Facility Decisions

Network Design in a Supply Chain

1
 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

2
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

4
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

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Distributor Storage with
Carrier Delivery (Fig. 4.8)

Factories

Warehouse Storage by
Distributor/Retailer

Customers

Product Flow
Information Flow
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Distributor Storage with
Last Mile Delivery (Fig. 4.9)

Factories

Distributor/Retailer
Warehouse

Customers

Product Flow
Information Flow
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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)
Retail Storage Manufacturer Manufacturer Distributor Distributor Manufacturer
with Storage with Storage with In- Storage with storage with storage with
Customer Direct Shipping Transit Merge Package Carrier last mile pickup
Pickup Delivery delivery
Response Time 1 4 4 3 2 4

Product Variety
4 1 1 2 3 1
Product Availability 2 3
4 1 1 1
Customer Experience 5 4 3 2 1 5

Order Visibility 1 5 4 3 2 6

Returnability 1 5 5 4 3 2

Inventory 4 1 1 2 3 1

Transportation 1 4 3 2 5 1

Facility & Handling 6 1 2 3 4 5

Information 1 4 4 3 2 5
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Linking Product Characteristics and Customer
Preferences to Network Design
Retail Manufacturer Manufacturer Distributor Storage Distributor storage Manufacturer
Storage with Storage with Storage with In- with Package with last mile storage with
Customer Direct Shipping Transit Merge Carrier Delivery delivery pickup
Pickup

High demand product

+2 -2 -1 0 +1 -1
Medium demand product
+1 -1 0 +1 0 0
Low demand product
-1 +1 0 +1 -1 +1
Very low demand product
-2 +2 +1 0 -2 +1
Many product sources
+1 -1 -1 +2 +1 0
High product value
-1 +2 +1 +1 0 -2
Quick desired response
+2 -2 -2 -1 +1 -2
High product variety
-1 +2 0 +1 0 +2
Low customer effort
-2 +1 +2 +2 +2 -1

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The Value of Distributors
in the Supply Chain
 Distributing Consumer Goods in India
 Distributing MRO Products
 Distributing Electronic Components

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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 long-
term 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

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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?

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

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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
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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
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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

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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

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Service and Number of Facilities
Response
Time

Number of Facilities

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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

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Costs and Number of Facilities

Inventory

Costs Facility costs

Transportation

Number of facilities

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Cost Build-up as a function of facilities
Total Costs
Cost of Operations

Percent Service
Level Within
Promised Time

Facilities
Inventory
Transportation
Labor

Number of Facilities
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A Framework for Global Site Location
Competitive STRATEGY GLOBAL COMPETITION
PHASE I
Supply Chain
INTERNAL CONSTRAINTS Strategy TARIFFS AND TAX
Capital, growth strategy, INCENTIVES
existing network

PRODUCTION TECHNOLOGIES REGIONAL DEMAND

Cost, Scale/Scope impact, support PHASE II Size, growth, homogeneity,
required, flexibility
Regional Facility local specifications
Configuration
COMPETITIVE
ENVIRONMENT POLITICAL, EXCHANGE
RATE AND DEMAND RISK

PHASE III
Desirable Sites AVAILABLE
INFRASTRUCTURE
PRODUCTION METHODS
Skill needs, response time

FACTOR COSTS PHASE IV LOGISTICS COSTS

Labor, materials, site specific Location Choices Transport, inventory, coordination

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 Conventional Network

Materials Customer
Vendor Finished Customer
DC Store
DC Goods DC DC

Customer
Component Store
Vendor Manufacturing
DC Plant Customer Customer
Warehouse DC Store
Components
DC Customer
Vendor Store
DC Finished
Customer
Goods DC
Final DC Customer
Assembly Store

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 Tailored Network: Multi - Echelon
Finished Goods Network
Local DC
Cross-Dock Store 1
Regional Customer 1
Finished DC
Goods DC Store 1
Local DC
Cross-Dock
National Store 2
Customer 2
Finished
DC
Goods DC
Local DC Store 2
Cross-Dock
Regional
Finished Store 3
Goods DC

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
n m
 Which market is Min   cij xij
served by which i 1 j 1
plant? s.t.
 Which supply sources
n
are used by a plant?  xij  D j
i 1
xij = Quantity shipped m
from plant site i to  xij  K i
j 1
customer j
xij  0

37
Plant Location with Multiple Sourcing
 yi = 1 if plant is n n m
Min  f i y i    cij xij
located at site i, 0 i 1 i 1 j 1
otherwise s.t.
 xij = Quantity shipped n
from plant site i to  xij  D j
i 1
customer j
n
 xij  K i y i
j 1
m
 y i  k ; y i  {0,1}
i 1
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Capacity Investment Strategies
 Speculative Strategy
– Single sourcing
 Hedging Strategy
– Match revenue and cost exposure
 Flexible Strategy
– Excess total capacity in multiple plants
– Flexible technologies

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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

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