Logistics and Supply Chain Network Design

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Course Title: Logistics and Supply Chain Management
Course Code : 19BMC304B
Course Leader: Dr. Chandra Sen Mazumdar
E mail: chandrasen.ms.mc@msruas.ac.in

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Supplier related Operations :

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The Sourcing Decision in a Supply Chain
• Purchasing, also procurement, is the process by which
companies acquire raw materials, components, products,
services, or other resources from suppliers to execute their
operations
• Sourcing – entire set of business processes required to
purchase goods and services
• Outsourcing – supply chain function being performed by a
third party

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The Sourcing Decision in a Supply Chain contd…
• Outsourcing questions
1. Will the third party increase the supply chain surplus
relative to performing the activity in-house?
2. To what extent do risks grow upon outsourcing?
3. Are there strategic reasons to outsource?

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How Do Third Parties Increase the Supply Chain Surplus?
• Decisions based on supply chain surplus and risk incurred
• Third parties increase surplus through
1. Capacity aggregation
2. Inventory aggregation
3. Transportation aggregation by transportation intermediaries
4. Transportation aggregation by storage intermediaries
5. Warehousing aggregation
6. Procurement aggregation
7. Information aggregation
8. Receivables aggregation
9. Relationship aggregation
10.Lower costs and higher quality

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Factors Influencing Growth of Surplus by a Third
Party
• Scale
• Large scale it is unlikely that a third party can achieve further
scale economies and increase the surplus
• Uncertainty
• If requirements are highly variable over time, third party can
increase the surplus through aggregation
• Specificity of assets
• If assets required are specific to a firm, a third party is unlikely to
increase the surplus
• Cost and quantity of available capital
• Third party may have available or lower cost capital

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Factors Influencing Growth of Surplus by a Third
Party contd…
Table 1: Growth in Surplus by Third Party as a Function of Scale,
Uncertainty, and Specificity
Blank Blank Specificity of Assets Involved in
Function (Low)
Specificity of Assets Involved in
Function (High)
Firm scale Low High growth in surplus Low to medium growth in surplus
Blank High Low growth in surplus No growth in surplus unless cost
of capital is lower for third party
Demand
uncertainty for
firm
Low Low to medium growth in surplus Low growth in surplus
Blank High High growth in surplus Low to medium growth in surplus

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Risks of Using a Third Party
1. The process is broken
2. Underestimation of the cost of coordination
3. Reduced customer/supplier contact
4. Loss of internal capability and growth in third-party power
5. Leakage of sensitive data and information
6. Ineffective contracts
7. Loss of supply chain visibility
8. Negative reputational impact

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Strategic Factors in Sourcing
1. Support for the business strategy
2. Improve firm focus

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Examples of Successful Third-Party Suppliers
• EMS (Electronics Manufacturing Services) providers like Dixon Technologies
(India) Pvt Ltd., SFO Technologies Pvt Ltd. EMS providers design, assemble,
produce, and test electronic components and printed circuit board (PCB)
assemblies for original equipment manufacturers (OEMs)
• Li & Fung – consumer goods
https://www.youtube.com/watch?v=KSeZXjkYERs
• Magna Steyr - development of complete vehicles, from systems and modules
to complete vehicle engineering, and complete vehicle manufacturing

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Network Design in a Supply Chain

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• Understand the role of network design in a supply chain.
• Identify factors influencing supply chain network design
decisions.
• Discuss a framework for making network design decisions.
• Develop an optimization model to design regional network
configurations
Network Design in a Supply Chain

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The Role of Network Design
• Network design decisions
• How many manufacturing plants, production lines, distribution centers, cross-
docking facilities?
• Where should facilities be located?
• How much capacity at each facility?
• Which products?
• What markets?
• Revisit design decisions after market changes, mergers, or factor
cost changes

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Factors Influencing Network Design Decisions
• Strategic Factors – cost or responsiveness?
• Competitive Factors
• Positive externalities between firms e.g. retail stores in a mall, building
supplier networks
• Locating to split the market
• Political Factors
• Infrastructure Factors

