Facility Location Models

1GSCM Carl M. Briggs Ph.D.

Facility Location Models

August 23, 2006 Briggs Session 1

www.kelley.iu.edu/briggsc/e730_lect1.ppt

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Outline

• Developing a framework for solving facility location problems

• Deriving and applying models from that framework

• Making network design decisions in practice

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But first… Some Location Trivia.

• Can you name these places:

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Which table is bigger?

A

B

Source: Shepard (1990)

Rulers

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Developing a Framework (Process) for Solving Facility Location Problems

• What decisions have to be made?

CustomerCustomerStoreStore

MaterialsMaterialsDCDC

ComponentComponentManufacturiManufacturi

ngng

VendorVendorDCDC

Final Final AssemblyAssembly

FinishedFinishedGoods DCGoods DC

ComponentsComponentsDCDC

VendorVendorDCDC PlantPlant

WarehouseWarehouse

FinishedFinishedGoods DCGoods DC

CustomerCustomerDCDC

CustomerCustomerDCDC

CustomerCustomerDCDC

CustomerCustomerStoreStore

CustomerCustomerStoreStore

CustomerCustomerStoreStore

CustomerCustomerStoreStore

VendorVendorDCDC

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Types of Network Design Decisions

• Facility roleWhat role should each facility play? What processes are performed at each

facility?

• Facility locationWhere should facilities be located?

• Capacity allocationHow much capacity should be allocated to each facility?

• Market and supply allocationWhat markets should each facility serve? Which supply sources

should feed each facility?

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Developing a Framework (Process) for Solving Facility Location Problems

• What decisions have to be made?

• What factors influence those decisions?

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Factors Influencing Network Design Decisions• Strategic

What is the differentiator?

• TechnologicalDoes production technologies result in economies of scale?

Is the cost of production technology prohibitive?

Is production technology inflexible?

Does product requirements differ significantly by region?

• MacroeconomicTaxes

Tariffs

Incentives

Exchange Rates

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Factors Influencing Network Design Decisions• Political

Stability

Formal/Informal legal system

• InfrastructureRoads, utilities, labor, access to ports

• CompetitiveLocate close to a competitor? Positive/Negative externalities?

• Customer Response Time and Local Presence (related to…)

• Logistics and facility costs (for example…)

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Service and Number of Facilities

Number of Facilities

ResponseTime

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Customer

DC

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

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Customer

DC

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

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Customer

DC

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

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Customer

DC

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

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Customer

DC

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

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Costs and Number of Facilities

Costs

Number of facilities

Inventory

Transportation

Facility costs

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Percent Service Percent Service Level Within Level Within

Promised TimePromised Time

TransportationTransportation

Cost Build-up as a function of facilitiesC

ost

of O

per

atio

ns

Cos

t of

Op

erat

ion

s

Number of FacilitiesNumber of Facilities

InventoryInventory

FacilitiesFacilities

Total CostsTotal Costs

LaborLabor

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Put these components together and a framework for solving network location decisions

emerges.

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A Framework for Solving Facility Location Decisions

PHASE ISupply Chain

Strategy

PHASE IIRegional Facility

Configuration

PHASE IIIDesirable Sites

PHASE IVLocation Choices

Competitive STRATEGY

INTERNAL CONSTRAINTSCapital, growth strategy,existing network

PRODUCTION TECHNOLOGIESCost, Scale/Scope impact, supportrequired, flexibility

COMPETITIVEENVIRONMENT

PRODUCTION METHODSSkill needs, response time

FACTOR COSTSLabor, materials, site specific

GLOBAL COMPETITION

TARIFFS AND TAXINCENTIVES

REGIONAL DEMANDSize, growth, homogeneity,local specifications

POLITICAL, EXCHANGERATE AND DEMAND RISK

AVAILABLEINFRASTRUCTURE

LOGISTICS COSTSTransport, inventory, coordination

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Questions about this Framework

• What are the strengths?

• What are the problems?

• Does it pass the “good model” criteria?

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Modeling the facility location problem

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A Simple Gravity Method

• A company has three factories. The x- and y-coordinates for each factory are shown below:

Factory 1: (6, 1)

Factory 2: (1,3)

Factory 3: (4,1)

• The company wants to locate a warehouse at a point that minimizes the sum of the squared distances of the plants from the warehouse.

• Where should the warehouse be located?

