Slide 1

Chapter 5Network Design in the Supply Chain

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraNotes:

Learning ObjectivesUnderstand the role of network design in a supply chain.

Identify factors influencing supply chain network design decisions.

Develop a framework for making network design decisions.

Use optimization for facility location and capacity allocation decisions.

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraNotes:

Network Design DecisionsFacility roleWhat role, what processes?

Facility locationWhere should facilities be located?

Capacity allocationHow much capacity at each facility?

Market and supply allocationWhat markets? Which supply sources?

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraFactors InfluencingNetwork Design DecisionsStrategic factors

Technological factors

Macroeconomic factorsTariffs and tax incentivesExchange-rate and demand riskFreight and fuel costs

PoliticalContd

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraFactors InfluencingNetwork Design DecisionsInfrastructure factors

Competitive factorsPositive externalities between firmsLocating to split the market

Customer response time and local presence

Logistics and facility costs

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraFramework for Network Design DecisionsFigure 5-2

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraFramework for Network Design DecisionsPhase I: Define a supply chain strategy/designClear definition of the firms competitive strategyForecast the likely evolution of global competitionIdentify constraints on available capitalDetermine growth strategy

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraFramework for Network Design DecisionsPhase II: Define the regional facility configurationForecast of the demand by country or regionEconomies of scale or scopeIdentify demand risk, exchange-rate risk, political risk, tariffs, requirements for local production, tax incentives, and export or import restrictionsIdentify competitors

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraFramework for Network Design DecisionsPhase III: Select a set of desirable potential sitesHard infrastructure requirementsSoft infrastructure requirements

Phase IV: Location choices

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraModels for Facility Location and Capacity AllocationMaximize the overall profitability of the supply chain network while providing customers with the appropriate responsiveness

Many trade-offs during network design

Network design models used to decide on locations and capacities and to assign current demand to facilities

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraSocio Economic Factors in Choice of Facility LocationWhat 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?

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraModels for Facility Location and Capacity AllocationImportant informationLocation of supply sources and marketsLocation of potential facility sitesDemand 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 quantitySale price of product in different regions Taxes and tariffs Desired response time and other service factors

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraCapacitated Plant Location Model=number of potential plant locations/capacity

=number of markets or demand points=annual demand from market j=potential capacity of plant i=annualized fixed cost of keeping plant i open=cost of producing and shipping one unit from plant i to market j (cost includes production, inventory, transportation, and tariffs)

=quantity shipped from plant i to market j=1 if plant i is open, 0 otherwise

subject to

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraGravity Location Modelxn, yn:Coordinate location of either a market or supply source nFn:Cost of shipping one unit for one mile between the facility and either market or supply source n Dn:Quantity to be shipped between facility and market or supply source n(x, y) is the location selected for the facility, the distance dn between the facility at location (x, y) and the supply source or market n is given by

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraNetwork Optimization ModelsAllocating demand to production facilities=Number of factory locations

=Number of markets or demand points=Annual demand from market j=Capacity of factory i=Cost of producing and shipping one unit from factory i to market jxij = Quantity shipped from factory i to market j

subject to

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraCapacitated Plant Location ModelMerge the companiesSolve using location-specific costsyi=1 if factory i is open, 0 otherwisexij = quantity shipped from factory i to market j

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraCapacitated Model with Single SourcingMarket supplied by only one factoryModify decision variablesyi=1 if factory i is open, 0 otherwisexij=1 if market j is supplied by factory i, 0 otherwise

subject to

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraLocating Plants and Warehouses SimultaneouslyFigure 5-13

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraLocating Plants and Warehouses SimultaneouslyModel inputsm =Number of markets or demand points n =Number of potential factory locationsl =Number of supplierst =Number of potential warehouse locations Dj =Annual demand from customer j Ki =Potential capacity of factory at site iSh =Supply capacity at supplier h We =Potential warehouse capacity at site eFi =Fixed cost of locating a plant at site i fe =Fixed cost of locating a warehouse at site echi =Cost of shipping one unit from supply source h to factory i cie =Cost of producing and shipping one unit from factory i to warehouse e cej =Cost of shipping one unit from warehouse e to customer j

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraLocating Plants and Warehouses SimultaneouslyGoal is to identify plant and warehouse locations and quantities shipped that minimize the total fixed and variable costsYi=1 if factory is located at site i, 0 otherwiseYe=1 if warehouse is located at site e, 0 otherwisexej =Quantity shipped from warehouse e to market jxie=Quantity shipped from factory at site i to warehouse exhi=Quantity shipped from supplier h to factory at site i

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraLocating Plants and Warehouses Simultaneouslysubject to

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraAccounting for Taxes, Tariffs, and Customer RequirementsA supply chain network should maximize profits after tariffs and taxes while meeting customer service requirements

Modified objective and constraint

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraMaking Network Design Decisions in PracticeDo 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

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraSummary of Learning Objectives1. Understand the role of network design in a supply chain.

Network design decisions include identifying facility roles, locations, and capacities and allocating markets to be served by different facilities. These decisions define the physical constraints within which the network must be operated as market conditions change. Good network design decisions increase supply chain profits

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraNotes:

Summary of Learning Objectives2. Identify factors influencing supply chain network design decisions.

Broadly speaking, network design decisions are influenced by strategic, technological, macroeconomic, political, infrastructure, competitive, and operational factors.

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraSummary of Learning Objectives3. Develop a framework for making network design decisions. The goal of network design is to maximize the supply chains long-term profitability. The process starts by defining the supply chain strategy, which must be aligned with the competitive strategy of the firm. The supply chain strategy, regional demand, costs, infrastructure, and the competitive environment are used to define a regional facility configuration. For regions where facilities are to be located, potentially attractive sites are then selected based on available infrastructure. The optimal configuration is determined from the potential sites using demand, logistics cost, factor costs, taxes, and margins in different markets.

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraSummary of Learning Objectives4. Use optimization for facility location and capacity allocation decisions. Gravity location models identify a location that minimizes inbound and outbound transportation costs. They are simple to implement but do not account for other important costs. Network optimization models can include contribution margins, taxes, tariffs, production, transportation, and inventory costs and are used to maximize profitability. These models are useful when locating facilities allocating capacity to facilities, and allocating markets to facilities.

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. KalraGroup work for review next weekIdentify various SCM decisions made during Network Design phase and determine effectiveness evaluation criteria for each decision .

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra