Supply Chain

Management
Dr Vijaya Kumar Manupati
Assistant Professor
IIM Mumbai
Lecture 1

Supply Chain Basics

2-2
 What is a Supply Chain?

Decision Phases in a Supply Chain

Process View of a Supply Chain

Outline
The Importance of Supply Chain Flows

Examples of Supply Chains

1-3
Traditional SUPPLY CHAIN
Financial flow

SUPPLIER MANUFACTURER DISTRIBUTER CUSTOMER

Flow of Products, and services

Information

Dr Vijaya Kumar Manupati

Hypothetical supply chain
CUSTOMERS

SUPPLIERS WAREHOUSES Steel customers

M
I W1
N Odisha
E Leg 1 customers
S

W2
Jharkhand

p
o Leg 2 customers
r
Kalinga Nagar
t Haldia
 The Objective of a
Supply Chain

MAXIMIZE OVERALL VALUE CREATED

Individual again is not a win in SC

1-6
 Sources of supply chain revenue: the
customer

Supply Chain Sources of supply chain cost: flows of

information, products, or funds between
Profitability stages of the supply chain

Supply chain management is the

management of flows between and
among supply chain stages to maximize
total supply chain profitability

1-7
Decision Phases of a Supply Chain

1 2 3
Supply chain Supply chain planning Supply chain operation
strategy or design
Supply Chain Strategy or Design
 Definition of a set of policies that
govern short-term operations

Fixed by the supply configuration from

Supply Chain previous phase
Planning
Starts with a forecast of demand in the
coming year

1-10
 Supply Chain Planning
Planning decisions:

• Which markets will be supplied from which locations

• Planned buildup of inventories
• Subcontracting, backup locations
• Inventory policies
• Timing and size of market promotions

Must consider in planning decisions demand uncertainty,

exchange rates, competition over the time horizon
1-11
Supply Chain Operation
• Time horizon is weekly or daily
• Decisions regarding individual customer orders
• Supply chain configuration is fixed and operating policies
are determined
• Goal is to implement the operating policies as effectively as
possible
• Allocate orders to inventory or production, set order due
dates, generate pick lists at a warehouse, allocate an order to
a particular shipment, set delivery schedules, place
replenishment orders
• Much less uncertainty (short time horizon)

1-12
Process View of a Supply Chain

Push/pull view: processes in a

Cycle view: processes in a
supply chain are divided into
supply chain are divided into a
two categories depending on
series of cycles, each
whether they are executed in
performed at the interfaces
response to a customer order
between two successive supply
(pull) or in anticipation of a
chain stages
customer order (push)

1-13
Cycle View of Supply Chains

Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor

Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier
1-14
Push/Pull View of
Supply Chain Processes

Pull Push Push/pull

Push: execution is
Pull: execution is Push/pull boundary
initiated in
initiated in response separates push
anticipation of
to a customer order processes from pull
customer orders
(reactive) processes
(speculative)

1-15
Objective of Push Vs Pull view

How to respond to market demand and volatility ?

Where to keep an inventory? When to order?

SCM : The Old Paradigm: Push Strategies
• Production decisions are based on long-term forecasts;
• Ordering decisions are based on inventory forecasts;
• What are the problems with push strategies?
• Inability to meet changing demand patterns
• Obsolescence
• The bullwhip effect:
• Excessive inventory
• Excessive production variability
• Poor service levels
Example

Strategy: Push Strategy: Pull (1996-99) Strategy: Push-Pull

(1999-Till )
Example

1989-99; stockouts 8% to 10% 1999-present; stockouts < 2%

Strategy: Pull Strategy: Push - Pull

PUSH PULL VIEW OF SUPPLY CHAIN
Procurement, Manufacturing and Customer Order Cycle
Replenishment cycles

SUPPLIER MANUFACTURER DISTRIBUTER CUSTOMER

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives
Dr Vijaya Kumar Manupati
Push Pull and Cycle Views
Characteristics of the Push and Pull
Portions

Portion Push Pull

Objective Minimize cost Maximize service level
Complexity High Low
Focus Resource allocation Responsiveness
Lead Time Long Short
Processes Supply chain planning Order fulfillment
Matching supply chain strategies with products
Demand
Uncertainty
Pull
H Computer
COMPUTER Furniture
Furniture

Books & CDs

Grocery
Books and CDs Grocery

Push L
L H Economies
of Scale

Pull Push
Supply Chain Strategies with products of LT
and Demand Uncertainty
Demand
Uncertainty
Pull
H
Pull

