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1、Location and DistributionHenry C. CoTechnology and Operations Management, California Polytechnic and State University1Location and Distribution (Henry C. Co)ContentsLocation Importance of LocationSystematic Decision ProcessFactor RatingCost-volume AnalysisLocational Breakeven AnalysisSingle Facility

2、 Location Multi-Facility LocationDistributionThe Transportation ProblemThe Transportation Problem with Lost SalesIt is not about time!2Location and Distribution (Henry C. Co)Importance of Location3Location and Distribution (Henry C. Co)“Location, Location, Location!”Location decisions for residentia

3、l homes are important because They affect travel time to work, to school, to recreational centers, and to shopping malls. A home in a good school district is particularly important for most parents with school-age children. A home in a “bad” neighborhood means the residents are exposed to higher ris

4、k of crimes and drugs, while a home is a “good” neighborhood is a source of pride and status. 4Location and Distribution (Henry C. Co)Location decisions are important to business organizations because They affect the cost of doing business, and the flow of goods and services. The faster the flow of

5、goods and service in one direction, the lower the inventory, and the quicker funds ($) flow back in the reverse direction. They commit the organization to long lasting financial, employment, and distribution patterns. For retail outlets, location affects the demand for their products/services. For l

6、abor-intensive operations, labor costs may force an organization to relocate its operations to locations where wages are lower. 5Location and Distribution (Henry C. Co)Location decisions are either demand-pulled, supply-pushed, or more frequently, both demand-pulled and supply pushed. Demand-pulledM

7、arket-related factors such as the location of customers, the location of the competition, the need for room for expansion, and the communitys attitude towards the organization. 6Location and Distribution (Henry C. Co)Supply-pushed location factors Based on the cost of doing business. The cost of doi

8、ng business may be tangible or intangible.Tangible costs include the cost of site and construction, the availability and costs of labor, transportation cost (proximity to suppliers and markets), utilities (availability and costs), taxes, and real estate (site acquisition, preparation and constructio

9、n) costs.Intangible costs include:Zoning and legal regulations, community attitudes, proximity to parent companys facilities, expansion potential, labor climate, training and employment services, and the quality of life (schools and churches, recreation and cultural attractions, amount and type of h

10、ousing available) are examples of important location factors that are difficult to quantify. 7Location and Distribution (Henry C. Co)Technology-Based FirmsTend to cluster around these organizations.Eventually developed into regional networks of expertise. Stanford University, which spawned Silicon V

11、alleyMIT which spawned Route 128 in BostonIn the United Kingdom, Imperial College and Cambridge which spawned Science Parks. Large well-established firm also serve as incubators. Xerox PARC and Bell Laboratories spawned Fairchild Semiconductor which in turn led to numerous spin-offs including Intel,

12、 Advanced Memory Systems, Teledyne, and Advanced Micro-Devices. Engineering Research Associates (ERA) led to more than 40 new firms, including Cray, Control Data Systems, Sperry and Univac. Technology-based firms cluster around their incubator organizations to gain financial and technical support. 8

13、Location and Distribution (Henry C. Co)International LocationsTrade quotas, language, culture, government stability and cooperation, monetary system, infrastructure, etc. can sometimes force a multinational corporation to divest its interest in a country. 9Location and Distribution (Henry C. Co)Syst

14、ematic Decision ProcessQuantitative ApproachesQualitative ApproachesIntegrating Qualitative & Quantitative Data10Location and Distribution (Henry C. Co)Define the location objectives and associated constraints.Identify the relevant decision criteria.Quantitative (e.g., cost of doing business)Qualita

15、tive (i.e., less tangible).Relate the objectives to the criteria using appropriate models (e.g., economic cost models, BEP analysis, LP, factor rating system).Do field research to generate relevant data and use the models to evaluate the alternative locations.Select the location that best satisfies

16、the criteria.Monks, J. G., Operations Management Theory and Problems, 3rd Edition, McGraw-Hill Book Company, ISBN 0-07-042727-5, p. 106.11Location and Distribution (Henry C. Co)Qualitative ApproachesQuantitative ApproachesConventional approaches. cost-volume analysis, net-present valueDecision trees

