ABSCM13 04 Network
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Transcript of ABSCM13 04 Network
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NETWORK DESIGN IN THE SUPPLY
CHAIN
Dr. Jabir Ali
Associate Professor
Centre for Food and Agribusiness Management,
Indian Institute of Management,Prabandh Nagar, Off Sitapur Road,
Lucknow - 226013, Uttar Pradesh, India
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Food Chain Structure
PrimaryProducer
Processing Distribution Retail
M
A
R
K
E
T
EconomicsTechnology
Social/ Legal Environment
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Production
Self Consumption
Market Surplus
Pvt. Procurement
Mandi Arrival
Open Market-Leakage
Spot Market
Mapping the Agriculture Commodity Flow in
Uttar Pradesh Rice & Wheat
Govt. Procurement PDS Consumers
What to do with the leakage? What efficient and innovative model can we suggest for linking
the farmers with the markets?
It is even more critical to understand the commodity chain for perishable products such as
fruits, vegetables, milk, meat etc
Rice = 10.81 Million tonnes
Wheat = 27.52 Million tonnes
Rice = 8.48 Million tonnes (78.4%)
Wheat = 13.73 Million tonnes (49.9%)
Rice = 2.33 Million tonnes
Wheat = 13.79 Million tonnes
Rice = 2.62 Million tonnes (30.9 % of MSR)
Wheat = 3.88 Million tonnes (28.2% of MSR)
Rice = 4.0 Million tonnes (47.5% of MSR)
Wheat = 8.3 Million tonnes (60.4% of MSR)
Rice = 1.8 Million tonnes (21.5% of MSR)Wheat = 1.6 Million tonnes (11.3% of MSR)
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Network Design Decisions
Facility role
What role should each facility play? What processes to be 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 allocationWhat markets should each facility serve? Which supply sources should feed each
facility?
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Factors Influencing
Network Design Decisions
Strategic
Technological
Macroeconomic
Political Infrastructure
Competitive
Logistics and facility costs
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Dimensions of Distribution Network
Design
Making chain responsive
Meeting customer servicesCustomer needs that
are met
Making the chain efficient
Minimizing the cost
Cost of meeting
customer needs
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Factors Influencing
Production and Distribution
Elements of customer service influenced by supply chain structure:
Response time: time taken for a customer to receive an order
Product variety: number of different products offered
Product availability: probability of having a product in stock
Customer experience: ease in placing order Time to market: bring a new product to the market
Order visibility: ability of customers to track their orders
Returnability: ease in returning unsatisfactory merchandise
Supply chain costs affected by supply chain structure:
Inventories Transportation
Facilities and handling
Information
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Service and Number of
Facilities
Number of Facilities
Response
Time
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Customer
DC
Where inventory needs to be for a one week order response time -
typical results --> 1 DC
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Customer
DC
Where inventory needs to be for a 5 day order response time -
typical results --> 2 DCs
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Customer
DC
Where inventory needs to be for a 3 day order response time -
typical results --> 5 DCs
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Customer
DC
Where inventory needs to be for a next day order response time -
typical results --> 13 DCs
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Customer
DC
Where inventory needs to be for a same day / next day order
response time - typical results --> 26 DCs
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Distribution network and chain
costs Changing the distribution network design
affects the following supply chain costs:
Inventories
Transportation
Facilities and handling
Information
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Costs and Number of
Facilities
Costs
Number of facilities
Inventory
Transportation
Facility costs
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Transportation
Cost Buildup as a Function of Facilities
CostofOpe
rations
Number of Facilities
Inventory
Facilities
Total Costs
Labor
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Design Options for a Distribution Network
There are two key decisions when designing a distribution network: Will product be delivered to the customer location or picked up from a
preordained site?
Will product flow through an intermediary (or intermediate location)?
Based on the choices for the two decisions, there are six distinct
distribution network designs that are classified as follows: Manufacturer storage with direct shipping
Manufacturer storage with direct shipping and in-transit merge
Distributor storage with package carrier delivery
Distributor storage with last mile delivery
Manufacturer / distributor storage with costumer pickup Retail storage with customer pickup
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Manufacturer
Retailer
Customers
Product Flow
Information Flow
Manufacturer Storage with
Direct Shipping
The biggest advantage of drop shipping is the ability tocentralize inventories at the manufacturer
Lower inventories by postponing customization until after the
customer order
Transportation costs are high with drop shipping because
the average outbound distance to the end consumer
Truckload (TL) or less-than-truckload (LTL) carriers
Response times tend to be large
also referred as drop shipping
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Performance Characteristics of Manufacturer
Storage with Direct Shipping Network
Cost Factor Performance
Inventory Lower costs because of aggregation. Benefits of aggregation are highest for low-demand, high-
value items. Benefits are very large if product customization can be postponed at the
manufacturer.
