MGT 235
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11212018161045.pdf
Supply Chain
Design
Many of you have probably shopped at apparel stores such as the Gap, Old Navy, or Banana Republic. Apparel supply chains typically begin at farms that grow raw materials such as cotton. Textile mills then weave the raw materials into fabrics for makrng T-shirts, jeans, and other ciothing items. Factories then cut and sew the fabrics into finished goods, which are then transported to retail stores for sale to consumers. For clothing manufacturers, which rely greatly on manual labor, the suppiy chain has significant implications for social responsibiliLy and sustainability.
The Gap is one company that takes this seriously. As they note. "Gap Inc. seeks to ensure that the neonle
working at various points along the supply charn are treated with fairness, dignity and respect-an aspiration that is born out of the belief that each Iife is of equal value, whether the person is sitting behind a sewing machine at a factory that produces clothes for Gap Inc., working at one of our stores, or wearing a pair of our jeans. We know that our efforts to improve the lives of people who work on behalf of our company help us run a more successful business. People who work a reasonable number of hours in a safe and healthy environment not only have a better quality of life, but they also tend to be more productive and deliver higher-quality products than those who work in poor conditions."l
LEARNING OBJECTIVES After studying this chapter, you should be able to:
@ (D
Explain the concept of a global supply chain and describe the key design decisions.
Describe the key trade-offs that managers must consider in designing supply chains, and how to evaluate outsourcing and offshoring decisions.
@ oescribe how Inditex/Zara designs and operates its supply clrain.
Explain the types of decisions required and criteria used to lc cate facilities in supply chains, and be able to apply the center of gravity method.
@ nxntain how the transportation model can be used to help optimize costs in supply chains.
WHAT DO YOU THINK?
We introduced the concept of a supply chain in Chapter l, noting that a supply chain is a key subsystem of a value chain that focuses prirnarily on the physical rnovement of goods and rnaterials along with supporting information
1 06 PARTTWO: Designing Operations and Supply Charns
through the supply, production, and distribution pro- cesses. Organizations face numerous decjsions in de- signing their supply chains. These decisions include the
number, type, and location of manufacturing plants,
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For the Gap and other clothing manufacturers, the supply chain has signif icant implications for social responsibility and sustainability.
distribution centers, retail stores, and custorner semc: or technical support centers; the selection of supplierr; ways of managing inforrnation flow throughout the sup- ply chain; and the integration of'all the pieces into arr effective, efficient system. The location of factories, dis- tribution centers, and service facilities establisl-res the in- frastructure {br the supply chain trnd has a major imparc on profitability.
Poor supply chain design can undermine the strat egy of t]re {irrn zrnd can easily result in lower revenue market share, and profits. As a firm's product lines anc markets change or expand, the design or redesign o1' supply chains becomes even more a critical issue. In ad dition, as companies merge and consolidate, they fhce
l- I The location of factories,I I distribut j-on centers,I
and service facilities establishes the
infrastructure for the supply'chain and has a m IaJor I
impact on profitability. I --l
many challenges and must reevaluate their supply chains and locations of facilities.
In this chapter, we focus on tl're design of the supply chain that sets the infrastructure for day-to-day operat- ing decisions. In Chapter 12, we will focus on rnanagntg such tasks as sourcing and purchasing, supplier relation- ships, logistics and transportation, managing inventory clealing with risk, and cost analysis in supply chains.
GLOBAL SUPPIY CI|AINS
Altliough not every organization operates in the global business environrnent, modern technology and distribu- tion have made it feasible and attractive fbr: botli large and srnall companies to develop supply chains tlrat span international bound- ar:ies. A multinational enterprise I s a n org o n i zo - tion that sources, markets, ond produces its goods ond services in several countries to minimize costs, and to moximize profit, customer
CHAPTER 6: Supply Chain Design 107
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sotisfaction, ond social welfore. Exarnples of multinational
enterprises include British Petroleum, General Elec-
tric, dnited Parcel Serwice, Siemens, Procter & Gamble'
Toyota, and the Internationbl Red Cross' Their value
"}rnirm provide the capability to source, market, cre-
ate, and deliver their goods and serwices to customers
worldwide. Multinational enterprises operate complex supply
chaius that cliallenge operations managers' In today's
elobal business environment, good supply chain design
"an lead to rnajor reductions in total supply chain costs
and improvements in customer response tirne
o-ra Decisions in Supply Chain Design
Operations lntrnagers must make numerous decisions in
designing global supply chains. Some of the major deci-
sions, which are not inclusive of all the issues and decisions
tliat global supply chain executives f'ace, are sumrnarized
in Edribit 6.1. Many of these decisions are strategic and should slrpport an olganization's strategy, mission,
and cornpetitive priorities. Others, such as selectingtrans-
portation modes and measuring performance, are tactical
^nd l.rfl,r"n"e how supply chains are rnanaged on a day-
to-day basis; these issues are addressed in Chapter: 12'
We will briefly discuss each of these.
ndustrialized countries and.1Ue rapid growth of
;ilit; economies while considering cultural differences? 6iiiii,ilO" *a eeniratize'or oecentralize control of the suppl r,chain?
'lijliii;i,i,il?ji:in:ff;:"t:;iil,3"1*i. ,iiJ'".'].i"l; a.u.iop"n, orrices, carr c€nt6rs, and warehoyse.snd drstribution
;iie;i; il;;oo,u;"in to proviae etficiencies and improvo gusto,me1.r11r1e] 3"fiT,'.'llffir:Hj#ilXJ:'#.fi;;;'"#;i;, ;;;i';;;;; ur,lnJ'o.i.t sustainabirity soars and
practices,ih slolar ''''
;::iy"::1f.'3o- we sfrare ?:l]::ll*:v^'S.::l:5""r prol rerlv with suppriers and partners in other countries? lf so' how do
we protect intellectual property' patents, ancl rlghts/
Dlgatsl content,,How do *" ullliJr^Jitt"gr.ti digit.l:contelrt and e-commerce capabilities into goods and services and the
3'iir'J|;l:'i,t". whom do we purchase raw materials, parts' rnd :ybt-::"-TPliY r.ogi"irci,",ro lrynrnort*ionidil;;il;ion"ro$,
ti r , ship, air, rait, or truck) should we use to maxlmiz" t"tl:: io
,
Sffit]ilfi:ttirhat supply chain activities do we keep in-house or outsource to suppliers (either domesticallv or abroad)? Do we
:outsourc6.to-contract manufactur€rs or use third-party logisti';s providers? . .Managlng risk. How do we address supply chain ris[t "na
a sruptions? Wtrat is our risk mitigation plan?
iil;;;;;i";.';*o,'"n"".fur,iip"*oi''n.'metticsshouldweuseinmanagingsupp|ychains?
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F Strategr-Supply chains should support
an organizationi strategy, mission,
and compeLitive
priorities. In Chapter 3, we
provided an overall
framework for developing corporate, marketing, and
operations strates' and subsequent design decisions'
Executives, for example, might choose a supply charn
that is highly efficient versus one that is more flexible
for its particular industry and market' Different q'?es
of supply chains may better fit the slower growth of
induitriahzed countries or the more rapid growth of
ernerging economies.
