Supply Chain Management Transformation Processes

Introduction
Types of transformations processes????

Traditional View: Logistics in the

Traditional View: Supply Chains Manufacturing Firm
in the Economy
 Freight Transportation $352, $455 B Profit 4% Profit
– Transportation manager in charge Logistics
– Transportation software Cost
 Inventory Expense $221, $311 B Logistics Cost 21%
– Inventory manager in charge Marketing
– Inventory software Cost
Transportation and inventory managers
 Administrative Expense $27, $31 B
Marketing Cost 27%
 Logistics related activity 11%, 10.5% of GNP
Manufacturing
Manufacturing Cost 48% Cost

Logistics is the flow's management of products,
services and information from the origin point
(suppliers) to the end (final customer). It involves the
management of four basic sub-systems: supply,
production support, distribution and returns.
 Nowadays, the logistics needs to be totally integrated,
with intense information sharing among its sub-
systems to achieve its mission, which is: delivery the
right product, with appropriate quality, at minimal
cost, in the right place, satisfying the customers.
SCM is a broader concept, it involves the logistics
management of the processes carried out within all
members in supply chain and also, the relationships
management with suppliers, logistics providers,
clients and final customers, aiming partnerships or
strategic alliances, in order to enable the intense
information sharing and also resources (physical,
monetary, knowledge) sharing.
Nowadays the companies do not compete with other
companies, but one supply chain competes with other
supply chains. So, the companies involved in a
specific supply chain are managed as a single entity,
not as separated ones.

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 Supply Chain Management: The
Magnitude in the Traditional View
Estimated that the grocery industry could save $30
billion (10% of operating cost) by using effective
logistics and supply chain strategies
– A typical box of cereal spends 104 days from factory to sale
– A typical car spends 15 days from factory to dealership
Supply Chain Management:
The True Magnitude
Compaq estimates it lost $.5 billion to $1 billion in
sales in 1995 because laptops were not available when
and where needed
When the 1 gig processor was introduced by AMD,
the price of the 800 mb processor dropped by 30%
P&G estimates it saved retail customers $65 million
by collaboration resulting in a better match of supply
and demand

Supply Chains
What is a Supply Chain?
A Supply Chain consists of all parties involved,
Introduction directly or indirectly, in fulfilling a customer
The objective of a supply chain request.
All facilities, functions, and activities associated with
flow and transformation of goods and services from
raw materials to customer, as well as the associated
information flows
An integrated group of processes to “source,” “make,”
and “deliver” products
All stages may not be present in all supply chains
DELL; AMAZON

Supply
Chain
for
Denim
Jeans

Supply Chain Illustration

2

Supply Chain for Service
Providers
 More difficult than manufacturing
 Does not focus on the flow of physical goods
 Focuses on human resources and support
services
 More compact and less extended
Supply Chain
Uncertainty and Inventory
 One goal in SCM:
 respond to uncertainty in
customer demand
without creating costly
excess inventory
 Negative effects of
uncertainty
 lateness
 incomplete orders
 Inventory
 insurance against supply
chain uncertainty
Supply Chain Processes
Supply
Chain
for
Denim
Jeans
(cont.)
Supply Chain
Management (SCM)
 Managing flow of information through supply
chain in order to attain the level of
synchronization that will make it more
responsive to customer needs while lowering
costs
 Keys to effective SCM
 information
 communication
 cooperation
 trust
Bullwhip Effect
Occurs when slight demand variability is magnified as information moves back
upstream
 Factors that contribute to
uncertainty
 inaccurate demand
forecasting
 long variable lead times
 late deliveries
 incomplete shipments
 product changes
 batch ordering
 price fluctuations and
discounts
 inflated orders
3
 A picture is better than 1000 words! Detergent supply chain:

- A supply chain consists of

P&G or other Third Albertson’s Customer wants
Supplier Manufacturer Distributor Retailer Customer manufacturer party DC Supermarket detergent

Upstream
Downstream
Chemical
Plastic cup Tenneco
manufacturer
- aims to Match Supply and Demand, Producer Packaging
(e.g. Oil Company)
profitably for products and services

SUPPLY SIDE DEMAND SIDE

- achieves Chemical
Paper Timber
manufacturer
Manufacturer Industry
The right
Product
+ + + + +
The right
Price
The right
Store
The right
Quantity
The right
Customer
The right
Time
= Higher
Profits
(e.g. Oil Company)

Flows in a Supply Chain A Generic Supply Chain

Sources: Regional Field Customers,
plants Warehouses: Warehouses: demand
vendors stocking stocking centers
ports points points sinks
Information

Product
Customer
Funds Supply

Inventory

Purchase Inventory
Transportation

Value Chains Value Chain

 Value chain  Value: creation of value for customer is important
 every step from raw materials to the eventual end aspect of supply chain management
user
 Final Value= Difference between Worth of product/
 ultimate goal is delivery of maximum value to the
end user service delivered to the customer to the cost incurred
across the supply chain for filling the customers order.
 Supply chain
 activities that get raw materials and subassemblies  Supply chain profitability (supply chain surplus)? It is
into manufacturing operation the total profit to be shared not piece meal across
 ultimate goal is same as that of value chain different stages.
 Demand chain  Effective SCM managing all stages to maximize SC
 increase value for any part or all of chain profitability.
 Terms are used interchangeably

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 The Objective of a Supply Chain
Example: Dell receives $2000 from a customer for a
computer (revenue)
Supply chain incurs costs (information, storage,
transportation, components, assembly, etc.)
Difference between $2000 and the sum of all of these
costs is the supply chain profit
Decision Phases of a Supply
Chain
Supply chain strategy or design
Supply chain planning
Supply chain operation
Supply Chain Planning
Definition of a set of policies that govern short-term
operations
Fixed by the supply configuration from previous
phase
Starts with a forecast of demand in the coming year
The Objective of a Supply Chain
Sources of supply chain revenue: the customer
Sources of supply chain cost: flows of information,
products, or funds between stages of the supply chain
Supply chain management is the management of
flows between and among supply chain stages to
maximize total supply chain profitability
Supply Chain Strategy or Design
 Decisions about the structure of the supply chain and what
processes each stage will perform
 Strategic supply chain decisions
– Locations and capacities of facilities
– Products to be made or stored at various locations
– Modes of transportation
– Information systems
 Supply chain design must support strategic objectives
 Supply chain design decisions are long-term and expensive
to reverse – must take into account market uncertainty
Supply Chain Planning
Planning decisions:
– Which markets will be supplied from which locations
– Planned buildup of inventories
– Subcontracting, backup locations
– Inventory policies
– Timing and size of market promotions
Must consider in planning decisions demand
uncertainty, exchange rates, competition over the
time horizon
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 Supply Chain Operation
 Time horizon is weekly or daily
 Decisions regarding individual customer orders
 Supply chain configuration is fixed and operating policies
are determined
 Goal is to implement the operating policies as effectively as
possible
 Allocate orders to inventory or production, set order due
dates, generate pick lists at a warehouse, allocate an order to
a particular shipment, set delivery schedules, place
replenishment orders
 Much less uncertainty (short time horizon)
Process View of a Supply Chain
Cycle view: processes in a supply chain are divided
into a series of cycles, each performed at the
interfaces between two successive supply chain stages
Push/pull view: processes in a supply chain are
divided into two categories depending on whether
they are executed in response to a customer order
(pull) or in anticipation of a customer order (push)