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Competitive Factors
• Locating to split the market
– Locate to capture largest market share
Two Firms Locating on a Line
– – –

  
b a b a
d a d
1 2
1 1
and
2 2

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Factors Influencing Network Design Decisions
contd…
• Customer Response Time and Service Level
• Total Logistics Cost
• Macroeconomic Factors
• Tariffs and tax incentives
• Exchange-rate and demand risk

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Framework for Network Design Decisions
• Maximize the overall profitability of the supply chain network while
providing customers with the appropriate responsiveness
• Many trade-offs during network design
• Network design models used
• to decide on locations and capacities
• to assign current demand to facilities and identify transportation
lanes

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Framework for Network Design Decisions contd…

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• Phase I: Define a Supply Chain Strategy/Design
• Clear definition of the firm’s competitive strategy
• Forecast the likely evolution of global competition
• Identify constraints on available capital
• Determine broad supply strategy

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• Phase II: Define the Regional Facility Configuration
• Forecast of the demand by country or region
• Identify fixed and variable costs, economies of scale or
scope
• Identify regional tariffs, requirements for local production,
tax incentives, and export or import restrictions
• Identify competitors
• Identify demand risk, exchange-rate risk, political risk

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Framework for Network Design Decisions
• Phase III: Select a Set of Desirable Potential Sites
• Hard infrastructure requirements
• Soft infrastructure requirements
• Phase IV: Location Choices and Market Allocation

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© Wiley 2007
Making Location Decisions
• Analysis should follow 3 step process:
• Step 1: Identify dominant location factors
• Step 2: Develop location alternatives
• Step 3: Evaluate locations alternatives
• Procedures for evaluation location alternatives include
• Factor rating method
• Load-distance model
• Center of gravity approach
• Break-even analysis
• Transportation method

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© Wiley 2007
Factor rating method
• Steps involved
• Step 1: Identify dominant factors (e.g., proximity to market, access, competition,
quality of life)
• Step 2: Assign weights to factors reflecting the importance of each factor relative to
the other factors. The sum of these weights must be 100
• Step 3: Select a scale by which to evaluate each location relative to each factor. A
commonly used scale is a five-point scale, with 1 being poor and 5 excellent
• Step 4: Evaluate each alternative relative to each factor, using the scale selected in
Step 3. For example, if you chose to use a five-point scale, a location that was excellent
based on quality of life might get a 5 for that factor
• Step 5: For each factor and each location, multiply the weight of the factor by the
score for that factor and sum the results for each alternative. Th is will give you a score
for each alternative based on how you have rated the factors and how you have
weighted each of the factors at each location
• Step 6: Select the alternative with the highest score

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© Wiley 2007
Factor Rating Example
Example 3: Antonio is evaluating three different locations for his new Italian restaurant. Costs are
comparable at all three locations. He has identified seven factors that he considers important and
has decided to use factor rating to evaluate his three location alternatives based on a five point
scale, with 1 being poor and 5 excellent. Table below shows Antonio’s factors, the weights he has
assigned to each factor, as well as the factor score for each factor at each location.
Conclusion: Best
location is Location 2
as that has the
highest weighted
score

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© Wiley 2007
Load distance model
• The load–distance model is a procedure for evaluating location
alternatives based on distance.
• The distance to be measured could be proximity to markets, proximity to
suppliers or other resources, or proximity to any other facility that is
considered important.
• The objective of the model is to select a location that minimizes the total
amount of loads moved weighted by the distance traveled.

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© Wiley 2007
Load distance model – Steps involved
• Step 1: Identify Distances: The first step is to identify the distances between location
sites. The rectilinear distance between two locations, A and B, is computed by
summing the absolute differences between the x coordinates and the absolute
differences between the y coordinates. The equation is as follows:
• Step 2: Identify Loads: The next step is to identify the loads between different
locations. The notation lij is used to indicate the load between locations i and j
• Step 3: Calculate the Load–Distance Score for Each Location: Next, calculate the load–
distance score for each location by multiplying the load, lij, by the distance, dij
• Step 4: Select the site with the lowest load–distance score

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© Wiley 2007
Load distance model example
Example 4: Matrix Manufacturing is considering where to locate its warehouse in order to service its
four Ohio stores located in Cleveland, Cincinnati, Columbus, Dayton. Two sites are being considered;
Mansfield and Springfield, Ohio. Use the load-distance model to make the decision.

