Supply Chain Management PDF

Supply chain Management Lecture 1 Operations and Supply Chain Management (OSCM) OSCM is defined as “the design, operation, and improvement of the systems that create and deliver a firm’s primary products and services.” Understanding OSCM is crucial due to various career opportunities, including ro...

Supply chain Management Lecture 1 Operations and Supply Chain Management (OSCM) OSCM is defined as “the design, operation, and improvement of the systems that create and deliver a firm’s primary products and services.” Understanding OSCM is crucial due to various career opportunities, including roles like plant manager, hospital administrator, bank branch manager, call center manager, store manager, purchasing manager, supply chain manager, project manager, and Chief Operating Officer (COO). Process View in OSCM A process consists of activities that transform inputs into valuable outputs for the customer. Inputs may include raw materials, while resources like labor and capital facilitate transformation into outputs such as goods and services. Supply Chain View The supply chain for a given firm includes the supply chain partner on the right (the customer) and the one on the left (the supplier). This structure is outlined from raw materials to end consumers through stages like manufacturer, distributor, wholesaler, retailer, and consumer. Movement upstream (toward suppliers) and downstream (toward customers) characterizes the flow of goods and information in the chain. Supply chain structure The supply chain structure illustrates different types of arrangements that a company can use to connect suppliers, manufacturers, distributors, and customers. The diagrams in the slide suggest different configurations: 1. A simple linear structure where goods move from one stage to another in a straight line. 2. A more complex structure where multiple suppliers and customers are involved, leading to more nodes in the network. 3. A very intricate structure involving multiple levels of suppliers and customers, forming a network of interactions and dependencies Supply Chain Network The supply chain network represents the entire system from suppliers to customers. In the example provided, the supply chain is broken into different tiers (Tier 3, Tier 2, and Tier 1 suppliers), which feed into warehouses, factories, and distribution centers before reaching the final customers. Each node in the network performs specific functions like manufacturing, storing, or transporting goods. Effective communication and coordination across these tiers are crucial for a smooth flow of information and products The Bullwhip Effect This effect describes the amplification of demand volatility as it moves upstream in the supply chain, increasing unpredictability. More tiers in the chain can worsen variability, leading to issues like inventory shortages and surpluses. The Bullwhip Effect happens in a supply chain when small changes in customer demand cause much bigger changes in orders and inventory as you move up the chain from retailers to suppliers. It’s called the “bullwhip” because just like a small flick of the wrist can make a whip crack much harder, small shifts in customer orders can lead to huge swings in production and inventory levels further up the supply chain Imagine that a few people at your local supermarket buy extra toilet paper because they’re worried about a shortage. The store notices the shelves are emptying faster than usual and orders much more toilet paper from the warehouse to make sure they don’t run out. The warehouse, seeing this big order, assumes there’s a huge spike in demand and asks the manufacturer for a lot more toilet paper. The manufacturer, thinking demand is skyrocketing, speeds up production and orders more raw materials like wood pulp to make the toilet paper. In reality, only a small group of people bought extra toilet paper, but because each step in the supply chain overreacted, everyone ends up with way too much toilet paper, way more than people actually need Sources of the Bullwhip Effect Key sources include: Inaccurate forecasts Order batching Setup costs and transportation requirements Quantity discounts and promotions Price fluctuations Customer competition. Customers or traders may rush to buy or sell if they think others are going to, leading to a bigger impact than the original demand change Biases and behavioral concerns Consequences of the Bullwhip Effect Consequences include high inventory levels to avoid stock-outs, elevated holding costs, depreciation, inconsistent worker utilization (overtime or idle time(available but not used)), difficulties in coordinating with supply chain partners, transportation challenges, and potential lost sales due to stock-outs. Reducing the Bullwhip Effect To mitigate the Bullwhip Effect, strategies include: 1. Information sharing: Actual sales and available inventory should be shared with distributors, enabling better decisions on shipment volumes. 2. Vendor-managed inventory (VMI): Vendors directly manage the inventory for stores, enhancing coordination across the supply chain. 