Cycle View of Supply Chains Cycle View of a Supply Chain

Customer Each cycle occurs at the interface between two successive
Customer Order stages
Cycle
Customer order cycle (customer-retailer)
Retailer
Any cycle Replenishment cycle (retailer-distributor)
Replenishment Cycle 0. Customer arrival
1. Customer triggers an order Manufacturing cycle (distributor-manufacturer)
Distributor 2. Supplier fulfils the order
3. Customer receives the order
Procurement cycle (manufacturer-supplier)
Manufacturing Cycle Cycle view clearly defines processes involved and the
Manufacturer owners of each process. Specifies the roles and
responsibilities of each member and the desired outcome
Procurement Cycle
of each process.
Supplier

Cycle View of a Supply Chain Differences

 A cycle view of supply chain defines the process
and owners of each process. It specifies the role/
responsibilities and desired outcome of each
process
Supplier markets  Buyer Places order 
Supplier receives order  Supplier supplies the
order Buyer receives the order Buyer
returns reverse order
Size of order
Uncertainty of demand time as well as amount.
Predictability of orders –
– Order in customer cycle can only be predicted hence can
only be forecasted.
– Orders in the procurement cycle are predictable once
manufacturing planning has been done.
– In other stages also it is uncertain but can be managed as
per the policies of the particular SC.

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 Push vs Pull System Push/Pull View of Supply Chains
 What instigates the movement of the work in the system? Procurement, Customer Order
Manufacturing and Cycle
 In Push (speculative) systems, work release is based on downstream Replenishment cycles
demand forecasts
– Keeps inventory to meet actual demand
– Acts proactively
» e.g. Making generic job application resumes today
PUSH PROCESSES PULL PROCESSES
 In Pull (reactive) systems, work release is based on actual demand
or the actual status of the downstream customers
– May cause long delivery lead times
– Acts reactively Customer
» e.g. Making a specific resume for a company after talking to the recruiter Order Arrives
Push-Pull boundary

Push/Pull View of Push/Pull View of

Supply Chain Processes Supply Chain Processes
Useful in considering strategic decisions relating to
Supply chain processes fall into one of two categories
supply chain design – more global view of how
depending on the timing of their execution relative to
supply chain processes relate to customer orders
customer demand  Can combine the push/pull and cycle views
Pull: execution is initiated in response to a customer – L.L. Bean (assemble/made to stock)
– Dell (assemble to order)
order (reactive)
Push: execution is initiated in anticipation of customer The relative proportion of push and pull processes can
orders (speculative) have an impact on supply chain performance
Push/pull boundary separates push processes from
pull processes
Assignment 1: Draw & discuss push/ pull processes
&boundaries of at least three companies

What is Supply Chain Management? What is Supply Chain Management?

Managing supply chain flows and assets, to maximize What is supply chain surplus?
supply chain surplus – Supply chain surplus is the value addition by supply
chain function of an organisation.
What is supply chain surplus? – It is calculated by the following formula: Supply chain
surplus = Revenue generated from a customer - Total cost
– Find the answer for at least three companies!!! incurred to produce and deliver the product.
» A manufacturing/ process company
– "The objective of every supply chain should be to
» A service provider
maximize the overall value generated." The value
» An educational institute
generated is "supply chain surplus."

7
 Competitive and Supply
Chain Strategies
 Competitive strategy: defines the set of customer needs a firm
seeks to satisfy through its products and services (defined by
competitive priorities): Dell, WalMart, W, Un, online
jewellery etc. (Q,C, D, F (low price/variety/ responsiveness) &
Inno.)
 Product development strategy: specifies the portfolio of new
SUPPLY CHAIN products that the company will try to develop (make or buy)
PERFORMANCE: ACHIEVING  Marketing and sales strategy: specifies how the market will be
segmented and product positioned, priced, and promoted
A STRATEGIC FIT  Supply chain strategy:
– determines the nature of material procurement, transportation of
materials, manufacture of product or creation of service, distribution of
product
– Consistency and support between supply chain strategy, competitive
strategy, and other functional strategies is important

Linking SC and Business Strategy

Competitive Strategy
Competitive (Business) Strategy

Product Development Strategy Marketing Strategy

-Portfolio of products
-Frequent discounts Supply Chain Strategy
-Timing of product introductions
-Coupons

New Marketing
Product and Operations Distribution Service
Development Sales

Finance, Accounting, Information Technology, Human Resources

Strategies: Strategies
Product Development
It relates to Technologies for future
operations (via patents) and Set  Marketing and sales strategy relates to positioning, pricing and
of products/services promotion of products/services
– e.g. Never offer more than 40% discount
 Be the technology leader
IBM workstations – e.g. EDLP = every day low price
» At Wal-Mart
 Offer many products
– e.g. Demand smoothing via coupons
Dell computers
» BestBuy
 Offer products for locals
Tata’s Nano at $2500=100000 rupees
 Supply chain management strategy relates to procurement,
Production at Sanand, Gujrat (West transportation, storage and delivery
Bengal, India); – e.g. Never use more than 1 supplier for every input
l x w x h=3.1 x 1.5 x 1.6 meters;
– e.g. location to build warehouses
Top speed: 105km/hr;
Engine volume 623 cc;
– e.g. Decision about to buy or outsource.
Mileage 50 miles/gallon; – e.g. manufacturing or simple distribution or franchising at demand points
Annual sales target 200,000.