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© Wiley 2007
Calculating the Load-Distance Score for
Springfield vs. Mansfield
•
• The load-distance score for Mansfield is higher than for Springfield. The
warehouse should be located in Springfield.
Computing the Load-Distance Score for Springfield
City Load Distance ld
Cleveland 15 20.5 307.5
Columbus 10 4.5 45
Cincinnati 12 7.5 90
Dayton 4 3.5 14
Total Load-Distance Score(456.5)
Computing the Load-Distance Score for Mansfield
City Load Distance ld
Cleveland 15 8 120
Columbus 10 8 80
Cincinnati 12 20 240
Dayton 4 16 64
Total Load-Distance Score(504)

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© Wiley 2007
The Center of Gravity Approach
• This approach requires that the analyst find the center of gravity of the
geographic area being considered
• Computing the Center of Gravity for Matrix Manufacturing
• Is there another possible warehouse location closer to the C.G. that should be
considered?? Why?
10.6
41
436
l
Y
l
Y
;
7.9
41
325
l
X
l
X
i
i
i
c.g.
i
i
i
c.g. 









Computing the Center of Gravity for Matrix Manufacturing
Coordinates Load
Location (X,Y) (li) lixi liyi
Cleveland (11,22) 15 165 330
Columbus (10,7) 10 165 70
Cincinnati (4,1) 12 165 12
Dayton (3,6) 4 165 24
Total 41 325 436

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© Wiley 2007
Centre of Gravity approach
• This is an easy way to find a suitable location for locating the warehouse by testing the
location at the center of gravity of the target area
• The X and Y coordinates that give us the center of gravity for a particular area are
computed in the following way:

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© Wiley 2007
Centre of Gravity approach example
Example 5: For the same problem given in Example 4, find the best place to locate the warehouse
using the Centre of Gravity method

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© Wiley 2007
Break-Even Analysis
• Break-even analysis computes the amount of goods required to be sold to
just cover costs
• Break-even analysis includes fixed and variable costs
• Break-even analysis can be used for location analysis especially when the
costs of each location are known
• Step 1: For each location, determine the fixed and
variable costs
• Step 2: Plot the total costs for each location on one graph
• Step 3: Identify ranges of output for which each location
has the lowest total cost
• Step 4: Solve algebraically for the break-even points
over the identified ranges

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© Wiley 2007
Break-Even Analysis
• Remember the break even equations used for calculation total cost of each
location and for calculating the breakeven quantity Q.
• Total cost = F + cQ
• Total revenue = pQ
• Break-even is where Total Revenue = Total Cost
Q = F/(p-c)
Q = break-even quantity
p = price/unit
c = variable cost/unit
F = fixed cost

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© Wiley 2007
Break-Even Analysis example
Example 6: Clean-Clothes Cleaners is considering four possible sites for its new
operation. They expect to clean 10,000 garments. The table and graph below are
used for the analysis.

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© Wiley 2007
Break-Even Analysis example - solution
• From the graph you can see that the two lowest
cost intersections occur between C & B (4667
units) and B & A (9000 units)
• The best alternative up to 4667 units is C,
between 4667 and 9000 units the best is B, and
above 9000 units the best site is A

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Design Options for Distribution Network

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Manufacturer Storage with Direct Shipping
E.g.: Furniture production, automobiles

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Network (1 of 2)
Table 2: 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
large if product customization can be postponed at the
manufacturer.
Transportation Higher transportation costs because of increased distance and
disaggregate shipping.
Facilities and
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.

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Network (2 of 2)
Table 2 [Continued]
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 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 Expensive and difficult to implement.

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In-Transit Merge Network
E.g.: When a customer orders a PC from Dell
along with a Sony monitor

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In-Transit Merge (1 of 2)
Table 3 Performance Characteristics of In-Transit Merge
Inventory Similar to drop-shipping.
Transportation Somewhat lower transportation costs than drop-shipping.
Facilities and handling Handling costs higher than drop-shipping at carrier;
receiving costs lower at customer.
Information Investment is somewhat higher than for drop-shipping.

