6.2 Facility Location and Network Optimization

Facility location and network optimization are crucial for global supply chains. Companies must carefully choose where to place facilities, considering factors like costs, risks, and customer service. These decisions shape the entire distribution network's performance and resilience.

Optimizing global supply chains involves complex trade-offs. Mathematical models help balance transportation costs, inventory levels, and customer service. Companies must design networks that are both efficient and resilient, adapting to changing market conditions and potential disruptions.

Facility Location Analysis in a Global Context

Key Factors and Complexities

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• Facility location analysis involves determining the optimal placement of facilities within a supply chain network to minimize costs and maximize efficiency
• Key factors considered include:
  • Transportation costs
  • Labor costs
  • Taxes and duties
  • Proximity to suppliers and customers
  • Infrastructure
• The global context introduces additional complexities:
  • Varying transportation modes and costs
  • Trade regulations
  • Currency fluctuations
  • Political risks
  • Cultural differences that impact facility location decisions

Techniques and Strategies

• Techniques for facility location analysis include:
  • Center of gravity method
  • Factor rating method
  • Mathematical optimization models
• These methods consider quantitative and qualitative factors to evaluate potential locations
• Facility location decisions have long-term strategic implications for a company's global supply chain performance:
  • Responsiveness
  • Flexibility
  • Competitiveness
• Global facility location strategies may involve:
  • Offshoring production
  • Nearshoring production
  • Reshoring production based on changing market conditions, costs, and risks

Optimization of Global Supply Chains

Mathematical Models and Algorithms

• Mathematical optimization models, such as mixed-integer linear programming (MILP), are used to determine the optimal number, location, and capacity of facilities in a global supply chain network
• These models consider various constraints:
  • Facility capacities
  • Product flows
  • Transportation modes
  • Service level requirements
• The objective is to minimize total supply chain costs while meeting demand
• Network optimization algorithms are used to solve specific subproblems within the larger facility location problem:
  • Shortest path
  • Minimum spanning tree
  • Maximum flow

Heuristics and Sensitivity Analysis

• Heuristic and metaheuristic algorithms, such as genetic algorithms and simulated annealing, are used to find near-optimal solutions for large-scale, complex global supply chain networks when exact optimization methods are computationally infeasible
• Sensitivity analysis is conducted to evaluate the robustness of the optimal solution under different scenarios:
  • Changes in demand
  • Changes in costs
  • Disruptions
• This analysis informs decision-making and helps identify the most critical factors affecting the global supply chain network

Trade-offs in Global Facility Location

Transportation Costs and Inventory Levels

• Transportation costs are a significant factor in global facility location decisions, as they impact the total landed cost of products
• Trade-offs exist between centralized and decentralized distribution strategies:
  • Centralization often leads to lower inventory costs but higher transportation costs
  • Decentralization can reduce transportation costs but may increase inventory costs
• Inventory levels must be carefully managed in global supply chains to balance the cost of holding inventory with the risk of stockouts and lost sales
• Facility location decisions affect inventory levels by determining the number and placement of stocking points

Customer Service and Total Cost Optimization

• Customer service levels, measured by metrics such as order fill rates and delivery lead times, are influenced by facility location decisions
• Locating facilities closer to customers can improve responsiveness but may increase costs
• The total cost of the global supply chain, including transportation, inventory, and facility costs, must be optimized while meeting customer service level targets
• Risk pooling strategies, such as consolidating inventory in fewer locations (e.g., regional distribution centers), can be used to reduce overall inventory levels and costs while maintaining customer service levels

Designing Resilient Global Distribution Networks

Efficiency and Resilience

• An efficient global distribution network minimizes total supply chain costs while meeting customer service level requirements
• This involves optimizing the number, location, and capacity of distribution centers and transportation routes
• A resilient global distribution network is able to withstand and recover from disruptions:
  • Natural disasters (earthquakes, hurricanes)
  • Supplier failures
  • Transportation breakdowns (port strikes, road closures)
• Strategies for improving resilience include:
  • Multi-sourcing from different geographical regions
  • Maintaining redundant capacity in key facilities
  • Utilizing flexible transportation options (intermodal, expedited shipping)

Risk Management and Sustainability

• Risk factors must be considered in the design of global distribution networks:
  • Political instability in certain countries or regions
  • Currency fluctuations affecting costs and revenues
  • Supply chain security threats (theft, counterfeiting)
• Risk assessment and mitigation strategies are used to manage these risks:
  • Scenario planning to prepare for potential disruptions
  • Insurance to protect against financial losses
• Sustainability considerations are increasingly important in global distribution network design:
  • Carbon emissions from transportation and facilities
  • Energy consumption in warehouses and distribution centers
  • Waste reduction and recycling efforts
• Strategies for improving sustainability include:
  • Optimizing transportation modes (rail, sea, road)
  • Using eco-friendly packaging materials
  • Collaborating with suppliers and customers on sustainability initiatives
• Technology, such as real-time tracking and visibility systems, can be used to improve the efficiency and resilience of global distribution networks by enabling better decision-making and faster response to disruptions