Facility Location

• Evaluating potential sites – non-tangible criteria

• Cost – transportation models – Applichem

• Service facilities• Issue of cost minimization vs. response

speed• Role of inventory

Plant Location Methodology: Factor Rating Method Example

Fuels in region 0 to 330Power availability and reliability 0 to 200Labor climate 0 to 100Living conditions 0 to 100Transportation 0 to 50Water supply 0 to 10Climate 0 to 50Supplies 0 to 60Tax policies and laws 0 to 20

Two refineries sites (A and B) are assigned the following range of point values and respective points, where the more points the better for the site location.

1231505424453484545

Major factors for site location Pt. Range

1561006396551445020

SitesA B

Total pts. 528 558

Best Site is B

Plant Location Methodology: Transportation Method of Linear Programming

• Transportation method of linear programming seeks to minimize costs of shipping n units to m destinations or it seeks to maximize profit of shipping n units to m destinations.

Applichem – Steps to solve1. Calculate cost/1,000 units for each alternative

(matrix).2. Calculate total cost/alternative matrix.3. Calculate total cost of current solution.4. Solver setup

-Target Cell-Minimize-Capacity Constraints-Demand Constraints-Options

Linear SolutionNon-Negative

-Solve

Locating Service Facilities

• Site screening using regression analysisProfitability = a + b1 x1 + b2 x2 + b3 x3

Variables to include in the model (dependent on situation):

Median income of local population Local population size Traffic in front of site

Categories of variables: competitive, demand, demographic, physical access.

Matching Supply-Chains with Products

Efficient

Supply-Chain

Responsive

Supply-Chain

Functional

Products

Innovative

Products

Match

MatchMismatch

Mismatch

Marshall Fisher – Efficient vs Responsive Supply Chains

Demand Characteristics Supply Characteristics

Functional Innovative Stable Evolving

Low demand uncertaintyMore predictable demandStable demandLong product lifeLow inventory costLow profit marginLow product varietyHigher volumeLow stockout costLow obsolescence

High demand uncertaintyDifficult to forecastVariable demandShort selling seasonHigh inventory costHigh profit marginHigh product varietyLow volumeHigh stockout costHigh obsolescence

Less breakdownsStable and higher yieldsLess quality problemsMore supply sourcesReliable suppliersLess process changesLess capacity constraintsEasier to changeoverFlexibleDependable lead times

Vulnerable to breakdownsVariable and lower yieldsPotential quality problemsLimited supply sourcesUnreliable suppliersMore process changesPotential capacity constrainedDifficult to changeoverInflexibleVariable lead time

Demand Uncertainty

Low (Functional Products)

High (Innovative Products)

Supply Uncertainty Low (Stable

Process)

Grocery, basic apparel, food, oil and gas

Efficient Supply Chain

Fashion apparel, computers, popular music

Responsive Supply Chain

High (Evolving Process)

Hydro-electric power, some food produce

Risk-Hedging Supply Chain

Telecom, high-end computers, semiconductor

Agile Supply Chain

Hau Lee’s Uncertainty Framework – Examples and Types of Supply Chain Needed

Automobile Manufacturing

• What type of supply chain are these companies opting for these days? – Efficient, Responsive, Risk Hedging, Agile

• Ford• BMW• Mercedes Benz• GM• Honda

Faraway FactoriesGlobal auto makers increasingly are using remote plants in the developing world to make cars for their home markets. Here are some of the latest examples: 1. Ford in Bahia: Fusion mini-SUV for U.S. (starting 2004) 2. BMW in Rosslyn: 3-series sedans for Japan, Australia, U.S. 3. Volkswagen in Uitenhage: Golf compacts for Europe 4. DaimlerChrysler in East London: Mercedes C-class sedans for Europe 5. Honda in Ayutthaya: unnamed compact car for Japan (starting late 2002) 6. GM in Rayong: Opel Zafira minivans for Europe, Japan 7. Honda in Guangzhou: unnamed cars for Europe and Asia (starting 2004) Source: the companies

Concluding Remarks

• Struggle between low cost labor and transportation to market.

• Response is a function of distance to market vs inventory carried locally.

• Labor productivity is largely a function of automation. • Automation greatly impacts flexibility. • Global producers have a global set of alternatives to

consider.• Very rich area for analysis – no shooting from the hip

here.