Supply Chain Management Lecture 7. Outline Homework 1 Today –Introduction to Excel Solver –Start with Chapter 5 Thursday –Chapter 5 Skipping sections

Supply Chain Management

Lecture 7

Outline

• Homework 1• Today

– Introduction to Excel Solver– Start with Chapter 5

• Thursday– Chapter 5

• Skipping sections– Locating to Split the Market (3e: p. 120, 4e: p. 112)– Gravity Location Models (3e: p. 129-131, 4e: p.120-122)– Locating Plants and Warehouses Simultaneously (3e: p. 138-139, 4e: 129-131)– Accounting for Taxes, Tariffs and Customer Requirements (3e: p. 139-140, 4e p. 131-

132)

– Start with Chapter 6?– Homework 2

Design Options For a Distribution Network

Retailer

Manufacturers

Consumers

RetailerMergers

Consumers

Manufacturers

DistributorWarehouse

Manufacturers

Consumers



Manufacturers

Consumers



Manufacturers

Consumers


Retailer

Consumers

RetailerRetailer


Manufacturers


Example: Dell Network Design Decision

$19

$23

$31

Example: Dell Network Design Decision

Romenia Poland IrelandFrance 23 19 31Germany 9 15 11Italy 23 21 40Spain 29 26 40United Kingdom 33 36 20

Romenia Poland Ireland DemandFrance 23 19 31 15,000.00Germany 9 15 11 20,000.00Italy 23 21 40 13,000.00Spain 29 26 40 12,000.00United Kingdom 33 36 20 19,000.00

Romenia Poland Ireland DemandFrance 23 19 31 15,000.00Germany 9 15 11 20,000.00Italy 23 21 40 13,000.00Spain 29 26 40 12,000.00United Kingdom 33 36 20 19,000.00Capacity 80,000 80,000 80,000Cost 18,000,000.00$ 17,500,000.00$ 24,500,000.00$

What is an Optimization Problem• Generally, an optimization problem seeks a

solution where decisions need to be made in a constrained or limited resource environment– Most supply chain optimization problems require

matching demand and supply when one, the other, or both may be limited

• An optimization problem comprises of three major components– Decision variables– Constraints– Objective

Introduction to Excel Solver

• Installing Excel Solver– Goto Tools > Add-ins…– Select “Solver Add-in” and press OK

• Opening Excel Solver– Goto Tools > Solver

Example: Profit Maximization Problem

• The Windsor Glass Company is planning to launch two new products.– 8 feet glass door with aluminum framing– 4x6 feet window with wood framing

• Management of the company wants to determine what mixture of both products would be most profitable

Example: Profit Maximization Problem

Plant 1(Aluminum frames)

Plant 2(Wood frames)

Plant 3(Glass and assembly)

Windsor Glass Company

8 Feet Aluminum Frame Doors

1 hour

3 hours

2 hours

Profits

$3,000Excess cap. 4 hours

Excess cap. 12 hours

Excess cap. 18 hours

2 hours $5,000

4x6 Wood Frame Windows

Windsor Glass Company Model

• Inputs

• Decision variables– Xdoors number of batches of doors produced

– Xwindows number of batches of windows produced

Production time per batch (hours)Plant 1 Plant 2 Plant 3 Profit per batch

Doors 1 0 3 $3,000Windows 0 2 2 $5,000Available time (hours) 4 12 18


• Objective function– Maximize

3000 Xdoors + 5000 Xwindows




• Constraints– Hours available in Plant 1

Xdoors 4

– Hours available in Plant 22 Xwindows 12

– Hours available in Plant 33 Xdoors + 2 Xwindows 18

– Nonnegative production quantitiesXdoors 0, Xwindows 0






• Objective function– Maximize 3000 Xdoors + 5000 Xwindows

• Constraints– Xdoors <= 4 (Available hours Plant 1)

– 2 Xwindows <= 12 (Available hours Plant 2)

– 3 Xdoors + 2 Xwindows <= 18 (Available hours Plant 3)