3. Practical concerns 4. The idea of coordination ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Lecture 2 The six main factors that influence how well a supply chain works are facilities, inventory, transportation, information, sourcing, and pricing. These factors are important because they help strike a balance between making the supply chain efficient and ensuring it can respond quickly to changes. factor of SC is Facilities Facilities are the physical locations where products are stored, assembled, or fabricated. Major types of facilities include production sites and storage sites. Examples of these include warehouses, distribution centers (DCs), manufacturing plants, ports, and terminals. There are also maintenance, repair, and operations (MRO) centers. The decisions related to facilities involve several components: Role (whether facilities are dedicated, flexible, or a combination), The role of production facilities can either be dedicated, where facilities are limited to certain types of products (e.g., an automobile manufacturing plant), or flexible, allowing for a range of products but at potentially reduced efficiency (e.g., an electronics assembly plant). For warehouses and distribution centers, firms decide whether they act as cross-docking or storage facilities. Cross-docking involves unloading products from inbound trucks, breaking them into smaller lots, and quickly loading them onto store-bound trucks. 1. Storage Example (Amazon): Amazon stores products in warehouses and ships them when customers order, allowing them to keep a large stock but with slightly longer delivery times. 2. Cross-Docking Example (Walmart): Walmart moves products quickly through its distribution centers without storing them, reducing costs and speeding up restocking in stores. Location (centralized vs. decentralized depending on proximity to customers, quality of workers, and facility costs), Another factor in facilities is location, which weighs centralization to gain economies of scale versus decentralization to improve responsiveness by being closer to customers. Other considerations include worker quality, facility costs, proximity to customers, and tax effects. Capacity (the maximum amount a facility can process), Layout (how the facility is physically arranged). Capacity measures a facility’s maximum processing ability, while utilization is the fraction of that capacity currently being used. Utilization can have both benefits (like maximized revenue and economies of scale) and challenges (such as overcapacity and limited flexibility). Facility layouts can vary from U-shaped, I-shaped, or L-shaped designs. U-Shaped: Compact design, where goods enter and exit near the same point, saving space and reducing worker travel. Great for warehouses needing efficient flow. I-Shaped: Straight-line flow, where goods move in one direction, ideal for fast, simple operations like assembly lines. L-Shaped: Goods move in an L-pattern, offering flexibility for separating processes and fitting into irregular spaces. Suitable for facilities with varied tasks Metrics related to facilities include Capacity, measuring how much a facility can process. Utilization, the proportion of that capacity currently used. Throughput, the amount of product produced or processed in a given time. Lead time, the time it takes for a product to move through the facility. factor of SC is Inventory Inventory includes raw materials, work-in-process, and finished goods within the supply chain. They’re used to: 1. Demand and Supply Changes: Extra stock handles unexpected changes. 2. Lead Time: Covers the time needed to make or get products. 3. Cost Savings: Bulk buying reduces costs, so extra stock is kept. 4. Seasonal/Promo Demand: Stock up for busy seasons and sales. 5. Customer Satisfaction: Ensures quick service and happy customers The key types of inventory decisions include: Cycle Inventory: This is the regular stock that a business keeps on hand to meet normal, ongoing customer demand between supplier deliveries. For example, if a company orders supplies once a month, the cycle inventory is what they use up in that month until the next delivery. Safety Inventory: This is extra stock kept as a safety net in case demand unexpectedly increases or if there are delays in getting new supplies.  This is extra stock kept as a safety net in case demand unexpectedly increases or if there are delays in getting new supplies. Think of it like an emergency backup. You don’t expect to use it, but it’s there just in case demand is higher than predicted. Seasonal Inventory: This is extra stock built up ahead of predictable busy times, like holidays or seasonal peaks in demand. For example, a toy company might build up seasonal inventory before the holiday season to meet the higher demand during that time. Cycle inventory is your day-to-day stock for regular operations. Safety inventory is there to cover any surprises, like sudden demand spikes or supply delays. Seasonal inventory is planned ahead for known busy periods when demand will be much higher. All three types of inventory can be managed within the same warehouse, but they serve different purposes depending on how the business operates and what kind of demand fluctuations they experience. key inventory-related metrics: 1. Material Flow Time: This is the time it takes for materials to go through the supply chain, from when they enter (raw materials) to when they exit (finished products). 2. Throughput: This is the rate at which products are sold or completed. Little’s Law: I=DxT I = Inventory D = Throughput (rate of sales or production) T = Flow time (how long the materials are in the system) Example: If an auto assembly process takes 10 hours to complete (T), and 60 units are produced per hour (D), then the total inventory (I) is: I = 60 x 10 = 600 units If the company wants to reduce the inventory to 300 units, they would need to reduce the flow time to 5 hours: 300/60 = 5 hours This shows that by reducing the amount of time materials spend in the system, the company can lower its inventory levels. factor of SC is Transportation Transportation refers to the movement of inventory from point to point within the supply chain. It connects suppliers, producers, and customers and directly impacts inventory levels and turnover, as seen in just-in-time (JIT) manufacturing, where products are created to meet demand. Transportation Decisions: 1. Transportation Network: Decides how and where products move, including the transport methods (truck, ship, etc.), routes, and locations. This ensures efficient delivery. 