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 Fitting the SC to the customer or vice
versa?
Understand the customer Wishes
Understand the Capabilities of your SC
Match the Wishes with the Capabilities
Challenge: How to meet extensive Wishes
with limited Capabilities?
Achieving Strategic Fit
Large Variety with quick delivery
Low inventory
Economies of scale/ economies of scope
Low Cost of Transportation
Poor product availability
Response v/s efficiency
How is Strategic Fit Achieved?
Step 1: Understanding the customer and supply chain
uncertainty
Step 2: Understanding the supply chain
Step 3: Achieving strategic fit
Achieving Strategic Fit
Strategic fit:
– Consistency between customer priorities of competitive
strategy and supply chain capabilities specified by the
supply chain strategy
– Competitive and supply chain strategies have the same
goals
A company may fail because of a lack of strategic fit
or because its processes and resources do not provide
the capabilities to execute the desired strategy
Example of strategic fit – Dell (standardized/
customized)
Achieving Strategic Fit
The competitive and functional strategies must fit
together to achieve coordinated overall strategy
Each function must align their processes and
resources to achieve / execute these strategies
The design of overall SC and the role of each stage
must be aligned to support SC strategy.
Step 1: Understanding the Customer
and Supply Chain Uncertainty
Identify the needs of the customer segment being
served
Quantity of product needed in each lot
Response time customers will tolerate Responsiveness
v/s
Variety of products needed Efficiency
Service level required
Price of the product
Desired rate of innovation in the product
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 Step 1: Understanding the Customer Step 1: Understanding the Customer
and Supply Chain Uncertainty and Supply Chain Uncertainty
Overall attribute of customer demand Implied demand uncertainty also related to customer
Demand uncertainty: uncertainty of customer demand needs and product attributes
for a product
Implied demand uncertainty: resulting uncertainty
for the supply chain given the portion of the First step to strategic fit is to understand customers by
demand the supply chain must handle based on the mapping their demand on the implied uncertainty
attributes the customer desires spectrum

Achieving Strategic Fit: Impact of Customer Needs on Implied

Consistent SCM and Competitive
strategies
Fit SC to the customer
Understanding the Customer
– Range of demand, pizza hut stable
– Production lot size, seasonal products
– Response time, organ transplantation
– Service level, product availability
– Product variety
– Innovation
– Price
– Accommodating level of quality
Demand Uncertainty
Customer Need Causes implied demand
uncertainty to increase because …
Range of quantity required increases Wider range of quantity required
implies greater variance in demand
Implied (Demand) Lead time decreases Less time to react to orders
Uncertainty for SC
Variety of products required increases Demand per product becomes more
Implied trouble disaggregated
for SC Number of channels through which Total customer demand is now
product may be acquired increases disaggregated over more channels
Rate of innovation increases New products tend to have more
uncertain demand
Required service level increases Firm now has to handle unusual
surges in demand

Contributors to Implied Demand Levels of Implied Demand

Uncertainty Uncertainty

Commodities Customized products

Detergent High Fashion Clothing
Long lead time steel Emergency steel,
for maintenance/replacement

Price Customer Need Responsiveness

Low Implied Demand Uncertainty High

The Implied Uncertainty: Supply & Demand

Short lead times, product variety,
distribution channel variety, high rate of innovation and Frequent breakdowns; unpredictable & low yield; poor quality; limited &
high customer service levels all increase inflexible supply chain capacity; evolving production process (factors of
the Implied Demand Uncertainty supply source capability) all lead to increased supply uncertainty.

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 Correlation Between Implied Demand Considerations for Supply Chain
Uncertainty and Other Attributes Drivers- Important
Driver Efficiency Responsiveness
Attribute Low Implied High Implied
Uncertainty Uncertainty Inventory Cost of holding Availability
Product margin Low High Transportation Consolidation Speed
Facilities Consolidation / Proximity /
Avg. forecast error 10% 40%-100% Dedicated Flexibility
Information Low cost/slow/no High cost/
Avg. stockout rate 1%-2% 10%-40% duplication streamlined/reliable
Sourcing Low cost sources Responsive sources
Avg. forced season- 0% 10%-25% Pricing Constant price Low-high price
end markdown

Step 2: Understanding the Step 2: Understanding the

Supply Chain
How does the firm best meet demand?
Dimension describing the supply chain is supply chain
responsiveness
Supply chain responsiveness -- ability to
– respond to wide ranges of quantities demanded: capacity
– meet short lead times
– handle a large variety of products
– build highly innovative products
– meet a very high service level ??
– Handle supply uncertainty
Supply Chain
There is a cost to achieving responsiveness
Supply chain efficiency: inverse of the cost of making
and delivering the product to the customer
Increasing responsiveness results in higher costs that
lowers efficiency
Second step to achieving strategic fit is to map the
supply chain on the responsiveness spectrum

Understanding the Supply Chain: Cost-

Responsiveness Efficient Frontier Responsiveness Spectrum
Responsiveness

High
Highly Somewhat Somewhat Highly
efficient efficient responsive responsive

Integrated An Apparel Most FedEx

steel mill Company automotive
production

Low GIVE SOME MORE EXAMPLES !!!

Cost
High Low

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 Achieving Strategic Fit Shown on the
Step 3: Achieving Strategic Fit Uncertainty/Responsiveness Map
Responsive
Step is to ensure that what the supply chain does well supply chain

is consistent with target customer’s needs

All functions in the value chain must support the
competitive strategy to achieve strategic fit Responsiveness
spectrum
Two key points Responsiveness:
Increasing implied
– there is no right supply chain strategy independent of demand uncertainty
competitive strategy from supply sources and
customers
– there is a right supply chain strategy (level of Efficient
responsiveness) for a given competitive strategy (Level of supply chain
implied uncertainty) - consider case by case basis Certain Implied Uncertain
demand uncertainty demand
spectrum

Comparison of Efficient and

Step 3: Achieving Strategic Fit Responsive Supply Chains
Efficient Responsive
Primary goal Lowest cost Quick response

Product design strategy Min product cost Modularity to allow

postponement
Pricing strategy Lower margins Higher margins

Mfg strategy High utilization Capacity flexibility

Inventory strategy Minimize inventory Buffer inventory

Lead time strategy Reduce but not at expense Aggressively reduce even if
of greater cost costs are significant
Supplier selection strategy Cost and low quality Speed, flexibility, quality

Transportation strategy Greater reliance on low cost Greater reliance on

modes responsive (fast) modes

Multiple Products and Customer Segments

Other Issues Affecting Strategic Fit
Multiple products and customer segments
Product life cycle
Globalization & Competitive changes over time
Firms sell different products to different customer
segments (with different implied demand uncertainty)
The supply chain has to be able to balance efficiency
and responsiveness given its portfolio of products and
customer segments
Two approaches:
– Different supply chains
– Tailor supply chain to best meet the needs of each
product’s demand:
» High responsiveness: separate shipping mode/ separate
line (responsive line of production)
» High efficiency: unit load concept/ efficient production
mode

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 Product Life Cycle Product Life Cycle
The demand characteristics of a product and the needs Examples: pharmaceutical firms, Intel
of a customer segment change as a product goes As the product goes through the life cycle, the supply
through its life cycle chain changes from one emphasizing responsiveness
Supply chain strategy must evolve throughout the life to one emphasizing efficiency
cycle
Early: uncertain demand, high margins (time is
important), product availability is most important,
cost is secondary
Late: predictable demand, lower margins, price is
important