Push

Continuous Replenishment

Inventory Positioning

Push L
Short Long Lead Time

Pull Push
Traditional Fulfillment Vs E-Fulfillment
Portion Traditional Fulfillment E-Fulfillment

Supply Chain Strategy Push Push-Pull

Shipment Bulk Parcel

Reverse Logistics Small part of the business Important and Highly

Complex
Delivery Destination Small number of stores Large number of
geographically dispersed
customers
Lead Times Relatively Long Relatively Short
 • What are the cycle and push/pull views of a
supply chain?
Summary of • How can supply chain macro processes be
classified?
Learning • What are the three key supply chain decision
phases and what is the significance of each?
Objectives • What is the goal of a supply chain and what is
the impact of supply chain decisions on the
success of the firm?

1-26
Case - - - Zara
COMMITMENT
Traditional vs Zara
Success
Success
Lecture 2

Supply Chain Performance:

Achieving Strategic Fit and Scope

2-32
Achieving Strategic Fit

• Introduction
• How is strategic fit achieved?
• Other issues affecting strategic fit

2-33
Achieving Strategic Fit
• Strategic fit:
• Consistency between customer priorities of competitive strategy
and supply chain capabilities specified by the supply chain strategy
• Competitive and supply chain strategies have the same goals.

• A company may fail because of a lack of strategic fit or because its

processes and resources do not provide the capabilities to execute the
desired strategy

2-34
 Understanding the customer and
Step 1
supply chain uncertainty

How is
Strategic Step 2 Understanding the supply chain
Fit
Achieved?
Step 3 Achieving strategic fit

2-35
Strategic FIT
▪ Target market
▪ Positioning
▪ Supply Chain
▪ Technology

Both started in the year 1962

 Identify the needs of the customer segment being
served
Quantity of product needed in each lot

Step 1: Response time customers will tolerate

Understanding
Variety of products needed
the Customer and
Supply Chain Service level required
Uncertainty
Price of the product

Desired rate of innovation in the product

2-37
Step 1: Understanding the Customer and Supply Chain
Uncertainty

Overall attribute of customer demand

Demand uncertainty: uncertainty of customer demand for a product

Implied demand uncertainty: resulting uncertainty for the supply chain

given the portion of the demand the supply chain must handle and
attributes the customer desires
2-38
Achieving Strategic Fit
• Understanding the Customer
• Lot size
• Response time
• Service level
Implied
• Product variety Demand
• Price Uncertainty
• Innovation

2-39
 Customer Need Causes implied demand
uncertainty to increase
because …
Range of quantity increases Wider range of quantity
implies greater variance in
demand
Impact of Lead time decreases Less time to react to orders
Customer Needs Variety of products required Demand per product becomes
on Implied increases more disaggregated
Demand Number of channels increases Total customer demand is now
Uncertainty disaggregated over more
channels
Rate of innovation increases New products tend to have
more uncertain demand
Required service level increases Firm now has to handle
unusual surges in demand
2-40
 Levels of Implied Demand Uncertainty

Predictable Predictable supply and uncertain Highly uncertain

supply and demand or uncertain supply and supply and demand
demand predictable demand or somewhat
uncertain supply and demand

Salt at a An existing A new

supermarket automobile communication
model device

Figure 2.2: The Implied Uncertainty (Demand and Supply)

Spectrum
2-41
 Attribute Low Implied High Implied
Uncertainty Uncertainty

Product margin Low High

Correlation
Between Avg. forecast error 10% 40%-100%
Implied Avg. stockout rate 1%-2% 10%-40%
Demand
Uncertainty and Avg. forced season- 0% 10%-25%
end markdown
Other Attributes

2-42
 • How does the firm best meet demand?
• Dimension describing the supply chain is
Step 2: supply chain responsiveness
Understanding • Supply chain responsiveness -- ability to
the • respond to wide ranges of quantities
Supply Chain demanded
• meet short lead times
• handle a large variety of products
• build highly innovative products
• meet a very high service level

2-43
Step 2: Understanding the
Supply Chain
• There is a cost to achieving responsiveness

• Supply chain efficiency: cost of making and delivering the product to the customer

❖ Increasing responsiveness results in higher costs that lower efficiency

• Second step to achieving strategic fit is to map the supply chain on the responsiveness
spectrum