Control-A second supply chain design decision is centralization versus decentralization' Ihe
operational structure of o supply choin isthe
configurotion of resources such as suppliers, factories,
worehouses, distributors, technicol support centers,
engineering design and sales offices, ond communication
/lnks. Different management shlls are required
{br diffeient operational stmctures, For example,
Wahnart's global supply chain, though very large,
is focused on purchasing and distrlbution, and is
controlled frorn a centralized location in Bentonville,
Arkansas. In contrast, General Electrics supply
chain, which encompasses such diverse businesses
as rnedical imaging, jet engines, and electrical power
generation, are all quite di{ferent. Each business
is u profit center with its own unique market and
opeiating conditions. Consequently, the operational
structure is decentralized globally.
Location-The location of facilities in a supply chain has a significant impact on cost and customer
service. Later: in this chapter we will discuss how
to evaluate location decisions and present some
simple approaches and quantitative models that aid
in these decisions.
Sustainability-sustainability ls a key issue in
supply chains, and we often hear about this in
1 0B PARTTWO: Designing Operations and Supply Chains
the media (often quite negatively). We introduced the basic ideas of sustainability in Chapter 1. Sustainability issues, concepts, and methods are liighlighted throughout this book. Upward of 60 to 70 percent of a company,s carbon footprint is found along their supply chain.s.
Technology-D ealing witli intellectual pr:operty is an irnportant issue for multinational entelprises. Technologlz often provides a competitive edge, and licensing it to firrns in other countries c"rrJ"ud to risks. Protecting and honoring patents from other countries is also a constant topic in global trade negotiations. And, as noted in Chapter 1, patents do not protect services.
Digital content-Digital content in goods and services is becoming increasingly important. Products such as autornobiles, appliances, or cell phones are often enhanced with digital content by means of the "Internet of Things."
l- I A sing Le supplier I often provides
economies of scale and the ability to form close
partnerships ; however, mu1tip1,: suppliers lower the .i; of a I supply rlisruption.
I
transportation, information systems, and technical support to suppliers either dornestically or abroad. These decisions have a major impact on product and supply chain cost and control. and the trade-offs are seldom easy to make.
L Managing risks-In Chapter 12, we discuss risk management of the supply chain. These risks are both strategic
Sourcing-selecting suppliers from whorr to purchase is a key design decision that also ties closely with the location decision. A key sourcing decision is whether to use a single source or mulUpll sources. A single supplier olien provides econornies of scale and tle ability to form close partnerships; however, rruJtiple suppliers lower the risk of a supply disruphon.
Logistics and transportation_Transportation is more complex in global supply chains. Global shipments often require mulUple modes of transportation, such as water shipping, aia rail, and truck. The transportation infrastructure may vary considerably in foreign countries. The coast of'China, for e"ample, enjoys rnuch better transportation, distribution, and retail infrastructures than the interior ofthe country Outsourcing-Many companles outsource activities such as manufacturing, logistics and
and tactical and require every company to develop a risk mitigation strategy and plan.
F. Measuring performance-Almost every chapter contains concepts and methods for measuring performance at all levels of the organization. fue will focus on measuring supply chiin performance in Chapter 12.
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Executiveshave many trade-offs to consider when clesign- ing a supply chain. We see many examples of di{ferent Tpply chain design structures in a variety of industries. For exarnple, most major airlines
"rrd truci.irre firms sucl.r
as United Airlines and UpS operate ..hub_andlspoke,,svs_
tems; some firms such as Apple and Nike depend on "orr_tract manufbcturers to manufacture almost 100 percent
CHAPTER 6: Supply Chain Design 1 09
of their physical goods;while others like Harley Davidson and Allen-Edmonds Shoe Corporation produce ailmost I00 percent o{' their manufactured goods in company- owned factories. Here we discuss some key design trade- offs in supply chains.
o-za Efficient and Responsive Supply Chains
Supply chains can be designed from two strategic- perspectives-providing high efficiency and low cost, or providing agile response. Efficient supply chains ore designed for efficiency and low cost by minimizing inven- tory ond maximizing efficiencies in process flow. L focus on efficiency works best for goods and services with highly predictable demand, stable product lines with long life cycies that do not change frequently, and low contribu- tion margins. In designing an efficient supply cl-rain, for example, an organization would seek to balance capacity and dernand, resulting in low levels of inventory; might use only a few, large distribution centers (as opposed to small ones) to generate economies of scale; and use opti- mization models that minimize costs of routing products from {'actory through distribution centers to retail stores and customers. Examples of companies that run effi- cient supply chains are Procter & Gamble and Walmart.
On the other hand, responsive supply chains fo- cus on flexibility and responsive service and ore oble to react quickly
to changing market demond ond requirements. A focus on flexibility and response is best wheu demand is unpre- dictable; product life cycles are short and change often because of product innovations; fast response is the main competitive priority; customers require customization;
o-zu Push and Pull Systems
TWo ways to configure and run a supply chain are as a push system or pull system. A supply chain can be viewed from "left to right"-that is, materials, information, and goods are rnoved or pushed downstream from supplier to cus- tomer. A push system producesgoodsinodvanceof customel demand using a forecast of sales ond moves them through the sup-
ply choin to points of sale, where they are stored os finished-goods
inventory. Examples of push systems are "big-box" retailers such as Best Buy and department stores such as Macys. A push system has several advantages, such as immediate availability of goods to customers and the ability to reduce transportation costs by using {ull-truckload shipments to move goods to distribution centers. However, some disad- vantages edst. Forecasting can be difficult when customer demand changes quickly, which either can result in higher costs from excessive stock or out-of-stock conditions. Push systems work best when sales patterns are consistent and when there are few distribution centers and products.
and contribution margins are high, Responsive sup- ply chains have the abil- ity to quickly respond to market changes and con- ditions faster than tradi- tional supply chains; are supported by information technology that provides real-tirne. accurate in- formation to managers across the supply cliain; and use information to identify market changes and redirect resources to address these changes. Companies such as Apple and Nordstrom are exarn- ples of companies having responsive supply chains.
PARTTWOT Designing Operations and Supply Chains
In contrast, viewing tlie supply chain from "right to left" and transferring demand to upstream processes is sometimes referred to as a demand chctin or pull system. A pufl system produces only whot is needed at upstreom stages in the supply choin in response to customer demand signals from
downstream srages. Pliysical goods are "pulled" by cus- tomer demand through each stage of the supply chain. That is, ideally, if we sell one unit, we make one unit; if we sell ten units, we make ten units; and so on. This minimizes inventory and production costs. Pull systems generally reduce the chances of having excessive inven- tory but can result in shortages if customer demand sud- denly increases or if schedules are missed. Pull systems are rlore effective when there are many production fa- cilities, many points of distribution, and rrany products.
Dell, for example, introduced the idea o{'a make-to- order supply chain design to the computer industry and has long been recognizedfor outstanding practices in this
Delllnc.