Globalization & Competitive

Changes Over Time Expanding Strategic Scope
Competitive pressures can change over time  Scope of strategic fit
– The functions and stages within a supply chain that devise an
More competitors may result in an increased emphasis integrated strategy with a shared objective
on variety at a reasonable price – One extreme: each function at each stage develops its own
strategy
The Internet makes it easier to offer a wide variety of
– Other extreme: all functions in all stages devise a strategy jointly
products  Five categories:
The supply chain must change to meet these changing – Intracompany intraoperation scope: Minimum Local Cost View
competitive conditions – Intracompany intrafunctional scope: Minimize Functional Cost
– Intracompany interfunctional scope: Maximize Company profit
– Intercompany interfunctional scope: Maximize Supply Chain
Surplus

Different Scopes of Strategic Fit

Across a Supply Chain Maximize SCM Surplus
Speed a key driver of SCM success is hindered due to
Suppliers Manufacturer Distributor Retailer Customer boundaries between various stages of SCM
Competitive
Strategy
Leads to enhanced inventory cost at various places
Product Intercompany
Interfunctional Intracompany
due to no synergy of demand management
Development
Strategy Intrafunctional
at Distributor
Supply Chain
Intracompany
Strategy Intracompany
Interfunctional
Intraoperation
at Distributor
Hence intercompany interfunctional scope of SCM is
Marketing at Distributor
Strategy needed for have maximum SCM surplus.
Each stage need to share their demand information
with other players in specific SC leading to increased
size of the pie as well as SC surplus.

13
 Journal Articles to Read
 Delivering Simultaneous Benefits to the Farmer and the Common
Man: Time to Unshackle the Agricultural Produce Distribution
system. S. Raghunath & D. Ashok
 Amrik S. Sohal Damien J. Power Mile Terziovski,
(2002),"Integrated supply chain management from the wholesaler’s
perspective", International Journal of Physical Distribution &
Supply Chain Drivers and Metrics Logistics Management, Vol. 32 Iss 2 pp. 96 – 109
 V.M. Rao Tummala Cheryl L.M. Phillips Melanie Johnson,
(2006),"Assessing supply chain management success factors: a case
study", Supply Chain Management: An International Journal, Vol. 11
Iss 2 pp. 179 – 192
 Aligning product design with the supply chain: a case study, Khan
O., Christopher M. and Creazza A., Supply Chain Management: An
International Journal, 17/3 (2012) 323–336.
 Chee Yew Wong Jan Stentoft Arlbjørn John Johansen,
(2005),"Supply chain management practices in toy supply chains",
Supply Chain Management: An International Journal, Vol. 10 Iss 5
pp. 367 - 378

Journal Articles to Read

Delivering Simultaneous Benefits to the Farmer and Impellers to Supply Chain
the Common Man: Time to Unshackle the
Agricultural Produce Distribution system. S. Empowered Customer
Raghunath & D. Ashok
V.M. Rao Tummala Cheryl L.M. Phillips Melanie Development of IT Tools: MRP; MRPII, ERP; CPFR;
Johnson, (2006),"Assessing supply chain management VMI and some more; with performance management
success factors: a case study", Supply Chain tool like SCOR (supply chain operation reference)
Management: An International Journal, Vol. 11 Iss 2
Model (Present)
pp. 179 – 192
Aligning product design with the supply chain: a case
study, Khan O., Christopher M. and Creazza A., Globalization
Supply Chain Management: An International Journal,
17/3 (2012) 323–336.

Supply Chain Concepts Systems Concept

Systems Concept
Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy

Total Cost Concept Product

Development
Intercompany
Interfunctional Intracompany
Intrafunctional
Strategy
at Distributor
Supply Chain
Intracompany
Strategy Intracompany
Intraoperation
Interfunctional
at Distributor
Marketing at Distributor
Strategy
Trade-Off Concept

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Drivers of Supply Chain Performance
Facilities
– places where inventory is stored, assembled, or
fabricated
– Role; location; capacity, flexibility
– production sites and storage sites
Inventory
– raw materials, WIP, finished goods within a supply
chain
– inventory policies
Transportation
– moving inventory from point to point in a supply chain
– combinations of transportation modes and routes
Drivers of Supply Chain Performance
 Information
– data and analysis regarding inventory, transportation,
facilities throughout the supply chain
– potentially the biggest driver of supply chain performance
 Sourcing
– Responsibility of production; storage; transportation or MIS
– functions a firm performs and functions that are outsourced
 Pricing
– Price associated with goods and services provided by a firm
to the supply chain
– Responsive Prices v/s Efficient Prices

A Framework for
Structuring Drivers WAL-MART
Competitive Strategy Efficiency v/s Responsiveness
Efficient
Supply Chain
Strategy – Inventory: cross docking; well planned DC;
Efficiency Responsiveness – Transportation
Supply chain structure
– Location: centrally Located DC’s
Logistical Drivers
– Sourcing: Large orders; economies of scale
Facilities Inventory Transportation Responsiveness:
– Information
Information Sourcing Pricing – Cross Docking
No drastic price fluctuations hence demand is stable.
Cross Functional Drivers
Wal-Mart Case Study

Facilities Components of Facilities Decisions

Role in the supply chain
– the “where” of the supply chain
– manufacturing or storage (warehouses)
Role in the competitive strategy
– economies of scale (efficiency priority)
– larger number of smaller facilities (responsiveness priority)
Components of facilities decisions
Location
– centralization (efficiency) vs. decentralization (responsiveness)
– other factors to consider (e.g., proximity to customers)
Capacity (flexibility (variety) versus efficiency (dedicated))
Manufacturing methodology (product focused versus process
focused)
Warehousing methodology (SKU storage, job lot storage,
cross-docking)
Overall trade-off: Responsiveness versus efficiency

15
 Inventory: Role in Competitive
Inventory: Role in the Supply Chain Strategy
Inventory exists because of a mismatch between If responsiveness is a strategic competitive priority, a
supply and demand firm can locate larger amounts of inventory closer to
Source of cost and influence on responsiveness customers
Impact on If cost is more important, inventory can be reduced to
– material flow time: time elapsed between when material make the firm more efficient
enters the supply chain to when it exits the supply chain
Trade-off
– throughput
» rate at which sales to end consumers occur
» I = DT (Little’s Law)
» I = inventory; D = throughput; T = flow time
» Inventory and throughput are “synonymous” in a supply chain as
throughput is determined as per customers demand.