– Xdoors, Xwindows >= 0 (nonnegativity)



Objective functionMaximize profit =SUMPRODUCT(E4:E5,H4:H5)


• Constraints– X1 <= 4 (Available hours Plant 1)

– 2 X2 <= 12 (Available hours Plant 2)

– 3 X1 + 2 X2 <= 18 (Available hours Plant 3)

– X1, X2 >= 0 (nonnegativity)

• Constraints– 0 <= 4 - Xdoors (Available hours Plant 1)

– 0 <= 12 - 2 Xwindows (Available hours Plant 2)

– 0 <= 18 - 3 Xdoors - 2 Xwindows (Available hours Plant 3)

– Xdoors, Xwindows >= 0 (nonnegativity)Constraints

Plant 1DoorsWindowsAvailable time (hours) =B6-SUMPRODUCT(B4:B5,H4:H5)





• Constraints– 0 <= 4 - Xdoors (Available hours Plant 1)

– 0 <= 12 - 2 Xwindows (Available hours Plant 2)

– 0 <= 18 - 3 Xdoors - 2 Xwindows (Available hours Plant 3)

– Xdoors, Xwindows >= 0 (nonnegativity)

Windsor Glass Company Model using Excel Solver

Objective function

Decision variables

Constraints

Windsor Glass Company Model using Excel

Inputs VariablesProduction time per batch (hours)Plant 1 Plant 2 Plant 3 Profit per batch

Doors 1 0 3 $3,000 Doors 2Windows 0 2 2 $5,000 Windows 6Available time (hours) 4 12 18

ConstraintsPlant 1 Plant 2 Plant 3 Profit per batch

DoorsWindowsAvailable time (hours) 2 0 0

Objective functionMaximize profit 36,000$

Supply Chain Network Design Decisions

• Facility role– What role should each facility play? What processes are

performed at each facility?

• Facility location– Where should facilities be located?

• Capacity allocation– How much capacity should be allocated to each facility?

• Market and supply allocation– What markets should each facility serve? Which supply sources

should feed each facility?

Example: Dell Market Allocation

What are the decisions?

What are the constraints?





• Constraints (Satisfy demand at each market)– 0 = 15,000 - XIreland,France - XPoland,France - XRomenia,France

– 0 = 20,000 - XIreland,Germany - XPoland,Germany - XRomenia,Germany

– 0 = 13,000 - XIreland,Italy - XPoland,Italy - XRomenia,Italy

– 0 = 12,000 - XIreland,Spain - XPoland,Spain - XRomenia,Spain

– 0 = 19,000 - XIreland,UK - XPoland,UK - XRomenia,UK

Romenia Poland Ireland DemandFrance 23 19 31 15,000Germany 9 15 11 20,000Italy 23 21 40 13,000Spain 29 26 40 12,000United Kingdom 33 36 20 19,000





• Constraints (Capacity cannot be exceeded)– 0 30,000

- XRomenia,France - XRomenia,Germany - XRomenia,Italy - XRomenia,Spain - XRomenia,UK

– 0 30,000 - XPoland,France - XPoland,Germany - XPoland,Italy - XPoland,Spain - XPoland,UK

– 0 30,000 - XIreland,France - XIreland,Germany - XIreland,Italy - XIreland,Spain - XIreland,UK

Romenia Poland Ireland DemandFrance 23 19 31 15,000Germany 9 15 11 20,000Italy 23 21 40 13,000Spain 29 26 40 12,000United Kingdom 33 36 20 19,000Capacity 30,000 30,000 30,000

Example: Dell Facility Location

? ??




