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Facility Location Models. August 23, 2006 Briggs Session 1 www.kelley.iu.edu/briggsc/e730_lect1.ppt. Outline. Developing a framework for solving facility location problems Deriving and applying models from that framework Making network design decisions in practice. - PowerPoint PPT Presentation
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1GSCM Carl M. Briggs Ph.D.
Facility Location Models
August 23, 2006 Briggs Session 1
www.kelley.iu.edu/briggsc/e730_lect1.ppt
222GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
Outline
• Developing a framework for solving facility location problems
• Deriving and applying models from that framework
• Making network design decisions in practice
333GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
But first… Some Location Trivia.
• Can you name these places:
444GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
555GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
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Which table is bigger?
A
B
Source: Shepard (1990)
Rulers
888GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
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
101010GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
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?
111111GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
Developing a Framework (Process) for Solving Facility Location Problems
• What decisions have to be made?
• What factors influence those decisions?
121212GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
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
131313GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
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…)
141414GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
Service and Number of Facilities
Number of Facilities
ResponseTime
151515GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
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
161616GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
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
171717GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
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
181818GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
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
191919GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
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
202020GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
Costs and Number of Facilities
Costs
Number of facilities
Inventory
Transportation
Facility costs
212121GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
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
22GSCM Carl M. Briggs Ph.D.
Put these components together and a framework for solving network location decisions
emerges.
232323GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
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
242424GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
Questions about this Framework
• What are the strengths?
• What are the problems?
• Does it pass the “good model” criteria?
25GSCM Carl M. Briggs Ph.D.
Modeling the facility location problem
272727GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
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?
282828GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
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)
30GSCM Carl M. Briggs Ph.D.
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
343434GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
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
353535GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
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
363636GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
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.)
373737GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
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
383838GSCM Carl M. Briggs Ph.D. E730 Global Supply Chain Management Program
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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