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In-Transit Merge (2 of 2)
Table 3 [Continued]
Response time Similar to drop-shipping; may be marginally higher.
Product variety Similar to drop-shipping.
Product availability Similar to drop-shipping.
Customer
experience
Better than drop-shipping because only a single delivery is
received.
Time to market Similar to drop-shipping.
Order visibility Similar to drop-shipping.
Returnability Similar to drop-shipping.

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Distributor Storage with Carrier Delivery
E.g.: Amazon, Flipkart

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Distributor Storage with Carrier Delivery
(1 of 2)
Table 4 Performance Characteristics of Distributor Storage with Carrier
Delivery
Inventory Higher than manufacturer storage. Difference is not
large for faster-moving items but can be large for very
slow-moving items.
Transportation Lower than manufacturer storage. Reduction is
highest for faster-moving items.
Facilities and
handling
Somewhat higher than manufacturer storage. The
difference can be large for very-slow-moving items.
Information Simpler infrastructure compared to manufacturer
storage.

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Distributor Storage with Carrier Delivery (2 of 2)
Table 4 [Continued]
Response time Faster than manufacturer storage.
Product variety Lower than manufacturer storage.
Product availability Higher cost to provide the same level of availability as
manufacturer storage.
Customer
experience
Better than manufacturer storage with drop-shipping.
Time to market Higher than manufacturer storage.
Order visibility Easier than manufacturer storage.
Returnability Easier than manufacturer storage.

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Distributor Storage with Last Mile Delivery

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Distributor Storage with Last Mile Delivery (1
of 2)
Table 5 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 and 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.

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Distributor Storage with Last Mile Delivery (2 of 2)
Table 5 [Continued]
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 longer 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 previous options. Harder and more
expensive than a retail network.

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Manufacturer or Distributor Storage with
Customer Pickup

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Customer Pickup (1 of 2)
Table 6 Performance Characteristics of Network with Customer 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 and handling Facility costs can be high if new facilities have to be built.
Costs are lower if existing facilities are used. The increase in
handling cost at the pickup site can be significant.
Information Significant investment in infrastructure required.

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Customer Pickup (2 of 2)
Table 6 [Continued]
Response time Similar to package carrier delivery with manufacturer or
distributor storage. Same-day pickup is possible for items stored
at regional DC.
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.
Experience is sensitive to capability of pickup location.
Time to market Similar to manufacturer or distributor storage options.
Order visibility Difficult but essential.
Returnability Somewhat easier, given that pickup location can handle returns.

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Retail Storage with Customer Pickup

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Retail Storage with Customer Pickup (1 of 2)
Table 7 Performance Characteristics of Retail Storage with Customer Pickup
Sites
Inventory Higher than all other options.
Transportation Lower than all other options.
Facilities and 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.

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Retail Storage with Customer Pickup (2 of 2)
Table 7 [Continued]
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 by customer.
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 other options because retail store can provide
a substitute.

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Transportation Modes and Their Role in a
Supply Chain
• Movement of product from one location to another
• Products rarely produced and consumed in the same location
• Significant cost component
• Shipper requires the movement of the product
• Carrier moves or transports the product

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Modes of Transportation and Their
Performance Characteristics
• Air
• Package carriers
• Truck
• Rail
• Water
• Pipeline
• Intermodal

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Air
• Cost components
1.Fixed infrastructure and equipment
2.Labor and fuel
3.Variable depending on passenger/cargo
• Key issues
• Location/number of hubs
• Fleet assignment
• Maintenance schedules
• Crew scheduling
• Prices and availability

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Package Carriers
• Small packages up to about 150 pounds
• Expensive
• Rapid and reliable delivery
• Small and time-sensitive shipments
• Provide other value-added services
• Consolidation of shipments a key factor

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Truck
• Significant fraction of the goods moved
• Truckload (TL)
• Low fixed cost
• Imbalance between flows
• Less than truckload (LTL)
• Small lots
• Hub and spoke system
• May take longer than TL
• Fatigue-related accidents

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Rail
• Move commodities over large distances
• High fixed costs in equipment and facilities
• Scheduled to maximize utilization
• Transportation time can be long
• Trains ‘built’ not scheduled

