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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