Components of Inventory Transportation: Role in

Decisions the Supply Chain
 Cycle inventory Moves the product between stages in the supply chain
– Average amount of inventory used to satisfy demand between shipments
Impact on responsiveness and efficiency
– Depends on lot size/ economies of scale!! Holding v/s ordering cost!!
 Safety inventory Faster transportation allows greater responsiveness
– inventory held in case demand exceeds expectations but lower efficiency
– costs of carrying too much inventory versus cost of losing sales Also affects inventory and facilities
 Seasonal inventory
– inventory built up to counter predictable variability in demand
– cost of carrying additional inventory versus cost of flexible production
 Overall trade-off: Responsiveness versus efficiency

Transportation: Components of
Role in the Competitive Strategy Transportation Decisions
If responsiveness is a strategic competitive priority, Mode of transportation:
then faster transportation modes can provide greater – air, truck, rail, ship, pipeline, electronic transportation
responsiveness to customers who are willing to pay – vary in cost, speed, size of shipment, flexibility
for it Route and network selection
Can also use slower transportation modes for – route: path along which a product is shipped
customers whose priority is price (cost) – network: collection of locations and routes
Can also consider both inventory and transportation to In-house or outsource
find the right balance Overall trade-off: Responsiveness versus efficiency

16
 Information: Role in
the Supply Chain
The connection between the various stages in the
supply chain – allows coordination between stages
Crucial to daily operation of each stage in a supply
chain – e.g., production scheduling, inventory levels
Components of Information
Decisions
Push (MRP) versus pull (demand information
transmitted quickly throughout the supply chain)
Coordination and information sharing
Forecasting and aggregate planning
Enabling technologies
– EDI: Electronic Data Interchange
– Internet
– ERP systems
– Supply Chain Management software
– RFID: Radio Frequency Identification
Overall trade-off: Responsiveness versus efficiency
Sourcing:
Role in the Competitive Strategy
Sourcing decisions are crucial because they affect the
level of efficiency and responsiveness in a supply
chain
In-house vs. outsource decisions- improving
efficiency and responsiveness
Information:
Role in the Competitive Strategy
Allows supply chain to become more efficient and
more responsive at the same time (reduces the need
for a trade-off) HOW?? EVPI!!
Information technology
What information is most valuable?
Sourcing: Role in
the Supply Chain
Set of business processes required to purchase goods
and services in a supply chain
Supplier selection, single vs. multiple suppliers,
contract negotiation
Components of Sourcing
Decisions
In-house versus outsource decisions
Supplier evaluation and selection
Procurement process
Overall trade-off: Increase the supply chain profits
17
 Make or Buy Decisions
WHY????
– Capacity not free
– Demand is variable
Make – Cheaper to buy
– R & D costs
Or – No experience or expertise

Buy????

Pricing: Role in
Make or Buy Decisions the Supply Chain
Costs Pricing determines the amount to charge customers in
Capacity a supply chain
Quality Pricing strategies can be used to match demand and
Speed supply
Reliability: Delivery and Quality
Expertise

Pricing:
Role in the Competitive Strategy
Firms can utilize optimal pricing strategies to improve
efficiency and responsiveness
Low price and low product availability; vary prices by
response times
Components of Pricing Decisions
Pricing and economies of scale
– Changeover
– Load size
– Quantity discounts
Everyday low pricing versus high-low pricing
Big Bazar/ Wal-Mart v/s Movie tickets
Fixed price versus menu pricing
Overall trade-off: Increase the firm profits

18

For Reading Assignment
Metrics related to each SC Driver.
Designing Distribution Networks and
Applications to E-Business
DISTRIBUTION
NAME SOME TYPES!!!
– Wal-Mart
– Dell
– HP
– Direct to Customer –P&G
– Storage/ warehouse/ distributors
– Channels
– E-distribution –No intermediaries
Obstacles to Achieving
Strategic Fit
Increasing variety of products
Decreasing product life cycles
Increasingly demanding customers
Fragmentation of supply chain ownership
Globalization
Difficulty executing new strategies
DISTRIBUTION
NAME SOME TYPES!!!
The Role of Distribution
in the Supply Chain
Distribution: the steps taken to move and store a
product from the supplier stage to the customer stage
in a supply chain
Distribution directly affects cost and the customer
experience and therefore drives profitability
Choice of distribution network can achieve supply
chain objectives from low cost to high responsiveness
Examples: Wal-Mart, Dell, Proctor & Gamble (direct/
distributor both), Grainger (fast moving/ slow moving
are separated)
19
 Factors Influencing
Distribution Network Design Service and Number of Facilities
 Evaluation on two basis:
– Customer needs that are met
– Cost of meeting customer needs
Number of
 Elements of customer service influenced by network structure: Facilities
– Response time
– Product variety
– Product availability
– Customer experience: core as well as add ones like ambience, response……
– Time to market:
– Order visibility
– Returnability
 Supply chain costs affected by network structure:
– Inventories
– Transportation Response Time
– Facilities and handling
– Information

Inventory Costs and Number Transportation Costs and

of Facilities Number of Facilities

Inventory
Transportation
Costs
Costs

• Inbound
Transportation
Cost
• Outbound
Transportation
Costs
Number of facilities Number of facilities

Facility Costs and Number Variation in Logistics Costs and Response

of Facilities Time with Number of Facilities
Response Time
Facility
Costs
Total Logistics Costs

Number of facilities
Number of Facilities

20
 Design Options for a Manufacturer Storage with
Distribution Network Direct Shipping
Manufacturer Storage with Direct Shipping
Manufacturer
Manufacturer Storage with Direct Shipping and In-
Transit Merge
Retailer
Distributor Storage with Carrier Delivery
Distributor Storage with Last Mile Delivery
Manufacturer or Distributor Storage with Customer Customers
Pickup
Retail Storage with Customer Pickup Centralization case: Product Flow
Selecting a Distribution Network Design High cost; low demand with
unpredictable demand. Information Flow
More customization; Need
for retailer only for order
collection

Manufacturer Storage with Direct Distributor Storage with

Shipping In-Transit Merge Network Carrier Delivery
Factories

Factories

Retailer In-Transit Merge by

Warehouse Storage by
Carrier
Distributor/Retailer

Customers

Merge combines orders from Higher inventory at distributor but lesser than Customers
different suppliers; customer retail network
Product Flow Product Flow
receives a single delivery Medium to fast moving items
Outbound orders to a single customer can be Information Flow
High value, customization
Information Flow bundled together
postponed; high uncertainty items, Real time visibility between customer and
increased coordination warehouse needed

Distributor Storage with Manufacturer or Distributor Storage

Last Mile Delivery with Customer Pickup
Factories Factories

Distributor/Retailer Cross Dock DC

Retailer
Warehouse

Customers
Pickup Sites
Delivery at customers home; needs
more outlets/ warehouses as delivery
Product Flow
place needs to be nearer to customers Customers
place; requires higher inventory; Information Flow
Used for fast moving products, with
disaggregation not leading to significant
Customer Flow
increase in cost. Product Flow
Information Flow

