SC Design
Facility Location Strategy
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Frequency Decomposition
 SCs
are enormous
 It is hard to make all decisions at once
 Integration by smart decomposition
 Frequency decomposition yields several sets of
decisions such that each set is integrated within itself
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Frequency Decomposition
 Low
frequency activity, ~ once a year, high fixed cost
– R&D budget
– Capacity expansion budget
 Moderate frequency activity, ~ once a month
– Cancellation of specific R&D projects depending on
experimental outcomes
– Specific machines to purchase
 High frequency activity, ~ once a day, low fixed cost
– What experiments to start / continue today
– What to produce
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Facility Location: The Cost-Response Time Frontier
An inventory location based point of view
7-Eleven
Regional
Hi
Local Finished Goods (FG) Inventory
Regional FG Inventory
Cost
Local WIP (work-in-process)
Central
Sam’s Club
Central FG Inventory
Central WIP
Central Raw Material and Custom production
Custom production with raw material at suppliers
Low
Pull the inventory upstream
Low
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Response Time
Hi
4
Where inventory needs to be for a one week
order response time - typical results --> 1 DC
Customer
DC
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3 day order response time - typical results -> 5 DCs
Customer
DC
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Same day / next day order response time typical results --> 26 DCs
Customer
DC
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Inbound and outbound shipping
with more facilities
Supplier
Add more
facilities for
responsiveness
Manufacturer
Inbound shipment
Supplier
Manufacturer
Customer
Outbound shipment
Distributor
Inbound shipment
Retailer
Customer
Outbound shipment
More inbound shipping and less outbound shipping with more facilities.
Less (inbound + outbound) shipping costs with more facilities possible,
if economies of scale in transportation.
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Costs and Number of Facilities
Total SC Inventory
Facility costs
Costs
Transportation
Number of facilities
No economies of scale in shipment size,
SC covers a larger portion with each facility.
With economies of scale in inbound shipping to retailers.
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Cost Build-up as a function of facilities
Cost of Operations
Total Costs
Facilities
Inventory
Transportation
Labor
Number of Facilities
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Classification of Network Design Decisions

Facility function: Plant, DC, Warehouse:
What facility performs what function
– Packaging at the manufacturer or warehouse
– Should a rental computer return location run diagnostic tests on the returned
computers or should the testing be done at major warehouses?


Question arising from CRU Computer Rental Case done in OPRE6302
Facility location
– Starbucks opened up at UTD student apartments in 2005 but closed in 2006!
– Recall Japanese 7-eleven and their blanketing strategy
– SMU’s experimentation with Plano campus: http://www.smu.edu/legacy .

Capacity allocation
– SOM car park took 80 cars in 2005 and expanded in 2006 to take about 110 cars,
further expanded in 2009 to take about 300 cars.

Supply and market allocation:
Who serves whom
– By location: UT Austin serves central Texas students
– By grade: UT Arlington serves undergraduate students
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Strategic Factors
Influencing Location Decisions

Strategic Facilities
Lead facility
Global Customers
Regional Customers
Server
<local-content>
Offshore
<reduced tariffs>
<for exports>
VW plants in Mexico
Serving Latin America
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Suziki’s Indian venture
Maruti Udyog
Source
<low-cost>
Nike plants in Korea
<advanced technology>
Lockheed Martin’s JSF in Dallas
Outpost facility
<Learn local skills>
Facilities in Japan; Toyota Prius
Contributor
<customization>
<development skills>
Maruti Udyog
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Factors Influencing Location Decisions



Customer response time and local presence
Operating costs – main driver for offshoring
Technological,
–
Availability and economies of scale (fixed operational costs)
»


Infrastructure, electricity, phone lines, suppliers
Macroeconomic / Politic
–
–
–


Semiconductor manufacturing takes place only in 5-6 countries worldwide
Tariffs, exchange rate volatility, economic volatility
Economic communities: Nafta, EU, Pacific Rim, Efta
Stability
Logistics and facility costs
Competitive
– Positive externalities
» Nissan in India develops car suppliers which can also supply Suziki in India.
» DFW Telecom corridor hosting Alcatel, Ericsson, Nortel, …
» Toyota City, Shopping Malls
– Negative externalities, see the next slide
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Negative externality:
Market Splitting by Hotelling’s Model
0
a
a
b
1-a-b
1
b
Suppose customers (preferences, e.g. sugar content in coke)
are uniformly distributed over [0,1]
- How much does firm at a get, how about firm at b
by locating as above?
- If a locates first, where should b locate?
- If a estimates how b will locate in response to a’s location,
where should a locate?
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Steps of Comparing Locations
According to McKinsey Global Institute on HBR Jun. 2006 p.91


1. Draw up a list of possible locations
2. Define the decision criteria
– Six common criteria used by companies
»
»
»
»
»
»


1. Cost of operating – tax incentives from local/federal governments
2. Availability of the skills
3. Sales potential in the adjacent markets
4. Risk of doing the business
5. Attractiveness of living environments
6. Quality of infrastructure
3. Collect data for each location
4. Weight the criteria
» Fortisbank of Belgium, wants to enter new large markets, gives highest weight to 3.
» Citibank, wants a location for a captive IT center, gives the highest weight to 4.



Find risk data at
– Economist intelligence unit: www.eiu.com
– UN Development Program: http://hdr.undp.org/statistics/data/
5. Rank locations according to weighted sum of their scores
6. Assess the dynamics of the labor pool
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» Availability of skilled labor: Top tier universities in large U.S. cities (e.g., Dallas?). 15
Summary
 Frequency
decomposition of activities
 A strategic framework for facility location
– Classification
– Factors
– Steps
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