Transportation Higher transportation costs because of increased distance and disaggregate shipping
Facilities & Handling Lower facility costs because of aggregation. Some saving on handling costs if manufacturer can
manage small shipments or ship from production line.
Information Significant investment in information infrastructure to integrate manufacturer and retailer.
Service Factor Performance
Response Time Long response time of one to two weeks because of increased distance and two stages for order
processing. Response time may vary by product, thus complicating receiving.
Product variety Easy to provide a very high level of variety
Product availability Easy to provide a high level of product availability because of aggregation at manufacturer
Customer experience Good in terms of home delivery but can suffer if order from several manufacturers is sent as
partial shipments
Time to market Fast, with the product available as soon as the first unit is produced.
Order visibility More difficult but also more important from a customer service perspective.
Returnability Experience and difficult to implement
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Factories
Retailer
Product Flow
Information Flow
In-Transit Merge by Carrier
Customers
In-Transit Merge Network
In-transit merge combines pieces of orders
from different locations to provide single
delivery to consumers
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Cost Factor Performance
Inventory Similar to drop- shipping.
Transportation Somewhat lower-transportation costs than drop-shipping.
Facilities & Handling Handling costs higher than drop-shipping at carrier; receiving costs lower at customer.
Information Investment is somewhat higher than for drop-shipping.
Service Factor Performance
Response Time Similar to drop-shipping; may be marginally higher.
Product variety Similar to drop-shipping. High
Product availability Similar to drop-shipping. High level of product availability
Customer experience Better than drop-shipping because a single delivery has to be received.
Time to market Similar to drop-shipping. Fast
Order visibility Similar to drop-shipping. Difficult
Returnability Similar to drop-shipping. Difficult
Performance Characteristics of In-Transit
Merge
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Factories
Customers
Product Flow
Information Flow
Warehou se Storage by
Distr ibutor/Retai ler
Distributor Storage with
Carrier Delivery
Inventory is held at distributor/
retailers and package carriers are
used to deliver the product to
customer
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Performance Characteristics of
Distributor Storage with Carrier Delivery
Cost Factor Performance
Inventory Higher than manufacturer storage. Difference is not large for faster-moving
items.
Transportation Lower than manufacturer storage. Reduction is highest for faster-moving items.
Facilities & Handling Somewhat higher than manufacturer storage. The difference can be large for
very slow- moving items.
Information Simpler infrastructure compared to manufacturer storage.Service Factor Performance
Response Time Faster than manufacturer storage.
Product variety Lower than manufacturer storage.
Product availability Higher cost to provide the same level of availability as manufacturer storage.
Customer experience Better than manufacturer storage with drop-shipping.
Time to market Higher than manufacturer storage
Order visibility Easier than manufacturer storage
Returnability Easier than manufacturer storage
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Factories
Customers
Product Flow
Information Flow
Distributor/Retailer
Warehouse
Distributor Storage with
Last Mile Delivery
Inventory is held at distributor/
retailers and they deliver the
product to customer
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Performance Characteristics of Distributor
Storage with Last-Mile Delivery
Cost Factor Performance
Inventory Higher than distributor storage with package carrier delivery.
Transportation Very high cost given minimal scale economies. Higher than any other distribution
option.
Facilities & Handling Facility costs higher than manufacturer storage or distributor storage with package
carrier delivery, but lower than a chain of retail stores
Information Similar to distributor storage with package carrier delivery.Service Factor Performance
Response Time Very quick. Same day to next-day delivery.
Product variety Somewhat less than distributor storage with package carrier delivery but larger than
retail stores.
Product availability More expensive to provide availability than any other option except retail stores.
Customer experience Very good, particularly for bulky items.
Time to market Slightly higher than distributor storage with package carrier delivery
Order visibility Less of an issue and easier to implement than manufacturer storage or distributor
storage with package carrier delivery
Returnability Easier to implement than other options. Harder and more expensive than a retail
network
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Factories
Retailer
Pickup Sites
Product Flow
Information Flow
Cross Dock DC
Customer Flow
Customers
Manufacturer or Distributor Storage with
Customer Pickup
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Performance Characteristics of Network
with Consumer Pickup Sites
Cost Factor Performance
Inventory Can match any other option, depending on the location of inventory.
Transportation Lower than the use of package carriers, especially if using an existing delivery network.
Facilities & Handling Facility costs can be very high if new facilities have to be built. Costs are lower of existing
facilities are used. The increase in handling cost at the pickup site can be significant.
Information Significant investment in infrastructure required.
