Designing the Supply Chain Network

Models from Chapter 4, 5 of Chopra & Meindl Byung-Hyun Ha [email protected]

Outline



Designing the Distribution Network in Supply Chain

   Factors Influencing Distribution Network Design Design Options for Distribution Network Selecting Distribution Network Design 

Models for Facility Location and Capacity Allocation

Designing Distribution Network



Factors Influencing Distribution Network Design

  Customer needs that are met Cost of meeting customer needs Required Number of Facilities Response Time Total Logistics Costs Cost Response Time Inventory Transportation Facility Number of Facilities Number of Facilities

Designing Distribution Network



Elements of customer service influenced by network structure

 Response time    Product variety Product availability Customer experience • Ease with which customer can place and receive order  Order visibility • Ability of customer to track their order from placement to delivery  Returnability • Ease with which customer can return unsatisfactory merchandise and ability of logistics network to handle such returns

Designing Distribution Network



Supply chain costs affected by network structure

 Inventories    Transportation Facilities and handling Information infrastructure

Design Options for Distribution Network



Possible distribution network design

   Manufacturer storage with direct shipping Manufacturer storage with direct shipping and in-transit merge Distributor storage with carrier delivery    Distributor storage with last mile delivery Manufacturer or distributor storage with consumer pickup Retail storage with consumer pickup • Customers walking into store or ordering online

Design Options for Distribution Network



Manufacturer storage with direct shipping

  Drop-shipping, demand aggregation, postpone customization Slow-moving/low-demand/high-value items

Manufacturer

Product Flow Information Flow

Retailer Customers

Inventory Transportation Facilities and handling Information Response time Product variety Product availability Customer experience Order visibility Returnability

L H L H H H H M L L

Design Options for Distribution Network



Manufacturer storage with direct shipping and in transit merge

  e.g. PC from Dell along with Sony monitor low- to medium-demand and high-value items

Factories Retailer In-Transit Merge by Carrier Customers

Inventory Transportation Facilities and handling Information Response time Product variety Product availability Customer experience Order visibility Returnability

H L L H H H L M M H Product Flow Information Flow

Design Options for Distribution Network



Distributor storage with carrier delivery

  High-level inventory at distributor Medium- to fast-moving items at distributor, loss of aggregation

Product Flow

Factories Warehouse Storage by Distributor/Retailer

Information Flow

Customers

Inventory Transportation Facilities and handling Information Response time Product variety Product availability Customer experience Order visibility Returnability

H M M M M M M L M M

Design Options for Distribution Network



Distributor storage with last mile delivery

  Delivering to customer’s home instead of using package carrier e.g. grocery industry, water, bag of rice at dense city

Product Flow

Factories Distributor/Retailer Warehouse

Information Flow

Customers

Inventory Transportation Facilities and handling Information Response time Product variety Product availability Customer experience Order visibility Returnability

H M M L L L H H H M

Design Options for Distribution Network



Manufacturer or distributor storage with consumer pickup

 Reusing existing pick-up site, customer participation

Factories Retailer

Product Flow

Cross Dock DC

Information Flow

Pickup Sites Customers

Inventory Transportation Facilities and handling Information Response time Product variety Product availability Customer experience Order visibility Returnability

L H H L H H ?

L ?

H Customer Flow

Selecting Distribution Network Design



Comparative performance

 1: best performance Inventory Transportation Facilities and handling Information Response time Product variety Product availability Customer experience Order visibility Returnability

Manufacturer storage with direct shipping Manufacturer storage with direct shipping and in-transit merge Distributor storage with carrier delivery Distributor storage with last mile delivery Manufacturer or distributor storage with consumer pickup Retail storage with consumer pickup 1 4 1 4 4 1 1 4 5 5 1 3 2 4 4 1 1 3 4 5 2 2 3 3 3 2 2 2 3 4 3 5 4 2 2 3 3 1 2 3 1 1 5 5 4 1 1 5 6 2 4 1 6 1 1 4 4 5 1 1

Selecting Distribution Network Design



Performance for different product/customer char.