2. Design of the Network: Decides whether to: Ship directly to customers (fast but costly), Or go through hubs to consolidate shipments (cheaper but slower). Also decides whether deliveries will have multiple stops or not. 3. Choice of Transportation Mode: Chooses the best transport method (air, truck, rail, etc.) based on cost, speed, and product type. Metrics related to transportation include: Average inbound/outbound transportation cost, measuring the cost of moving goods into or out of facilities. Average shipment size, tracking the typical size of incoming and outgoing shipments. factor of SC is Information Information encompasses all data and analysis concerning facilities, inventory, transportation, costs, prices, and customers. It serves as the link between different supply chain stages, enabling coordination to maximize profitability. Information plays a key role in activities such as demand forecasting, inventory management, and supplier collaboration. Metrics related to information include: Forecast Horizon: How far ahead predictions are made. Frequency of Update: How often forecasts are updated. Forecast Error: The difference between predicted and actual demand. Seasonal Factors: Adjustments for demand changes during different seasons. Variance from Plan: Difference between planned vs. actual production or inventory levels factor of SC is Sourcing Sourcing refers to the set of business processes required to purchase goods and services. Key activities include: Supplier identification and evaluation, Negotiation and contract management, Supplier relationship management. continuous improvement and supplier development A key decision in sourcing is are: 1. In-house or Outsource: Decide whether to make products in-house or outsource to another company. Outsource if it increases overall profits without adding too much risk. 2. Supplier Selection: Choose how many suppliers are needed for a task. Set criteria to select and evaluate suppliers (e.g., cost, quality, reliability). Decide if suppliers should be chosen through direct negotiation or an auction. 3. Procurement: This is the process where the supplier delivers products in response to customer orders. factor of SC is Pricing Pricing is how a company decides how much to charge for its products or services. Pricing decisions are crucial because they affect: Demand: Different prices attract different customers. Customer Expectations: Pricing influences what customers expect in terms of quality or service. How Pricing Can Balance Supply and Demand: Adjusting prices can help balance how much of a product is available versus how much customers want it. For example, a discount can help sell extra products if there’s a surplus. Factors Affecting Pricing: 1. Cost Structure: The cost of making and selling the product. 2. Market Demand: How much customers want the product. 3. Competition: Prices set by competitors. 4. Economic Conditions: Inflation, economic growth, and how much money customers have to spend. 5. Regulations: Government rules, taxes, and tariffs. 6. Company Objectives: Goals like increasing market share, maximizing profits, or positioning the brand. Pricing Strategies: 1. Economies of Scale: Companies can reduce prices if they produce and sell in large quantities. 2. Everyday Low Pricing vs. High-Low Pricing: Everyday Low Pricing: Like Costco, prices stay low and steady over time to keep demand consistent. High-Low Pricing: Prices are higher, but discounts are offered periodically, creating demand spikes during the sale period. 3. Fixed Price vs. Menu Pricing: Fixed Price: One set price for all customers. Menu Pricing: Different prices based on factors like delivery speed or location. Pricing-Related Metrics: 1. Profit Margin: The percentage of revenue that is profit. Companies track various profit margins (gross, net, etc.) to optimize pricing. 2. Average Sale Price: The average price at which a product or service was sold during a specific period. 3. Average Order Size: The average number of items sold per order. In short, pricing is about finding the right balance between costs, market demand, and company goals to set a price that maximizes profits and meets customer expectations. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Lecture 3 Evaluating Process Capacity The lecture begins with an introduction to process analysis, focusing on several critical concepts, including the process flow diagram, capacity, bottleneck, flow rate, utilization, workload, and implied utilization. It also touches on handling multiple types of flow units in a process. Process analysis - Process Flow Diagram A process flow diagram is a graphical representation of a process. It helps in identifying and analyzing the process by defining the process boundaries and choosing an appropriate level of detail. For example, if you are studying patient waiting times in a hospital, you would define the flow units as patients. In a car manufacturing plant, the flow units would be cars. These diagrams use different symbols: Boxes represent activities performed by resources that add value to the flow unit and have a capacity (maximum number of flow units that can flow through the activity within a unit of time). Triangles indicate inventory/buffers, where items are held but do not add value to the process. Arrows represent the movement of flow units between activities and inventory points. Here’s a process flow diagram for patient flow in a hospital emergency department +-----------+ | Arrival | +-----------+ | v +---------------+ | Registration | +---------------+ | v +----------+ | Triage | +----------+ | v +-----------------+ | Waiting Room | (Inventory/Buffer) +-----------------+ | v +---------------+ | Consultation | +---------------+ | v +-------------------------+ | Discharge or Admission | +-------------------------+ Flow Units: Patients are the flow units moving through each step. Process Flow: The diagram visually maps out the patient journey. Bottlenecks: Identifying steps like Consultation that may cause delays due to limited capacity Process analysis - Capacity, bottleneck and flow rate Capacity is the highest amount of work or output that can be produced in a specific time period. There are two main types: Resource Capacity: The maximum output a single resource (like a machine or employee) can produce. Process Capacity: The maximum output the entire process (which includes all resources) can achieve Bottleneck The bottleneck is the resource with the smallest capacity in a process. Since every flow unit must pass through all resources, the bottleneck determines the overall process capacity. For instance, in an assembly line for producing bicycles, if all stations except the wheel attachment can handle 200 bicycles a day, but the wheel attachment station can only handle 100 bicycles, the bottleneck would be the wheel attachment station. As a result, the process capacity is constrained to 100 bicycles per day. Flow Rate (Throughput) Flow Rate is the actual output of a process—the speed at which units move through it. It depends on three factors: 1. Process Capacity: The maximum output the process can produce. 2. Demand: How much customers want. 3. Available Input: The materials or resources you have. The flow rate is determined by whichever of these is the smallest. So, the process’s output is limited by: Available Input: If materials are scarce. Demand: If customers want less than you can produce. Process Capacity: If the process can’t handle more. In simple terms: If demand is the limiting factor, the flow rate is demand-constrained. If capacity or input limits production, the flow rate is supply-constrained. Exercise: Process Analysis with One Flow Unit Given: Three resources with different processing times and workers. Goal: Determine the bottleneck, process capacity, and flow rate if demand is 8 units per hour. To find the bottleneck (the slowest step in the process) we need to calculate each resource capacity which is calculated as  Each resource’s capacity is calculated as: Resource 1: 0.2 units/min Resource 2: 0.1666 units/min Resource 3: 0.1875 units/min Process Capacity: Process capacity is limited by the lowest resource capacity, which is 0.1666 units per minute (or 10 units per hour) from Resource 2, making it the bottleneck Flow rate: The flow rate depends on both the process capacity and demand, whoever is the smallest. Between 10u/h of process capacity and 8u/h of demand 8 is smaller so flow rate is 8u/h The flow rate will be useful to calculate the time to process a certain quantity X Process analysis - Utilization Utilization is a measure of how much a resource or process is being used relative to its capacity. If demand is less than capacity or if supply is insufficient, the process may not be running at full utilization. Utilization is calculated as: The bottleneck in a process will have the highest utilization, and any increase in utilization must take into account the process’s goal, which is typically to maximize profit, not just utilization. Why Utilization Matters: High utilization (close to 100%) means the resource is almost fully used. Low utilization (much below 100%) suggests there’s extra capacity, which might indicate inefficiencies or excess resources. By calculating utilization, you can understand how efficiently each resource is being used in a process Example : What is the utilization of each resource if demand is eight units per hour? Steps to Calculate Utilization for Each Resource 1. Find the Flow Rate: Determine the actual flow rate going through each resource. 2. Divide the Flow Rate by Capacity: For each resource, divide its flow rate by its capacity to get utilization as a percentage The flow rate is determined by the process capacity or demand, whichever is lower. In the exercise, we calculated the process capacity as 10 units per hour, which comes from the bottleneck (the resource with the smallest capacity). Since demand is given as 8 units per hour, the flow rate is limited to 8 units per hour (we use the lower value between process capacity and demand) So, the flow rate of 0.1333 units per minute is based on the demand of 8 units per hour 1. Resource 1:  Capacity: 0.2 units per minute Flow Rate: 0.1333 units per minute Utilization of Resource 1 = 0.1333 / 0.2 = 66.66% 2. Resource 2: Capacity: 0.1666 units per minute Flow Rate: 0.1333 units per minute Utilization of Resource 2 = 0.1333 / 0.1666 = 80% (the bottleneck has the highest utilization of course ) 3. Resource 3: Capacity: 0.1875 units per minute Flow Rate: 0.1333 units per minute Utilization of Resource 3 = 0.1333 / 0.1875 = 71.11 Implied Utilization Implied utilization measures how much work a resource has to do compared to its maximum capacity, based on the demand. If implied utilization is over 100%, it means the demand is greater than what the resource can handle, indicating the resource can’t meet demand fully. In short, implied utilization shows if a resource is overloaded by demand, unlike regular utilization, which only shows actual usage within its limits. Process analysis - Multiple Types of Flow Units A process may deal with different types of flow units, like multiple product types or customer segments. In such cases, the analysis must take into account the different requirements for each flow unit type. For example, in an emergency room, life-threatening cases may follow a different flow than non-critical cases. exercise 1 An employment verification agency receives resumes from consulting firms and law firms. They need to validate the information provided by job candidates. This involves different types of applications (e.g., consulting, staff, and internship applications), each potentially following a different validation process. This process receives 3 consulting, 11 staff, and 4 internship applications per hour. The following table provides the capacities of each activity, in applications per hour. What is the bottleneck of this process? 