Servi ce Factor Performance
Response Time Similar to package carrier delivery with manufacturer or distributor storage. Same-day delivery
possible for items stored locally at pickup site.
Product variety Similar to other manufacturer or distributor storage options.
Product availability Similar to other manufacturer or distributor storage options.
Customer experience Lower than other options because of the lack of home delivery. In areas with high density ofpopulation, loss of convenience may be small.
Time to market Similar to manufacturer storage options.
Order visibility Difficult to manufacturer storage options.
Returnability Somewhat easier given that pickup location can handle returns.
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Performance Characteristics of Local
Storage at Consumer Pickup Sites
Cost Factor Performance
Inventory Higher than all other options.
Transportation Lower than all other options.
Facilities & Handling Higher than other options. The increase in handling cost at the pickup site can be
significant for online and phone orders
Information Some investment in infrastructure required for online and phone orders.
Service Factor Performance
Response Time Same-day (immediate) pickup possible for items stored locally at pickup site.
Product variety Lower than all other options.
Product availability More expensive to provide than all other options.
Customer experience Related to whether shopping is viewed as a positive or negative experience bycustomer.
Time to market Highest among distribution options.
Order visibility Trivial for in-store orders. Difficult, but essential, for online and phone orders.
Returnability Easier than order options given that pickup location can handle returns.
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PHASES IN SUPPLY CHAIN
NETWORK DESIGN
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A Framework for
Global Site Location
PHASE I
Supply Chain
Strategy
PHASE IIRegional Facility
Configuration
PHASE III
Desirable Sites
PHASE IV
Location Choices
Competitive STRATEGY
INTERNAL CONSTRAINTS
Capital, growth strategy,
existing network
PRODUCTION TECHNOLOGIES
Cost, Scale/Scope impact, supportrequired, flexibility
COMPETITIVE
ENVIRONMENT
PRODUCTION METHODS
Skill needs, response time
FACTOR COSTS
Labor, materials, site specific
GLOBAL COMPETITION
TARIFFS AND TAX
INCENTIVES
REGIONAL DEMAND
Size, growth, homogeneity,
local specifications
POLITICAL, EXCHANGE
RATE AND DEMAND RISK
AVAILABLEINFRASTRUCTURE
LOGISTICS COSTS
Transport, inventory, coordination
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Models for Facility Location and Capacity
Allocation
Goal: maximize the overall profitability of the resulting supply chainnetwork while providing customers with the appropriateresponsiveness
Trade-off: between revenue and costs
Information required: Location of supply sources and markets
Location of potential facility sites
Demand forecast by market
Facility, labour and material costs by sites
Transportation costs between each pair of sites
Inventory costs by site and as a function of quantity
Sale price of product in different regions Taxes and tariffs
Desired response time and other service factors
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Network Optimization Models
Allocating demand to production facilities Locating facilities and allocating capacity
Which p lants to establ ish? How to con f igure the network?
Key Costs:
Fixed facility cost Transportation cost
Production cost
Inventory cost
Coordination cost
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Network Optimization Model-Data
Requirement
Network Optimization Model requires following datainputs:
n=number of potential plant locations/ capacity
m=number of markets or demand pointsDj=annual demand from marketj
Ki=potential capacity of plant i
fi=annualized fixed cost of keeping factory iopen
cij=cost of producing and shipping one unit fromfactory ito marketj
yi=1 if plant iis open, 0 otherwise
xij=quantity shipped from plant ito marketj
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Demand Allocation and Supply Source Model
Which market is served by which plant? Which supply sources are used by a plant?
Objective: minimization of cost of meeting demand
niFory
mjFor
ts
Min
iKx
Dx
xc
i
m
jij
j
n
iij
n
i
m
j
ijij
,...,1,
,...,1,
..
1
1
1 1
Demand at each regional market be satisfied
No plant can supply more than its capacity
0,,........,11,0 iji xniFory Plant is either open or closed
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Case: SunOil
Inputs-Costs, Capabilities, Demands
SupplyRegion
Demand Region, Production and transportationcost per 1000000 units (000 USD)
Fixedcost ($)
Lowcapacity
Fixedcost ($)
Highcapacity
N.
America
S.
America
Europe Asia Africa
N.
America
81 92 101 130 115 6000 10 9000 20
S. America 117 77 108 98 100 4500 10 6750 20
Europe 102 105 95 119 111 6500 10 9750 20
Asia 115 125 90 59 74 4100 10 6150 20
Africa 142 100 103 105 71 4000 10 6000 20
Demand 12 8 14 16 7
Worksheet
http://localhost/var/www/apps/conversion/tmp/scratch_14/Network%20Design.xlshttp://localhost/var/www/apps/conversion/tmp/scratch_14/Network%20Design.xls