Documente Academic
Documente Profesional
Documente Cultură
Facility Location
Sections 4.1, 4.2
Chapter 5 and 6
1
utdallas.edu/~metin
Outline
Frequency decomposition of activities
A strategic framework for facility location
Multi-echelon networks
Analytical methods for location
2
utdallas.edu/~metin
Frequency Decomposition
SCs are enormous
It is hard to make all decisions at once
Integration by smart decomposition
Frequency decomposition yields several sets of
decisions such that each set is integrated within
itself
3
utdallas.edu/~metin
Frequency Decomposition
Low frequency activity, ~ once a year, high fixed cost
R&D budget
Capacity expansion budget
Moderate frequency activity, ~ once a month
Cancellation of specific R&D projects depending on
experimental outcomes
Specific machines to purchase
High frequency activity, ~ once a day, low fixed cost
What experiments to start / continue today
What to produce
4
utdallas.edu/~metin
Facility Location: The Cost-Response Time Frontier
An inventory location based point of view
7-Eleven Regional
Hi
Local Finished Goods (FG) Inventory
Regional FG Inventory
Number of Facilities
6
utdallas.edu/~metin
Where inventory needs to be for a one week
order response time - typical results --> 1 DC
Customer
DC
7
utdallas.edu/~metin
5 day order response time - typical results
--> 2 DCs
Customer
DC
8
utdallas.edu/~metin
3 day order response time - typical results
--> 5 DCs
Customer
DC
9
utdallas.edu/~metin
Next day order response time - typical
results --> 13 DCs
Customer
DC
10
utdallas.edu/~metin
Same day / next day order response time -
typical results --> 26 DCs
Customer
DC
11
utdallas.edu/~metin
Inbound and outbound shipping with more facilities
Supplier Manufacturer Customer
Facility costs
Costs
Transportation
Number of facilities
Percent Service
Level Within
Promised Time
Facilities
Inventory
Transportation
Labor
Number of Facilities
14
utdallas.edu/~metin
Network Design Decisions
Facility function: Plant, DC, Warehouse:
What facility performs what function
Packaging at the manufacturer or warehouse
Should a rental computer return location run diagnostic tests on the returned
computers or should the testing be done at major warehouses?
Question arising from CRU Computer Rental Case done in OPRE6302
Facility location
Starbucks opened up at UTD student apartments in 2005 but closed in 2006!
Recall Japanese 7-eleven and their blanketing strategy
SMUs experimentation with Plano campus: http://www.smu.edu/legacy .
Capacity allocation
SOM car park took 80 cars in 2005 and expanded in 2006 to take about 110 cars.
Supply and market allocation:
Who serves whom
By location: UT Austin serves central Texas students
By grade: UT Arlington serves undergraduate students
15
utdallas.edu/~metin
Strategic Factors Influencing
Location Decisions
Strategic Facilities
Lead facility
<advanced technology>
Global Customers Regional Customers Lockheed Martins JSF in Dallas
0 a b 1
1-a-b
a b
Suppose customers (preferences, e.g. sugar content in coke)
are uniformly distributed over [0,1]
PHASE III
Desirable Sites AVAILABLE
INFRASTRUCTURE
PRODUCTION METHODS
Skill needs, response time
19
utdallas.edu/~metin
Comparing Locations Objectively
According to McKinsey Global Institute on HBR Jun. 2006 p.91
Key Costs:
K3 c32
c34 D4
23
utdallas.edu/~metin
Demand Allocation Model: Transportation Problem
Which market is served by which plant? n m
Which supply sources are used by a plant? Min cij xij
i 1 j 1
25
utdallas.edu/~metin
Plant Location with Multiple Sourcing
n n m
Which market is served by which plant?
Min f y c x
Which supply sources are used by a plant? i i ij ij
i 1 i 1 j 1
s.t.
None of the plants are open, a cost of f i is
n
paid to open plant i
x D
i 1
ij j
x K y
j 1
ij i i
yi = 1 if plant is located at site i, 0
m
otherwise
xij = Quantity shipped from plant site i to y
i 1
i
k
customer j
y {0,1}
i
How does cost change as k increases? 26
utdallas.edu/~metin
Plant Location with Single Sourcing
Each customer has exactly one supplier
Which market is served by which plant?
Which supply sources are used by a plant?
n n m
Min f y D c x j
None of the plants are open, a cost of f i is i 1
i i
i 1 j 1
ij ij
x
i 1
ij
1
0 otherwise Dx K y
j 1
j ij i i
xij = 1 if market j is supplied by factory i,
yi , xi , j {0,1}
0 otherwise
28
utdallas.edu/~metin
Applichem Demand Allocation (1982)
Demand
Capacity
30 Mexico 30
220 Mexico
32
26 Canada 2
37 Canada
11
45 Venezuela 45 Latin America 160
115
470 Frankfurt 200 Europe 200
36
185 185 U.S.A 264
Gary
119
50 Sunchem Japan 119
29
utdallas.edu/~metin
Applichem Production Network 1982
(with duties)
Mexico Mexico
Canada Canada
30
utdallas.edu/~metin
Applichem Production Network 1982
(without duties)
Mexico Mexico
Canada Canada
Venezuela Latin America
Frankfurt Europe
Gary U.S.A
Sunchem Japan
Annual Cost = 66,328,100
Without duties, Venezuela and Canada plants are closed and
Frankfurt satisfies the excess Canada, Latin America and USA demand.