1. Calculate Available Capacity for Each Resource For each resource, use this formula to find capacity (the maximum applications it can handle per hour): Available Capacity = 1 / Processing Time per Application * Number of Workers Example: If Processing Time per Application = 3 minutes Number of Workers = 1 Then: 1. Capacity per minute = 1 / 3 applications per minute 2. Multiply by 60 minutes to get capacity per hour: 1 / 3 * 60 = 20 applications per hour Repeat this for each resource. 2. Calculate Workload (Demand) for Each Resource For each type of application (consulting, staff, internship), calculate how much work it creates for each resource: Multiply the number of applications per hour by the time each application takes at that resource. Example:  3 consulting applications per hour Each takes 20 minutes for a resource Then: Workload for consulting = 3 * 20 = 60 minutes per hour Do this for each type of application and add them up to get the total workload for each resource. 3. Calculate Implied Utilization for Each Resource Calculate implied utilization to see if each resource can handle its workload: Implied Utilization = Total Workload (Demand) / Available Capacity Example: Workload = 14 applications per hour Available Capacity = 12 applications per hour Then: Implied Utilization = 14 / 12 = 1.17 or 117% If implied utilization is over 100%, the resource is overloaded and is a bottleneck. 4. Identify the Bottleneck The bottleneck is the resource with the highest implied utilization. If a resource has implied utilization over 100%, it cannot keep up with demand, which limits the process flow. This approach shows where the process slows down and which resources may need additional capacity. Exercise 2 Consider a process consisting of five resources that are operated eight hours per day. The process works on three different products, A, B, and C Demand for the three different products is as follows: product A, 40 units per day; product B, 50 units per day; and product C, 60 units per day. What is the bottleneck? What is the flow rate for each flow unit assuming that demand must be served in the mix described above (i.e., for every four units of A, there are five units of B and six units of C)? 1. Draw the Process Flow Diagram Sketch the steps in the process, showing how products A, B, and C move through each resource 2. Calculate Available Capacity for Each Resource Use this formula to find each resource’s maximum capacity (how many units it can process per day): Available Capacity = (1 / Processing Time per Unit) * Number of Workers * Minutes per Day For example, if Processing Time per Unit is 5 minutes, there are 2 workers, and they work 8 hours (or 480 minutes) per day 3. Calculate Capacity Needed for Each Product at Each Resource 1. Multiply the demand for each product (how many units are needed per day) by the processing time for that resource. For example, if Product A has demand of 40 units per day and takes 5 minutes per unit at a resource:  Capacity needed for Product A = 40 * 5 = 200 minutes per day. Repeat this for each product at each resource 4. Calculate Workload and Implied Utilization for Each Resource 1. Add up the capacity needed for all products at each resource to get the total workload. 2. Calculate implied utilization for each resource: Implied Utilization = Total Workload / Available Capacity For example, if Total Workload is 600 minutes per day, and Available Capacity is 480 minutes: Implied Utilization = 600 / 480 = 1.25 or 125% If implied utilization is over 100%, that resource can’t meet demand and becomes the bottleneck Resource 3 is the bottleneck: It’s the slowest resource, so it limits how fast we can produce Product A. 2. Reduced Production Rate for Product A: We originally wanted to produce 40 units of A per day, but Resource 3 can’t keep up. Based on Resource 3’s limited capacity, we can only make 32 units of A per day (or 4 units per hour). 3. Keeping the Production Ratio (4:5:6): Since Products A, B, and C need to be produced in a set ratio of 4:5:6, we adjust the rates for B and C accordingly. With A at 4 units per hour: Product B = 5 units per hour Product C = 6 units per hour Do exercise 3 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Lecture 4 Supply Chain Network Design Overview Supply chain network design refers to the strategic decisions around where facilities should be located, what role they play, and how much capacity they should have. These decisions are critical because they determine the overall cost, efficiency, and responsiveness of the supply chain. Key Decisions in Network Design: 1. Facility Role: Deciding what each facility does (like manufacturing or distribution) affects how well the supply chain can respond to demand changes. 2. Facility Location: Location is critical because moving facilities is costly and a bad location reduces efficiency by increasing transport time and costs. 