Designing the Supply Chain Network

Models from Chapter 4, 5 of Chopra & Meindl Byung-Hyun Ha

bhha@pusan.ac.kr

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 Response Time Cost

Inventory

Transportation

Number of Facilities
Facility

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
Inventory L H L H H

Retailer

Transportation Facilities and handling Information Response time

Customers

Product variety
Product availability Customer experience

H
H M L L

Product Flow

Information Flow

Order visibility Returnability

Design Options for Distribution Network

Manufacturer storage with direct shipping and intransit merge
e.g. PC from Dell along with Sony monitor low- to medium-demand and high-value items
Factories
Inventory Transportation Facilities and handling L M M H H H

Retailer

In-Transit Merge by Carrier

Information Response time Product variety

Product availability

H
H L L

Customers
Product Flow Information Flow

Customer experience Order visibility Returnability

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
Factories
Inventory Transportation Facilities and handling M L M M M M

Warehouse Storage by Distributor/Retailer

Information Response time Product variety

Product availability

M
H M M

Customers
Product Flow Information Flow

Customer experience Order visibility Returnability

Design Options for Distribution Network

Distributor storage with last mile delivery
Delivering to customers home instead of using package carrier e.g. grocery industry, water, bag of rice at dense city
Factories
Inventory Transportation Facilities and handling H H H M L L

Distributor/Retailer Warehouse

Information Response time Product variety

Product availability

L
H M M

Customers
Product Flow Information Flow

Customer experience Order visibility Returnability

Design Options for Distribution Network

Manufacturer or distributor storage with consumer pickup
Reusing existing pick-up site, customer participation
Factories

Inventory Transportation

? L ? H L H

Retailer

Cross Dock DC

Facilities and handling Information

Pickup Sites

Response time Product variety

Product availability
Customer experience

H
L H H

Customers

Order visibility Returnability

Product Flow

Information Flow

Customer Flow

Selecting Distribution Network Design

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

Inventory Transportation Facilities and handling Information Response time Product variety Product availability

1 4 1 4 4 1 1

2 2 3 3 3 2 2

3 5 4 2 2 3 3

4 1 6 1 1 4 4

Customer experience
Order visibility Returnability

4
5 5

3
4 5

2
3 4

1
2 3

5
6 2

5
1 1

Selecting Distribution Network Design

Performance for different product/customer char.
+2: Very suitable, , -2: very unsuitable
Manufacturer storage with direct shipping Manufacturer storage with direct shipping and in-transit merge -1 0 0 +1 -1 +1 -2 0 +2 Distributor storage with carrier delivery Distributor storage with last mile delivery Manufacturer or distributor storage with consumer pickup -1 0 +1 +1 0 -1 -2 +2 -1 Retail storage with consumer pickup

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

-2 -1 +1 +2 -1 +2 -2 +2 +1

0 +1 +1 0 +2 +1 -1 +1 +2

+1 0 -1 -2 +1 0 +1 0 +2

+2 +1 -1 -2 +1 -1 +2 -1 -2

Network Design in the Supply Chain

A framework for network design decision
Competitive STRATEGY
INTERNAL CONSTRAINTS

Capital, growth strategy, existing network

PRODUCTION TECHNOLOGIES Cost, Scale/Scope impact, support required, flexibility COMPETITIVE ENVIRONMENT

PHASE I Supply Chain Strategy

GLOBAL COMPETITION

TARIFFS AND TAX INCENTIVES

PHASE II Regional Facility Configuration

REGIONAL DEMAND

Size, growth, homogeneity, local specifications

POLITICAL, EXCHANGE RATE AND DEMAND RISK

PHASE III Desirable Sites

PRODUCTION METHODS

AVAILABLE INFRASTRUCTURE

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 companys 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 Dj: demand from market j Ki: capacity of plant i fi: fixed cost of keeping plant i open cij: variable cost of sourcing market j from plant i yi = 1 if plant is located at site i, = 0 otherwise xij: quantity shipped from plant i to market j

min f i yi cij xij

i 1 i 1 j 1

s.t.

x
i 1 m

ij

Dj K i yi

for j 1, , m for i 1, , n

x
j 1

ij

yi {0,1} for i 1, , n

Phase II: Regional Facility Configuration

Phase III: Desirable Sites

Gravity methods for location x, y: Warehouse Coordinates xn, yn: Coordinates of delivery location n Dn: Quantity to be shipped to delivery location n Fn: Annual tonnage to delivery location n
d n ( x xn ) 2 ( y y n ) 2 min

d
n 1

Dn Fn

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 Dj: demand from market j Ki: capacity of plant i cij: variable cost of sourcing market j from plant i xij: quantity shipped from plant i to market j

min cij xij

i 1 j 1

s.t.

x
i 1 m

ij

Dj Ki

for j 1, , m for i 1,, n

x
j 1

ij

xij 0

Phase IV: Location Choices

Considering additional layers: simultaneously locating plants and DCs
suppliers plants DCs
customer1 customer2

customer3

min s.t.

f y f
i 1 i i e 1

ye chi xhi cie xie cej xej

h 1 i 1 i 1 e 1 e 1 j 1