 +2: Very suitable, …, -2: very unsuitable High-demand product Medium-demand product Low-demand product Very low-demand product Many product source High product value Quick desired response High product variety Low customer effort

Manufacturer storage with direct shipping Manufacturer storage with direct shipping and in-transit merge Distributor storage with carrier delivery Distributor storage with last mile delivery Manufacturer or distributor storage with consumer pickup Retail storage with consumer pickup -2 -1 +1 +2 -1 +2 -2 +2 +1 -1 0 0 +1 -1 +1 -2 0 +2 0 +1 +1 0 +2 +1 -1 +1 +2 +1 0 -1 -2 +1 0 +1 0 +2 -1 0 +1 +1 0 -1 -2 +2 -1 +2 +1 -1 -2 +1 -1 +2 -1 -2

Network Design in the Supply Chain



A framework for network design decision

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

PHASE I

Supply Chain Strategy

PHASE II

Regional Facility Configuration TARIFFS AND TAX INCENTIVES REGIONAL DEMAND Size, growth, homogeneity, local specifications POLITICAL, EXCHANGE RATE AND DEMAND RISK

PHASE III

Desirable Sites AVAILABLE INFRASTRUCTURE PRODUCTION METHODS Skill needs, response time FACTOR COSTS Labor, materials, site specific

PHASE IV

Location Choices LOGISTICS COSTS Transport, inventory, coordination

Phase I: Supply Chain Strategy



A company’s competitive strategy

 Defining set of customer needs that it seek to satisfy through its products and services 

Value chain perspective

   Product development strategy/marketing and sales strategy

Supply chain strategy

and achieving

strategic fit

e.g. Wal-Mart, McMaster Carr, Dell Finance, Accounting, Information Technology, Human Resources New Product Development Marketing and Sales Operations Distribution Services The Value Chain in a Company

Network Optimization Models



Useful tools for both Phase II and Phase IV



Questions for Phase II: “What regions to source demand in and how to configure network?” given,

 Regional demand, tariffs, economics of scale, aggregate factor costs   Not necessary to go to detail of specific plant locations Need to also consider less quantifiable factors such as political and regulatory climate, competition 

Phase IV involves selecting specific facilities and allocating capacity within those selected, given,

 Fixed facility cost, transportation cost, production cost, inventory cost, coordination cost

Phase II: Regional Facility Configuration



Capacitated plant location model

 Example: SunOil, a global energy company • The world is divvied into 5 different regions: N. America, S. America, Europe, Asia, Africa • SunOil has regional demand figures, transport costs, facility costs and capacities • We will ignore tariffs and exchange rate fluctuations for now, and assume all demand must be met (so we can focus on minimizing costs)  Question: • • Where to locate facilities to service their demand What size to build in the region (small or large), should they locate a facility there

Phase II: Regional Facility Configuration



Capacitated plant location model



n

: number of potential plant location • As we are considering two different type plants (small, large) for each region,

n

= 10     

m

: number of markets

D j

: demand from market

j K i

: capacity of plant

i f i

: fixed cost of keeping plant

i

open

c ij

: variable cost of sourcing market

j

from plant

i



y i

= 1 if plant is located at site

i

, = 0 otherwise 

x ij

: quantity shipped from plant

i

market

j

to min

s

.

t

.

i n

  1

f i y i



i n

  1

j m

 1

c ij x ij i n

  1

x ij



D j

for

j

 1 ,  ,

m j m

  1

x ij



y i

 { 0 , 1 }

K i y i

for for

i

 1 ,  ,

n i

 1 ,  ,

n

Phase II: Regional Facility Configuration

Phase III: Desirable Sites



Gravity methods for location



x

,

y

: Warehouse Coordinates   

x D F n n n

, : :

y n

: Coordinates of delivery location

n

Quantity to be shipped to delivery location Annual tonnage to delivery location

n n d n

 (

x



x n

) 2  (

y



y n

) 2 min

n k

  1

d n D n F n

Limitions?

Phase IV: Location Choices



Network optimization model

 Example: TelecomOne merged with High Optic • • They have plants in different cities and service several regions Supply cities • Baltimore (capacity 18K), Cheyenne (24K), Salt Lake City (27K), Memphis (22K) and Wichita (31K) • Monthly regional demands • Atlanta (demand 10K), Boston (6K), Chicago (14K), Denver (6K), Omaha (7K) • They will consider consolidating facilities

Phase IV: Location Choices



Network optimization model

    

n

: number of plant location

m

: number of markets

D j

: demand from market

j K i

: capacity of plant

i c ij

: variable cost of sourcing market

j

from plant

i



x ij

: quantity shipped from plant

i

market

j

to min

i

 1

j m n

  1

c ij x ij s

.

t

.

i n

  1

x ij



D j j m

  1

x ij x ij

 0 

K i

for

j

 1 ,  ,

m

for

i

 1 ,  ,

n

Phase IV: Location Choices



Considering additional layers: simultaneously locating plants and DCs

DCs suppliers plants customer1 customer2 customer3 min

i n

  1

f i y i



e t

  1

f e y e



h l

  1

i n

 1

c hi x hi



i n

  1

e t

 1

c ie x ie



e t

  1

j m

 1

c ej x ej s

.

t

.