3. Capacity Allocation: Setting the right capacity for each facility is key: Too much capacity wastes resources and increases costs. Too little capacity means the facility can’t respond quickly to demand 4. Market and Supply Allocation: Deciding which facilities will serve which markets and get supplies affects overall costs for production, inventory, and transportation Factors Influencing Supply Chain Network Design Several factors affect decisions on network design: Strategic Factors: A company’s competitive strategy influences how and where facilities are placed. For example: Cost Leadership: Facilities are located in low-cost regions to minimize expenses (e.g., Walmart manufactures in low-cost countries like Vietnam). Responsiveness: Facilities are placed closer to customers to improve delivery times (e.g., Zara locates its production near key European markets). Technological Factors: The production technology available influences network design. For instance: If there are economies of scale, fewer large facilities are more efficient (e.g., semiconductor plants). If the technology is flexible, more localized, smaller facilities can be established to reduce transportation costs (e.g., Coca- Cola’s bottling plants worldwide). Macroeconomic Factors: This includes taxes, tariffs, and exchange rates, all of which affect the cost structure of operating facilities. 1. Tariffs: Tariffs are fees for moving products across borders, which can raise costs. High tariffs often lead companies to build local plants to avoid these fees. With lower tariffs (thanks to agreements like the WTO or EU), companies can use fewer, larger facilities outside a country to serve its market without paying high duties. 2. Tax Incentives: Many countries offer tax breaks or reduced duties to attract foreign companies. Example: China’s Special Economic Zones (like Shenzhen) attract big companies with tax incentives, and Free Trade Zones, like the Shanghai FTZ, reduce import duties on raw materials, boosting export-oriented manufacturing. 3. Exchange Rates and Demand Risk: Currency exchange rates fluctuate, which can impact profits positively or negatively. A flexible supply chain allows companies to adjust production across markets to benefit from favorable rates or manage demand changes, helping them remain profitable. Political and Infrastructure Factors: The stability of the political environment and the quality of infrastructure (transportation, utilities, communication) also play a role. For example, firms prefer politically stable countries with well-defined rules for commerce and trade. Competitor Strategy and Location: Companies must consider where competitors are located, their strategies, and resources available. Example: Tesla’s Gigafactory in Nevada is close to competitors and suppliers in California. This location offers access to skilled workers, innovative suppliers, and shared infrastructure, improving logistics and reducing transportation costs. Positive Externalities: Sometimes, firms benefit by being close to each other (positive externalities), as it helps develop shared infrastructure, workforce, and other resources. Examples: Gas stations, retail stores, or shops in a mall cluster together to benefit from shared infrastructure and customer traffic. Locating to Split the Market: Companies may choose locations based on customer distribution. For example, if customers are spread along a line, two firms might locate near the center to capture equal market share. Equilibrium Strategy: If two firms aim to maximize market share, they may cluster near the center, even if it increases distance from some customers. However, if they compete on price, it may be more profitable to spread apart to avoid direct competition and reduce transportation costs for different customer segments Customer Response Time and Local Presence Companies that focus on fast customer response times tend to locate their facilities closer to customers. For example: Convenience stores are located in densely populated areas to minimize travel time for customers. Supermarkets are larger and more spread out, with fewer locations. Discount stores have even fewer locations, but offer lower prices due to economies of scale. Logistics and Facility Costs When designing a network, firms must balance the total logistics costs:  Inventory costs + Transportation costs + Facility costs Increasing the number of facilities raises inventory and facility costs but reduces transportation costs. On the other hand, reducing the number of facilities lowers inventory and facility costs but increases transportation costs. Framework for Network Design Decisions The framework for making network design decisions consists of four phases: Four Phases of Supply Chain Network Design (Connected and Simplified): Phase I: Define Supply Chain Strategy This phase sets the foundation by defining the broad structure and direction of the supply chain. Competitive Strategy: Identify the needs of your customers and ensure the supply chain can meet them. For example, if customers want fast delivery, the supply chain needs to be designed for speed. Global Competition: Consider both local and global competitors and how competition might change over time. Internal Constraints: Look at budget limits and decide if growth will come from building new facilities, partnering with others, or making acquisitions. Phase II: Regional Facility Configuration Next, decide on the best regions to locate facilities and their roles. Forecast Regional Demand: Estimate demand in each region, considering growth and specific local needs. Economies of Scale: If large facilities reduce costs, a few facilities might serve multiple regions. If not, each market might need its own facility. Risk and Incentives: Assess risks, like currency