ABSCM13 04 Network

7/29/2019 ABSCM13 04 Network

1/35

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


2/35

Food Chain Structure

PrimaryProducer

Processing Distribution Retail

M

A

R

K

E

T

EconomicsTechnology

Social/ Legal Environment


3/35

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)


4/35

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?


5/35

Factors Influencing

Network Design Decisions

Strategic

Technological

Macroeconomic

Political Infrastructure

Competitive

Logistics and facility costs


6/35

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


7/35

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


8/35

Service and Number of

Facilities

Number of Facilities

Response

Time


9/35

Customer

DC

Where inventory needs to be for a one week order response time -

typical results --> 1 DC


10/35

Customer

DC

Where inventory needs to be for a 5 day order response time -

typical results --> 2 DCs


11/35

Customer

DC

Where inventory needs to be for a 3 day order response time -



12/35

Customer

DC

Where inventory needs to be for a next day order response time -



13/35

Customer

DC

Where inventory needs to be for a same day / next day order

response time - typical results --> 26 DCs


14/35

Distribution network and chain

costs Changing the distribution network design

affects the following supply chain costs:

Inventories

Transportation

Facilities and handling

Information


15/35

Costs and Number of

Facilities

Costs

Number of facilities

Inventory

Transportation

Facility costs


16/35

Transportation

Cost Buildup as a Function of Facilities

CostofOpe

rations

Number of Facilities

Inventory

Facilities

Total Costs

Labor


17/35

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


18/35

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


19/35

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


20/35

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


21/35


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.


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


22/35

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


23/35

Performance Characteristics of

Distributor Storage with Carrier Delivery


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


24/35

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


25/35

Performance Characteristics of Distributor

Storage with Last-Mile Delivery


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


26/35

Factories

Retailer

Pickup Sites

Product Flow

Information Flow

Cross Dock DC

Customer Flow

Customers

Manufacturer or Distributor Storage with

Customer Pickup


27/35

Performance Characteristics of Network

with Consumer Pickup Sites


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.


28/35

Performance Characteristics of Local

Storage at Consumer Pickup Sites


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.


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.


29/35

PHASES IN SUPPLY CHAIN

NETWORK DESIGN


30/35

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


31/35

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


32/35

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


33/35

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


34/35

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


35/35

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

Documents

ABSCM13 04 Network