Chain management review novemberdecember drezner

Chapter 5 exercises

Chapter 5 • Network Design in the Supply Chain 163

	mobile industry.

1. SC Consulting, a supply chain consulting firm, must decide on the location of its home offices. Its clients are located pri-marily in the 16 states listed in Table 5-5. There are four potential sites for home offices: Los Angeles, Tulsa, Denver, and Seattle. The annual fixed cost of locating an office in Los Angeles is $165,428, Tulsa is $131,230, Denver is $140,000, and Seattle is $145,000. The expected number of trips to each state and the travel costs from each potential site are shown in Table 5-5. Each consultant is expected to take at most 25 trips

b. If 10 consultants are to be assigned to a home office, at most, where should the offices be set up? How many con-sultants should be assigned to each office? What is the annual cost of this network?

a. If there are no restrictions on the number of consultants at a site and the goal is to minimize costs, where should the home offices be located and how many consultants should be assigned to each office? What is the annual cost in terms of the facility and travel?

nationwide demand for the next year to be 180,000 units in the South, 120,000 units in the Midwest, 110,000 units in the East, and 100,000 units in the West. Managers at DryIce are designing the manufacturing network and have selected four potential sites—New York, Atlanta, Chicago, and San Diego.

TABLE 5-5	Travel Costs and Number of Trips for SC Consulting
TABLE 5-5	Travel Costs ($)
	Los Angeles	Tulsa		Seattle	Number
	Los Angeles	Tulsa		Seattle	of Trips
Washington	150	250	200	25	40
	150	250	200	75	35
	75	200	150	125	100
Idaho	150	200	125	125	25
Nevada	100	200	125	150	40
	175	175	125	125	25
	150	175	100	150	50
	150	150	100	200	30
	75	200	100	250	50
Colorado	150	125	25	250	65
New Mexico	125	125	75	300	40
North Dakota	300	200	150	200	30
	300	175	125	200	20
	250	100	125	250	30
	250	75	75	300	40
	250	25	125	300	55

164 Chapter 5 • Network Design in the Supply Chain

TABLE 5-6	Production and Transport Costs for DryIce, Inc.
New York
		$6 million	$5.5 million	$5.6 million	$6.1 million

	$10 million	$9.2 million	$9.3 million

East	$211				$232			$238		$299
	$232				$212			$230
	$240				$230			$215
West	$300				$280			$270		$225
TABLE 5-7
					South			Capacity
		Europe			Japan	America		Asia
United States	$600				$2,000			$1,700	185	$10,000
	$1,300		$600		$1,400				475
Japan	$2,000	$1,400			$300			$900	50	1,800,000 yen
	$1,200				$2,100		$800		200	13,000 real
India	$2,200				$1,000			$800	80	400,000 rupees
	270			200	120		190

(tons/year)

Plants could have a capacity of either 200,000 or 400,000 units. The annual fixed costs at the four locations are shown in Table 5-6, along with the cost of producing and shipping an air conditioner to each of the four markets. Where should DryIce build its factories and how large should they be?

d. How should Sunchem account for the fact that exchange rates fluctuate over time?

4. Sleekfon and Sturdyfon are two major cell phone manufac-turers that have recently merged. Their current market sizes are as shown in Table 5-9. All demand is in millions of units.

TABLE 5-8
Next Year
US$				Real	Rupee
US$	1.000	1.993	107.7	1.78
Euro	0.502		54.07	0.89
Yen	0.0093	0.0185	1	0.016
Real	0.562	1.124	60.65	1	24.52
Rupee	0.023	0.046	2.47	0.041	1

TABLE 5-9									Africa
Europe						Rest of Asia/
	N. America	S. America		(Non-EU)			Australia
	10	4			3	2		2	1
	12	1						3	1
Import duties (%)	3	20	4						25
TABLE 5-10
Capacity			Fixed Cost/Year			Variable Cost/Unit
Sleekfon	Europe (EU)	20	100			6.0
N. America		20	100			5.5
S. America		10	60			5.3
Sturdyfon	Europe (EU)	20	100			6.0
N. America		20	100			5.5
Rest of Asia		10	50			5.0

rest of Asia/Australia. The capacity (in millions of units), annual fixed cost (in millions of $), and variable production costs ($ per unit) for each plant are as shown in Table 5-10.

able production cost of $5.50, and a transportation cost of serve which markets?

