Facility Decisions

Network Design in a Supply Chain

Outline

The Role of Distribution in the Supply Chain

Factors Influencing Distribution Network Design
Design Options for a Distribution Network
The Value of Distributors in the Supply Chain
Distribution Networks in Practice
Summary of Learning Objectives

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, Proctor & Gamble,
Grainger
3

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

Factors Influencing
Distribution Network Design

Elements of customer service influenced by network structure:

Response time
Product variety
Product availability
Customer experience
Order visibility
Returnability

Supply chain costs affected by network structure:

Inventories
Transportation
Facilities and handling
Information
5

Service and Number of Facilities

(Fig. 4.1)
Number of
Facilities

Response Time
6

The Cost-Response Time Frontier

High

Local FG
Mix
Regional FG
Local WIP

Cost

Central FG
Central WIP
Central Raw Material and Custom production
Custom production with raw material at suppliers

Low
Low

Response Time

High
7

Inventory Costs and Number

of Facilities (Fig. 4.2)
Inventory
Costs

Number of facilities
8

Transportation Costs and

Number of Facilities (Fig. 4.3)
Transportation
Costs

Number of facilities
9

Facility Costs and Number

of Facilities (Fig. 4.4)
Facility
Costs

Number of facilities
10

Total Costs Related to

Number of Facilities

Total Costs

Total Costs

Facilities
Inventory
Transportation

Number of Facilities
11

Variation in Logistics Costs and Response

Time with Number of Facilities (Fig. 4.5)
Response Time

Total Logistics Costs

Number of Facilities
12

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
Consumer Pickup
Retail Storage with Consumer Pickup
Selecting a Distribution Network Design
13

Manufacturer Storage with

Direct Shipping (Fig. 4.6)
Manufacturer

Retailer

Customers
Product Flow
Information Flow
14

In-Transit Merge Network (Fig. 4.7)

Factories

Retailer

In-Transit Merge by
Carrier

Customers

Product Flow
Information Flow
15

Distributor Storage with

Carrier Delivery (Fig. 4.8)
Factories

Warehouse Storage by
Distributor/Retailer

Customers
Product Flow
Information Flow
16

Distributor Storage with

Last Mile Delivery (Fig. 4.9)
Factories

Distributor/Retailer
Warehouse

Customers
Product Flow
Information Flow
17

Manufacturer or Distributor Storage with

Customer Pickup (Fig. 4.10)
Factories

Retailer

Cross Dock DC

Pickup Sites
Customers
Customer Flow
Product Flow
Information Flow

18

Comparative Performance of Delivery

Network Designs (Table 4.7)
Response Time

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

Product Variety

Product Availability

Customer
Experience

Order Visibility

Returnability

Inventory

Transportation

Facility & Handling

Information

5
19

Linking Product Characteristics and Customer

Preferences to Network Design
Retail
Storage with
Customer
Pickup

High demand product

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

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

+2

-2

-1

+1

-1

+1

-1

+1

-1

+1

+1

-1

+1

-2

+2

+1

-2

+1

+1

-1

-1

+2

+1

-1

+2

+1

+1

-2

+2

-2

-2

-1

+1

-2

-1

+2

+1

+2

-2

+1

+2

+2

+2

-1
20

The Value of Distributors

in the Supply Chain
Distributing Consumer Goods in India
Distributing MRO Products
Distributing Electronic Components

21

Distribution Networks in Practice

The ownership structure of the distribution network

can have as big as an impact as the type of
distribution network
The choice of a distribution network has very longterm consequences
Consider whether an exclusive distribution strategy
is advantageous
Product, price, commoditization, and criticality
have an impact on the type of distribution system
preferred by customers
22

Summary of Learning Objectives

What are the key factors to be considered
when designing the distribution network?
What are the strengths and weaknesses of
various distribution options?
What roles do distributors play in the
supply chain?

