Supply Chain Management
Lecture 8
Outline
• Today
– Chapter 5
• Skipping sections
–
–
–
–
Locating to Split the Market (3e: p. 120, 4e: p. 112)
Gravity Location Models (3e: p. 129-131, 4e: p.120-122)
Locating Plants and Warehouses Simultaneously (3e: p. 138-139, 4e: 129-131)
Accounting for Taxes, Tariffs and Customer Requirements (3e: p. 139-140, 4e p.
131-132)
• Next week
– Chapter 6
• Homework 2
– Online Friday February 5
– Due Thursday February 11 before class
Announcements
• The RedPrairie Supply Chain Challenge is a
virtual competition using a customized web-based
version of the Littlefield Technologies game from
Responsive Technologies
– Students will have the opportunity to manage make-toorder factory and make forecasting, capacity, and
inventory and pricing decisions
• Registration deadline
– Feb 5, 2010, 5:00pm
– http://avnettechgames.com/supplychain2010
Announcements
• Game Day
– February 20, 2010
• Awards
– “Each team member will win a $1000 scholarship”
Excel Solver
Objective function
Decision variables
Constraints
Example: Dell Market Allocation
What are the decisions?
What are the constraints?
Example: Dell Facility Location
?
?
?
What are the decisions?
What are the constraints?
Example: Dell Facility Location
• Constraints (Satisfy demand at each market)
–
–
–
–
–
0 = 15,000 - XIreland,France - XPoland,France - XRomenia,France
0 = 20,000 - XIreland,Germany - XPoland,Germany - XRomenia,Germany
0 = 13,000 - XIreland,Italy - XPoland,Italy - XRomenia,Italy
0 = 12,000 - XIreland,Spain - XPoland,Spain - XRomenia,Spain
0 = 19,000 - XIreland,UK - XPoland,UK - XRomenia,UK
Romenia
France
Germany
Italy
Spain
United Kingdom
Poland
23
9
23
29
33
Ireland
19
15
21
26
36
31
11
40
40
20
Demand
15,000
20,000
13,000
12,000
19,000
Example: Dell Facility Location
• Constraints (Capacity cannot be exceeded)
– 0  30,000*YRomenia
- XRomenia,France - XRomenia,Germany - XRomenia,Italy - XRomenia,Spain XRomenia,UK
– 0  30,000*YPoland
- XPoland,France - XPoland,Germany - XPoland,Italy - XPoland,Spain - XPoland,UK
– 0  30,000*YIreland
- XIreland,France - XIreland,Germany - XIreland,Italy - XIreland,Spain - XIreland,UK
Romenia
France
Germany
Italy
Spain
United Kingdom
Capacity
Fixed operating cost
Poland
Ireland
23
19
31
9
15
11
23
21
40
29
26
40
33
36
20
80,000
80,000
80,000
$ 18,000,000.00 $ 17,500,000.00 $ 24,500,000.00
Demand
15,000
20,000
13,000
12,000
19,000
Factors Influencing Network Design
Decisions
• Customer response time
– Maintain a balance between an inexpensive location and proximity
to customers.
• Logistics and facility costs
– Inventory and facility costs increase as the number of facilities
increase
– Transportation costs decrease (up to a point) as the number of
facilities increase
Logistics Costs
Logistics
Costs
Facility Costs
Inventory Costs
Transportation Costs
Number of Facilities
Factors Influencing Network Design
Decisions
• Strategic factors
Strategic role
Global
Customers
Regional
Customers
Lead
Outpost
Offshore
Server
<low-cost>
<exports only>
<local market>
<avoid tariffs>
Many Asian plants
Suziki’s Indian venture
Maruti
<advanced
technology>
<access to Lockheed Martin’s JSF in Dallas
knowledge>
Dell in Ireland
Source
Contributor
<low-cost>
<global market>
<customization>
<development skills>
Nike plants in Korea
Maruti
Factors Influencing Network Design
Decisions
• Macroeconomic factors
– Quotas, tariffs, and tax incentives
• Economic trade agreements: Nafta, EU, APTA, AFTZ
– Exchange rate and demand risk
– Different states or countries often offer economic incentives to
companies that decide to set up shop there, including tax
incentives and low-interest economic development loans
How can trade agreements influence the number
of facilities in a supply chain?