$2.20. The 25 percent import duty is thus applied on $12.70 (5.00 + 5.50 + 2.20) to give a total cost on import of $15.88. For the questions that follow, assume that market demand is as in Table 5-9.

TABLE 5-11					Japan	Rest of Asia/
Europe				Europe		Rest of Asia/
N. America		S. America	(EU)	(Non-EU)		Australia
	1.00	1.50	1.50	1.80	1.70	2.00	2.20
S. America	1.50	1.00	1.70	2.00	1.90	2.20	2.20
Europe (EU)	1.50	1.70	1.00	1.20	1.80	1.70	1.40
	1.80	2.00	1.20	1.00	1.80	1.60	1.50
	1.70	1.90	1.80	1.80	1.00	1.20	1.90
	2.00	2.20	1.70	1.60	1.20	1.00	1.80
	2.20	2.20	1.40	1.50	1.90	1.80	1.00

166 Chapter 5 • Network Design in the Supply Chain

c. What is the lowest cost achievable for the production and distribution network after the merger if plants can be scaled back or shut down in batches of 10 million units of capacity? Which plants serve which markets?

TABLE 5-12

		East	West	South
Chennai	20	19	17	15

	Delhi	15	18	17	20

	18	15	20	19
	17	20	15	17

200 percent. 10 years—that is, years 6 to 15. The problem can now be

a. How should the merged company configure its network to accommodate the anticipated growth? What is the annual cost of operating the network?

b. How does your answer change if the anticipated growth is 15 percent? 25 percent?

c. How does your decision change for a discount factor of

c. If all duties are reduced to 0, how does your answer to Exercise 5(b) change?

d. How should the merged network be configured given the option of adding to the plant in the rest of Asia/

Each server sells for $1,000. The firm anticipates a 50 per-cent growth in demand (in each region) this year (after which demand will stabilize) and wants to build a plant with a capacity of 1.5 million units per year to accommo-date the growth. Potential sites being considered are in North Carolina and California. Currently the firm pays fed-eral, state, and local taxes on the income from each plant. Federal taxes are 20 percent of income, and all state and local taxes are 7 percent of income in each state. North Car-olina has offered to reduce taxes for the next 10 years from 7 percent to 2 percent. Blue Computers would like to take the tax break into consideration when planning its network. Consider income over the next 10 years in your analysis. Assume that all costs remain unchanged over the 10 years. Use a discount factor of 0.1 for your analysis. Annual fixed costs, production and shipping costs per unit, and current regional demand (before the 50 percent growth) are shown

units. Adding 150,000 units of capacity incurs a one-time in Table 5-13.

TABLE 5-13								Annual Fixed
Variable Production and Shipping Cost ($/Unit)								Annual Fixed
Northeast			Southeast				West
		185	180				200
		170	190				220
		180	180				215
		220	220				175
		700	400				600
TABLE 5-14
Variable Production and Shipping Costs
North			East	South	West	Capacity		Fixed Cost
Hot&Cold	France	100		105	100	50
Germany		95		110	105	50
Finland		90	100	115	110	40		850
Demand		30	20	20	35
CaldoFreddo		105		110	90	50
Italy		110		90	115	60		1,150
Demand		15	20	30	20

b. After the merger, what is the minimum cost configuration if none of the plants is shut down? What is the configura-tion that maximizes after-tax profits if none of the plants

demand (millions of units), and variable production and is shut down?

Anderson, Kenneth E., Daniel P. Murphy, and James M. Reeve. Daskin, Mark S. Network and Discrete Location. New York:

“Smart Tax Planning for Supply Chain Facilities.” Supply Wiley, 1995.

Bovet, David. “Good Time to Rethink European Distribution.”
Supply Chain Management Review (July–August 2010): 6–7.

168 Chapter 5 • Network Design in the Supply Chain

“Customer Service Based Design of the Supply Chain.” International Journal of Production Economics (2001) 69:

Robeson, James F., and William C. Copacino, eds. The Logistics Handbook. New York: Free Press, 1994.

69–79. MA: MIT Press, 1997. Mentzer, Joseph. “Seven Keys to Facility Location.” Supply Chain
Management Review (May–June 2008): 25–31.

