So welcome back in our last session we were
discussing about network decisions we discussed about 4 important type of decisions which
we take. We take decision with respect to role of the
facilities, we take decision with respect to location of the facilities, we take decisions
with respect to their sizes and then we take decisions with respect to market and supply
allocation. We discussed about various factors which are
responsible for taking decisions for network decisions and then in our last session we
also discuss that how response time and number of facilities are related. We discuss that if we have more number of
facilities the response time will decrease, as we are coming from left to right on the
x-axis we are increasing the number of facilities, so our response time is also start decreasing. So we already discussed this in our last session. No going further if you see this type of figure
that where you have this particular market which is plant, then here you have distribution
centres, these yellow points. These are representing the distribution center
and then all these dots are representing the customer. So you have these points representing the
plant these yellow point representing the distribution center. And then these marks small dots are representing
the customer, so this is a type of situation where you have so many customers, so many
distribution centres and few plants. Now here you see we can say that we require
one week order response time, in this particular case because you have only 3 plants 1, 2,
3, 4 plants and you have very limited number of suppliers with respect to distribution
centre. So here I talk like if I talk with this type
of a distribution centre or this type of distribution centre here your required at least one week
response time, so in this particular case the response time is very high because of
limited availability of the distribution centres in this overall global market. Now let us go to this type of situation, here
you have this distribution centre this distribution centre. Now within this market you have 2 distribution
center and here in this particular case because 2 cycles are intersecting, 2 yellow cycles
are intersecting. Now you see here in this particular case for
these people those customers which are coming in the intersecting cycle, here we have two
distribution centre. This distribution center can also fulfil the
requirement of customers coming in this intersection cycle and this distribution center can also
fulfill the requirement and as a result of that the response time has reduced from 1
week to 5 days. So that is the result of 2 distribution centres
for the customers which are in the intersecting cycles. Now you have more such distribution centre
and now you are reducing the cycles of distribution center and therefore you will find that in
some of the cases you have more than one cycle which are able to fulfill the requirement,
because you have 5 distribution centre for this market and talking of only this market
right now, so for this market this US market you have 1, 2, 3, 4, 5 distribution center
and there are at many places customers can be served by more than one distribution center. And what is happening that we have reduced
the response time from 5 days to 3 days. So as we have said that as our facilities
if you go back to this slide so as our number of facilities are increasing we have one facility
so at that time 7 days was the response time we had 2 facilities, 2 distribution centre,
so response time decreases to 5 days. Now we have 5 distribution Center to response
time decreases to three days. So that is how we are moving for more number
of distribution centre, less response time means response time we are able to fulfill
the requirement of the customer in a faster manner more with less time. And now you see you have how many 13 distribution
centre, you can see the 13 yellow circles here and these 13 yellow circles will further
reduce your response time and here we see that the response time is the next day, you
order today next day you get the supplies. So because in many cases here you will see
large number of intersecting circles and as a result of that customers can get benefited
by reduced response time. So more circles, more distribution centres
and your response time for that decreases. So again strength in the same thing that more
facilities and response time will decrease. Now going further you have now how many you
can count these yellow circles. You can count these yellow circles and the
result is already displayed here that is these are 26 distribution centre. These distribution centres and your order
can be received same day, the same day order or in some cases like in this case where you
do not have any intersecting circles. So probably in these cases if I talk of this
customer, so probably because of the distance from this distribution Center to this customer
order may be supplied next day in this case those 3 customers are very close but there
are two customers which are on the periphery of the circle for them order may be supplied
next day. There are few customers which are not part
of any of the circle for these customers order may come after one day only. So as we are improving our number of facilities
as we are increasing our number of facilities we can see in this diagram that the response
time has further reduced you are able to get the product in the same day, so from one distribution
center when we were having only one single yellow circle at that time our response time
was 7 days, one week and now we have 26 distribution centres and the response type is either the
same day or next day. So as we are increasing the number of facilities
it is very simple to understand that the response time will keep on decreasing. Now you see in this particular case what are
the different types of cost which are associated with facilities. Now as we have this cost verses number of
facility graph, so your with facility as you are increasing the number of facilities, your
inventory cost increases. Because now if you see you have various distribution
centres 1, 2, 3, 4, one manufacturer, all these are the DCs, then you have large number
of retailers maybe 1 to 50 and as you are increasing these numbers from 4 to 6, from
50 to 60 you need it at each location at each facilities some amount of inventory, some
amount of products to be kept at each of these locations. So when you are having more facilities in
your network your inventory cost is bound to increase. You have higher inventory cost, so that is
one simple lesson that more facilities more inventory cost. The second is transportation, now in the cases
of transportation you see the cost starts decreasing as we are increasing the number
of facilities the cost starts decreasing to some point here and then all of a sudden it
starts increasing, why it happens, why it happens that way that cost is decreasing to
a point and then starts increasing. The reason is that transportation cost can
be divided into two parts if this is a facility in supply chain. So there are some materials which are coming
to the facility and there are some materials which are leaving the facility in a supply
chain. So materials which are coming to a facility
the cost of transportation associated with the inbound material is known as inbound transportation
cost. This is inbound transportation cost and the
cost associated with the materials leaving the facility that is known as outbound transportation
cost, it is very simple to understand that normally the size of consignment which we