and political changes, and consider local benefits, such as tax breaks or trade restrictions. Phase III: Select Desirable Sites Once regions are chosen, find specific sites within those areas that support smooth operations. Infrastructure Needs: Look for locations with strong infrastructure. This includes reliable suppliers, transport options, utilities, and a skilled workforce. Also, consider local community support and workforce stability. Phase IV: Finalize Locations and Capacities Finally, choose exact locations and decide on facility capacities to maximize profits. Optimize the Network: Focus on balancing expected demand, costs, and profits. This includes considering local taxes, transportation, and facility expenses to make the network as efficient as possible. Each phase builds on the previous, creating a well-connected and strategic supply chain network that can adapt to customer needs and market conditions. Example 1: SunOil’s Global Network Design SunOil, a global petrochemical company, is deciding how to meet worldwide demand. They have two options: Option 1: Set up a facility in each region, which lowers transportation costs but doesn’t take full advantage of economies of scale. Option 2: Consolidate production in fewer regions, which improves economies of scale but raises transportation costs and import duties. SunOil collects data such as production, transportation, and inventory costs for each region. After using network optimization models, the company might decide to locate high-capacity plants in regions with lower costs and high demand. Models for Facility Location and Capacity Allocation Network Optimization Models After completing the main four phases of supply chain network design, Network Optimization Models should be seen as a support tool rather than an additional phase. It is an analytical model used to optimize and enhance the decisions around facility location, capacity allocation, and market assignment made in the previous phases Summary of the Role of Network Optimization Models: Calculating Costs and Profits: These models include all cost categories (production, transportation, inventory, taxes) to estimate the total profitability of the network. Simulation and Capacity Decisions: They allow testing of alternative configurations to see how costs and profits change, helping to optimize capacity allocation and placement. Adaptability: The models enable continuous updates and adjustments to keep the network optimized as new constraints or market changes arise Exercise 1: SunOil’s Global Network Design SunOil, a global petrochemical company, is deciding how to meet worldwide demand. They have two options: Option 1: Set up a facility in each region, which lowers transportation costs but doesn’t take full advantage of economies of scale. Option 2: Consolidate production in fewer regions, which improves economies of scale but raises transportation costs and import duties. SunOil collects data such as production, transportation, and inventory costs for each region. In Phase II of supply chain network design, the goal is to decide which regions are best for placing facilities and how much capacity each facility should have :After using network optimization models, the company might decide to locate high-capacity plants in regions with lower costs and high demand. For SunOil, the Vice President of Supply Chain decides to view the worldwide demand in terms of five regions-North America, South America, Europe, Africa, and Asia. Goal: SunOil’s Vice President of Supply Chain wants to find the lowest-cost setup, balancing production, transportation, and tariff costs to meet demand across all five regions. Step 1 Collecting data: annual demand (how much product is needed in each region) and costs —>variable production, inventory, and transportation cost (including tariffs and duties) of producing in one region to meet demand each individual region. Step 2 Input Formulation, you’re getting the data ready to feed into the optimization model, which will help you decide the best locations and capacities for SunOil’s plants. In Excel (or whatever tool you’re using for the model), set up the inputs clearly Rows for each supply region (e.g., North America, South America, etc.). Columns for each demand region (e.g., North America, South America). Cells for production and transportation costs between each region pair Step 3 Define Key Variables Definiamo due variabili principali che ci serviranno nel modello: yᵢ: Variabile che vale 1 se decidiamo di aprire un impianto nella regione i , 0 se non lo apriamo. xᵢⱼ: Quantità di unità prodotta in regione i e spedita alla regione j. Perché servono? yᵢ ci permette di indicare se in una certa regione avremo un impianto attivo oppure no. xᵢⱼ ci aiuta a calcolare quanto produrre in ogni impianto e come distribuire i prodotti per soddisfare la domanda di ogni regione Vincoli e Funzione Obiettivo Una volta organizzati i dati, impostiamo i vincoli e l’obiettivo del modello. 1. Vincoli: Vincolo di capacità: Ogni impianto può produrre al massimo la sua capacità (10 o 20 milioni di unità). Vincolo di domanda: Dobbiamo soddisfare esattamente la domanda in ciascuna regione (ad esempio, se Nord America ha bisogno di 12 milioni di unità, dobbiamo produrre e spedire 12 milioni di unità lì). 