Inventory held at suppliers
GeneralMotors
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E-*El*ffi*ffi rF
Inventory held as finished
goods
arer. Dell pulls component parts into its factories base,l on actual customer orders and carries no finished goocJs inventory relying on information technology to drive it; supply chain. This also provides the customer with th,: newest technologl rather than a finished computer tha! has been sitting in a warehouse for months. Suppliers, component part delivery schedules must match Dell's fac tory assembly schedules, which in turn must be integratec with shipping schedules. Each {'actory worldwide is re_ scheduled every two hours, and at the same time updates are sent to all third-party suppliers and logistics p.ouid"r,
Other examples of pull systems are airplane manu_ facturers such as Boeing, and manufacturers of custom machine tools. Pull systems are becoming easier to man_ age because of better information technoloey such as cloud computing. Having up-to-date data on J"l"r, *un_ ufacturing, shipments en route, and so on can helo to eliminate inventories and move toward more effecti re pull system confi gurations.
Many supply chains are combinations of push and puJl systems. This can be seen in the simpli{ied version ofseveral supply chains in Exhibit 6.2. The point in the supply choin that seporates the push system from the pull system is colled the push_ pull boundary. For a company like Dell, the push_pull boundary is very early in the supply chain, where ,rppti_ ers store inventory for frequent deliver:ies to Dell factorles. Dell also ships directlyto the customer, shpping the distrib_ utors and retailers. General Motors stores finished goods closer to the customer, at dealers. General Motors pushes finished goods fiom its factories to the deale. De"l"., might lnstall various options to customize the automobile
for dre customer. Customers pull the finished goods from the dealer. Thus, the push-pull boundary fbr General Mo_ tors is at the dealers.
The location of the push-pull boundary can affect a supply chain's responsivity. Many firms try to push as much of the finislied product as possible close to the cus_ tomer to speed up response and reduce work_in_process inventory requirements. Postponement 15 the process of deloying product customization until the product is closet to the cus- tomerattheendof thesupplychain. Anexample is a manufac_ turer of refrigerators that have different door styles and colors. A postponement strategy would be to manufacture the refrigerator without the door and maintain invento_ ries of doors at the distribution centers. When orders ar_ rive, the doors can be quickly attached to the left or right side of the refrigerator and the unit can be shipped. T"his postponement approach allows customers to buy exactlv what they need while manufacturers reduce their inven_ tory and installation costs.
Although supply chains can have a profoundly posi_ tive effect on business performance, supply chain initia_ tives do not always work out as one would hope. Nike, for example, spent about $500 million on develop- ing a global supply chain over the last couple of decades, and only now is it beginning to reap the benefits of this long, costly supply chain design and improvement initiative.
CHAPTER 6: Supply Chain Design 1 1 1
contrast, todays automobile production is characterized by a complex il"*o.k of f suppliers. Decentralizing supply
t cnaln acnuues lessens rne con- - lr trol that a {irm has over cost. quality, and other important business metrics, and often leads to higher levels of risk. ln theZara/lnditex example, we will see I that tlrc compan)/ uses a high degree of I vertical integration t r"l,i:i.:,Tl
aof the rnajor stages of its supply clrarn. -
a-zc Vertical Integration, 0utsourcing, and Offshoring Decisions
One of the most important strategic decisions a firm can rnake about its supply chain is whet}er to vertically inte- grate or outsource key business processes and functions. Vertical integration refers to the process of acquiring ond con- solidating elements of a value choin to achieve more confrol Some
firms might consolidate all processes for a specific product
or product line in a single facility; for example, Henry Ford's
early factories did everything frorn steelmaking to final as- sembly. Although such a stratery provides more control, it adds rnore complexity to managing the supply chain. In
manu{'acturers of chemicals and advanced rnaterials. a form of forward integration. Recently, Delta Air Lines purchased a $150 million refinery in an elfort to reduce its expenses for jet fuel-the largest expense for an air- line, and also the most difTicult to forecast and manage.
Outsourcing is the process of having suppliers provide goods and services thot were previously provided internally. Outsourcing is the opposite of vertical integration in the sense that dre organization is shedding (not acquiring) a part ofits orga- nization. The organization that outsources does not have ownership of the outsourced process or function. Some large U.S. banks and airlines, for example, have outsourced their telephone call service ceinters to third-party suppliers
I within or outside the United States. I The United States has experienced three
;| waves ol outsourcrlrg:-3q ,ri#k*rffini* E t Companies relied on /oreign factories fi,{ for the production of computer A
components, electronics, and many E other goods. Gibson Guitars, for example, produces E its Epiphone line in Korea. o T]re second wave involved sinryIe senilce usork
such as standard credit card processing, billing, keying information into computers, and writing simple software programs. Accenture, for exarnple, has information technology and bookkeeping operations in Costa Rica.
The third and current wave involves skllled knowledge u.,ork such as engineering design,
graphic artists, architectural plans, call center
customer service representatives, and computer chip design. For exarnple, Fluor Colporation of Aliso Viejo, California, uses engineers and draftspeople in the Philippines, Poland, and India to develop detailed blueprints and specs for industrial construction and improvement projects.2
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Companies rrust decide whether to integrate backward (acquiring suppliers) or forward (acquir- ing distributors), or both. Backward integration refers to acquiring capabilities toward suppliers, whereas tor- ward integration refers to ocquiring capabilities toword distribution, or even customers. Large companies such as Motorola, Siemens, and Sony have the resources to
build facilities in foreign countries and develop a high level of vertical integration. Their objec- tive is to own or control most, if not all, of the supply chain. Many large
chemical manufacturers, {br example, such as Du- Pont, British Petroleunr, Haimen Jiangbin, and GFS Chemicals, are buy- ing raw material suppliers and integrating back- ward. At the same time, chemical companies in industrial countries are acquiring smaller and more profitable specialty
Many supply chains use contract manufacturing for their outsourcing strategy. ,4 contlact manufacturer is a firm thot speciolizes in certoin types of goods-producing ac-
tivities, such as customized design, manufocturing, assembly,
and pockoging, and works under contract for end users. Out- sourcing to contract manufacturers can offer significant competitive advantages such as access to advanced man- ufacturing technologies, faster product time-to-market, customization of goods in regional markets, and lower total costs resulting frorn economies of scale. The main
112 PART TWo: Designing Operations and Supply Chains
Greatwide Logistics Services, which was formed by cc,nsolidating nine regional 3PLs in the United States, works with six of the top 10 gro(ery retailers and wholesalers in the United States, as well as such customers as Walnrart, Tyson, and Nordstrom. lt uses business analytics to forecast demand and build models to leverage the capacity of its nationally centralized system, which uses satelliles to track the locations of 5,000 truck tractors and over 10,000 trailers. By comb ning different customer needs and schedules, shipments can piggyback on another :ustomer's shipment or use trucks on the return leg of a regular run. This leads to higher efficiency and cost savings for all customers. As one example, efficient routing and coordination of vendor delivery dates have led to a 21 percent reduction in transportation costs for one private-label spice manufacturer.3
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disadvantage of using a contract manufacturer is th: t the client lirm gives up control and its technology tI the contract manufacturer. We will discuss break-eve r analysis for outsourcing decisions in the next sectior . Finally, the degree of vertical integration forward or bachvard in the supply chain is an irnportant decisio r for executives of the {irm.