There is consolidation without duties. 31
utdallas.edu/~metin
1981 Network
. Mexico
Mexico
Canada Canada
32
utdallas.edu/~metin
1981 Network (Sunchem Closed)
Mexico Mexico
Canada Canada
33
utdallas.edu/~metin
Value of Adding 0.1 M Pounds Capacity (1982)
36
utdallas.edu/~metin
Chapter 6
Network Design in an Uncertain Environment
38
utdallas.edu/~metin
A tree representation of uncertainty
One way to represent Uncertainty is a binomial tree
Up by 1 down by -1 move with equal probability
Normal (0, T ) 2
utdallas.edu/~metin
T steps 39
Decision tree
One column of nodes for each time period
Each node corresponds to a future state
What is in a state?
Price, demand, inflation, exchange rate, your OPRE 6366 grade
Each path corresponds to an evolution of the states into
the future
Transition from one node to another determined by
probabilities
Evaluate the cost of a path starting from period T and
work backwards in time to period 0.
40
utdallas.edu/~metin
Evaluating Facility Investments: AM Tires.
Section 6.5 of Chopra.
Now
U.S. Demand = 100,000; Mexico demand = 50,000.
Demand is not to be met always. But selling more increases profit.
1US$ = 9 pesos.
Sale price $30 in US and 240 pesos in Mexico.
Future
Demand goes up or down by 20 percent with probability 0.5 and
Exchange rate goes up or down by 25 per cent with probability 0.5.
41
utdallas.edu/~metin
AM
Tires
42
utdallas.edu/~metin
AM Tires
Four possible capacity configurations:
Both dedicated
Both flexible
U.S. flexible, Mexico dedicated
U.S. dedicated, Mexico flexible
Mexico Mexico
43
utdallas.edu/~metin
AM Tires in period 2: Demand Allocation for
DUS = 144; DMex = 72, E = 14.06
1.1=240/14.06-15-1
2 2
21.2=30-110/14.06-1
Max m ij x ij 9.2=(240-110)/14.06
i 1 j1
such that
2
x
j 1
ij Ki
xij 0
44
utdallas.edu/~metin
AM Tires: Demand Allocation for DU = 144;
DM = 72, E = 14.06; Cheap Peso
Plants Markets
100K; $15
U.S. U.S.
2 1. 2 Profit =Revenue-Cost
; $
44 K
Mexico Mexico
6K; $9.2
US Productions contribution=100,000*15-1,100,000=$400,000
Mex Productions contribution=44,000*21.2+6000*9.2-4,400,000/14.06=$675,055
Profit(DU = 144; DM = 72, E = 14.06; Period 2; Both flexible)=$1,075,055
45
utdallas.edu/~metin
AM Tires: Demand Allocation for DU = 144;
DM = 72, E = 8.44; Expensive Peso
Plants Markets
100K; $15
U.S. U.S.
$1 6
4 K ;
4
Mexico Mexico
6K; $15.4
US Productions contribution=100,000*15-1,100,000=$400,000
Mex Productions contribution=44,000*16+6000*15.4-4,400,000/8.44
=704000+92400-521327=$275,073
Profit(DU = 144; DM = 72, E = 8.44; Period 2; Both flexible)=$675,073
46
utdallas.edu/~metin
AM Tires: Demand Allocation for DU = 144;
DM = 72, E = 5.06; Very Expensive Peso
Plants Markets
78K; $15
U.S. U.S.
22K
; $3
1.4
Mexico Mexico
50K; $25.7
US Productions contribution=78000*15+22000*31.4-1,100,000=$760,800
Mex Productions contribution=50000*25.7-4,400,000/5.06=$415,435
Profit(DU = 144; DM = 72, E = 8.44; Period 2; Both flexible)=$1,176,235
Make profit computations for the first year nodes one by one:
Compute the profit for a node and add to that
(0.9)(1/8)(Sum of the profits of all 8 nodes
connected to the current one)
48
utdallas.edu/~metin
Capacity Investment Strategies
Single sourcing is risky
Hedging Strategy
Risk management?
Too much capacity or too little capacity
E.g. 200 leading financial services companies are examined from 1997-
2002. Every other company struck at least once by a risky event.
Source: Running with Risk. The McKinsey Quarterly. No.4. 2003.
Managers unfamiliar with risk often focus on relatively simple accounting
metrics as net income, earnings per share, return on investment, etc.
Match revenue and cost exposure
Flexible Strategy
Excess total capacity in multiple plants
Flexible technologies
More will be said in aggregate planning chapter
49
utdallas.edu/~metin
Summary
Frequency decomposition
Factors influencing facility decisions
A strategic framework for facility location
Gravity methods for location
Network-LP-IP optimization models
Value capacity as a real option
50
utdallas.edu/~metin
Location Allocation Decisions
Plants Warehouses Markets
1
y
Di demand of market i
No capacity limitations for plants
p
j
j
At most p plants are to be opened
xi , j y j for all i, j
dij distance between market i and plant j
52
utdallas.edu/~metin
p-Center Model
Replace the objective function in p-Median problem with
Min Max {dijxij : i is a market assigned to plant j}
53
utdallas.edu/~metin
p-Covering Model
xi = 1 if demand point i is covered, 0 Max Di xi
otherwise i
yj = 1 if facility j is opened, 0 otherwise
s.t.
Ni facilities associated with demand point
y
i
xi for all i (*)
If j is in Ni, j can serve i j
jN i
x,y i j
{0,1} for all i, j
54
utdallas.edu/~metin
Other Models
p-Choice Models
Criteria to choose the server: distance, price?
Models with multiple decision makers
Franchise model
55
utdallas.edu/~metin