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SCM

SC DesignFacility Location Strategy

Prof. Metin Çakanyıldırım used various resources to prepare this document for teaching/training. To use this in your own course/training, please obtain permission from Prof. Çakanyıldırım.

If you find any inaccuracies, please contact metin@utdallas.edu for corrections.Updated in Spring 2020

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SCMFrequency 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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SCMFrequency 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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SCM

Facility Location: 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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SCM

CustomerDC

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

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SCM

CustomerDC

3 day order response time - typical results --> 5 DCs

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SCM

CustomerDC

Same day / next day order response time -typical results --> 26 DCs

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SCM

Inbound & Outbound Shipping with more facilities

More facilities ⇒ More inbound shipping and less outbound shipping.Less (inbound + outbound) shipping costs with more facilities possible,

if economies of scale in transportation.

Supplier Manufacturer Customer

Add more facilities for

responsiveness Supplier Manufacturer Distributor Retailer Customer

Inboundshipment

Outboundshipment

Inbound shipment Outbound shipment

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SCMCosts 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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SCM

Transportation

Cost Build-up as a function of facilitiesC

ost o

f Ope

ratio

ns

Number of Facilities

Inventory

Facilities

Total Costs

Labor

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SCMClassification 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!

» It opened up again – 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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SCM

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 Koreathen in Thailand

Regional Customers

Server<local-content>Suzuki’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>

Ericson facility in Silicon ValleyDominion energy in Texas

Facilities in Japan; Toyota Prius

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SCMFactors Influencing Location Decisions

Customer response time and local presence Costs: Logistics, Facility and Operating – the last two drive off-shoring Taxes: “More companies with high-margin products are setting up manufacturing operations

in tax-advantaged countries to protect their profitability” Matt Jackson, Cushman & Wakefield (cushwake.com), specializes in global location strategies.

In 2012, encouraged by Turkish tax incentives, Hyundai planned expansion of its Izmit Assembly Plant. See www.hyundai.com.tr.

Technology / Infrastructure– Availability and economies of scale (fixed operational costs)

» Semiconductor manufacturing only in 5-6 countries worldwide– electricity, phone lines, suppliers

Macroeconomic / Politic– Tariffs, exchange rate volatility, economic volatility. Economic communities: Nafta, EU, Pacific Rim, Efta

Competitive– Positive externalities

» Nissan in India develops car suppliers which can also supply Suzuki in India.» Toyota City, Shopping Malls» DFW Telecom corridor hosting Alcatel, Ericsson, Nortel, …

– Negative externalities, see the next slide

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SCM

Negative externality:Market Splitting by Hotelling’s Model

Captured byfirm at 𝑎𝑎

Captured byfirm at 𝑏𝑏

Middle ground is equally split

Single firm for the entire market0 1

A line to represent a market and customer– Locations– Preferences, e.g., sugar content in coke

0 1

Market split with two competing firms

𝑎𝑎 𝑏𝑏

If a person cannot find exactly what s/he prefers, s/he buys closest alternative. Locations & preferences are uniform over the line: Amount of customers in any

line segment depends linearly only on the length of that segment.

If 𝑎𝑎 locates first, where should 𝑏𝑏 locate afterwards to maximize market share?– a) at 0; b) immediately left of 𝑎𝑎; c) immediately right of 𝑎𝑎; d) midpoint between 𝑎𝑎 and 1; e) at 1

If 𝑎𝑎 estimates how 𝑏𝑏 will locate from the answer above, where should 𝑎𝑎 locate first to maximize market share?

– a) at 0; b) midpoint between 0 and 𝑏𝑏; c) immediately left of 𝑏𝑏; d) immediately right of 𝑏𝑏; – e) midpoint between 𝑏𝑏 and 1; f) at 1/2; f) at 1

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SCMSteps of Comparing Locations

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?).Source: McKinsey Global Institute on HBR Jun. 2006 p.91

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SCMSummary

Frequency decomposition of activities A strategic framework for facility

location– Classification– Factors– Steps

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SCM

Factors Influencing Fulfilment Location Decision at Amazon

Customer Response Time ↓ in the number of fulfillment centers Outbound Transportation Cost ↓ in the number of fulfillment centers Sales Taxes ↑ in the number of fulfillment centers

– 1992 Supreme Court Ruling: An online seller is required to collect sales tax on a customer’s behalf if the seller has a warehouse, DC or fulfillment center in the customer’s state of residence.

Trading off advantages of low response time and transportation cost against the disadvantage of high taxes, Amazon seems to have decided that advantages outweigh the disadvantage.

Darker states havemore households.

Numbers are (weighted)sales taxes.

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