2-44
Understanding the Supply Chain: Cost-Responsiveness
Efficient Frontier
Responsiveness

High

Low
Cost
High Low
2-45
 Responsiveness Spectrum

Highly Somewhat Somewhat Highly

efficient efficient responsive responsive

Integrated Hanes Most Dell

steel mill apparel automotive
production

2-46
Step 3: Achieving Strategic Fit
• All functions in the value chain must support the competitive strategy to achieve
strategic fit
• Two extremes: Efficient supply chains (Barilla) and responsive supply chains
(Dell)
• Two key points
• there is no right supply chain strategy independent of competitive strategy
• there is a right supply chain strategy for a given competitive strategy

2-47
Achieving Strategic Fit Shown on the Uncertainty/Responsiveness Map

Responsive
supply chain

Responsiveness
spectrum

Efficient supply
chain

Certain Implied Uncertain

demand uncertainty demand
2-48 spectrum
Strategic Fit

▪ Stylish Products at reasonable cost ▪ Customized products

▪ Customers are served from inventory ▪ Retailer holding less inventory
▪ Large stores with inventory hence efficiency
▪ Manufacturer focus of being efficient ▪ Manufacturer focus on responsive
Efficient Supply Chain

➢ Optimization

➢ High quality partners

➢ Inventory management

➢ Customer satisfaction

Responsive Supply Chain

➢ Order fill accuracy

➢ Scalable fulfilment

➢ Communication

➢ Customer satisfaction
 Efficient Responsive
Primary goal Lowest cost Quick response
Product design Min product cost Modularity to allow
strategy postponement
Comparison of Pricing strategy Lower margins Higher margins
Efficient and Mfg strategy High utilization Capacity flexibility

Responsive Inventory strategy Minimize inventory Buffer inventory

Lead time strategy Reduce but not at Aggressively reduce
Supply Chains expense of greater cost even if costs are
significant
Supplier selection Cost and low quality Speed, flexibility,
strategy quality
Transportation Greater reliance on low Greater reliance on
strategy cost modes responsive (fast)
modes

2-51
Lecture 3

Supply Chain Drivers

2-52
Drivers of Supply Chain Performance
Facilities

• Places where inventory is stored, assembled, or fabricated

• Production sites and storage sites

Inventory

• Raw materials, WIP, finished goods within a supply chain

• Inventory policies

Transportation

• Moving inventory from point to point in a supply chain

• Combinations of transportation modes and routes

Information

• Data and analysis regarding inventory, transportation, facilities throughout the supply chain
• Potentially the biggest driver of supply chain performance

Sourcing

• Functions a firm performs and functions that are outsourced

Pricing

• Price associated with goods and services provided by a firm to the supply chain 3-53
Framework of
supply chain
drivers

Dr Vijaya Kumar Manupati

 Role in the supply chain

• The “where” of the supply chain

• Manufacturing or storage
(warehouses)

Role in the competitive

Facilities strategy
• Economies of scale (efficiency
priority)
• larger number of smaller facilities
(responsiveness priority)

3-55
Components of Facilities Decisions

Location
• centralization
(efficiency) vs.
decentralization Capacity (flexibility
(responsiveness) versus efficiency)
• other factors to
consider (e.g.,
proximity to
customers)

Warehousing
Manufacturing
methodology (SKU
methodology (product
storage, job lot
focused versus
storage, cross-
process focused)
docking)

3-56
 Processing/setup/do
Capacity Utilization wn/idle time

Production cost per Cycle time of

unit Quality losses production
Facility related
Metrics
Volume contribution
of top 20 percent
Flow time Product variety
SKUs and
customers

Production service
level
Inventory: Role in the Supply Chain

• Inventory exists because of a mismatch between supply and demand

• Source of cost and influence on responsiveness
• Impact on
• Material flow time: time elapsed between when material enters the supply chain to
when it exits the supply chain
• Throughput:
• rate at which sales to end consumers occur
• I = RT (Little’s Law)
• I = inventory; R = throughput; T = flow time
Example
• Inventory and throughput are “synonymous” in a supply chain

3-58
 Components of Inventory Decisions
Cycle inventory
• Average amount
of inventory used
to satisfy demand
between
shipments
• Depends on lot
size

Overall trade-off: Safety inventory

Responsiveness versus efficiency • inventory held in case demand
• more inventory: greater exceeds expectations
responsiveness but greater cost • costs of carrying too much
• less inventory: lower cost but inventory versus cost of losing
lower responsiveness sales