21
 Manufacturer Storage with
Direct Shipping
Centralization case:
High cost; low demand with
unpredictable demand.
More customization; Need
for retailer only for order
collection
Manufacturer Storage with Direct
Shipping In-Transit Merge Network
Retailer
Merge combines orders from
different suppliers; customer
receives a single delivery
High value, customization
postponed; high uncertainty items,
increased coordination
Distributor Storage with
Carrier Delivery
Higher inventory at distributor but lesser than
retail network
Medium to fast moving items
Outbound orders to a single customer can be
bundled together
Real time visibility between customer and
warehouse needed
Performance Characteristics
 Elements of customer service influenced by network structure:
– Response time: Long response time
Manufacturer
– Product variety: Higher variety
– Product availability: Higher level of availability
Retailer – Customer experience: Good if single shipment from single manufacturer
– Time to market: fast as product available just after production
– Order visibility: More difficult
– Returnability: Expensive and difficult
Customers  Supply chain costs affected by network structure:
– Inventories: Lower cost (aggregation)
– Transportation: Higher cost (distance and disaggregation)
Product Flow
– Facilities and handling: Lower facility costs
Information Flow – Information: More investment
Performance Characteristics
Factories  Elements of customer service influenced by network structure:
– Response time: Marginally higher than drop shipping
– Product variety: Similar to drop shipping.
– Product availability: Similar to drop shipping.
In-Transit Merge by – Customer experience: Better than drop shipping as only single delivery
Carrier
– Time to market: Similar to drop shipping
– Order visibility: Similar to drop shipping.
– Return-ability: Expensive and difficult
Customers  Supply chain costs affected by network structure:
– Inventories: Similar as drop shipping Lower cost (aggregation)
– Transportation: Somewhat lower
Product Flow
– Facilities and handling: Handling costs are higher
Information Flow
– Information: More investment than drop shopping
Performance Characteristics
 Elements of customer service influenced by network structure:
– Response time: Faster than manufacture storage
Factories
– Product variety: Lower than manu. storg
– Product availability: Higher cost for same level of availability
– Customer experience: Better
Warehouse Storage by
– Time to market: Higher than manu. storg
Distributor/Retailer
– Order visibility: Easier
– Return-ability: Easier
 Supply chain costs affected by network structure:
– Inventories: Higher
Customers
– Transportation: Lower
Product Flow
– Facilities and handling: Somewhat higher
Information Flow
– Information: Simper than manu. Storg.
22
 Distributor Storage with
Last Mile Delivery
Distributor/Retailer
Warehouse
Delivery at customers home; needs
more outlets/ warehouses as delivery
place needs to be nearer to customers
place; requires higher inventory;
Used for fast moving products, with
disaggregation not leading to significant
increase in cost.
Performance Characteristics
Factories  Elements of customer service influenced by network structure:
– Response time: Fast/ quick
– Product variety: lesser
– Product availability: expensive
– Customer experience: Good
– Time to market: Slightly higher
– Order visibility: easier
– Return-ability: easier
Customers  Supply chain costs affected by network structure:
– Inventories: Higher than distributor storage
Product Flow – Transportation: Very high due to minimal scale economy
Information Flow – Facilities and handling: Higher
– Information: Similar to distributor storage

Manufacturer or Distributor Storage

with Customer Pickup Performance Characteristics
 Elements of customer service influenced by network structure:
Factories
– Response time: Similar to previous
– Product variety: Similar to previous
– Product availability: similar
Cross Dock DC – Customer experience: Lower then prior due to lack of home delivery
Retailer
– Time to market: same as manu. storage
– Order visibility: Difficult
– Return-ability: Easier
Pickup Sites  Supply chain costs affected by network structure:
– Inventories: Can match any option
– Transportation: Lower
Customers
– Facilities and handling: If new facilities made higher cost if existing used cost
Customer Flow lower. Handling cost higher
Product Flow – Information: more investment
Information Flow

Comparative Performance of Delivery

Retail store with customer pick up Network Designs
Retail Storage Manufacturer Manufacturer Distributor Storage Distributor Manufacturer
 Elements of customer service influenced by network structure: with Customer
Pickup
Storage with Direct
Shipping
Storage with In-
Transit Merge
with Package
Carrier Delivery
storage with last
mile delivery
storage with pickup

– Response time: Highest Response Time 1 4 4 3 2 4

– Product variety: lowest
Product Variety
– Product availability: expensive 4 1 1 2 3 1

– Customer experience: customer dependent Product Availability

4 1 1 2 3 1
– Time to market: Highest amongst all Customer Experience Varies from
4 3 2 1 5
1-5
– Order visibility: Trivial for instore but important for online 5
Order Visibility 1 4 3 2 6
– Return-ability: Easier
Returnability
 Supply chain costs affected by network structure: 1 5 5 4 3 2

– Inventories: Highest Inventory 4 1 1 2 3 1

– Transportation: Lowest Transportation 1 4 3 2 5 1
– Facilities and handling: Higher than other options. Handling cost higher
Facility & Handling 6 1 2 3 4 5
– Information: some investment for online and phone orders
Information 1 4 4 3 2 5

23
Performance of Delivery Networks for Different
Product/Customer Characteristics Journal Articles to Read
Delivering Simultaneous Benefits to the Farmer and the
Retail Storage Manufacturer Manufacturer Distributor Storage Distributor storage Manufacturer
with Storage with Storage with In- with Package Carrier with last mile delivery storage with
Customer Direct Shipping Transit Merge Delivery pickup
Pickup
Common Man: Time to Unshackle the Agricultural
High demand product
+2 -2 -1 0 +1 -1 Produce Distribution system. S. Raghunath & D. Ashok
Medium demand product
+1 -1 0 +1 0 0 Amrik S. Sohal Damien J. Power Mile Terziovski,
Low demand product
-1 +1 0 +1 -1 +1 (2002),"Integrated supply chain management from the
Very low demand product
-2 +2 +1 0 -2 +1 wholesaler’s perspective", International Journal of
Many product sources
+1 -1 -1 +2 +1 0 Physical Distribution & Logistics Management, Vol. 32
High product value
-1 +2 +1 +1 0 -2
Iss 2 pp. 96 – 109
Quick desired response
+2 -2 -2 -1 +1 -2
V.M. Rao Tummala Cheryl L.M. Phillips Melanie
High product variety Johnson, (2006),"Assessing supply chain management
-1 +2 0 +1 0 +2
Low customer effort
success factors: a case study", Supply Chain Management:
-2 +1 +2 +2 +2 -1
An International Journal, Vol. 11 Iss 2 pp. 179 - 192
+2 most suitable; +1 somewhat suitable; 0- Neutral; -1: somewhat unsuitable; -2: very unsuitable

E-Business and the Distribution Impact of E-Business on

Network Customer Service
Response time
Impact of E-Business on Customer Service
Product variety
Impact of E-Business on Cost
Product Availability
Customer experience- product visualization after
customization; increased now due to AI; ML
Time to market
Order Visibility
Returnability-increased reverse flow
Direct Sales to Customers-increased revenue!!
Flexible Pricing, Product Portfolio, and Promotions
Efficient Funds Transfer

Impact of E-Business on Cost Reading Assignment

Inventory DELL-PC Industry
Facilities
Transportation AMAZON-BOOKS
Information
PEAPOD-GROCERIES

