Summary lecture on facilities strategy and

globalization

• Conclusions from ITT,Applichem, etc.• An integrated approach• New paradigms for the global environment

Conclusions from ITT, Applichem, etc.

• Fit with strategy• Focus of plants• Scale and cost• Centralization and standardization• Means of evaluation and plant roles• Sourcing and allocation models

A strategy for the facilities network emphasizes a number of issues

• Scale

• Logistics and flow patterns

• Focus

• Global flexibility and access

• Access to R&D

Product/Market-Process Focus Mean of Focus• Volume• Product• Market• Process

ExampleOff On

Low Vol. High Vol.

JobBatch

Line

DetroitFremont

LancasterMayesville

Low Vol. High Vol.

JobBatchLine

DetroitSaginaw

Lima

Scale Analysis

COST Technology 2

Technology 1

Subcontract

VOLUME

1.5

1.4

1.3

1.2

1.1

1

0.9

0.8

0.7

0.6

0.5

0.4

0.30 2 4 6 8

Costper unit($/unit)

Consumer goods example

Volume in millions of units

Additional logistics drivers

• Raw material access (e.g.wood products)• Distributed production for heavy products• Warehouses for commodities because of

transportation scale• Customer service requirements

Modeling supply chain flow

Supply chain management often requires sophisticated models to determine questions such as

• Number of inventory locations• Assignment of market areas and products to facilities

flows

Destinationssources

Simple facilities network and supply chain for two-stage LP

Suppliers Plants Distribution Centers Customers

Network forMulti-location supply chain

General Manufacturing Models (shared capacity, warehouses or two stages,fixed costs – details in extra slide)

il

k

ljj

lj

ikl

lkj

AA

DDDyx

∑=

= Total flow of l from k to j

= Total flow of type l from i to k

= Demand of l at zone j

= Capacity at warehouse k

= Capacity at plant I for product l

Some Examples of Strategies1. Different process steps and scale, significant logistics

Central stage 1, decentralized stage 22. Significant central R&D

Central plant for at least early life cycle3. Significant product flexibility

Decentralized satellite plants for some stages

The examples underscore the need to develop a strategically consistent focus approach and then appropriately analyze scale and logistics

A suggested approach

• Develop a strategy and appropriate means of focus

• Using data, benchmarking and analysis of technology, develop scale curves

• Identify major decision choices and service requirements covering plant and process options

• Do the analysis

Case StudyWorldwide ConsumerGoods Manufacturer

• 25 Product Groups

• About 10 Production Locations

• Variety of Product Values and Weights

• Over Capacity

• Lack of Focus

• Significant Tax Issues

Stage 1 Stage 2 CustomerWhy Separate?• Differing Scale• Market presence • Tax Laws• Focus• Technological complexity

Approach

• Cross sectional analysis

• Model of variable costs

• Tax analysis

• Detailed analysis of actual fixed costs

Solution:

• Move "light" products to tax havens

• Better focus facilities by product group

Globaliazation adds some additionalcomplexities

• Increase in worldwide exports

• Business level trends• lower scale, higher-skill level manufacturing

systems such as FMS• JIT systems that also underscore the need

for sophisticated vendor infrastructure• TQM and organizational learning• Faster product development• Customization needs• High-value products such as wafers and

chips

Complexities (continued)

• Macro level trends• Large, sophisticated overseas markets with local

needs• Non-tariff barriers• Regionalized trading economies

• Variable factor costs• Particular case of China

Global strategies emphasizesome additional factors

• Global product volumes

• Decentralized network based on regional presence

• Infrastructure versus cost• Changing product cost structure• Skill requirements• Vendors

• Flexibility in several ways

• Multiple stages, players and movements

• Global product and development supply chains

Exchange rate model

400

410

420

430

440

450

460

0 100 200 300 400

Total capacity

Cost

one planttwo plantsthree plantsfour plantsfive plants

Modeling framework for facilities strategy subject to exchange-rate uncertainty (Huchzermeir and Cohen)

ExpectedOptionsValues

ValuationModel

SupplyChainNetworkModel

SupplyChainOptions

SwitchingCosts

StochasticExchange RateModel

State, Option

Value

Business and Operations

Strategy

Location Strategy

Supply ChainModeling

Strengths

GlobalMarket

ProductionTechnologies

InfrastructuralRequirements

LogisticsCosts

CompetitiveEnvironment

Internal Constraints

Supplier Industries

Political and Market

Issues

Factor Costs

Four-stage approach to strategy development

Cross-sectionalData

Supply ChainStrategy andPlant Scale

CapacityFactors

RiskFactors

k

Summary

• Methods for analyzing focus, scale flow, etc.• Impact of new markets and technologies• Global product design and flow patterns• Flexibility• Factors we still need to address:

– Outsourcing and globalization– Longer lead times

For those of you interestedin details, formulation for general case

kjkjlkj

lkjikl

ljlkj

kllkj

ilikl

zzkx

xy

Dx

Afx

Ay

lj

i j

k

lj

k

,

,

∑

∑ ∑

∑

∑

∑

≤

≥

≥

≤

≤

where f is the unit usage of product l

is zero or one, forcing constraint

Could also have shared cap at plants.With no warehouses, define plant variables to go to customers directly. Can add another level for sourcing or two stages of plants.