Seasonal inventory
• inventory built up
to counter
predictable
variability in
demand
• cost of carrying
additional
inventory versus
cost of flexible
production

3-59
 Inventory related Metrix
Products with more
than a specified Average
Cash-to-cash cycle replenishment
time Average inventory
number of days of
batch size
inventory

Average safety Fraction of time

inventory Seasonal inventory Fill rate out of stock

Obsolete inventory
Transportation: Role in the Supply Chain

• Moves the product between stages in the supply chain

• Impact on responsiveness and efficiency

• Faster transportation allows greater responsiveness but lower efficiency

• Also affects inventory and facilities

3-61
Transportation:
Role in the Competitive Strategy

If responsiveness is a strategic
competitive priority, then Can also use slower
faster transportation modes transportation modes for Can also consider both
customers whose priority is inventory and transportation to
can provide greater find the right balance
responsiveness to customers price (cost)
who are willing to pay for it

3-62
Components of Transportation Decisions
Mode of
transportation:
• air, truck, rail,
ship, pipeline,
electronic
transportation
• vary in cost,
speed, size of
shipment,
flexibility

Route and network selection

• route: path along which a
Overall trade-off:
product is shipped
Responsiveness versus
efficiency • network: collection of
locations and routes

In-house or
outsource

3-63
Transportation related metrics
• Average inbound transportation cost
• Average incoming shipment size
• Average inbound transportation cost per shipment
• Average outbound transportation cost
• Average outbound transportation cost per shipment
• Fraction transported by mode
Information: Role in the Supply Chain
• The connection between the various stages in the
supply chain – allows coordination between stages.

• Crucial to daily operation of each stage in a supply

chain – e.g., production scheduling, inventory levels

3-65
Information:
Role in the Competitive Strategy

Allows supply chain to

become more efficient
What information is
and more responsive at Information technology
most valuable?
the same time (reduces
the need for a trade-off)

3-66
Components of Information Decisions

• Push (MRP) versus pull (demand information transmitted quickly throughout

the supply chain)
• Coordination and information sharing
• Forecasting and aggregate planning
• Enabling technologies
• Electronic data interchange (EDI)
• Internet
• ERP systems
• Supply Chain Management software
• Overall trade-off: Responsiveness versus efficiency
3-67
Information related matrics

Frequency of
Forecast horizon Forecast error
update

Ratio of demand
Variance from
Seasonal factors variability to
plan
order variability
Sourcing: Role in the Supply Chain

• Set of business processes required to purchase goods and services in a

supply chain.

• Supplier selection, single vs. multiple suppliers, contract negotiation

3-69
Sourcing:
Role in the Competitive Strategy

Sourcing decisions are crucial because In-house vs. outsource decisions-

they affect the level of efficiency and improving efficiency and
responsiveness in a supply chain responsiveness

3-70
Components of Sourcing Decisions

Overall trade-off:
In-house versus Supplier
Procurement Increase the
outsource evaluation and
process supply chain
decisions selection
profits

3-71
Pricing: Role in the Supply Chain

• Pricing determines the amount to charge customers in a supply chain

• Pricing strategies can be used to match demand and supply

3-72
Sourcing:
Role in the Competitive Strategy

Firms can utilize

Low price and low
optimal pricing
product availability;
strategies to improve Example: Amazon
efficiency and vary prices by
response times
responsiveness

3-73
Components of Pricing Decisions
Pricing and
economies
of scale

Overall trade-off: Everyday low

Increase the firm pricing versus high-
profits low pricing

Fixed price
versus
menu
pricing

3-74
 Pricing related metrics

Incremental Incremental
Days sales
Profit margin fixed cost per variable cost
outstanding
order per unit

Average sale Average order Range of sale Range of

price size price periodic sales
 Multiple products and customer segments

Other Issues
Affecting Product life cycle

Strategic Fit
Competitive changes over time

2-76
Multiple Products and Customer Segments
• Firms sell different products to different customer segments (with different implied
demand uncertainty)

• The supply chain has to be able to balance efficiency and responsiveness given its
portfolio of products and customer segments

• Two approaches:
• Different supply chains
• Tailor supply chain to best meet the needs of each product’s demand