17、Transportation (Linear Programming)Computer Simulation.Integrating Qualitative & QuantitativeRating scale approachRelative-aggregate-scores approach.12Location and Distribution (Henry C. Co)Qualitative Approach Factor Rating Method13Location and Distribution (Henry C. Co)Develop a checklist of relev

18、ant factorsAssign weight to each factor to indicate its relative importance (total = 100%)Assign a common scale to each factor (e.g., 1-5, 5=best), and designate any minimumScore each potential location according to the designated scale, and multiply the scores by the weightsTotal the points for eac

19、h location, and choose the location with the maximum points14Location and Distribution (Henry C. Co)Factor Rating Template (Illustration)15Location and Distribution (Henry C. Co)Which of these locations is better?16Location and Distribution (Henry C. Co)Locational Breakeven AnalysisTo identify the r

20、anges of demand volume where each location is preferable. 17Location and Distribution (Henry C. Co)Determine fixed and variable costs.Plot total costs.Determine lowest total costs.Example:Cell D3 =B3+C3*$B$1. To determine the total costs for the other three locations, we copy the formula for D3 and

21、paste onto cells D4:D6. 18Location and Distribution (Henry C. Co)Between of 0 and 5,000 units, the line segment associated with location B is the lowest. Between annual outputs of 5,000 and approximately 11,000 units, location C is superior. Beyond approximately 11,000 units, location A is superior.

22、 19Location and Distribution (Henry C. Co)Using Goal Seek to find the breakeven volumeBetween A and CD11=B11+$B$13*C11 and D12 =B12+$B$13*C12 Set Cell: D13 (the cost difference)To value: 0 (the two costs must be equal)By changing cell: B13 (the volume)20Location and Distribution (Henry C. Co)Between

23、 B and CD17=B17+$B$19*C17D18=B18+$B$19*C18Set Cell: D19 (the cost difference)To value: 0 (the two costs must be equal)By changing cell: B19 (the volume)21Location and Distribution (Henry C. Co)Below 5,000 units, B is the best alternative.Beyond 11,111 units, B is the best alternative.Between 5,000 a

24、nd 11,111 units, C is the best alternative.Alternative D is never a good choice.22Location and Distribution (Henry C. Co)Single Facility Location23Location and Distribution (Henry C. Co)AssumptionsDemand volumes are frequently assumed to be concentrated at one point (demand cluster)The basis of vari

25、able costsTotal transportation costs usually are assumed to increase proportionately with distanceStraight-line routes are commonly assumed b/w the facility and other network pointsNot dynamic24Location and Distribution (Henry C. Co)Center of Gravity ApproachCenter-of-gravity approach, the grid meth

26、od, centroid method, p-median methodTransportation cost is the only locational factor, static continuous location modelIllustration25Location and Distribution (Henry C. Co)E2=B2*D2; copy an paste onto E3:E8F2=C2*D2; copy an paste onto F3:F8D9=SUM(D2:D8); copy an paste onto E9:F9D12=E9/D9; D13=F9/D9.

27、26Location and Distribution (Henry C. Co)How good is the center of gravity?First, consider Euclidean distances.Geometrically, the straight line connecting the center of gravity and demand center A is the hypotenuse of a right triangle. The lengths of the two legs of the right triangle correspond to

28、the x- and y- coordinate distances between the center of gravity and demand center A, i.e., (6.669 2.5) along the x-axis, and (4.5 3.022) along the y-axis. From the Pythagorean Theorem, the square of the length of the hypotenuse equals the sum of square of the length of the two legs = (6.669 2.5) 2

29、+ (4.5 3.022)2 = 19.566. The Euclidean distance therefore is 4.423. The corresponding Excel formula is F6 = SQRT(B6-$C$2)2+(C6-$C$3)2). 27Location and Distribution (Henry C. Co)Copy and paste the formula for F6 onto F7:F12.The total weighted sum of the distances is the sumproduct of the forecasted d

30、emand and the Euclidean distances = 141,166.Euclidean Distances28Location and Distribution (Henry C. Co)Use Solver to optimize the location29Location and Distribution (Henry C. Co)Total weighted sum of the distances is reduced to 136,204.30Location and Distribution (Henry C. Co)Rectilinear DistanceP