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A Simple Gravity Method

• A company has three factories. The x- and y-coordinates for each factory are shown below:

Factory 1: (6, 1), Factory 2: (1,3), Factory 3: (4,1)

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Making the Facility Location Decision in Practice

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Sometimes theory differs from reality…

• The challenge…

• The challenger…

• The results…

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A Real Facility Location Problem…*

• Your company manufactures chairs and tables in Bloomington, Indiana, and distributes those chairs across the United States.

• The product is historically manufactured in North America (four locations), but increasingly a mix of the product is being manufactured in SE Asia and Mexico.

• When product is imported from abroad, it much be grouped into orders and shipped out. This currently happens at your mixing center in Bloomington.

• Your company is responsible for shipping complete orders to customers in North America.

• Should your company change its current mixing center configuration?

• How do you know?

*Based on an actual MBA student project, Supply Chain & Global Management Academy. Names and facts changed to protect both the

innocent and the guilty.

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The current situation…% Volume (cubes)

WA 1.2%

OR 0.63%

MT 0.27% ND 0.14%

MN 1.36%

WI 2.23%

NV 1.47%CA 13.07%

ID 0.2%

SD 0.08%

UT 1.11%

AZ 3.02%

NM 0.92%

TX 8.5%

OK 0.94%

CO 2.21%

WY 0.1%

MI 2.85%

LA 0.96% FL 8.97%

AR 0.7%

MS 0.65%

IL 3.58%

IA 0.38%

AL 1.63%

SC 0.6%

NC 2.56%

NE 0.67%

KS 0.51%MO 1.8%

GA 3.37%

TN 1.7%

KY 1.2%

OH 2.94%

WV 0.51%

ME 0.13%

MA 3.07%RI 0.18%CT 1.26%

VT 0.04%

NH 0.27%NY 2.38%

NJ 4.86%PA 3.62%

DE 0.11%

VA 3.2%

MD 5.1%DC 0.21%

Jasper

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Two Solutions… #1% Volume (cubes)

WA 1.2%

OR 0.63%

MT 0.27% ND 0.14%

MN 1.36%

WI 2.23%

NV 1.47%CA 13.07%

ID 0.2%

SD 0.08%

AZ 3.02%

NM 0.92%

TX 8.5%

OK 0.94%

CO 2.21%

WY 0.1%

MI 2.85%

LA 0.96% FL 8.97%

AR 0.7%

MS 0.65%

IL 3.58%

IA 0.38%

AL 1.63%

SC 0.6%

NC 2.56%

NE 0.67%

KS 0.51%MO 1.8%

GA 3.37%

TN 1.7%

KY 1.2%

OH 2.94%

WV 0.51%

ME 0.13%

MA 3.07%RI 0.18%CT 1.26%

VT 0.04%

NH 0.27%NY 2.38%

NJ 4.86%PA 3.62%

DE 0.11%

VA 3.2%

MD 5.1%DC 0.21%

UT

Jasper

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Two Solutions… #2% Volume (cubes)

DC 0.21%MD 5.1%

VA 3.2%

DE 0.11%

PA 3.62%NJ 4.86%

NY 2.38%NH 0.27%

VT 0.04%

CT 1.26%RI 0.18%MA 3.07%

ME 0.13%

WV 0.51%

OH 2.94%

KY 1.2%

TN 1.7%

GA 3.37%

MO 1.8%KS 0.51%

NE 0.67%

NC 2.56%

SC 0.6%

AL 1.63%

IA 0.38%

IL 3.58%

MS 0.65%

AR 0.7%

FL 8.97%LA 0.96%

MI 2.85%

WY 0.1%

CO 2.21%

OK 0.94%

TX 8.5%

NM 0.92%

AZ 3.02%

UT 1.11%

SD 0.08%

CA 13.07%

WI 2.23%

MN 1.36%

ND 0.14%MT 0.27%

OR 0.63%

WA 1.2%

JasperNV

Post Falls

Mexicali

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Making Network Design Decisions In Practice

• Don’t underestimate the life span of facilities

• Don’t gloss over the cultural implications/issues

• Don’t ignore the “big picture” issues…(i.e. quality of life, existing infrastructure, etc..)

• Make sure that ALL the components are included in the financial model (including things like tariffs and incentives.)

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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

• Making network design decisions in practice

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For Tomorrow

• Read Chapter 6

• Read “Leading a Supply Chain Turnaround”

• Form teams, and work on the Sportsstuff.com case (Chopra )Turn-in a hardcopy of your answers to the Sportsstuff.com problem. (Assume a single linear inventory cost.)

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