Factors Influencing Network Design
Decisions
• Political factors
– Political stability
• Infrastructure factors
– Availability of transportation terminals, labor
• Most of Amazon’s distribution centers are located near airports
• Competitive factors
– Positive externalities (many stores in a mall makes it more
convenient for customers – one location for everything the
customers need)
Factors Influencing Network Design
Decisions
• Technological factors
– Compare your supplies to the final product, considering whether
value, weight, volume or other factors change
– Availability of production technologies
– High or low fixed cost
• Semiconductor manufacturing takes place only in 5-6 countries
worldwide (building one plant costs about 1 to 4 billion dollars)
Which products gain/lose weight in the
production process?
Amazon’s Growth in Europe
(in 1999)
Amazon’s Growth in Europe
Amazon’s Growth in Europe
European use of credit cards for online purchases
Amazon’s Growth in the US
Amazon offered 2.5 million titles, yet
stocked only 2,000 titles
Delaware
Opened: 1997
220,000 sq. feet
Seattle, WA
Opened: 1996
Closed: 2001
85,000 sq. feet
Manufacturers
Distributor
Warehouse
Consumers
Distributor
Warehouse
Amazon stocked over 200,000 titles and
reduced promised delivery times
Amazon’s Growth in the US
In 1998, Amazon expanded its product line (music,
DVD) (1999: electronics, toys) (2000: health, kitchen)
Seattle, WA
Opened: 1996
Closed: 2001
85,000 sq. feet
Delaware
Opened: 1997
220,000 sq. feet
Amazon had to decide how many DCs it should have
and where to locate them
Amazon’s Growth in the US
• Amazon executives turned to outside experts and
used i2 Technologies’ Supply Chain Strategist
software package
– This software identified regions to consider for its
distribution facilities based on factors such as supplier
and customer locations, inbound and outbound freight
rates, warehousing expenses, labor, and other cost
factors
– After selecting the major regions, Amazon's
management narrowed its search based on additional
factors such as tax rates, employment levels and the
availability of suitable distribution facilities to lease
Amazon’s Growth in the US
“This has been the fastest expansion of distribution in
peacetime history”
Seattle, WA
Opened: 1996
Closed: 2001
85,000 sq. feet
Delaware
Opened: 1997
220,000 sq. feet
Fernley, NV
Opened: 1999
322,560 sq. feet
Lexington, KY
Opened: 1999
600,000 sq. feet
Coffeyville, KS
Opened: 1999
750,000 sq. feet
Cambellsville, KY
Opened: 1999
770,000 sq. feet
Mc Donough
Opened: 1999
Closed: 2001
800,000 sq. feet
Amazon’s Growth in the US
• Evolution of fulfillment cost as a percentage of
Manufacturers
revenue
Quarter
2000 / 1
2000 / 2
2000 / 3
2000 / 4
2001 / 1
2001 / 2
2001 / 3
2001 / 4
2002 / 1
2002 / 2
2002 / 3
2002 / 4
Fulfillment cost
17.3%
15.1%
15.1%
13.5%
14.1%
12.8%
12.8%
9.8%
10.6%
10.7%
10.6%
8.9%
Distributor
Warehouse
Distributor
Warehouse
Consumers
Manufacturers
Retailer
Consumers
Network Optimization Problems
• Market and supply allocation
– Demand allocation
• Facility location (and capacity allocation)
– Capacitated plant location model
• Facility location 1-source (and capacity allocation)
– Capacitated plant location model with single sourcing
Demand Allocation
n supply points
K1
K2
K3
c11
c12
c13
m demand points
D1
D2
D3
D4
D5
Demand Allocation
• Which market is served by which
plant?
n
– Given m demand points, j=1..m with
demands Dj
– Given n supply points, i=1..n with capacity
Ki
– Each unit of shipment from supply point i
to demand point j costs cij
• Serve markets from supply points to
demand points
– xij = quantity shipped from plant site i to
customer j
m
Min  cij xij
i 1 j 1
s.t.
n
x  D
ij
j
x  K
i
i 1
m
j 1
x
ij
ij
0
3e: p. 132-133, 4e: p. 123-125
Capacitated Plant Location
Which supply point
n supply points
operates?
y1 = yes or no
K1
Romenia
c11
c12
c13
m demand points
France
D
1
Germany
D
2
y2 = yes or noPoland
K2
Italy
D
3
y3 = yes or no Ireland
K3
Spain
D
4
United
D
Kingdom
5
Capacitated Plant Location
• Which market is served by which
plant?