31、arallel to the x- and y- axes (east-west, north-south, and making 90 turns only.F6=ABS(B6-$C$2)+ABS(C6-$C$3); copy an paste onto F7:F12G6=D6*F6; copy an paste onto G7:G12G13=SUM(G6:G12)31Location and Distribution (Henry C. Co)Use Solver to optimize the location32Location and Distribution (Henry C. C

32、o)Solver was able to reduce the total weighted sum of the distances based on rectilinear distance from 180,147 to 161,000 or by about 10.6%!33Location and Distribution (Henry C. Co)Multiple Facility Location34Location and Distribution (Henry C. Co)In many distribution/logistics problems, we are conc

33、erned with finding the minimum cost way to get products from a variety of plants/suppliers to their final markets.Typically, different suppliers have different costs and capacities; transportation costs are specific to a supplier / market pair; and different markets have different requirements and p

34、ossibly profitability.Realistic problems of this type can involve large numbers of suppliers, products, and markets and can be difficult to figure out by intuition or gut feel.35Location and Distribution (Henry C. Co)Solution MethodsThere are many approaches to the distribution system planning probl

35、em. The usual approach is to develop a first cut solution either by making simplifying assumptions or using heuristics, and then fine-tuning the solution with more advanced methodologies such as mathematical programming techniques and computer simulation. The center of gravity method is an example o

36、f a first cut solution. The solution was derived by taking weighted average of the x- and y- coordinates of the demand clusters. Solver improved the solution by than 10%. What we just solved is actually a complex non-linear optimization problem. The availability of inexpensive high-speed computer ha

37、s made such a complex problem appear so trivial!36Location and Distribution (Henry C. Co)Basic Planning QuestionWarehousesHow many warehouses should there be in the logistics network?How large should they be, and where should they be located?CustomersWhich customers should be assigned to which wareh

38、ouses? Which warehouses should be assigned to which plants, vendors, and ports?DistributionWhich products should be stocked in which warehouses?Which products should be shipped directly from plants/vendors/ports to customers?37Location and Distribution (Henry C. Co)Distribution38Location and Distrib

39、ution (Henry C. Co)The Transportation ProblemHow to satisfy demands at a given number of destinations with supplies from given set of origins.Structure of the system is knownLocation and characteristics of facilitiesLocation and profile/demand of customersTransportation means and costsDistribution s

40、trategy to satisfy demand at least cost.39Location and Distribution (Henry C. Co)IllustrationThe Hottest Mexican Restaurant has restaurants in 5 Midwestern cities. They order their tortillas from the Laredo Tortilla Factory, which has warehouses in 6 cities. The shipping costs (in dollars per dozen

41、tortillas) are given below:40Location and Distribution (Henry C. Co)The demand for each restaurant and the tortillas available at each warehouse are:41Location and Distribution (Henry C. Co)Excel SpreadsheetStep 1: Set up the EXCEL spreadsheet as shown below:42Location and Distribution (Henry C. Co)

42、Notice that there are two sections. The first section shows the unit shipping costs. The cells have been formatted as currency with 2 decimal places (Select by highlighting the cells, then click on Format- Cell- Currency ). The second section shows the allocation and shipping costs. The optimal allo

43、cations have been assigned to cells B20:F25. (at this time, these cells are all blanks). These are the decision variables. The demand and supply have been entered in cells B27:F27 and cells H20:H25, respectively. Also, row 28 has been formatted as “currency” with 2 decimal places, and all other cell

44、s formatted as number with 2 decimal places. 43Location and Distribution (Henry C. Co)Sums of CellsStep 2: Enter the formulae for the sum of demand (cells B26:F26) and the sum of supply (cells G20:G25), respectively. For example, B26=SUM(B20:B25) ;copy and paste the formula from C26:F26 .G20=SUM(B20

45、:F20) ;copy and paste the formula from G21:G25 .To find out if supply is sufficient, enter the formulae of the total system demand and the total system supply.Total system supply H26=SUM(H20:H25)Total system demand G27=SUM(B27:F27)The sum of supply is H26=423. Similarly, compute the sum of demand. T

46、he sum is G27=370. In this case, there will be excess supply.44Location and Distribution (Henry C. Co)Shipments from . Shipments to Step 3: Enter the formula for cell G20=SUM(B20:F20), the total shipment from Tulsa, as shown. Note that cells B20:F20 = the allocations from Tulsa to Minneapolis, Salin