2-77
Product Life Cycle
• The demand characteristics of a product and the needs of a customer segment change as a

product goes through its life cycle

• Supply chain strategy must evolve throughout the life cycle

• Early: uncertain demand, high margins (time is important), product availability is most

important, cost is secondary

• Late: predictable demand, lower margins, price is important

2-78
Product Life Cycle

• Examples: pharmaceutical firms, Intel

• As the product goes through the life cycle, the supply chain changes from one

emphasizing responsiveness to one emphasizing efficiency

2-79
Competitive Changes Over Time

• Competitive pressures can change over time

• More competitors may result in an increased emphasis on variety at a reasonable

price

• The Internet makes it easier to offer a wide variety of products

• The supply chain must change to meet these changing competitive conditions

2-80
Expanding Strategic Scope
Scope of strategic fit Five categories:
• The functions and stages
within a supply chain that • Intracompany intraoperation scope
devise an integrated
strategy with a shared • Intracompany intrafunctional scope
objective • Intracompany interfunctional scope
• One extreme: each
function at each stage • Intercompany interfunctional scope
develops its own strategy
• Flexible interfunctional scope
• Other extreme: all
functions in all stages
devise a strategy jointly
Different Scopes of Strategic Fit Across a Supply
Chain

Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy
Product Intercompany
Development Interfunctional Intracompany
Strategy Intrafunctional
at Distributor
Supply Chain
Intracompany
Strategy Intracompany
Intraoperation
Interfunctional
at Distributor
Marketing at Distributor
Strategy

2-82
Summary of Learning Objectives

• Why is achieving strategic fit critical to a company’s overall success?

• How does a company achieve strategic fit between its supply chain strategy and
its competitive strategy?

• What is the importance of expanding the scope of strategic fit across the supply
chain?

2-83
Lecture 4

Distribution Network Design

2-84
Designing the Distribution
Network in a Supply Chain
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

4-86
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

4-87
Factors Influencing
Distribution Network Design

Elements of customer service influenced by network Supply chain costs affected by network structure:
structure:
Response time Inventories
Product variety Transportation
Product availability Facilities and handling
Customer experience Information
Order visibility
Returnability

4-88
Service and Number of Facilities
Number of
Facilities

Response Time
4-89
The Cost-Response Time Frontier
Local FG
Hi
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

4-90
Inventory Costs and Number of Facilities

Inventory
Costs

Number of facilities

4-91
Transportation Costs and Number of Facilities

Transportation
Costs

Number of facilities

4-92
Facility Costs and Number of Facilities

Facility
Costs

Number of facilities

4-93
 Total Costs Related to
Number of Facilities
Total Costs
Total Costs

Facilities
Inventory
Transportation

Number of Facilities
4-94
 Variation in Logistics Costs and Response
Time with Number of Facilities
Response Time

Total Logistics Costs

Number of Facilities
4-95
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

4-96
Manufacturer Storage with Direct Shipping

Manufacturer

Retailer

Customers

Product Flow
Information Flow

4-97
Performance Measures
Measure Rating

Response Time 4

Product Variety 1

Product availability 1

Customer experience 4

Order visibility 5

Returnability 5

Facility 1

Transportation 4

Inventory 1

Information 4
In-Transit Merge Network
Factories

Retailer In-Transit Merge by

Carrier

Customers

Product Flow
Information Flow
4-99
 Measure Rating

Response Time 4

Product Variety 1

Product availability 1

Customer experience 3

Order visibility 4

Returnability 5

Facility 2

Transportation 3

Inventory 1

Information 4
Example
Distributor Storage with Carrier Delivery

Factories

Warehouse Storage by
Distributor/Retailer

Customers

Product Flow
Information Flow
4-103
Distributor Storage with Last Mile Delivery

Factories

Distributor/Retailer
Warehouse

Customers

Product Flow
Information Flow
4-104
Manufacturer or Distributor Storage with Customer Pickup

Factories

Retailer Cross Dock DC

Pickup Sites

Customers

Customer Flow
Product Flow
4-105
Information Flow
Example
 Comparative Performance of Delivery
Network Designs
Retail Storage Manufacturer Manufacturer Distributor Storage Distributor Manufacturer
with Customer Storage with Direct Storage with In- with Package storage with last storage with pickup
Pickup Shipping Transit Merge Carrier Delivery mile 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
4-107
Linking Product Characteristics and Customer
Preferences to Network Design
Retail Storage Manufacturer Manufacturer Distributor Storage Distributor storage Manufacturer
with Storage with Storage with In- with Package Carrier with last mile delivery storage with
Customer Direct Shipping Transit Merge 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

4-108
E-Business and the Distribution Network

• Impact of E-Business on Customer Service

• Impact of E-Business on Cost
• Using E-Business: Dell, Amazon, Peapod, Grainger

4-109
• 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 Distribution
consequences
• Consider whether an Networks in
exclusive distribution strategy
is advantageous Practice
• Product, price,
commoditization, and
criticality have an impact on
the type of distribution system
preferred by customers

4-110
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?

