Designing global supply chains
Module 5
1
Readings
Textbook: Chapters 6 and 7
Reading 5.1 Zielinski, T and Schatteman, O. 2009, A practical
approach to network optimisation, Freight Logistics, 17, May/June,
pp. 12-17.
Reading 5.2 Ellis, D. 2009, Using network optimization modelling
techniques to resolve supply chain complexity and achieve aligned
operations, in J. Gattorna, Dynamic Supply Chain Alignment, Gower
Publishing Limited, Farnham, UK, pp.221-237.
Reading 5.3 Billington, C. and Nie, W. 2009, ‘Perspectives for
managers, the customer value proposition should drive supply
chain design: an example in mass retailing’, IMD, October, four
pages.
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Introduction
Firms continue searches for new ways to lower costs
and improve service to their customers
Where to locate logistics and manufacturing facilities
becomes more complex and/or critical
Besides enhancing efficiency and/or effectiveness in
terms of critical flows, such as product, information and
finance. Re-designing a firm’s overall network can
contribute to its differentiation
3
Dynamic environment
Businesses operate in a very dynamic environment in which
change is the only constant
◦ Questionable whether any existing logistics/supply chain network can
be truly up to date
◦ Environmental scanning
Logistical requirements of customers continually changing for
eg
◦ Demands for more efficient and more effective logistics services
◦ Customer service requirements may experience change
◦ Types of customers served may also evolve over time.
◦ Significance of relationships with some suppliers, enabling logistical
capabilities and performance to reach new, unprecedented levels
◦ As a result, the need to reevaluate and redesign logistics/supply
chain networks is of great contemporary interest
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Environmental scanning
Detects important cultural, economic, legal, political, social,
and technological events and trends
Identifies and defines potential opportunities and threats
implied by identified events and trends
Helps managers accurately and objectively understand the
company’s strengths and weaknesses
Provides a common and correct perception for tactical and
strategic planning
Promotes an adaptable, forward-looking mindset among
managers and employees.
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Environmental scanning
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SWOT analysis of UTAS
SWOT analysis international students
recruiting / TasPorts.
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Time frames in SC design
Short run
a firm’s logistics/supply chain network and the locations of its
key facilities are fixed
Site availability, leases, contracts, and investments make
changing facility locations impractical in the short run
Long run
design of the overall network must be thought of as variable
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The Supply Chain Network
Basic structure of any SC network consists of:
Facilities: plants, warehouses, DC, retail outlets
Transport systems: inbound, outbound
Information network: communication link & databank
Inventory: inventories hold at facilities & in transit
Logistics systems should be designed based on 4 areas (Ballou 1993):
Customer service levels: product availability, lead time, product
condition, accuracy of order fulfilling
Location of facilities and demand allocated to them (connections)
Inventory policy
Transport decisions
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Network Design Decisions
Network design considers layout of facilities (location,
spatial) & flow of materials thru facilities (allocation,
temporal)
Types of decisions involved in network design & planning
(Chopra and Meindl 2001):
Facility role: What role should each facility play?
Facility location: Where should each facility be located?
Capacity allocation: How much capacity should be allocated to each
facility?
Market and supply allocation: What markets should each facility
serve? Which supply sources should feed each facility?
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Steps in Network Design Process
11 Source: Coyle et al 2017, p.96
Network Design Decisions
Objective = balance service level against costs
Key costs:
Production/ purchasing costs
Inventory carrying costs
Facility costs (handling and fixed costs)
Transportation costs
ie find a minimal-annual-cost configuration of the
distribution network that satisfies product demands at
specified customer service levels
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Logistics & Facility Costs: The Trade-offs
Costs are dependent on:
Number of facilities
Locations of facilities
Capacities allocated among facilities
Trade-offs of having more warehouses (decentralised
distribution warehousing system):
Improved service level
Increased inventory costs
Increased overhead and setup costs
Reduced outbound transport costs
Increased inbound transport costs
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Network Design & Decision Support System (DSS)
In SCM and Logistics, network design is often carried out with the aid
of a DSS
DSS-based network design configuration is based on the following
methodology:
Build an extensive database with quality data for all relevant elements of the
supply chain
Build a model of a logistics network using an appropriate solution technique
Validate the data and model against current configuration
Seek decision support guidance from the DSS The DSS architecture
The Unified Modelling Language
14 (UML) class diagram of the DSS
The activity diagram of the DSS
Data
A listing of all products
Location of customers, stocking points and sources
Demand for each product by customer location
Transportation rates
Warehousing costs
Shipment sizes by product
Order patterns by frequency, size, season, content
Order processing costs
Customer service goals
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Data Aggregation
Why aggregate?
The cost of obtaining and processing data
The form in which data is available
The size of the resulting location model
The accuracy of forecast demand
Two main areas of aggregation: customers and products
Aggregating customers:
Customers located in close proximity are aggregated using a grid
network or clustering technique
All customers within a single cell or a single cluster are replaced
by a single customer located at the centre of the cell or cluster
(customer zone)
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Data Aggregation
Source: Simchi-Levi et al. (2008)
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Data Aggregation
Aggregating products:
Companies may have hundreds to thousands of individual items in their
production line
Variations in product models and style
Same products are packaged in many sizes
Collecting all data and analyzing it is impractical for so many product groups
Strategies for aggregating products:
Place all SKU’s into a source-group
A source group is a group of SKU’s all sourced from the same place(s)
Within each of the source-groups, aggregate the SKU’s by similar logistics
characteristics
Weight
Volume
Holding Cost
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Transport Costs
A key component of network planning
Associated with both inbound and outbound goods
Calculation of transport costs for fleet managed internally is different
from external fleet
Network planning requires transport rates for various distances
in network model
Rates are linear with the distance, not volume
Mileage estimation: distance has to be considered with transport rates to
calculate transport costs
Mileage can be estimated by using:
Street network (road map, distance tables, etc.)