Many firms also use third-party logistics (3PL) ptoviders-businesses that provide integroted services thct might include packaging, warehousing, inventory monogemen:,
and inbound or outbound transportation 3PLs can leverag,: business intelligence and analytics to create efficien- cies and economies oI' scale in the supply chain (se,: the box on Greatwide Logistics Services). Zappos is r good example of using 3PLs for customer deliveries, re- turns, and some inbound shipping from Asian f'actorie-.. Toshiba used to have repair locations across the countrl, whereas UPS warehoused its parts. UPS suggested thirt Toshiba move its repair technicians into UPS facilities, which resulted in a 24-hour turnaround Ibr compute. r:epairs. It also saved transportation costs, lowered inven- tories, and reduced the carbon {botprint. 3PLs provid<r rnany services that help integrate and coordinate dif{'er ent parts of a supply chain.a
6-2d The Economics of Outsourcing Decisions
The simplest outsourcing decision is make versur; buy. This is usually based on economics, and break even analysis can be used to provide insight into thr,
best decision. If a company decides to rnake a part, it typically incurs fixed costs associated with purchasing equipment or setting up a production line, as well as a variable cost per unit. Fixed costs do not vary with volume and often include costs of a building, buying, or leasing equipment, and administrative costs. How- ever, the variable cost per unit will normally be more if the work is outsourced to some external supplier. Variable costs are a function ofthe quantity produced and might include labor, transportation, and rnateri- als costs.
Define
VC., : Variable cosVunit if produced in-house YCr: Variable cosVunit (i.e., purchase price/unit) if
outsourced
FC : Fixed costs associated with producing the part in-house
Q : Quantity produced (volume)
Then
Total cost of production : (VCr)Q + FC Total cost of outsourcing = (VCr)Q
[6.1] [6.2]
If the total cost o{' outsourcing is less than the total cost of in-house production, then clearly outsourcing is the bet- ter decision; if not, then the firm should produce inhouse.
CHAPTER 6: Supply Chain Design 1 1 3
At a time when more than 98 percent of all shoes sold in tne United States are made in other countries, Allen-Edmonds Shoe ( orp. is a lonely holdout against offshoring. Moving to China could have saved the company as much as 60 percent. However, John Stollenwerk, chief executive, will not compromise on quality and believes that Allen-Edmonds can make better shoes and serve customers faster in the United States. An experiment in producing one model in portugal
resulted in lining that wasn't quite right and stitching that wasn't as fine. Stollenwerk noted "we could take out a few stitches and you'd never notice it-and then we could take out a few more. Pretty soon you've cheapened the product, and you don't stand for what you're about.',s Instead, Allen-Edmonds invested more than S1 million to completely overhaul its nranufacturing process into a leaner, more efficient system that could reduce the cost of each pair of shoes by 5 perce rt. One year after implementing its new production processes, productivity was up 30 percent; damages were (lown l4 percent; and order fulfillment neared 100 percent, enabling the company to serve customers better than ever.6
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We may also find the break-even quantity to iden- ti{y the ranges of values fbr which outsourcing or in- house production would be ihe best decision. To find the break-even quantity, set the total cost ofproduction equal to the total cost of outsourcing and solve for Q:
(vC,)Q: Uc,)Q + FC
(vc,)Q - vcr)Q: FC (vc,_ vct)Q : FC
Tl-re break-even quantity is
value creation, support, and./or general management processes should move to other countries. For example, a company might move a soda-bottling {bctory from the United States to India. The company benefits from lower wages, avoiding country trade tariffs, and access to local markets and customers. Recently, we have seen a number of foreign firms offshore and build factories in the United States. For example, the British company Rolls-Royce makes jet engine parts in the United States lbr assembly in Europe and Asia, taking advantage of lower energy costs and a more stable economic environment; Mercedes, BMW Lexus, and others produce vehicles in the United States, Mexico, and Canada to be closer to custorners.
Some global trade experts recommend keeping some primary processes or key parts of a manufactur- ing process out of foreign lands to protect the firm's core competencies. We can pose four possible scenarios. In the first scenario, all key processes remain in the home country even though the firm sells its products overseas. An exarnple would be Harley-Davidson. The second scenario represents a low degree of o{fshoring in which some noncritical support processes are moved overseas. Examples would be Microsoft and American Express.
A third scenario is for a company to offshore many of its primary as well as support processes while keeping its management processes consolidated at the colporate headquarters as Coca-Cola and FedEx do. Finally, truly global multinational firms such as Procter & Gamble, General Electric, and Honda locate all of their key
O*: FC' vc"- vc, [6.3] If Q is less than Q., then the least-cost decision is to
outsource; otherwise, it is to produce in-house. Whenever the anticipated volume is greater th* Q", the {irm should produce the part in-house; otherwise it is best to outsource.
e-ze 0ffshoring and Reshoring
Offshoring is the building, acquiring, or moving of process capobilities from o domestic locotion to onother countty locotion
while maintoining ownership and control. Offshoring differs from outsourcing in that the lirm maintains own- ership of the facility in another country.
Offshoring decisions involve determining what
1 1 4 PART TWO: Designing Operations and Supply Chains
SOLVED PROBLEM 6.1
Suppose that a manufacturer needs to produce a custc m aluminum housing for a special customer order. Becau:;e it currently does not have the equipment necessary to make the housing, it would have to acquire machines and tooling at a fixed cost (net of salvage value after th: project is completed) of 5250,000. The variable cost of production is estimated to be 520 per unit. The company can outsource the housing to a metal fabricator at a corit of 535 per unit.The customer order is for 12,000 units. What should it do?
Solution: VC, : Variable cost/unit if produced = 520 VC, = Variable cost/unit if outsourced = S35 FC : Fixed costs associated with producing
the part = 5250,000 Q: Quantity produced
Using Equation 6.1, we find that the total cost of oroduction is
(S20)(12,000) + S2s0,000 = 5490,000
1
2
3
4
5
I iPtoout"a In-House
8l
,to jourrour."o
Flxod
Unlt variable
Using Equation 6.2, the total cost of outsourcing is
(53sXl 2,000) : 5420,000 Therefore, outsourcing is less expensive. Alternatively,
using Equation 6.3, we obtain
Q*: 250,000
35-20 :16,667
In this case, because the customer order is only for 12,000 units, which is less than the break-even point (Q), the least-cost decision is to outsource the component.
Exhibit 6.3 shows the results of using the Excel Break- Even Template available in the OM6 SpreadsheetTemplates
to compute the costs and find the optimal decision.The Excel Goal Seek tool may be used to find the break-even point. Select Goal Seek from the appropriate Excel menu, and a small dialog box will appear. In the"Set Cell"field, enter 815 (or simply click on this cell); in the"ToValue"field, enter 0; and in the"By changing cell"field, enter 84 (or
again, simply click on the cell). When you click OK, Excel will find the production volume in cell 84 that results in a cost difference of 0 in cell B l5.This is the break-even point.
F-,*rrE:ry?qr
r5 AA
15
L6
Total In-House Production Cost Total Outsourced Cost
Cost dlfference (ln-House - Outsourced)
processes across the globe {br more effective coordi- nation and local management. The global alignmentr, of course, may change over time. The third and fourtlr
scenarios might leave the llrm vulnerable to protecting trade secrets or losing first-hand knowledge of how to manufacture their own products.