2. Funzione Obiettivo: Il nostro obiettivo è minimizzare i costi totali, che includono: Costi fissi per mantenere aperti gli impianti. Costi variabili per produrre e spedire unità da una regione all’altra Step 4: Formulazione del problema di ottimizzazione Usiamo le informazioni sopra per costruire un modello di ottimizzazione. Il modello prenderà tutti questi dati e calcolerà la combinazione di impianti e flussi di produzione e spedizione che minimizza i costi Come fare? L’obiettivo della formulazione è minimizzare i costi totali, che includono: Costi fissi per aprire e mantenere attivi gli impianti. Costi variabili per produrre e spedire le unità dai vari impianti alle regioni di domanda. L’equazione dell’obiettivo è: Prima parte \sum_{i=1}^{n} f_i y_i : Somma i costi fissi degli impianti aperti. Se un impianto i è aperto ( y_i = 1 ), paghiamo il suo costo fisso f_i ; se è chiuso ( y_i = 0 ), non paghiamo niente Seconda parte \sum_{i=1}^{n} \sum_{j=1}^{m} c_{ij} x_{ij} : Somma i costi di produzione e spedizione. Per ogni combinazione di impianto i e regione j , calcoliamo il costo di produrre e spedire ( c_{ij} x_{ij} ) L’obiettivo è quindi sommare tutti i costi fissi (se un impianto è aperto) e tutti i costi variabili di produzione e trasporto Vincoli: Anche se vogliamo minimizzare i costi, dobbiamo comunque assicurarci che: 1. Ogni regione riceva la quantità di prodotto che richiede. 2. Gli impianti non producano più della loro capacità massima Vincolo di domanda Cosa significa: La somma delle unità spedite dai vari impianti alla regione di domanda j deve essere uguale alla domanda D_j di quella regione Vincolo di capacità Cosa significa: La somma delle unità prodotte e spedite dall’impianto i non può superare la sua capacità K_i , a meno che  l’impianto non sia aperto ( y_i = 1 ) Vincolo sulle variabili Cosa significa: y_i : È una variabile binaria, quindi può essere solo 0 o 1. Se è 1, l’impianto i è aperto; se è 0, l’impianto è chiuso. x_{ij} > 0 : Non possiamo spedire quantità negative, quindi x_{ij} deve essere positivo o zero Constraints Summary 1. Demand: Each region receives exactly the amount of product it requires. 2. Capacity: Each plant cannot produce more than its maximum capacity. 3. Variables: Plants are either open (1) or closed (0), and the shipped quantities are positive or zero. These constraints ensure that the model is realistic and respects production and demand limitation Example 2: DryIce, Inc. DryIce, a manufacturer of air conditioners, is designing its manufacturing network to meet growing demand. The company anticipates demand of 180,000 units in the South, 120,000 in the Midwest, 110,000 in the East, and 100,000 in the West. The company has four potential sites for its plants: New York, Atlanta, Chicago, and San Diego. Each plant could have either 200,000 or 400,000 units of capacity. DryIce needs to decide which locations to choose and how large each plant should be, balancing fixed costs and the cost of producing and shipping air conditioners to each region. Gravity Location Models The Gravity Location Model is a method used to determine the best location for a facility by minimizing the total transportation costs for shipping goods between supply sources and demand points. In phase 3, a company needs to decide where exactly to put new facilities (like factories or warehouses) in each region they’ve chosen In this phase, a company needs to decide where exactly to put new facilities (like factories or warehouses) in each region they’ve chosen 1. Identify Potential Locations: The manager first looks at different spots within a region where the company could set up a facility. 2. Use the Gravity Location Model: This model helps choose the best location by finding a “balance point” in the region Gravity models assume that – Markets and supply sources are located as grid points on a plane. – Distances are calculated as geometric distance between points. – Transportation costs increase linearly with the quantity shipped. Exercise : Consider, Steel Appliances (SA), a manufacturer of high-quality refrigerators and cooking ranges. SA has one assembly factory located near Denver, from which it has supplied the entire United States. Demand has grown rapidly and the CEO of SA has decided to set up another factory to serve its eastern markets.  The supply chain manager is asked to find a suitable location for the new factory. Three parts plants located in city A, B, and C will supply parts to the new factory, which will serve markets in city D, E, F, G, and H. The coordinate location, the demand in each market, the required supply from each parts plant, and the shipping cost for each supply source or market are shown below. Step 1: Data Collection For each supply source (parts plant) and demand point (market): Record coordinates (x, y) for each point. Demand/Supply Quantities: Note the number of units to be shipped. Shipping Cost per Unit Distance: Record the cost to ship one unit per mile (or kilometer). For example, you might have data similar to: Step 2: Distance Calculation For each location, calculate the distance d(n) between the potential factory location (let’s call it x, y ) and each supply source or market. The distance formula is: where: x_n, y_n are the coordinates of the supply or demand location n. x, y are the coordinates of the factory location (this is what we need to find). Step 3: Total Transportation Cost (Objective Function) The goal is to minimize the total transportation cost (TC). This is calculated as: where: d_n : Distance from the factory to location n (calculated in Step 2). D_n : Demand or supply quantity for location n. F_n : Cost per unit distance for transporting to or from location n. Step 4: Use Solver to Find Optimal Location To find the best location (x, y) for the factory: 1. Input all data (coordinates, demand, supply, and costs) into Excel. 2. Set up a formula to calculate distances d_n from the factory’s potential location to each supply and demand point. 3. Set up a formula for total transportation cost, using the distances and other values. 4. Use Excel Solver to adjust x and y values to minimize the total transportation cost