1 utdallas.edu/~metin sc design facility location strategy
TRANSCRIPT
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SC Design
Facility Location Strategy
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Frequency Decomposition
SCs are enormous It is hard to make all decisions at once Integration by smart decomposition Frequency decomposition yields several sets of
decisions such that each set is integrated within itself
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Frequency Decomposition
Low frequency activity, ~ once a year, high fixed cost– R&D budget– Capacity expansion budget
Moderate frequency activity, ~ once a month– Cancellation of specific R&D projects depending on
experimental outcomes
– Specific machines to purchase High frequency activity, ~ once a day, low fixed cost
– What experiments to start / continue today
– What to produce
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Facility Location: The Cost-Response Time FrontierAn inventory location based point of view
Local Finished Goods (FG) Inventory
Regional FG Inventory
Local WIP (work-in-process)
Central FG Inventory
Central WIP
Central Raw Material and Custom production
Custom production with raw material at suppliers
Cost
Response Time HiLow
Low
Hi7-Eleven
Sam’s Club
Regional
Central
Pull the inventory upstream
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Customer
DC
Where inventory needs to be for a Where inventory needs to be for a one week one week order response timeorder response time - typical results --> - typical results --> 1 DC1 DC
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Customer
DC
3 day order response time3 day order response time - typical results -- - typical results --> > 5 DCs5 DCs
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Customer
DC
Same day / next day order response timeSame day / next day order response time - - typical results --> typical results --> 26 DCs26 DCs
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Inbound and outbound shipping with more facilities
More inbound shipping and less outbound shipping with more facilities.Less (inbound + outbound) shipping costs with more facilities possible,
if economies of scale in transportation.
SupplierSupplier ManufacturerManufacturer CustomerCustomer
Add more facilities for
responsiveness SupplierSupplier ManufacturerManufacturer DistributorDistributor RetailerRetailer CustomerCustomer
Inbound shipment Outbound shipment
Inbound shipment Outbound shipment
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Costs and Number of Facilities
Costs
Number of facilities
Total SC Inventory
Transportation
Facility costs
No economies of scale in shipment size, SC covers a larger portion with each facility.
With economies of scale in inbound shipping to retailers.
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TransportationTransportation
Cost Build-up as a function of facilities
Cos
t of
Op
erat
ion
sC
ost
of O
per
atio
ns
Number of FacilitiesNumber of Facilities
InventoryInventory
FacilitiesFacilities
Total CostsTotal Costs
LaborLabor
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Classification of Network Design Decisions
Facility function: Plant, DC, Warehouse: What facility performs what function
– Packaging at the manufacturer or warehouse– Should a rental computer return location run diagnostic tests on the returned
computers or should the testing be done at major warehouses? Question arising from CRU Computer Rental Case done in OPRE6302
Facility location– Starbucks opened up at UTD student apartments in 2005 but closed in 2006!– Recall Japanese 7-eleven and their blanketing strategy– SMU’s experimentation with Plano campus: http://www.smu.edu/legacy .
Capacity allocation– SOM car park took 80 cars in 2005 and expanded in 2006 to take about 110 cars, further expanded in 2009 to take about 300 cars.
Supply and market allocation: Who serves whom
– By location: UT Austin serves central Texas students – By grade: UT Arlington serves undergraduate students
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Strategic Factors Influencing Location Decisions
Strategic Facilities
Global Customers
Offshore<reduced tariffs>
<for exports>VW plants in Mexico Serving Latin America
Source<low-cost>
Nike plants in Korea
Regional Customers
Server<local-content>Suziki’s Indian venture
Maruti Udyog Contributor<customization>
<development skills>Maruti Udyog
Lead facility<advanced technology>Lockheed Martin’s JSF in Dallas
Outpost facility<Learn local skills>
Facilities in Japan; Toyota Prius
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Factors Influencing Location Decisions
Customer response time and local presence Operating costs – main driver for offshoring Technological,
– Availability and economies of scale (fixed operational costs) » Semiconductor manufacturing takes place only in 5-6 countries worldwide
Infrastructure, electricity, phone lines, suppliers Macroeconomic / Politic
– Tariffs, exchange rate volatility, economic volatility– Economic communities: Nafta, EU, Pacific Rim, Efta– Stability
Logistics and facility costs Competitive
– Positive externalities» Nissan in India develops car suppliers which can also supply Suziki in India.» DFW Telecom corridor hosting Alcatel, Ericsson, Nortel, … » Toyota City, Shopping Malls
– Negative externalities, see the next slide
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Negative externality:Market Splitting by Hotelling’s Model
0 a b 1
a b1-a-b
Suppose customers (preferences, e.g. sugar content in coke) are uniformly distributed over [0,1]
- How much does firm at a get, how about firm at b by locating as above?
- If a locates first, where should b locate?
- If a estimates how b will locate in response to a’s location, where should a locate?
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Steps of Comparing Locations
According to McKinsey Global Institute on HBR Jun. 2006 p.91 1. Draw up a list of possible locations 2. Define the decision criteria
– Six common criteria used by companies» 1. Cost of operating – tax incentives from local/federal governments» 2. Availability of the skills» 3. Sales potential in the adjacent markets» 4. Risk of doing the business» 5. Attractiveness of living environments» 6. Quality of infrastructure
3. Collect data for each location 4. Weight the criteria
» Fortisbank of Belgium, wants to enter new large markets, gives highest weight to 3.» Citibank, wants a location for a captive IT center, gives the highest weight to 4.
Find risk data at– Economist intelligence unit: www.eiu.com– UN Development Program: http://hdr.undp.org/statistics/data/
5. Rank locations according to weighted sum of their scores 6. Assess the dynamics of the labor pool
» Availability of skilled labor: Top tier universities in large U.S. cities (e.g., Dallas?).
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Summary
Frequency decomposition of activities A strategic framework for facility location
– Classification
– Factors
– Steps