Supply Chain Management

Part 2b. Network Design in the Supply

Chain

Ririn Diar Astanti, D.Eng

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id

 Outline
 Role of network design in the supply chain
 Factors influencing network design decision
 Framework for network design decision
 Models for facility locations and capacity
locations

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id 5-2

 Role of network design in the supply
chain
 Facility role:
 What role should each facility play?
 What processes are performed in each facility?
 Facility location
 Where should facilities be located?
 Capacity allocation
 How much capacity should be allocated to each facility?
 Market and supply allocation
 What market should each facility serve?
 Which supply sources should feed each facility?

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id 5-3

Factors Influencing Network Design Decisions
 Strategic factors
 For example :
 Firms focusing on cost leadership tends to find the lowest facilities
cost for their manufacture, even though sometimes it is very far from
the market Nike case study
 Technological
 For example:
 If the technology to do some operations in manufacturers is cheap,
then the company tend to set up more location in order to serve for
local market  Bottling plants for coca cola
 Macroeconomic: tax, exchange rate
 Political and Infrastructure: related to the facilities
 Competitive factors
 Logistics and facility costs
 Response time

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id 5-4

 Service and Number of Facilities
Response
Time

Number of Facilities

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id 5-5

Where inventory needs to be for a one week order
response time - typical results --> 1 DC

Customer
DC

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id

Where inventory needs to be for a 5 day order
response time - typical results --> 2 DCs

Customer
DC

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id

Where inventory needs to be for a 3 day order
response time - typical results --> 5 DCs

Customer
DC

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id

Where inventory needs to be for a next day order
response time - typical results --> 13 DCs

Customer
DC

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id

Where inventory needs to be for a same day / next
day order response time - typical results --> 26 DCs

Customer
DC

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id

 A Framework for
Global Site Location
Competitive STRATEGY GLOBAL COMPETITION
PHASE I
Supply Chain
INTERNAL CONSTRAINTS Strategy
Capital, growth strategy, TARIFFS AND TAX
existing network INCENTIVES

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

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id

5-11
 Conventional Network – Single Echelon

Materials Customer
Vendor Finished Customer
DC Store
DC Goods DC DC

Customer
Component Store
Vendor Manufacturing
DC Plant Customer Customer
Warehouse DC Store
Components
DC Customer
Vendor Store
DC Finished
Customer
Goods DC
Final DC Customer
Assembly Store

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id

5-12
 Tailored Network: Multi-Echelon
Finished Goods Network
Local DC
Cross-Dock Store 1
Regional Customer 1
Finished DC
Goods DC Store 1
Local DC
Cross-Dock
National Store 2
Customer 2
Finished
DC
Goods DC
Local DC Store 2
Cross-Dock
Regional
Finished Store 3
Goods DC

Store 3
Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id
5-13
Phase 2: Capacitated Plant Location
Model
 yi = 1 if plant i is n n m
Min f y   c x
open, 0 otherwise i 1
i i
i 1 j 1
ij ij

 xij = Quantity shipped s.t.

from factory i to n

market j  x  D , j  1,..., m
i 1
ij j

 x  K y , i  1,..., n
j 1
ij i i

y {0,1}, i  1,..., n
i

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id

 Case study – see excel file

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id

Phase III: : Gravity Methods for Location

 To identify potential locations in each region

where the company has decided to locate a
plant  minimize the cost of transporting raw
materials from suppliers and finished goods
to the market served
 Steps to be done:
1. Identify the geographical location where potential
sites may be considered
2. Develop a model
3. Solve the model to find the solution

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id

Phase III: : Gravity Methods for Location

 Assumptions:
 Both market and the supply sources can be
located as grids points on a plane
 All distances are calculated as the geometric
distance between two points on the plane
 Transportation cost grow linearly with the
quantity shipped

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id

 Phase III: Gravity Methods for Location
 Ton Mile-Center Solution Min  d n Dn F n
 x,y: Coordinate location of
( x  x n)  ( y  y n)
2 2
either a market or supply d n

source n
D nx F
k
 xn, yn : Coordinates of delivery  d
n n

location n x n 1 n

F
 Dn d
k
 dn : Distance to delivery n

location n n 1 n

 Fn : Annual tonnage to D ny F
k

delivery location n
 d
n n

y n 1 n

D nF
k

 dn 1
n

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id

5-18
 Case study – see excel file

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id

 Phase IV: Network Optimization Models

 To decide location and capacity

allocation for each facility
 The allocation must account for
customer constraints in term of
response time
Key Costs: Which plants to establish? How to
• Fixed facility cost configure the network?
• Transportation cost
• Production cost
• Inventory cost
• Coordination cost
Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id
5-20
 Demand Allocation Model – Allocating
Demand to Production Facilities
n m
 Which market is served by Min  cij xij
which plant? i 1 j 1

s.t.
 Which supply sources are n

used by a plant? x
i 1
ij
 D j
, j  1,..., m

 xij = Quantity shipped from m

plant site i to customer j x

j 1
ij
 K i
, i  1,..., n

 Ki = Capacity of factory i x ij
0

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id

5-21
 Case study – see excel file

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id

 Locating Plant: Capacitated Plant
Location Model
n n m
 yi = 1 if plant i is Min f y   c x
i i ij ij
i 1 i 1 j 1
open, 0 otherwise s.t.
 xij = Quantity shipped n

x ij
 D j
, j  1,..., m
from factory i to i 1
n
market j x ij
 K y , i  1,..., n
i i
j 1

y i
 {0,1}, i  1,..., n

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id

 Case study – see excel file

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id

Plant Location with Single Sourcing
 yi = 1 if plant is Min
n n m

f y   D j c x ij
located at site i, 0 i 1
i i
i 1 j 1
ij

s.t.
otherwise n

 xij = 1 if market j is x
i 1
ij
 1, j  1,..., m

supplied by factory i, n

0 otherwise
D jx
j 1
ij
 Ki y , i  1,..., n
i

xij , y {0,1}i

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id

5-25
 Plant Location with Multiple
Sourcing
 yi = 1 if plant is n n m
Min f y   c x
located at site i, 0 i 1
i i
i 1 j 1
ij ij

otherwise s.t.
 xij = Quantity shipped n

x ij
 D j , j  1,..., m
from plant site i to i 1
n
customer j x  Ki y , i  1,..., n
ij i
j 1
m

y
i 1
i
 k ; y  {0,1}
i

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id

5-26
 Thank you

Jl. Babarsari 44 Yogyakarta Telp. +62-274-487711 Fax. +62-274-487748 www.uajy.ac.id