– None of the plants are open, a cost
fi is paid to open plant i
– yi = 1 if plant is located at site i, 0
otherwise
– xij = quantity shipped from plant site
i to customer j
n
Min 
i 1
n
m
f y   c x
i
i
i 1 j 1
ij
ij
s.t.
n
x  D
ij
i 1
j
m
x  K y
j 1
ij
i
i
y {0,1}
i
3e: p. 133-135, 4e: p. 125-128
Capacitated Plant Location With Single
Source (each customer has exactly one supplier)
Which supply point
n supply points
operates?
y1 = yes or no
K1
Romenia
c11
c12
c13
m demand points
France
D
1
Germany
D
2
y2 = yes or noPoland
K2
Italy
D
3
y3 = yes or no Ireland
K3
Spain
D
4
United
D
Kingdom
5
Capacitated Plant Location With Single
Source (each customer has exactly one supplier)
• Which market is served by
which plant?
– None of the plants are open, a
cost fi is paid to open plant i
– yi = 1 if plant is located at site i, 0
otherwise
– xij = 1 if market j is supplied by
factory i, 0 otherwise
n
Min 
i 1
n
m
f y   D c x
i
i
i 1 j 1
j
ij
ij
s.t.
n
x
i 1
1
ij
m
Dx  K y
j 1
j
ij
i
i
yi , xi , j  {0,1}
3e: p. 135-137, 4e: p. 128-129
Example – SunOil
• SunOil, a manufacturer of petrochemical products
with worldwide sales, needs to decide the regions
in which facilities are to be located
Example – SunOil
Capacitated Plant Location Model
12
14
7
8
Dj = annual demand from market j
16
Example – SunOil
Capacitated Plant Location Model
cij = cost of producing and shipping one
million units from plant i to market j
Example – SunOil
Capacitated Plant Location Model
10
20
10
20
10
20
10
20
Ki = capacity of plant i
10
20
Example – SunOil
Capacitated Plant Location Model
$6500
$6000 $9750
$9000
$4500
$6750
$4100
$6150
$4000
$6000
fi = annualized fixed cost of keeping plant i open
Capacitated Plant Location
• Which market is served by which
plant?
– None of the plants are open, a cost
fi is paid to open plant i
– yi = 1 if plant is located at site i, 0
otherwise
– xij = quantity shipped from plant site
i to customer j
n
Min 
i 1
n
m
f y   c x
i
i
i 1 j 1
ij
ij
s.t.
n
x  D
ij
i 1
j
m
x  K y
j 1
ij
i
i
y {0,1}
i
3e: p. 133-135, 4e: p. 125-128
Example – SunOil
Capacitated Plant Location Model
7
Dj – ∑ni=1 xij = 0
for all j = 1, …, m (unmet demand)
Example – SunOil
Capacitated Plant Location Model
10
20
Kiyi – ∑mj=1 xij  0
for all i = 1, …, n (excess capacity)
Capacitated Plant Location With Single
Source (each customer has exactly one supplier)
• Which market is served by
which plant?
– None of the plants are open, a
cost fi is paid to open plant i
– yi = 1 if plant is located at site i, 0
otherwise
– xij = 1 if market j is supplied by
factory i, 0 otherwise
n
Min 
i 1
n
m
f y   D c x
i
i
i 1 j 1
j
ij
ij
s.t.
n
x
i 1
1
ij
m
Dx  K y
j 1
j
ij
i
i
yi , xi , j  {0,1}
3e: p. 135-137, 4e: p. 128-129
Example – SunOil
Single Source Model
xij = 1 if market j is supplied by plant i, 0 otherwise
yi = 1 if plant i is open, 0 otherwise
Making Network Design Decisions in
Practice
• Computer models versus sound judgment
– Most facility location decisions are based on tariffs and
tax incentives