CasE stuDy


		Internet. The idea was well received in the marketplace,
		demand grew rapidly, and, by the end of 2004, the com-
		pany had sales of $0.8 million. By this time, a variety of
80 percent. This growth, however, was a mixed blessing.		new and used products were being sold, and the com-
The venture capitalists supporting the company were

		the outskirts of St. Louis to manage the large amount of
clearly see that costs would grow faster than revenues if		product being sold. Suppliers sent their product to the
demand continued to grow and the supply chain network		warehouse. Customer orders were packed and shipped
		by UPS from there. As demand grew, SportStuff.com
		leased more space within the warehouse. By 2007,
		SportStuff.com leased the entire warehouse and orders
		were being shipped to customers all over the United
SportStuff.com		States. Management divided the United States into six customer zones for planning purposes. Demand from


ment and jackets from families and surplus equipment		Sanjay and his management team could see that they
from manufacturers and retailers and sell these over the		needed more warehouse space to cope with the antici-
TABLE 5-15

	Demand in 2007	Zone
	320,000	Lower Midwest	220,000
Southwest	200,000	Northeast	350,000
	160,000		175,000

TABLE 5-16
Small Warehouse										Large Warehouse
Fixed Cost								Variable Cost			Fixed Cost	Variable Cost
Location					($/year)		($/Unit Flow)
Seattle			300,000						0.20	500,000
Denver			250,000						0.20	420,000
St. Louis				220,000					0.20	375,000		0.20
Atlanta			220,000						0.20	375,000		0.20
Philadelphia									0.20	400,000

space in St. Louis itself. Other options included leas-										inventory holding cost of $600,000 in the course of the


warehouse and variable costs that depended on the										costs:


ver, Seattle, Atlanta, and Philadelphia. Leased										0–2 million

ft.) or large (200,000 sq. ft.). Small warehouses could
ft.) or large (200,000 sq. ft.). Small warehouses could										4–6 million
										4–6 million
												$798,000Y + 0.113F
lion units per year. The current warehouse in St. Louis


Table 5-16.										ity, Y = 1 if the facility is used, 0 otherwise.

										ment sent to a customer. An average customer order con-tained four units. SportStuff.com, in turn, contracted
through the warehouse per year. This relationship is										with UPS to handle all its outbound shipments. UPS


to the square root of the throughput through the facility.										agement estimated that inbound transportation costs for


gregating throughput through many facilities. Thus, a										was selected.
TABLE 5-17
Northwest						Southwest	Upper Midwest
Seattle	$2.00					$2.50		$3.50		$4.00		$5.00	$5.50
Denver	$2.50					$2.50		$2.50		$3.00		$4.00	$4.50
St. Louis	$3.50					$3.50		$2.50		$2.50		$3.00	$3.50
	$4.00					$4.00		$3.00		$2.50		$3.00	$2.50
		$4.50				$5.00		$3.00		$3.50		$2.50	$4.00

	3. How would your recommendation change if transportation costs were twice those shown in Table 5-17?

leased are in St. Louis?

Matt O’Grady, vice president of supply chain at Cool-

rently had one factory in Chicago that produced both

Wipes, thought that his current production and distribu-

products for the entire country. The wipes line in the

Chicago facility had a capacity of 5 million units, an

annualized fixed cost of $5 million a year, and a vari-

able cost of $10 per unit. The ointment line in the Chi-

cago facility had a capacity of 1 million units, an

increased by a factor of more than four and were

annualized fixed cost of $1.5 million a year, and a vari-

expected to continue growing in the next few years. A

able cost of $20 per unit. The current transportation

costs per unit (for both wipes and ointment) are shown

	New Network Options

CoolWipes

Matt had identified Princeton, New Jersey; Atlanta; and

CoolWipes was founded in the late 1980s and produced

Los Angeles as potential sites for new plants. Each new

plant could have a wipes line, an ointment line, or both.

A new wipes line had a capacity of 2 million units, an

TABLE 5-18

Wipes

Ointment

Zone

Demand

Zone

Demand

Demand

Northwest

500

Southwest

700

Northeast

1,000

Upper Midwest

900

120

600

TABLE 5-19

Transportation Costs per Unit

Upper

Northwest

Southwest

Midwest

Northeast

Chicago

$6.32

$5.76

$5.96

Princeton

$6.60

Atlanta

$6.72

$6.48

$5.92

$4.08

Los Angeles

$4.36

$3.68

$6.72

$6.60

2. Do you recommend adding any plant(s)? If so, where should the plant(s) be built and what lines should be	included? Assume that the Chicago plant will be main-tained at its current capacity but could be run at lower uti-lization. Would your decision be different if transportation costs are half of their current value? What if they were double their current value?