A f
I Outsourclng Break-€ven Analysis lEnter data only ln yellow cells. i
cost cost
cost
12.000
s2s0,000.0c
s20.0c
S3s,oc
CHAPTER 6: Supply Chain Design 1 15
trconomrc reasons
Noneconomic reasons
The decision to offshore involves a variety of eco- nornic and noneconomic issues. Exhibit 6.4 summarrzes the key issues in these decisions.
When many mtrnufacturers began o{I'shoring to Asia in the early 1990s, ihey were focused strictly on low labor cost. This cost differential is narrowing. In ad- dition, offshoring can create numerous problerns. For instance, the logistics of shipping from Asia can be com- plex. Travel expenses for executives and other employees needed to teach or rnonitor operations can mount up. Quality is more diflicult to control, as is enforcing intel- lectual property rigbts. Some foreign manufacturers, for exarnple, began using inf'erior materials or parts despite contractual trgreements. When all these factors are con- sidered, some argue tliat the total cost of production in the United States is actually cheaper. As a result, many firrrs are br:inging operations back to the United States.T
Reshoring is the process of moving operations bock to o compony's domestic location. For example, American Giant, an appar:el company that makes popular sweat- shirts, rnoved its sourcing back to the United States from India and lbund tliat it is easier to manage the supply chain. When solvents caused blotting on T-shirts at tlre Los Angeles factory, the issue was fixed in just a few hours with only about I0 yards of fabric
wasted; had the company been sour:cing fabric from India, it could have taken weeks, resulting in a loss of thousands of yards of {abric.8 A nonprofit organization,
understand tlie total cost of of{.shoring, so they can make rnore in{brmed decisions.
@i-xilFf,! i^,';i'J,'#l To gain a better understanding oI'global supply chains and supply chain design decisions, we present a case study of Inditex and its flagship brand, Zara. Then we briefly show how InditexZara made supply chain design decisions similar to those descr:ibed in Exhibit 6.1.
Inditex (www.inditex.corn) is a global fashion retailer based in La Coruna, Spain. Its most-recognized brand is Zara, with approximately 6,900 stores in over 85 countries speaking 45 di{ferent languages. To be success{ul in I'ash- ion, companies must continually provide the latest prod- ucts and capitalize on tomorrow's trends, not yesterday! (a-s
they say on "Project Runway': "In fashion, one day you'r:e in; the next day you're out!"). What makes Zara unique is a value chain model that fbcuses on two beuic rules: "Give
customers what they want, and get it to them {hster than anyone else."e As an example, Zara delivers new items to its stores twice weekly, taking less than two weeks fi'orn de- sign to delivery! To accornplish this, the company must understand changing consumer trends and have the agility to rapidly produce and deliver appealing products that will sell befbre consumer tastes change again. This requires a highly responsive supply chain that seamlesslylinks market sensing, design, and production plocesses with custorners.
Exlibit 6.5 illustrzrtes the key elernents of Inditex's global supply chain, which uses over 5,300 firctories
the Reshoring Initiative (www.reshorenow.org) seeks to revitalize U.S. manufacturing by help- ing companies better
1 16 PARTTWO: Designing Operations and Supply Chains
stages of its supply cliain. They ern- ploy exhaustive controls over product design, the selection and quality o{' raw materials, and end-of-product- li{'e recycling initiatives. Inditex uses 2B third-party laboratories around the world to test its r:aw materials and dyes, products, and processes to ensure custolner saf'ety and comfor:t, and environrnerrtal well-being.
Business analytics is used to monitor and predict customer-buy- ing behavior and supply chain per{br- mance. To avoid overstocks of items tl"rat don't sell, the contpany initially sends only a few orders fbr new styles but can quickly deliver rnore if they
become hot-selling items. Store managers report this in- formation daily through point-o{'-sale infbrmation. Mar- keting analysts then study the data and the voice ofthe customer (acquired by the sales stall), monitor trencls fi'oln {'ashion leader:s in Paris and Milan, and even track blogs to ensure that their goods meet di{ferent custorner needs in each region. Inditex'.s products appear in mul- tiple social media channels, in its cornmercials. trnd in
€
Iocerted in over 50 countries. It sources locally when por si- ble; in Spain, for example, over 60 percent of its suppli,:rs are located near textile and garment {hctories. However, they also outsource to over 1,600 suppliers worldwide.
Their supply chain design can also be viewed as rnore of a pull system, bec:ruse point-of-sale data drir es niany flexible production processes. Zara uses a lrigh c e- gree of vertical integration to control rnany of the major
II Measuroment and Fcedback I I
;
CHAPTER 6: Supply Chain Design 117
over 20 corporate videos on topics like design, social responsibility, customer service, logistics, and fashion.
Design in{brmation is communiczrted to a tearn of in-house designers who quickly develop new designs and send thern to factories to be manufactured. So. instead of producing up to six months in advance o{'the selling season, Inditex observes what goods are selling, makes rnore of thern, and elirninates those that aren't selling, without having to keep and discount outdated inventory.
Zar:r uses its own highly autorrated pattem-cutting fac- tofies and subcontracts labor-intensive sewing and {inish- ing work to rnor:e than 300 srnall regional {'acllities in Spain, Portugal, and Morocco (called "proximity sourcing"); it also outsources some production to Asian factories. More than half'of its production is per{ormed close to its design and distribution cen- ters in about a dozen cornpany- owned factories. This approach is sirnilar to "lean manu{hcturing" and exploits the principles of the Toyota production systern, which we will describe in Chapter 17. In contrast, most other f'ashion re-
all its l)rocesses r must be srrstainable
I and resDonsible - |
it is understood to be a responsibility that is shared by all Inditext members of staf{. . . . All of these [sup- pliers], as well as each factory where production is carried out, must be exphcitly bound by the values o{' social and environmental responsibility that defines Inditex, through the Department of Colporate Social Responsibility, the Department of the Environment and the commercial and purchasing teams. Inditex guarantees its customers products that meet the most exacting health and safety standards.r0 The company's animtll welfare policies and production
standards, for example, are world class regarding animal shns, fur, and wool, and how the animals are to be treated.
As part of Inditex's governing stnrcture, the firm has a Com- mittee of Risks that constantly evaluates supply chain risks such as shipping disruptions, chemical and dye spills and accidents, and data security breaches.
Zara's global supply chain addresses rnany of the key sup- ply chain decisions described in Exhibit 6.1. For example:
I t*itex' s I model is
the prer
business based on ise that
tailers outsource all their rnanufacturing to Asia to reduce labor costs, resulting in slow supply chains tlrat require the designer:s to rnake early sqrle and volume commitments well aliead of the selling season. Although proxirnity sourc- ilrg is more costly, the ability of Inditex's supply chain to quicldy change styles, ramp up manufacturing, and deliver goods to its stores allows them to capitalize on the hottest trends and offset the labor costs by increased revenue.
inbound transportation to warehouse hubs is nor- mally by air, ship, irnd truck. Outbound shipments to all retail stores twice weekly are delivered by truck and air cargo. In fact, its supply clrain can deliver most goods in 24 hours in Europe and the United States, and in 48 hours in Asia and Lzrtin America. Air transportation is used {br rnost htgh-{ashion and hot-selling items. Automated warehouses move clothing quickly to retail stores. One of tlieir supply chain management principles is the "trirce- ability' of all raw rnaterials and finislred goods from sup- pliers to factories to warehouses and to each retail store.
