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Supply Chain Management

Facility Location

2007 Pearson Education

Facility Location
Facility
oPlaces where inventory is stored, assembled or fabricated oProduction sites and storage sites

Where should a plant or service facility be located?


Need to produce close to supplier as well as customers.
Need to locate near the appropriate labour pool to take advantage of low wages and high technical skills

Profit-oriented organization Non-profit organization


2007 Pearson Education

Make decision on profit potential


Balance between cost and level of customer service

Importance of Facility Location


Facility Location decisions are part of the companys strategy. Infrequent but expensive. Reasons for the importance: Facility Location requires large investment that can not be recovered.

Facility Location decisions affect the competitive capacity of the company.


All areas of the company are affected by Facility Location: Operations, Business Development, Human Resources, Finance, etc.

2007 Pearson Education

Importance of Facility Location


The facility location decisions affect not only costs but the companys income:
For a service business, market proximity is critical to determine the capacity to attract customers. For a manufacturing business, facility location affects product delivery time and level of customer service, which affects sales.

Regarding costs, facility location affects a great variety of them:


Land costs. Labor costs. Raw materials. Transportation and distribution
2007 Pearson Education 4-4

Facility Location
Factors Affecting Location Decisions
Proximity to Customers Proximity to Suppliers Business Climate Total Cost Infrastructure Quality of Labour Other Facilities Political Stability Government Barriers Environmental Regulation

Government Barriers

Host Community

2007 Pearson Education

Designing the Distribution Network in Supply Chain

2007 Pearson Education

4-6

Outline
The Role of Distribution in the Supply Chain Factors Influencing Distribution Network Design Design Options for a Distribution Network

2007 Pearson Education

4-7

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

2007 Pearson Education

4-8

Factors Influencing Distribution Network Design


Distribution network performance evaluated along two dimensions at the highest level:
Customer needs that are met Cost of meeting customer needs

Distribution network design options must therefore be compared according to their impact on customer service and the cost to provide this level of service

2007 Pearson Education

4-9

Factors Influencing Distribution Network Design


Elements of customer service influenced by network structure:
Response time Product variety Product availability Customer experience Order visibility Returnability

2007 Pearson Education

4-10

Supply chain costs affected by network structure


Facilities and handling Inventories Transportation Information

2007 Pearson Education

4-11

Service and Number of Facilities


Number of Facilities

Response Time
2007 Pearson Education 4-12

Facility Costs and Number of Facilities


Facility Costs

Number of facilities
2007 Pearson Education 4-13

Inventory Costs and Number of Facilities


Inventory Costs

Number of facilities
2007 Pearson Education 4-14

Transportation Costs and Number of Facilities


Transportation Costs

Number of facilities
2007 Pearson Education 4-15

Total Costs Related to Number of Facilities


Total Costs

Total Costs

Facilities Inventory

Transportation

Number of Facilities
2007 Pearson Education 4-16

Design Options for a Distribution Network


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 Customer Pickup

Retail Storage with Consumer Pickup

2007 Pearson Education

4-17

Manufacturer Storage with Direct Shipping


Manufacturer

Retailer

Customers

Product Flow Information Flow


2007 Pearson Education 4-18

Manufacturer Storage with Direct Shipping


Cost Factor
Inventory

Performance
Lowest Costs because of aggregation.

Transportation
Facilities & Handling

Higher Transportation Cost.


Lower Facility Cost. Saving on handling cost if manufacturer can manage small shipment or can ship from assembly line.

Information

Significant investment to integrate manufacture and retailer

2007 Pearson Education

4-19

Manufacture Storage with Direct Shipping and In-Transit Merge Network


Factories

Retailer

In-Transit Merge by Carrier

Customers

Product Flow Information Flow


2007 Pearson Education 4-20

Manufacture Storage with Direct Shipping and In-Transit Merge Network Cost Factor
Inventory

Performance
Similar to drop-shipping.

Transportation
Facilities & Handling

Somewhat lower cost than drop-shipping


Handling cost higher than drop-shipping at carrier. Receiving cost lower at customer.

Information

Somewhat higher than drop-shipping.

