Finished Goods Network
Regional
Finished
Goods DC
National
Finished
Goods DC
Local DC
Cross-Dock
Store 1
Customer 1
DC
Local DC
Cross-Dock
Customer 2
DC
Regional
Finished
Goods DC
Local DC
Cross-Dock
Store 1
Store 2
Store 2
Store 3
Store 3
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5-16
Gravity Methods for Location
 Ton
Mile-Center Solution
– x,y: Warehouse Coordinates
– xn, yn : Coordinates of delivery
d n  ( x  x n)  ( y  y n)
2
n
 xi F i
i 1
location n
– dn : Distance to delivery
location n
x
– Fn : Annual tonnage to delivery
 Fi
n

Fi
di
n
 Fi
i 1
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di
yi F i
i 1
y
Fi
di
n
i 1
location n
Min  F i ( xi  x)2  ( yi  y )2
2
di
5-17
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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5-18
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
n m
Min  cij xij
i 1 j 1
s.t.
n
 xij  D j
i 1
m
 xij  K i
j 1
xij  0
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5-19
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
n
n m
i 1
i 1 j 1
Min f i y i    cij xij
s.t.
n
 xij  D j
i 1
n
 xij  K i y i
j 1
m
 y i  k ; y i {0,1}
i 1
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5-20
Value of Adding 0.1 Million Pounds
Capacity (1982)
Mexico
$0
Canada
$8,300
Venezuela
$36,900
Frankfurt
$22,300
Gary
$25,200
Sunchem
$0
Should be evaluated as an option and priced accordingly.
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5-21
Evaluating Facility Investments:
AM Tires
Plant
Dedicated Plant
Flexible Plant
Fixed Cost Variable Cost Fixed Cost Variable Cost
$1 million/yr.
$15 / tire
$1.1 million
$15 / tire
/ year
4 million
110 pesos /
4.4 million
110 pesos /
pesos / year
tire
pesos / year
tire
US 100,000
Mexico
50,000
U.S. Demand = 100,000; Mexico demand = 50,000
1US$ = 9 pesos
Demand goes up or down by 20 percent with probability 0.5 and
exchange rate goes up or down by 25 per cent with probability 0.5.
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5-22
AM Tires
Period 0
Period 1
Period 2
RU=144
RM = 72
E=14.06
RU=120
RM = 60
E=11.25
RU=120
RM = 60
E=6.75
RU=120
RM = 40
E=11.25
RU=100
RM=50
E=9
RU=120
RM = 40
E=6.75
RU=80
RM = 60
E=11.25
RU=80
RM = 60
E=6.75
RU=80
RM = 40
E=11.25
RU=144
RM = 72
E=8.44
RU=144
RM = 48
E=14.06
RU=144
RM = 48
E=8.44
RU=96
RM = 72
E=14.06
RU=96
RM = 72
E=8.44
RU=96
RM = 48
E=14.06
RU=96
RM = 48
E=8.44
RU=80
RM = 40
E=6.75
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5-23
AM Tires
Four possible capacity scenarios:
• Both dedicated
• Both flexible
• U.S. flexible, Mexico dedicated
• U.S. dedicated, Mexico flexible
For each node, solve the demand allocation model.
Plants
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Markets
U.S.
U.S.
Mexico
Mexico
5-24
Facility Decision at AM Tires
Plant Configuration
United States
Mexico
Dedicated
Dedicated
Flexible
Dedicated
Dedicated
Flexible
Flexible
Flexible
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NPV
$1,629,319
$1,514,322
$1,722,447
$1,529,758
5-25
Capacity Investment Strategies
 Speculative
Strategy
– Single sourcing
 Hedging
Strategy
– Match revenue and cost exposure
 Flexible
Strategy
– Excess total capacity in multiple plants
– Flexible technologies
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5-26
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
© 2004 Prentice-Hall, Inc.
5-27