• Constraints (Satisfy demand at each market)– 0 = 15,000 - XIreland,France - XPoland,France - XRomenia,France

– 0 = 20,000 - XIreland,Germany - XPoland,Germany - XRomenia,Germany

– 0 = 13,000 - XIreland,Italy - XPoland,Italy - XRomenia,Italy

– 0 = 12,000 - XIreland,Spain - XPoland,Spain - XRomenia,Spain

– 0 = 19,000 - XIreland,UK - XPoland,UK - XRomenia,UK

Romenia Poland Ireland DemandFrance 23 19 31 15,000Germany 9 15 11 20,000Italy 23 21 40 13,000Spain 29 26 40 12,000United Kingdom 33 36 20 19,000


• Constraints (Capacity cannot be exceeded)– 0 30,000*YRomenia

- XRomenia,France - XRomenia,Germany - XRomenia,Italy - XRomenia,Spain - XRomenia,UK

– 0 30,000*YPoland - XPoland,France - XPoland,Germany - XPoland,Italy - XPoland,Spain - XPoland,UK

– 0 30,000*YIreland - XIreland,France - XIreland,Germany - XIreland,Italy - XIreland,Spain - XIreland,UK Romenia Poland Ireland Demand

France 23 19 31 15,000Germany 9 15 11 20,000Italy 23 21 40 13,000Spain 29 26 40 12,000United Kingdom 33 36 20 19,000Capacity 80,000 80,000 80,000Fixed operating cost 18,000,000.00$ 17,500,000.00$ 24,500,000.00$

Supply Chain Network Design Decisions

Site location matters. Indeed, it has become a more critical decision for supply chain leaders as supply chains have stretched, companies have expanded, and transportation costs have soared. Today, a poor location decision can have much greater and more immediate effects on operating efficiencies and cash flow.

Yet it is surprising how few of the executives responsible for the location of a new distribution center (DC) or production facility can explain the basic principles behind choosing the location. In fact, it is alarming that more and more business leaders are relying on the results of sophisticated computer analyses to make their location decisions without fully understanding the underlying logic—or its potential impact on their supply chains

Source: John T. Mentzer -- Supply Chain Management Review, 5/1/2008

Factor Influencing Network Design Decisions

• Customer response time– Maintain a balance between an inexpensive location and proximity

to customers. Don't get too close, or go too far away

Pull

PushLocal FG Inventory

Regional FG Inventory

Central FG Inventory

Custom production and Central Raw Material

Custom production and raw material at suppliers

High

Low

Cost

HighLow Response time

Central WIP Inventory

Regional WIP Inventory


• Logistics and facility costs– Inventory and facility costs increase as the number of facilities

increase– Transportation costs decrease (up to a point) as the number of

facilities increase

LogisticsCosts

Number of Facilities

Transportation Costs

Facility Costs

Logistics Costs

Inventory Costs


• Strategic factors

GlobalCustomers

Offshore<low-cost>

<exports only>Many Asian plants

Source<low-cost>

<global market>Nike plants in Korea

Regional Customers

Server<local market><avoid tariffs>

Suziki’s Indian ventureMaruti

Contributor<customization>

<development skills>Maruti

Lead<advanced technology>

Lockheed Martin’s JSF in Dallas

Outpost<access to

knowledge>Dell in Ireland

Strategic role


• Macroeconomic factors– Quotas, tariffs, and tax incentives

• Economic trade agreements: Nafta, EU, APTA, AFTZ

– Exchange rate and demand risk– Different states or countries often offer economic incentives to

companies that decide to set up shop there, including tax incentives and low-interest economic development loans

How can trade agreements influence the number of facilities in a supply chain?


• Political factors– Political stability

• Infrastructure factors– Availability of transportation terminals, labor

• Most of Amazon’s distribution centers are located near airports

• Competitive factors– Positive externalities (many stores in a mall makes it more

convenient for customers – one location for everything the customers need)

Should you locate your facility close to your competitors or far from them?


• Technological factors– Compare your supplies to the final product, considering whether

value, weight, volume or other factors change – Availability of production technologies– High or low fixed cost

• Semiconductor manufacturing takes place only in 5-6 countries worldwide (building one plant costs about 1 to 4 billion dollars)

Which products gain/lose weight in the production process?

Documents

Supply Chain Management Lecture 7. Outline Homework 1 Today –Introduction to Excel Solver –Start with Chapter 5 Thursday –Chapter 5 Skipping sections