2007 Pearson Education

4-21

Distributor Storage with Carrier Delivery


Factories

Warehouse Storage by Distributor/Retailer

Customers
Product Flow Information Flow
2007 Pearson Education 4-22

Distributor Storage with Carrier Delivery


Cost Factor
Inventory Transportation

Performance
Higher than Manufacturer Storage. Lower than manufacturer storage

Facilities & Handling

Somewhat higher than manufacturer storage.

Information

Simpler infrastructure compared to manufacturer storage

2007 Pearson Education

4-23

Distributor Storage with Last Mile Delivery


Factories

Distributor/Retailer Warehouse

Customers
Product Flow Information Flow
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Distributor Storage with Last Mile Delivery

Cost Factor
Inventory Transportation

Performance
Higher than distributor storage with package carrier delivery. Higher than any other distribution option.

Facilities & Handling

Facility costs is higher than manufacturer storage or distributor storage with package carrier.

Information

Similar to distributor storage with package carrier delivery.

2007 Pearson Education

4-25

Manufacturer or Distributor Storage with Customer Pickup


Factories

Retailer

Cross Dock DC

Pickup Sites

Customers Customer Flow Product Flow Information Flow

2007 Pearson Education

4-26

Manufacturer or Distributor Storage with Customer Pickup


Cost Factor
Inventory Transportation

Performance
? ?

Facilities & Handling

Information

2007 Pearson Education

4-27

Retail Storage at Consumer Pickup Site

Cost Factor
Inventory Transportation Facilities & Handling

Performance
Higher than all other options. Lower than all other options. Higher than all other options.

Information

Some investment is required for online and phone order.

2007 Pearson Education

4-28

Comparative Performance of Delivery Network Designs


Retail Storage with Customer Pickup Manufacturer Storage with Direct Shipping Manufacturer Storage with InTransit Merge Distributor Storage with Package Carrier Delivery Distributor storage with last mile delivery Manufacturer storage with pickup

Response Time
Product Variety Product Availability Customer Experience Order Visibility Returnability Inventory Transportation Facility & Handling Information 2007 Pearson Education

1 correspond to the strongest performance and 6 the weakest performance

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Comparative Performance of Delivery Network Designs


Retail Storage with Customer Pickup Manufacturer Storage with Direct Shipping Manufacturer Storage with InTransit Merge Distributor Storage with Package Carrier Delivery Distributor storage with last mile delivery Manufacturer storage with pickup

Response Time
Product Variety Product Availability Customer Experience Order Visibility Returnability Inventory Transportation Facility & Handling Information 2007 Pearson Education

1
4 4

4
1 1

4
1 1

3
2 2

2
3 3

4
1 1 5 6 2 1 1 5 5
4-30

5
1 1 4 1 6 1

4
5 5 1 4 1 4

3
4 5 1 3 2 4

2
3 4 2 2 3 3

1
2 3 3 5 4 2

1 correspond to the strongest performance and 6 the weakest performance

Linking Product Characteristics and Customer Preferences to Network Design


Retail Storage with Customer Pickup Manufacturer Storage with Direct Shipping Manufacturer Storage with InTransit Merge Distributor Storage with Package Carrier Delivery Distributor storage with last mile delivery Manufacturer storage with pickup

High demand product

+2 +1 -1 -2 +1 -1 +2 -1 -2
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Medium demand product

Low demand product

Very low demand product

Many product sources

High product value

Quick desired response

High product variety

Low customer effort

+2= very suitable, +1= somewhat suitable, 0= natural -1= somewhat unsuitable , -2= very unsuitable
2007 Pearson Education

Linking Product Characteristics and Customer Preferences to Network Design


Retail Storage with Customer Pickup Manufacturer Storage with Direct Shipping Manufacturer Storage with InTransit Merge Distributor Storage with Package Carrier Delivery Distributor storage with last mile delivery Manufacturer storage with pickup

High demand product

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

-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 -2 -2 +2 -1
4-32

Medium demand product

Low demand product

Very low demand product

Many product sources

High product value

Quick desired response

High product variety

Low customer effort

+2= very suitable, +1= somewhat suitable, 0= natural -1= somewhat unsuitable , -2= very unsuitable
2007 Pearson Education