GRAINGER-MRO

24
 Distribution Networks in Practice
The ownership structure of the distribution network
can have as big as an impact as the type of distribution
network
The choice of a distribution network has very long-
term consequences
Consider whether an exclusive distribution strategy is NETWORK DESIGN IN THE
advantageous SUPPLY CHAIN
Product, price, commoditization, and criticality have
an impact on the type of distribution system preferred
by customers

COMPETITIVENESS OF A NETWORK
THREE TIER MODEL NETWORK DESIGN DECISIONS
 Facility role
 Facility location
 Capacity allocation

 Market and supply allocation

5-148

NETWORK DECISION FACTORS INFLUENCING

RELEVANT FACTORS NETWORK DESIGN DECISIONS
 Strategic
 Technological
 Fixed cost high: Economies of Scale
 Fixed cost low
 Flexible/ inflexible technology
 Macroeconomic
 Tax & Tariffs; incentives
 Demand fluctuation
 Political
 Infrastructure
 Competitive

25
FACTORS INFLUENCING
NETWORK DESIGN DECISIONS THE COST-RESPONSE TIME FRONTIER
 Socioeconomic Factors
 Customer Response time and Local Presence: High Local FG
Mix
 Short response time Regional FG
 Economy Local WIP
 Convenience of shopping Cost Central FG
 Availability of options….etc. Central WIP

 Logistics and facility costs: Central Raw Material and Custom production
 Inventory cost
Custom production with raw material at suppliers
 Transportation cost
Low
 Diseconomies of scale
 Volume of supplies v/s finished product: steel; zinc Low Response Time High
 Balance response v/s logistics costs

FRAMEWORK FOR NETWORK DESIGN A FRAMEWORK FOR

DECISIONS NETWORK DESIGN DECISIONS
 Phase I – Supply Chain Strategy Competitive STRATEGY
PHASE I
GLOBAL COMPETITION

Supply Chain
 Phase II – Regional Facility Configuration INTERNAL CONSTRAINTS Strategy TARIFFS AND TAX
Capital, growth strategy,
 Phase III – Desirable Sites
INCENTIVES
existing network

 Phase IV – Location Choices

PRODUCTION TECHNOLOGIES REGIONAL DEMAND
Cost, Scale/Scope impact, support PHASE II Size, growth, homogeneity,
required, flexibility Regional Facility local specifications
Configuration
COMPETITIVE
ENVIRONMENT POLITICAL, EXCHANGE
RATE AND DEMAND RISK

PHASE III
Desirable Sites AVAILABLE
INFRASTRUCTURE
PRODUCTION METHODS
Skill needs, response time

FACTOR COSTS PHASE IV LOGISTICS COSTS

Labor, materials, site specific Location Choices Transport, inventory, coordination

FACILITIES LOCATION FACILITIES LOCATION

INTEGRAL PART OF SUPPLY CHAIN GROWING IMPORTANCE

 Location decision pertains to the choice of an  Factors promoting globalisation of operations

appropriate geographical site for locating various  Regulatory & economic reforms
manufacturing and/or service facilities of an
organization  Factor Cost Advantages
 At one extreme, is a single location in which all the facilities could be
located (Aerospace manufacturers such as Boeing and Airbus are  Expanding markets in developing countries
examples of this category)
 At the other extreme, many facilities are located in as many markets  Location issues have become more prominent
(Automobile manufacturers such as Ford and Toyota are examples of
this category) in recent years due to globalisation
 Location Decisions are important  Location decision pertains to the choice of
 The controversy surrounding the Tata Nano project in Singhur Special
Economic Zone (SEZ) in West Bengal appropriate geographical site for locating
manufacturing & service facilities of an
 Location decisions integral part of a supply chain organisation
 It determines the flow of materials from raw material suppliers to the
factories and finally to the customers

26
 Some factors influencing the location of
sites TYPES OF FACILITIES
Resource Required
costs service level
 Heavy-manufacturing facilities
 large, require a lot of space, and are expensive
Land and Suitability
facilities of site  Light-industry facilities
investment
 smaller, cleaner plants and usually less costly
OPERATIONS Location of MARKET  Retail and service facilities
RESOURCES sites REQUIREMENTS
 smallest and least costly

Resource Image of
availability location

Community
factors

FACTORS IN HEAVY MANUFACTURING FACTORS IN LIGHT INDUSTRY

LOCATION LOCATION
 Construction costs  Transportation costs
 Land costs  Proximity to markets
 Raw material and finished goods shipment modes  Frequency of delivery required by customer

 Proximity to raw materials  Land costs

 Utilities  Easily accessible geographic region

 Labor availability  Education and training capabilities

ALTERNATIVES TO LOCATING NEW

FACTORS IN RETAIL LOCATION FACILITIES

 Proximity to customers  Licensing/ Franchising

 Location is everything
 Exporting

 Local warehousing and sales

 Local assembly/ finishing

 Full local production

27
ALTERNATIVE FOR RELOCATION
 Same Location
 Original keep, open new
 Shut Down, open new
REGIONAL LOCATION FACTORS
 Labor (availability,
education, cost, and
unions)
 Proximity of
customers
 Number of customers
 Construction/leasing
costs
 Land cost
LOCATION INCENTIVES
 Tax credits
 Relaxed government regulation
 Job training
 Infrastructure improvement
 Money
GLOBAL LOCATION FACTORS
 Raw material  Government stability
availability
 Government regulations
 Number and proximity
of suppliers  Political and economic
systems
 Transportation and
distribution system  Economic stability and
 Labor cost and growth
education  Exchange rates
 Available technology  Culture
 Commercial travel  Climate
 Technical expertise
 Export import
 Cross-border trade regulations, duties and
regulations tariffs
 Group trade agreements
REGIONAL LOCATION FACTORS (CONT.)
 Modes and quality of  Business climate  Infrastructure (e.g.,
transportation  Community services roads, water, sewers)
 Transportation costs  Quality of life
 Incentive packages
 Community  Taxes
 Government
government Local regulations  Availability of sites
business regulations
 Environmental  Financial services
 Government services regulations  Community
(e.g., Chamber of
 Raw material inducements
Commerce)
availability  Proximity of suppliers
 Commercial travel  Education system
 Climate
LOCATION ANALYSIS TECHNIQUES
 Location rating factor
 Center-of-gravity
 Load-distance
28
LOCATION FACTOR RATING: EXAMPLE LOCATION FACTOR RATING
SCORES (0 TO 100)
LOCATION FACTOR WEIGHT Site 1 Site 2 Site 3 WEIGHTED SCORES