Sustainability and risk management are also impor- tant components of Inditex's supply chain. In its 2012 annual report the company states:
Inditex's business model is based on the premise that all its processes must be sustainable and responsible. This concept of sustainability in Inditex not only cov- ers the entire value chain but :rlso considered the focal point ofall its strategic decisions. In this regard,
Zara defined aclear strategy and rnakes sourcing and facility location decisions based on its strategy. Zara {hvors keeping key operational activities such as suppliers and warehouses close to its factories,
Altliough the firm outsources wlren appropriate, it rnaintains a high degree of supply chain control. They have resisted the industry trend to trans{'er their fast-fashion production approach to developing countries.
TIre firm exploits technology and business trnalytics to run its factories and design clothing faster than competitors, and uses digital content for marketing and promoting its products and philosophy.
Air transportation is an integral part of quickly creating and delivering what the customer wants.
Tlrey carefully rnanage supplg chain risks associated with over- or undersupply. If a new design item, for example, does not sell within a lbw weeks ofbeing in the stores, they cancel all orders and pursue a new design.
Tlre {irrn clearly works to champion sustainabilitq wherever it can.
Finally, Zara measures the performance o{'its supply chain through traceability of raw rnaterials and finished goods.
PARTTWO: Designing Operations and Supply Chains
LOCATION DECISIONS
The principal goal of a supply chtrin is to provide custcn- ers with accurate and quick l€sponse to their orders at he lowest possible cost. This requires a network of f'acilir ies that trre located strategically in the supply chain. Faci ity networking and location {bcuses on deterr-nining the best network structure and geographical locations fbr facilities to maximize service and revenue, and to minimize cor;ts. These decisions can becorne complex, especially fo. a global supply chain, which must consider shipping ccsts between all demand and supply points in tlre networ:k, fixed operating costs of each distribution and,/or retail [a- cility, revenue generation per customer location, {'acility labor and operating costs, and construction costs.
F' , ,-;
Larger {irms have more complex location decisions. Tbey nright liave to position a large nurnber of fhctories ar d distribution centers advantageously with respect to suppJi- ers, retail outlets, and each other. Rarely are these deci- sions made simultaneously Tl,pically, factories are locate d with respect to suppliers and a fixed set o{'distribution cerr- ters, or distribution centers are located with respect to a fixed set of'factories and markets. A ftrm rnight also choose to locate a ftrcility in a new geograpliic region not only to provide cost or seMce e{ficiencies but also to create cu , tural ties between the {irrn and the local community.
Location is also critical in services. A grei t serwicescape and fircility layout can seldom overcome :l poor location decision, simply because custorners may not have convenient access, which is one of the rnost irnportant requirements {br a servjce facility. Serwice Ib- cilities such as post ollices, branch banks, dentist oflices, and {ire stations tlpically need to be in close proxirnit.,z to the custorner. In many cases, the customer travels trl the seMce I'acility, whereas in others, such as mobil,r
X-ray and imaging centers or "on-call" conrputer-repair services, the service travels to the custorner.
Many service organizations operate large numbers of similar facilities. Multisite management is the process of manoging geogrophicolly dispersed service-providing focilities. F or example, McDonalds has over 30,000 restaurants world- wide plus hundreds of food-processing factories and distri- bution centers. Federal Express has over I rnillion pickup and delivery sites worldwide, plus hundreds oi'sorting and distribution facilities. Sorne major banks have over 5,000 branch banks, plus thousands of'ATM locations. Supply chains are vital to multisite management, and in each of these cases it can be difficult to design a good supplychain.
Criteria {br locating these facilities dif'fer depend- ing on the nature ol'the service. For exanrple, service {'acilities that custorners travel to, such as public librar-
ies and urgent-care facilities, seek to minimi,ze the aoerage or ntaxirrutm distance or traoel tima recluired from among the customer population. For those that travel to customer locations, such as fire stations, the location deci- sion seeks to minimize response tirne to customers.
a-+a Gritical Factors in Location Decisions
Location decisions in supply and value chains are based on both economic and noneconomic factors. For exarnple, althougli the Gap, Banana Republic,
and Old Navy are part of tlie sarne corporation, each firm locates its factories dilI'erently. The Gap makes its goods in Mexico to provide rnore agility in supplying the North American market; Old Navy sources in China to keep costs down; and Banana Republic has facilities in Italy in order to be close to fashion innovations. Exhibit 6.6 is a list of some important location f'actors for site selection. Eco- nomic factors include facility costs such as construction, utilities, insuran ce, taxes, depreciation, and maintenance; operating costs, including fuel, direct labor, and adminis- trzrtive personnel; and transportation costs associated with moving goods and services from their origins to the final destinations, or the opportunity cost of customers coming to the f'acility. Audi, for instance, is building its {irst plant in North America-in Mexico-to exploit free-trade agree- ments that allow thern to ship cars duty free to the United States and better manage exchange- rate fluctuations.
'oj
CHAPTER 6: Supply Chain Design 119
Economic criteria are not ahvays the most im- porttrnt factors in such decisions. Sornetimes locatiorr decisions are based upon strategic objectives such as preernpting conrpetitors frorn entering a geographical region. New {iicilities also require large anrounts ol'c:rp- ital investrnent and, once built, cannot easily be moved. Moreover, location decisions also afl'ect the manage- ment of operations at lower levels o{ the organization. For instance, if a rn:rnufacturing {'acility is located far {rorn sources of raw rnaterials, it may take a consider- able arnount of time to deliver an order. and there will be more uncerteilnty as to the actual time of delivery. Noneconornic lirctors in location decisions include the availability of labor, transportation services, and utili- ties; climate, cornmunity environment, and quality of li{'e; and state and local legal and politictrl f'actors. These must be balanced with economic factors in arriving :rt a location decision that meets {inancial as we}l as cus- tomer and oper:rtional needs.
6-3b location Decision Process
Facility location is typically conducted hierarchically and involves the folbwing fbur basic decisions where appropriate.
Global Location Decision Many cornpanies rnust cope with issues of global operations such as time zones,
120 PARTTWO: Designing Operations and Supply Chains
Housing and roads
K-12 schools
Climate and living conditions
Universities and research facilities
Community attitudes
Health care facilities
Property costs
Cost of living
Payroll taxes
Local and state tax structure
Taxation climate and policies
upponuntry ror highway advertising
Tax incentives and abatements
Zoning laws
Hoalth and safety laws
Regulatory agencies and policies
{breign lrrngutrges, inter:n ational funds tr:ansf'er, customs, tari{i's, and other trade restrictions, packaging, interna- tional rnonetary policy, and cultural practices. The global location decision involves evaluating the product portfb- lio, new marlcet opportunities, changes in regulatory laws and procedures, pr:oduction and delivery economics, sus-
tainabiliry and the cost to locate in difl'erent countries. With this in{brmation, the company needs to determine wl-rether it should locate domestically or in another coun- try; what countries are most arnenable to setting up a {'a- cility (and what countries to avoid); and how important it is to establish a local presence in other regions of'the world. The decision by Mercedes-Benz to locate in Alzr- bama was based on the fact that German labor costs were
about 50 percent higher than labor costs in the southern United States; the plant also gives the company better in- roads into the American mtrrket and lunctions as a kind o1 laboratory for I'uture global-manufactu ri ng ven tu res.