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Water
• Limited to certain geographic areas
• Ocean, inland waterway system, coastal waters
• Very large loads at very low cost
• Slowest
• Dominant in global trade
• Containers

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Pipeline
• High fixed cost
• Primarily for crude petroleum, refined petroleum products, natural gas
• Best for large and stable flows
• Pricing structure encourages use for predicable component of demand

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Intermodal
• Use of more than one mode of transportation to move a shipment
• Grown considerably with increased use of containers
• May be the only option for global trade
• More convenient for shippers – one entity
• Key issue – exchange of information to facilitate transfer between different
modes

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Design Options for a Transportation Network
• When designing a transportation network
1. Should transportation be direct or through an intermediate site?
2. Should the intermediate site stock product or only serve as a cross-
docking location?
3. Should each delivery route supply a single destination or multiple
destinations?

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Direct Shipment Network to Single Destination

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Direct Shipping with Milk Runs
E.g.: 1. Any company that supplies to multiple retailers
2. Toyota
In Japan, Toyota has many assembly plants located close together and thus uses milk
runs from a single supplier to many plants.
In the United States, however, Toyota uses milk runs from many suppliers to each
assembly plant given the large distance between assembly plants.

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All Shipments Via Intermediate Distribution
Center with Storage

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All Shipments Via Intermediate Transit Point
with Storage
• Suppliers send their shipments to a central distribution center
• Stored until needed by buyers
• Shipped to each buyer location

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All Shipments Via Intermediate Transit Point
with Cross-Docking
• Suppliers send their shipments to an intermediate transit point
• They are cross-docked and sent to buyer locations without storing them

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Shipping Via DC Using Milk Runs

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Pros and Cons of Different Transportation
Networks
Network Structure Pros Cons
Direct shipping No intermediate warehouse
Simple to coordinate
High inventories (due to
large lot size)
Direct shipping with milk
runs
Lower transportation costs for small lots
Lower inventories
Increased coordination
complexity
All shipments via central
DC with inventory
storage
Lower inbound transportation cost
through consolidation
Increased inventory cost
Increased handling at DC
All shipments via central
DC with cross-dock
Low inventory requirement
Lower transportation cost through
consolidation
Increased coordination
complexity
Shipping via D C using
milk runs
Lower outbound transportation cost for
small lots
Further increase in
coordination complexity
Tailored network Transportation choice best matches
needs of individual product and store
Highest coordination
complexity

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Summary
Network design decisions include identifying facility locations,
capacities, products handled, and allocating markets to be served by
different facilities. These decisions define the physical constraints
within which the network must operate as market conditions change.
Good network design decisions increase profits by supporting the
supply chain strategy.

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Summary
Network design decisions are influenced by non-quantifiable factors
including strategic, competitive, political, and infrastructure. These
decisions are also influenced by quantifiable factors including desired
response time and service levels, total logistics costs, and taxes and
tariffs. Network design decisions should be checked for robustness in
the face of fluctuations in demand, costs, and exchange rates.

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Summary
The goal of network design is to maximize the supply chain’s long-term profitability.
The process starts by defining the supply chain strategy, which must be aligned with
the competitive strategy of the firm. The supply chain strategy, regional demand,
costs, infrastructure, and competitive environment are used to define a regional
facility configuration. For regions where facilities are to be located, potentially
attractive sites are then selected based on costs and available infrastructure. The
optimal configuration is determined from the potential sites using demand, logistics
cost, factor costs, taxes, and margins in different markets. The robustness of the
network should be checked in the context of various risks and uncertainties faced by
the supply chain. The allocation of markets to facilities should be revised as demand
and costs change.

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Distribution networks that ship directly to the customer are better suited for
a large variety of high-value products that have low and uncertain demand.
These networks incur lower facility costs and carry low levels of inventory but
incur high transportation cost and provide a slow response time. Distribution
networks that carry local inventory are suitable for products with high
demand, especially if transportation is a large fraction of total cost. These
networks incur higher facility and inventory cost but lower transportation cost
and provide a faster response time.
Summary

Logistics and Supply Chain Network Design

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