Straight line distance (Calculation with latitude & longitude)
Technology (programming, GPS, etc.)
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Warehousing Costs
Facility (eg warehouse, DC) costs:
Fixed costs: i.e. building, etc., not proportional to the amount of
material that flows through the warehouse
Handling costs: labour costs, utility costs
Storage costs: proportional to the inventory level
Easy to calculate handling costs, but need to use inventory
turnover ratio (Annual cost of sales/average inventory) to
estimate storage and fixed costs
Storage costs = inventory turnover ratio x inventory holding
(carrying) cost
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Warehousing Costs
Fixed cost is based on space required, which is twice that of
average inventory level
Calculating needed storage space:
Convert units into space requirements
Allow for growth
Allow for adequate aisle space for materials handling equipment
Types of space needed:
Space for storage
Space for the transportation interface
Space for order-picking
Space for regrouping, office, and miscellaneous
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Warehousing costs
Also take into account:
Role of distribution facility functionality eg
Accumulation
Sorting
Allocation
Value adding services offering eg
Product assembly
Kitting, bundling and unbundling services
Postponement
Sequencing eg for JIT
Recycling, repair and returns management
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Facility Locations
Location is complex problem
The complexity increases with
the number of customers,
the number of products,
the number of potential locations for facilities, and
the number of facilities located
Facility location decision should be based on both qualitative
& quantitative factors (refer to ‘network design process’
step 4)
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Other Issues
Service level requirements:
Key consideration in network design
Can be defined in terms of distance (also representing time &
cost) of a facility from a customer
Target service level is to serve a certain % of customers with a
specific customer service level
Future demand
Critical factor, as network design is a strategic, long-term
decision
Future growth in demand?
Net Present Value (NPV) can be used for various scenarios (may
refer to Supplement D: pp.131-134)
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Modelling
Range of mathematical models can use
Can be used to generate some possible solutions
Eg using centre of gravity model
Refer here for a brief overview http://www.shmula.com/distribution-
center-location-optimizing-your-logistics-network/9312/
Suthamphong (2012) – its application to a factory location decision
Then use some qualitative analysis to get closer to best
solution
High costs incurred but it’s a major decision, so can
justify!
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Model & Data Validation
After data are collected, need to ensure data & model
accurately reflect network design problem
Test against reconstruction of existing network configuration
using model & collected data
Compare model’s output to existing data
Questions in model validation:
Does model make sense?
Are data consistent?
Can results be fully explained?
Was sensitivity analysis performed?
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Network Design Solution Techniques
Simulation model:
Not an optimisation model; takes into account dynamics of the
system
Provides an output based on input and the mathematical
relationship of the various elements
Which techniques to use? Hax and Candea (in Simchi-Levi
et al. 2008) suggest:
Use an optimisation model to generate a number of least-cost
solutions at the macrolevel, taking into account the most
important cost components
Use a simulation model to evaluate the solutions generated in the
first phase
https://www.youtube.com/watch?v=aN6BWAHUXy0
https://www.youtube.com/watch?v=cYRiKfuEu1c
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Key Features of a Network Configuration DSS
Main features of a DSS used in network configuration
◦ flexibility to incorporate in the model all relevant elements of
a particular supply chain and all possible options
◦ means of incorporating managerial decisions regarding service
level
DSS helps the manager with decision effectiveness
(Ballou & Masters 1999)
◦ user friendliness
◦ technical support
◦ optimality of solution and data interface
◦ faster processing time and flexibility
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Designing a supply chain
Strategy underpins design too
Low cost/differentiated/niche eg
Agile = responsive
Lean = low cost
Leagile – locate decoupling point
Long term thinking necessary
Decision making in environmental uncertainty
ALSO Near-shoring? Re-shoring?
Process of redesign
Think of as a project
Apply project management techniques (refer to Supplement G)
Critical path method (CPM)
29 Gantt chart
Summary
The logistics/supply chain network design decision is of great strategic
importance to logistics, the firm as a whole, and the supply chain.
A number of factors may suggest the need to redesign the
logistics/supply chain network.
A formal, structured process for network design is preferable; the
potential impacts on cost and service justify a significant effort toward
following a sound process.
Numerous factors may affect the design of a logistics network and the
location of specific facilities within the context of the network, but
The availability and cost of transportation affect the location decision in a
number of significant and unique ways.
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References
Ballou, R. H. & Masters, J. M. 1993, ‘Facility location commercial
software survey’, Journal of Business Logistics,Vol. 14, No. 2,
pp.71-105.
Ballou, R. H. & Masters J. M. 1999, ‘Facility location commercial
software survey’, Journal of Business Logistics, vol. 20, no. 1,
pp.215-232.
Chopra, S. & Meindl, P. 2001, Supply Chain Management, Strategy,
Planning and Operation, Prentice Hall.
Kim, B. 2005, Supply Chain Management, Mastering Business in
Asia, John Wiley & Sons (Asia), Singapore.
Simchi-Levi, D., Kaminsky, P. & Simchi-Levi, E. 2008, Designing and
Managing the Supply Chain, 3rd edn, McGraw-Hill, USA.
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Activities next week
Textbook p. 204, question 2
Textbook p. 231, question 1
Read case textbook pp. 204-205, answer questions
Study Supplements F (textbook pp.206-210) and G (textbook,
pp. 236-242 then complete question 1 on page 240.
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