47、a, Kansas, Lincoln, and Wichita, respectively. Copy this formula and paste it onto cells G21:G25. Step 4: Likewise, enter the formula for cell B26=SUM(B20:B25), the shipments to Minneapolis; copy and paste the formula onto cells C26:F26.45Location and Distribution (Henry C. Co)Shipping CostsStep 5:

48、Enter the formula for cell B28=SUMPRODUCT(B3:B8,B20:B25), the total shipping cost to Minneapolis. Copy and paste the formula onto cells C28:F28.Step 6: Enter the formula for cell G28=SUM(B28:F28), the total system cost.46Location and Distribution (Henry C. Co)47Location and Distribution (Henry C. Co

49、)What we have just modeled is a linear programming problem. The objective function is the total transportation cost (to be minimized), subject to the demand-supply constraints. We are now ready to solve the problem using an Excel tool called Solver.48Location and Distribution (Henry C. Co)The “North

50、west Corner” SolutionStarting from cell B20 (the “northwest corner”), let us find out how many units we can allocate from Tulsa to Minneapolis. Tulsa has 77 units available and Minneapolis needs 52 units. Suppose we allocated 52 from Tulsa, to satisfy the demand of Minneapolis. The leaves Tulsa with

51、 a remaining capacity of 77-52=25 units. Allocate the remaining 25 units from Tulsa to Salina (cell C20). Salina has a demand of 99 units. With 25 units from Tulsa, Salina still needs 74 units. Allocate 45 units from the next origin Oklahoma. This will exhaust the supply of Oklahoma. The remaining 2

52、9 units will come from Denver. Etc., etc.49Location and Distribution (Henry C. Co)SolverStep 7 Click on “Tool”, and choose “Solver” in the pull-down menu. You should see this:Step 8: In the Tool-Solver menu, enter the following (the “Set Target Cell” is $G$28, the grand total cost):By changing cells

53、 B20:F25 (the cells highlighted in light green is our allocation table).Select the Min button to minimize the grand total cost. 50Location and Distribution (Henry C. Co)Adding ConstraintsStep 9: Add the following constraints (one at a time):Since total capacity exceeds demand, the shipment from each

54、 source should be less than or equal to its capacity: G20:G25 H20:H25, i.e. Since total demand is less than total capacity, the total shipment to each destination should be equal to its demand, B26:F26 = B27:F27 51Location and Distribution (Henry C. Co)Options: Linear, Non-negative, Auto-ScaleStep 1

55、0:After entering all constraints, set the option as shown:52Location and Distribution (Henry C. Co)Step 11: Click the Solve button!53Location and Distribution (Henry C. Co)The Transportation Problem with Lost Sales54Location and Distribution (Henry C. Co)Suppose, the warehouse in Omaha becomes unava

56、ilable. Originally, the sum of supply was 423.With Omaha gone, the total supply is now 351 units. Since total demand is 370 units, 19 (=370-351) units of demand will not be satisfied. Replace Omaha by “Lost Sales,” with capacity equal to the demand not satisfied, i.e., 19 units. Suppose the unit cos

57、t of unsatisfied demand is $30 for the restaurants in Salina and Kansas, and $20 for the other locations. 55Location and Distribution (Henry C. Co)The Northwest Corner SolutionRow 8 has been changed to Lost Sales.Cell H25 and cell B16 equals the demand not satisfied = 19 units. 56Location and Distri

58、bution (Henry C. Co)Solver reduced total cost by 40% (from $2,277 down to $1,369). Lincoln & Wichita will have shortages (4 & 15 units, respectively).57Location and Distribution (Henry C. Co)It is not about time!Based in part from:/gibsobj/SCM%20-%201929%20-%20Location%20Location.

59、doc. Journal of Commerce Inc. Feb 26, 2019 58Location and Distribution (Henry C. Co)How many warehouses?About every five years, large companies undertake a network design project to determine if their warehouses are properly positioned. Many companies hire consultants for this and use software to pe

60、rform the analysis. They address the positioning of warehouses but not all the elements of the supply chain.Most important of these elements is how warehouse design affect customer service. 59Location and Distribution (Henry C. Co)Customers Lead-timeLead-time is based on two components - inventory a