Supply Chain Management

Topics: Costs, Inventory, Cost Pages: 10 (1599 words) Published: July 16, 2013
Supply Chain Management
Network Design and Facility Location

Classical Theories

von Thunen
Agricultural activity occurs in a “limitless plain of equal fertility” with a city in the middle Theorized that: City price = origin price + transport costs Transport costs = f {weight & distance}

As a result
Products having high weight/value ratio should be produced near the city (see next slide)

Other Contributions
Land values decrease as move from city More intense land utilization near cities

Classification of Materials as:
Localized vs. Ubiquitous (available everywhere) Pure vs. Weight-Losing

How does a raw material’s status as pure, weight-losing, or weight-gaining influence the facility location decision? A pure raw material is one that loses no weight in manufacturing and, because of this, the processing point can be anywhere, near the raw material source and the market. Weight-losing products lose weight during processing; the processing point should be near their source in order to avoid payment of unnecessary transportation charges. Weight-gaining products gain weight during processing; the processing point should be close to the market.

Calculate MI:

if MI > 1.0, locate plant nearer to raw materials if MI = 1.0, indifferent if MI < 1.0, locate plant nearer to markets


When to plan?
No distribution network currently exists There has been no re-evaluation in 5 years When costs are changing rapidly, especially transport & inventory When markets have shifted. When current distribution economics encourage shifts When there has been a major policy shift in logistics such as in price, customer service, or investment level.

Logistics Strategy
• The objectives of logistics strategy are:

• Minimize Cost • Minimize Investments • Maximize Customer Service Maximize Return on Logistics Assets


ROLA=Revenue−Costs Assets



Network Design Decisions
Facility role Facility location Capacity allocation Market and supply allocation Methods of Evaluating Location Alternatives The Factor-Rating Method Locational Break-Even Analysis Center-of-Gravity Method The Transportation Method Simulation

Objective of Location Strategy
Maximize the benefit of location to the firm


Industrial Location Decisions
Cost focus
Revenue varies little between locations

Service Location Decisions
Revenue focus
Costs vary little between market areas

Location is a major cost factor
Affects shipping & production costs (e.g., labor) Costs vary greatly between locations

Location is a major revenue factor
Affects amount of customer contact Affects volume of business

Factors Influencing Network Design Decisions
Strategic Technological Political Infrastructure Competitive Logistics and facility costs

In General - Location Decisions
Long-term decisions Difficult to reverse Affect fixed & variable costs Transportation cost

As much as 25% of product price
Other costs: Taxes, wages, rent etc.

Objective: Maximize benefit of location to firm

Location Decision Sequence
COUNTRY Region/Community

Global Location Factors
Government stability Government regulations Political and economic systems Economic stability and growth Exchange rates Culture Climate Export import regulations, duties and tariffs Raw material availability Number and proximity of suppliers Transportation and distribution system Labor cost and education Available technology Commercial travel Technical expertise Cross-border trade regulations Group trade agreements



Regional Location Factors
Business climate Community services Incentive packages Government regulations Environmental regulations Raw material availability Labor (availability, education, cost, and unions) Government services (e.g., Chamber of Commerce) Commercial travel Climate Infrastructure (e.g., roads, water, sewers) Quality of life Taxes Availability...
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