Labor pool and climate .30 80 65 90 Site 1 Site 2 Site 3

Proximity to suppliers .20 100 91 75 24.00 19.50 27.00
Wage rates .15 60 95 72 Site 3 has the
20.00 18.20 15.00
Community environment .15 75 80 80 highest factor rating
9.00 14.25 10.80
Proximity to customers .10 65 90 95 11.25 12.00 12.00
Shipping modes .05 85 92 65 6.50 9.00 9.50
Air service .05 50 65 90 4.25 4.60 3.25
2.50 3.25 4.50
Weighted Score for “Labor pool and climate” for 77.50 80.80 82.05
Site 1 = (0.30)(80) = 24

CENTER-OF-GRAVITY TECHNIQUE GRID-MAP COORDINATES

 Locate facility at center of geographic area y n n

 Based on weight and distance traveled establish  xiWi  yiWi

2 (x2, y2), W2 i=1 i=1
grid-map of area y2 x= n y= n
 Identify coordinates and weights shipped for each  Wi  Wi
location 1 (x1, y1), W1 i=1 i=1
y1
where,
x, y = coordinates of new facility
3 (x3, y3), W3 at center of gravity
y3 xi, yi = coordinates of existing
facility i
Wi = annual weight shipped from
facility i

x1 x2 x3 x

 The Burger Doodle restaurant chain purchases ingredients

LOAD-DISTANCE TECHNIQUE
 Compute (Load x Distance) for each site
 Choose site with lowest (Load x Distance)
from four different food suppliers. The company wants to
construct a new central distribution centre to process and
package the ingredients before shipping them to their
various restaurants. The supplies transport ingredient
items in 40-foot truck trailers, each with a capacity of
38,000 lb. The locations of four suppliers A, B, C and D
and the annual number of trailer loads that will be
transported to the distribution centre are shown in the
following table:
A B C D

 Distance can be actual or straight-line X – coordinate 200 100 250 500

Y – coordinate 200 500 600 300
Annual no. of trailer loads 75 105 135 60
that will be transported

 Using centre of gravity method, determine a possible

location for the distribution centre

29
 The management of Burger doodle was not
convinced with location obtained in Part (a).
Hence they further analysed and identified three LOAD-DISTANCE CALCULATIONS
new sites. Now, they want to evaluate these
three different sites it has identified for its new n
distribution centre relative to the four suppliers
A,B,C and D mentioned above. The coordinates
LD = ld i i

of the new sites under consideration are as i=1

where,
follows
LD = load-distance value
Site 1 Site 2 Site 3
li = load expressed as a weight, number of trips or units
being shipped from proposed site and location i
X - coordinate 360 420 250 di = distance between proposed site and location i
di (straight line) = √ (xi - x)2 + (yi - y)2
Y – coordinate 180 450 400
where,
 Identify the best site based on the load distance (x,y) = coordinates of proposed site
method. (xi , yi) = coordinates of existing facility

Center-of-Gravity Technique:
Example (cont.)
 A manufacturer of a certain industrial component is interested
in locating a new facility in a target market and would like to
know the most appropriate place in the target market. There n
are four supply points: A, B, C and D in the locality that will  xW
i i
provide key inputs to the new facility, which are located at the i=1 (200)(75) + (100)(105) + (250)(135) + (500)(60)
following coordinates: (125, 550), (350, 400), (450, 125) and x= = = 238
n 75 + 105 + 135 + 60
(700, 300) respectively. Similarly, the annual supply from  W
these four points to the proposed facility is 200, 450, 175 and i=1
i
150 respectively.
 Show them in a two dimensional grid and identify the location
based on the centre of gravity method. Unfortunately, the n
location identified from the above method is not feasible.  yW
Hence to locate the new facility, the manufacturer has i=1
i i
(200)(75) + (500)(105) + (600)(135) + (300)(60)
identified four possible alternative locations: 1, 2, 3, and 4. the y= = = 444
coordinates for them are (300, 500), (200, 500), (500, 350) and n 75 + 105 + 135 + 60
(400, 200) respectively. Represent the whole in a two-  W
i
dimensional grid and identify the best location for the i=1
proposed new facility using a suitable location decision
method. Make necessary assumptions and highlight the same

Center-of-Gravity Technique:
Load-Distance: Example
Example (cont.)
y A B C D Potential Sites Suppliers
700 x 200 100 250 500 Site X Y A B C D
C y 200 500 600 300 1 360 180 X 200 100 250 500
600 (135)
B Wt 75 105 135 60 2 420 450 Y 200 500 600 300
500 (105) 3 250 400 Wt 75 105 135 60
Center of gravity (238, 444)
Miles

400
D Compute distance from each site to each supplier
300
A (60)
200 Site 1 dA = (xA - x1)2 + (yA - y1)2 = (200-360)2 + (200-180)2 = 161.2
(75)
100 dB = (xB - x1)2 + (yB - y1)2 = (100-360)2 + (500-180)2 = 412.3

0 100 200 300 400 500 600 700 x dC = 434.2 dD = 184.4

Miles

30
 Load-Distance: Example (cont.)
Location
Transportation Method
Site 2 dA = 333 dB = 323.9 dC = 226.7 dD = 170 Setting up the Initial Tableau
Site 3 dA = 206.2 dB = 180.3 dC = 200 dD = 269.3
Add a column for plant capacities and a row for warehouse demand
Compute load-distance
Warehouse
n Plant Capacity


1 2 3
LD = li di
Phoenix 400
i=1
Site 1 = (75)(161.2) + (105)(412.3) + (135)(434.2) + (60)(434.4) = 125,063
Atlanta 500
Site 2 = (75)(333) + (105)(323.9) + (135)(226.7) + (60)(170) = 99,789
900
Site 3 = (75)(206.2) + (105)(180.3) + (135)(200) + (60)(269.3) = 77,555* Requirements 200 400 300 900

* Choose site 3

Location Jaipur Delhi Lucknow Shipment

Transportation Method PROBLEM Available

Mumbai 200 300 200 300

Setting up the Initial Tableau
Nagpur 100 100 300 400
Insert costs into the shipping route option cells
Surat 300 200 100 200
Warehouse 200 300 400
Plant Capacity
1 2 3
5.0 6.0 5.4
Phoenix 400 Jaipur Delhi Lucknow Shipment
Available
7.0 4.6 6.6 Mumbai 200 300 200 300
Atlanta 500

Nagpur 100 100 300 400

900
Requirements 200 400 300 900 Patna 100 300 400 200
200 300 400

LOCATION OF FACILITIES ON NETWORK SET COVERING ALGORITHM

 Single Median

 Set Covering Algorithm

 Locating Multiple facilities

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LOCATING MULTIPLE FACILITIES

1. Find the desired number of locations and

arbitrarily select an initial set from those
available
2. Assign each customer to the nearest facility
3. Calculate the total cost , which is the sum of
weights moved multiplied by distances through
which they are moved
4. If the solution is not acceptable change one of
the locations and repeat the process from step 2,
otherwise go step 5
5. Calculate the capacity needed by each facility.

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