4-111
Lecture 5

Supply Chain Network Design

2-112
Outline
• A strategic framework for facility
location
• Multi-echelon networks
• Gravity methods for location
• Plant location models

5-113
 Network Design Decisions

Facility role Facility location Capacity allocation Market and

supply allocation

5-114
Factors Influencing
Network Design
Decisions
• Strategic
• Technological
• Macroeconomic
• Political
• Infrastructure
• Competitive
• Logistics and facility costs

5-115
Broad Geographic and Site-Specific Locational Determinants

Global/National/ Regional Determinants Site-Specific Determinants

Labor climate • Transportation access
• Truck
Transportation services and infrastructure
• Air
Proximity to markets and customers
• Rail
Quality of life • Water
Taxes and industrial development incentives • Inside/outside metropolitan area
Supplier networks • Availability of workforce and needed skill sets
Land costs and utilities • Land costs and taxes
IT infrastructure • Utilities
Company preference
 The Role of Network
Design
Network design decisions
• How many manufacturing plants,
production lines, distribution centers,
cross-docking facilities?
• Where should facilities be located?
• How much capacity at each facility?
• Which products?
• What markets?
Service and Number of Facilities

Response Time

Number of Facilities

5-118
Where inventory needs to be for a one week order response time - typical results --> 1 DC

Customer
DC
Where inventory needs to be for a 5 day order response time - typical results --> 2 DCs

Customer
DC
Where inventory needs to be for a 3 day order response time - typical results --> 5 DCs

Customer
DC
Where inventory needs to be for a next day order response time - typical results --> 13 DCs

Customer
DC
Where inventory needs to be for a same day / next day order response time - typical results --
> 26 DCs

Customer
DC
Costs and Number of Facilities
Inventory

Facility costs
Costs

Transportation

Number of facilities

5-124
 Cost Buildup as a Function of Facilities
Total Costs
Cost of Operations
Percent Service
Level Within
Promised Time
Facilities
Inventory
Transportation
Labor

Number of Facilities

5-125
A Framework for Global Site Location
Competitive STRATEGY GLOBAL COMPETITION
PHASE I
Supply Chain
INTERNAL CONSTRAINTS Strategy
Capital, growth strategy, TARIFFS AND TAX
existing network INCENTIVES

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

5-126
 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

5-127
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

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Gravity Methods for Location
• Ton Mile-Center Solution
• x,y: Warehouse Coordinates
( x − xn) + ( y − y n)
2 2
d =
• xn, yn : Coordinates of delivery n

nx F
location n D k

• dn : Distance to delivery location  d

n n

n x= n =1 n

D nF
k
• Fn : Annual tonnage to delivery  d
n =1
n

location n n

D ny F
k

 d
n n

y= n =1 n

D nF
k

Min  d n Dn F n  d n =1
n

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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?

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 Demand Allocation Model
n m
• Which market is served by which plant? Min  cij xij
i =1 j =1
• Which supply sources are used by a plant? s.t.
xij = Quantity shipped from plant site i to n

customer j 
i =1
x ij
= D j , j = 1,..., m
m

x  K
j =1
ij i
, i = 1,..., n

x ij
0

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 Plant Location with Multiple Sourcing

• yi = 1 if plant is located at n n m
Min  f y +  c x
site i, 0 otherwise i =1
i i
i =1 j =1
ij ij

• xij = Quantity shipped s.t.

from plant site i to n
customer j  x = D , j = 1,..., m
i =1
ij j

 x  K y , i = 1,..., n
j =1
ij i i

 y  k ; y {0,1}
i =1
i i

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Plant Location with Single Sourcing
• yi = 1 if plant is located at n n m

site i, 0 otherwise Min  f y +  D j c x ij

i i ij
i =1 i =1 j =1

• xij = 1 if market j is s.t.

supplied by factory i, 0 n

otherwise x
i =1
ij
= 1, j = 1,..., m
n

 D j x  K y , i = 1,..., n
j =1
ij i i

xij , y {0,1}i

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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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