Regional Lo<ation Decision The regional location clecision involves choosing a general region of a coun- try such as the northeast or south. Factors that afi'ect the regional decision include size ol'the target market, tlre locations o{' rrajor customers and sources of' mate- rials and supply; labor availability and costs; degree of unionization; land, construction, and utility costs; quality of life: and climate.
Customer access
Demand and markets
Sourcing
Ability to retain labor force
Availabilitv of adeouate labor skills
Labor ret6s :
Location of competitors
Volume of traffic around location (i.e., traffic congestion)
Minimize distance traveled (i.e., convenience)
Closeness to markets
Closeness to sources of supply
Adequacy of transportation modes (i.e., air, truck, train, wated
Costs of transportation
Visibility of the facility from the highway
Parking capability
Inbound and outbound driving time for employees and customers
Fuel availability
Waste Cisposal
Water ;upply
Power rupply
Local energy costs
Comm rnications . capabil ty
Price/c, )st
Utility regulatory laws and pre ctices
SOLVED PROBLEM 6.2
The following data are related to the operating costs of three possible locations for Fountains Manufacturino:
Location 1 Location 2 Location 3
Solution: Compute the total cost associated with annual production. For example, the direct material cost at location 1 is (58.50X50,000 units) : $425,000, summarized as follows:
Total Costs Location I Location 2 Location 3
Fixed costs
Direct mate- rial cost per
unit
Direct labor cost per unit
Overhead per
unit
5165,000
58.s0
54.20
S 1.20
512s,000 5180,000 58.40 58.60
53.90
51. r0
s 1.10
53.70
s 1.00
So.9s
Fixed costs
Direct material
Direct labor
Overhead
Transportation
5165,000
5425,000
5210,000
560,000
540,000
s 12s,000
5420,000
s 19s,000
5ss,000
5ss,000
5180,000
s430,000
s 18s,000
550,000
547,500
Transportation 50.80 cost per unit
Which location would minimize the total costs, given annual production of 50,000 units?
5
6
7
I 9
Total $900,000 5850,000 5892,500 Based on total manufacturing and distribution costs, location 2 would be best. Exhibit 6.7 shows the Excel Location Analysis template, which can be used to perform these calculations.
Locatlon 2
Community Location Decision The community Iocation decision involves selecting a specific city or community in rvhich to locate. In addition to the fac- tors cited previously, a company would consider man- agers' prefel'ences, community sewices and taxes (as well as tax incentives), trvailable transportation sys- terns, banking services, and environmental impacts.
Mercedes-Benz settled on Vance, Alabama, after con- sidering sites in 30 di{I'erent states. Alabama pledged $250 million in tax abatements and other incentives. and the local business community came up with $11 mil- lion. The community also submitted a plan for how it would help the farnilies o{'German workers adiust to li{'e in that community.
rsl 16i 1a
18
rsi
CHAPTER 6: Supply Chain Design 121
Local Site Location Decision The site location decision involves the selection of a particular location within the chosen community. Site costs, proximity to transportation systems, utilities, payroll and local taxes, sustainability issues, and zoning restrictions are among
the factors to be considered.
Researchers at the University of Tennessee de- veloped a tool to help organizations assess their sup- ply chain location decisions, identitying the strengths, weaknesses, opportunities, and threats ofthe different regions in the world. Called the EPIC {iamework, it
provides the structure for assessing various regions around the globe for supply chain readiness from eco- nomic (E), political (P), infrastructural (I) and compe- terrce (C) perspectives. The framework measures and assesses the levels of "maturity" held by a geographic region, with specific respect to its ability to support supply chain activities. The {bur EPIC dimensions are then assessed using a set of variables associated with each dimension. Exhibit 6.8 summarizes the key var:i- ables and supply chain network design issues in the EPIC framework.rl
Economy
Politics
GDP and GDP Growth Rate '
Population Size .
, Retail store location : I . ,,
lr ,,,,1
Supply network-node location .
,
Retail store location
:
Ecommerce vs. retail store-. ' : Foreign Direct Investment Manufacturing location:: ':-. Exchange Rate Stability & CPI
Balance ofTrade . Ease o{ Doing Business
Legal & Begulatory Framework
Risk of Political Stability
Intellectual Property Rights
Manufacturing location
.Sourcing & mqlqtacturing loealion
Retail store location
Supply network-node location
Sourcing & manu{acturing location
Retail store location
Supply network- node location
Sourcrng & manufacturing location
Retail store location
Supply network-node location
Sourcing & manufacturing locatron
R&D center
E-commerce vs. retail store
Decisions on product design
lnfrastructure Transportation I nf rasiructure
Utility lnfrastructure
(Elecuicity) ' ', , . '.t.'
TelecorRrnuniaation & Conneotivity
Logistics network design
Sourcing, manufacturing and logistics location
Competence Labor Relations
Education Level
Logistics Competence
Customs & Security
I l2 PARTTWo: Designing Operations and Supply Chains
Sourcing, menulacturing and logistics location
Retail s;ore location -
:
Sourcing, manu{acturing and logistics location
R&D center
E-commerce vs. retail store
Design school and champion
Sourcing, manufacturing and logistics location
Retail store location
Sourcing, manufacturing and Iogistics location
E-commerce vs. retail store (e.9., courier services)
Sourcing, manufacturing and logistics location
o-+c The Genter-of-Gravity Method
Supply chain design and location decisions are qu:ite di{'- {icult to analyze and make. Many types of quantita:ive models and approaches, ranging f'rom simple to complex, can be used to facilitate these decisions. We introduce a simple quantitative approach; however, in practice, more sophisticated models are generally used.
Ihe center-of-gravity method determines the x znd y coordinates (location) for a single focility. Nthough it dces not explicitly address customer service objectives, it :an be used to assist managers in balancing cost and sen ice objectives. Tlre center-of-gravity method ttrkes into ac- count the locations of the {'aciliW and markets. dernard. and transportation costs ln arriving at the best locat on fbr: a single f'acility. It would seem reasonable to f nd sorne "central" location, between the goods-produc ng or service-providing facility and customers, at which to locate the new fhciliry. But distance alone should not be the principal criterion, as the demand (volurne, trans rc- tions, etc.) {rorn one location to another also trf'fects lhe costs. To incorporate distance and demand, the cen:er of gravity is defined as the location that rninirnizes the weighted distzrnce between the {acility and its supply and dernand points.