23

Outline
A strategic framework for facility location
Multi-echelon networks
Gravity methods for location
Plant location models

24

Network Design Decisions

Facility role
- flexibility of Toyota since 1997

Facility location
- Amazon.com : a single warehouse in Seattle

Capacity allocation
- Allocating too much poor utilization
- Allocating too little poor responsiveness, high cost

Market and supply allocation

- Amazon.com : built new warehouses due to grown markets
25

Factors Influencing Network Design

Decisions

Strategic Cost vs. Responsiveness

ex) Apparel producers, Convenience stores, Discount stores

Technological
Economies of scale few high-capacity locations
ex) Manufacturer of computer chips

Lower fixed costs many local facilities

ex) Bottling plants for Coca-Cola

Macroeconomic
Tariffs, Tax incentives, Exchange rate and Demand risk

Political

26

Factors Influencing Network Design

Decisions (continued)

Infrastructure
availability of sites & labor
proximity to transportation terminals, rail service, airports
and seaports
highway access, congestion, local utilities

Competitive Close vs. Far

ex) Retail stores in a mall, Supermarkets

Logistics and facility costs

27

The Cost-Response Time Frontier

Hi

Local FG
Mix
Regional FG
Local WIP

Cost

Central FG
Central WIP
Central Raw Material and Custom production
Custom production with raw material at suppliers

Low
Low

Response Time

Hi
28

Service and Number of Facilities

Response
Time

Number of Facilities
29

Where inventory needs to be

for a 1 week order response time [1 DC]
for a 5 day order response time [2 DCs]
for a 3 day order response time [5 DCs]
etc

30

Costs and Number of Facilities

Inventory
Facility costs

Costs

Transportation

Number of facilities
31

Cost Build-up as a function of facilities

Cost of Operations

Total Costs

Percent Service
Level Within
Promised Time
Facilities
Inventory
Transportation
Labor

Number of Facilities
32

A Framework for Global Site Location

Competitive STRATEGY
INTERNAL CONSTRAINTS
Capital, growth strategy,
existing network
PRODUCTION TECHNOLOGIES
Cost, Scale/Scope impact, support
required, flexibility
COMPETITIVE
ENVIRONMENT

GLOBAL COMPETITION

PHASE I
Supply Chain
Strategy

PHASE II
Regional Facility
Configuration

REGIONAL DEMAND
Size, growth, homogeneity,
local specifications
POLITICAL, EXCHANGE
RATE AND DEMAND RISK

PHASE III
Desirable Sites
PRODUCTION METHODS
Skill needs, response time
FACTOR COSTS
Labor, materials, site specific

TARIFFS AND TAX

INCENTIVES

PHASE IV
Location Choices

AVAILABLE
INFRASTRUCTURE

LOGISTICS COSTS
Transport, inventory, coordination

33

Conventional Network
Vendor
DC

Vendor
DC

Vendor
DC

Materials
DC

Finished
Goods DC

Customer
DC

Customer
Store

Component
Manufacturing
Customer
DC

Plant
Warehouse
Components
DC

Final
Assembly

Customer
Store

Finished
Goods DC

Customer
Store
Customer
Store

Customer
DC

Customer
Store
34
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Tailored Network: Multi - Echelon

Finished Goods Network
Regional
Finished
Goods DC
National
Finished
Goods DC

Local DC
Cross-Dock

Store 1
Customer 1
DC

Local DC
Cross-Dock
Customer 2
DC

Regional
Finished
Goods DC

Local DC
Cross-Dock

Store 1
Store 2
Store 2
Store 3
Store 3
35

Network Optimization Models

Allocating demand to production facilities
Locating facilities and allocating capacity

Key Costs:
Fixed facility cost
Transportation cost
Production cost
Inventory cost
Coordination cost
Which plants to establish? How to configure the network?
36

Demand Allocation Model

Which market is
served by which
plant?
Which supply sources
are used by a plant?
xij = Quantity shipped
from plant site i to
customer j

n m

Min cij xij

i 1 j 1

s.t.
n

xij D j

i 1
m

xij K i
j 1

xij 0
37

Plant Location with Multiple Sourcing

yi = 1 if plant is
located at site i, 0
otherwise
xij = Quantity shipped
from plant site i to
customer j

n m

i 1

i 1 j 1

Min f i y i cij xij

s.t.
n

xij D j

i 1
n

xij K i y i
j 1
m

y i k ; y i {0,1}

i 1

38

Capacity Investment Strategies

Speculative Strategy
Single sourcing

Hedging Strategy
Match revenue and cost exposure

Flexible Strategy
Excess total capacity in multiple plants
Flexible technologies

39

Summary
Factors influencing facility decisions
A strategic framework for facility location
Gravity methods for location
Network optimization models
Value capacity as a real option

40

Summary of Learning Objectives

What is the role of network design decisions in

the supply chain?
What are the factors influencing supply chain
network design decisions?
Describe a strategic framework for facility
location.
How are the following optimization methods used
for facility location and capacity allocation
decisions?
Gravity methods for location
Network optimization models
41
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