The first step in the procedure is to place the 'o- cations of existing supply irnd demand points on a
SOLVED PROBLEM 6.3
Taylor Paper Products is a producer of paper stock used in newspapers and magazines.Taylor's demand is relatively constant, and thus can be forecast rather accurately.The company's two factories are located in Hamilton, Ohio, and Kingsport, Tennessee.The company distributes paper stock to four major markets: ChicagO Pittsburgh, New York, and Atlanta. The board of directors has authorized the construction of an intermediate warehouse to service those markets. Coordinates for th,:
c
coordinate system. The origin of the coordinate system and scale used are arbitrary as long as the relative dis- tances are correctly represented. Placing a grid over an ordinary rnap is one way to do that. The center of gravity is deterrnined by Equations 6.4 and 6.5, and can easily be implemented on a spreadsheet.
C,:2X,W,DW, C,,: 2Y,W,/2W,
[6 4]
[6 5]
_ s8(400) + 80(300) + 30(200) + e0(100) + 127(300) + 6s(100) 400 + 300 + 200 + 100 + 300 + 100
where
C, : x coordinate of the center of gravity C,,: U coordinate of the center of gravity X, : x coordinate of location i Y, : ! coordinate oflocation i W = volume of goods or services moved to or from
location i
The center-of-gravity rnethod is olten used to locate ser- vice facilities. For example, in locating a waste disposal facility, the location coordinates can be weighted by the average amount of waste generated {'rom residential neighborhoods and industrial sites. Similarly, to locate a library fire station, hos- pital, or post office, the population densities will define the appropriate weights in the model.
factories and markets are shown in the Excel template in Exhibit 6.9.For example, we see that location 1, Hamilton, is at the coordinate (58, 96); therefore, X. : 5g and Y, : 96. Hamilton and Kingsport produce 400 and 300 tons per month, respectively. Demand at Chicago, Pittsburgh, New York, and Atlanta is 200, 100, 300. and '| 00 tons per month, respectively. With that information, using Equations 6.4 and 6.5, the center of gravity coordinates are computed as follows:
= 76.3
100+300+100 : 98.1
of southern Ohio and West Virginia. Managers now can search that area for an appropriate site.
_ e6(400) + 70(300) + 120(200r + 110(100) + 130(300) + 40(100) 400 + 300 + 200 +
The Excel Center-of-Gravity template uses these formulas to find the best location. By overlaying a map on the chart, we see that the location is near the border
(Continued)
CHAPTER 6: Supply Chain Design 123
ABCD 1 icantarotGhvlty
iEntcr dab only In yollow..lk. Th. t.mpl.t6 k d€slgn.d tor up to 1 ) lo.rtloni.
140
120
!lm 3eo tr@ 'to
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0 a00m
r-@lnd.
SUPPLY CHAIN OPTIMIZATION
Supply chain optimization is the process of ensuring thot a supply choin operotes ot the highest levels of efficiency ond effective,
neis. This includes minirnizing the total costs of rnanufac- turing and transportation, which might consider sourcing, distribution, and placernent of inventory throughout the supply chain. Sophisticated mzrthematical tools are used to model cornplex transportation configurations and conduct "what-if' analyses to evtrluate alternative sup- ply cl-rain strategies. Some $pical uses of such a system are investigating the "what-if' e{fects of chirnges in de- rnand and volunre; changes in transportation modes and costs; transportation and labor strikes, nafural disasters, and energy shortages; plant- capacity expansion proposals; new product iines; deletion of pr:oduct lines; price changes arrd discounts; emerging global or loczrl rnarkets; transpoda- tion using public versus private
carriers; and ftrcility size, t1pe, mix, and location(s). Sup- ply cliain optimization can become very complex and re- quires sophisticated matbetratical modeling app.
Ihe transportation problem is a specioltype of lin- eor optimizotion model thot orises in planning the distribution of goods and services from severol supply points to severol demand
locations. Usually the quantity of goods available at each supply location (origin) is limited, and a specified quan- tity of goods is needed at each demand location (desti- nation). With a variety of shipping routes and dif{'ering transportation costs for the routes, the objective is to deterrnine how many units should be shipped from each origin to each destination so that all destination dernands are satisfied with a minimum total transportation cosr.
124 PARTTWO: Designing Operations and Supply Charns
SOLVED PROBLEM 6.4
Let us consider the problem faced by Foster Generators, Inc. Currently, Foster has three plants: one in Cleveland, Ohio, one in Bedford, Indiana, and one in York, Pennsylvania. Generators produced at the plants (origins) are shipped to distribution centers (destinations) in Boston, Chicago, St. Louis, and Lexington, Kentucky.The supply chain manager needs to know the best way to distribute the product from the plants to the distribution centers.
Using a typical, one-month planning period, the production capacities at the three plants are shown in Exhiblt 6.10. Forecasts of monthly demand at the four distribution centers are shown in Exhibit 6.1 1. Note that the total production capacity must be at least as large as the total demand in order to meet the forecasted demand. The transportation cost per unit for each route is shown in Exhibit 6.12.
1
2
Cleveland
Bedford
York
5,000
6,000
4,000
Total 15,000
A convenient way of summarizing the transportation- problem data is with a table such as the one shown in Exhibit 6.13. Note that the t 2 cells in the table correspond to the 12 possible shipping routes from the three origins to the four destinations. We denote the amount shipped from origin i to destinationl by the variable x,. The entries in the column at the right of the table represent the supply available at each plant, and the entries at the bottom represent the demand at each distribution center. The entry in the upper-right corner of each cell represents the per-unit cost of shipping over the corresponding route.
Looking across the first row of this table, we see that the amount shipped from Cleveland to all destinations cannot exceed 5,000, or x,.l 4 x,, * X,, * X,o = 5,000. Similarly, the amount shipped from Bedford to all destinations cannot exceed 6,000, orxr, + x22+ x,-+ xro < 6,000. Finally, the amount shipped from york to all destinations cannot exceed 4.000, orxr, * xr, * X., * Xy S 2,500.
We also must ensure that each destination receives the required demand. Thus, the amount shipped from all origins to Boston must equal 6,000, orx,, * xr, -r xr, : 6,000. For Chicago, St. Louis, and Lexington, we have similar constraints:
Chicago: Xrr* Xr, * xr, = 4,000 St. Louis:x,, + x,.+ xr, = 2,000 Lexington:xr o* Xro* xro:
.l,500
lf we ship x,, units from Cleveland to Boston, we incur a total shipping cost of 3x,,. By summing the costs associated with each shipping route, we have the total cost expression that we want to minimize:
Totaf cost : 3x,, * 2xrr* Txrr* 6xro * 7x, I 5x, * 2xr, * 3xro * 2xr,, * 5xr, * 4xr, * Sxro
By including nonnegativity restrictions, x,, > 0 for all variables, we have modeled the transportation problem as a linear optimization model. Supplementary Chapter C describes how to set up a linear optimization model on a spreadsheet and use Excel Solver to find an optimal solution.The solution, which has a minimum cost of 533,500, is shown in Exhibit 6.14.
(Continued)
..1
.:. 4
. -Cleveland
o
Bedford
iiioir l
Boston
Chicago
si,'t-ouis
Lexington
6,000
4,000
2,000
11500
Total 13,500
DO
a
5
$z
I
4
$3:i ,. r:i 92 t5
2' '5
CHAPTER 6: Supply Chain Design 125