receive at a particular facility is larger, is bigger than the size of consignment leaving
the facility. The size of consignment leaving the facility
is normally is smaller than the size of consignment coming to facility. We know that if I am a manufacturer I receive
raw material in large quantities and which is very homogeneous also and the finish product
because these finished products will go to many dealers, many distribution centres, so
the size of outbound transportation, outbound consignment will be smaller. The point which I am trying to say here you
get inbound logistics, here you get sufficient economy of scale, but here that economy of
scale will not be there. Though we try to keep some amount of economy
of scale even in the outbound transportation also. When we are making more and more facilities
we are trying to go closer to the customer, so what will happen we may lose after a particular
level of facilities after a particular number of facilities we may lose all of a sudden
economy of scale even in inbound transportation cost because more facilities so the size of
inbound consignment will also reduce with the assumption that market is not growing. If market is constant and I am making more
and more facilities so in that case it is quite possible that with increasing number
of facilities my economy of scale my benefit of economics will not be there even in the
inbound transportation and if that happens because of more number of facilities, so transportation
cost starts increasing after a particular number of facility. Otherwise as long as I am coming to this site
transportation cost will decrease because I will be going closer to my customer and
I will continuously decreased my outbound transportation cost, I am going closer to
the customer, so this outbound on transportation cost which is much higher than the inbound
transportation cost. This cost is higher than this inbound transportation
cost. So making more number of facilities will help
me to reduce the outbound transportation cost. As long as I am able to maintain economy of
scale in the inbound transportation cost but what I said that after a particular number
of facilities I may lose economy of scale in the inbound transportation cost also and
at that time the benefits of reduced outbound transportation cost will be nullified or rather
I need to pay more if that happens if I lose the economy of scale in my inbound transportation
cost. And therefore I can have this type of increase
very sharp increase in the transportation cost of the product after a particular number
of facility, so that is the discussion about the second important cost with respect to
number of facilities. The third cost of the facility cost itself,
this is the facility cost, so as I am making more number of facilities I need to develop
the required infrastructure, I need to put my capital into that and as a result of that
with more number of facilities I have increasing the cost of facility. Up to some level you see I am moving in a
very linear fashion up to here, but beyond this point there will be a very sharp increase
exponential increase in the facility cost. I will ask my students to think on this aspect
that why the cost of facility increases in this exponential manner, after a particular
level. after a particular number of facilities. And probably in our next session I will like
to around reply I will give you this question right now that why you have this straight
line up to a particular point of number of facilities and beyond this the shape of the
curve changes at it becomes more exponential in nature with respect to facility cost. And you please think through and in our next
class we will like to discuss the answer of this every question. Then if I combined my various types of cost,
so this type of curve emerges where this curve at the top represents the total cost which
is the sum of facilities, inventory, transportation and labour cost, more number of facilities
so with increase in facilities you have a step increase in the labour cost also, you
have transportation cost decreasing and then increasing, you have inventory cost which
increases with number of facilities and the cost of facilities itself. And as a result of that you have this total
cost curve where total cost is decreasing up to a point and then it starts increasing
because of increase in the transportation cost and then the role of services and facilities
is also very important with your increased number of facilities why are you increasing
the number of the facilities?. The question is why are you increasing the
number of facilities?, we increase facilities because we want to serve our customer in a
more satisfying manner. Or you can say that we want to achieve higher
level of services by providing more number of facilities, more number of facilities going
closer to the customer and going closer to the customer will bring better service level
so as you are seeing with this curve that your service level is increasing with number
of facilities as you are increasing the number of facilities your service level is also improving. So this is a combined discussion of variety
of cost and the service level which you get with the increase number of facilities. Now with this discussion we cannot understand
that what should be the ideal number of facilities. Now if you see the total cost curve, the lowest
point of this total cost curve somewhere here around this point and here if I get this level
of service and if this level of service is within the my promise limits to my customer
then I will like to keep this as the number of facilities, these number of facilities
I will like to keep and you see this is the point of intersection of my facility cost
and the transportation cost also. So this is the point where I get the minimum
cost of facilities and this is the level of service. Now if I want to improve my service level
this is only possible when I will incur additional cost of facilities. Additional cost of facilities will be required
for improved service level for higher response rates and in case of a product where we want
very high level of responsiveness we can go with higher level of service and accordingly
cost of offering that service will also increase. So those products probably of emergency nature
where we require very high level of service in that case cost many a times may not matter
and therefore you will provide high level of services by going to the higher level of
caused by increasing the number of facilities like in the case of humanitarian supply chains,
the disaster supply chains where you are providing the facilities for better rehabilitation for
immediate relief of the victims. In those cases cost issues are secondary,
the ability to provide relief immediately is more important and in such type of situations
we will like to have more number of facilities in those disaster prone areas in those risky
areas where you feel that disasters may come and for that purpose to provide higher level
of services you keep your ambulances, your nursing homes, your other dispensaries, your
other facilities, always readily available. And therefore your cost is also high but in
those situations we require very high level of response and therefore it is well justified
but in many other cases the higher level of response of service may not be required and
therefore it is not essential to increase the cost of your offering by increasing the
number of facilities. So therefore in most of the cases it is always
advisable to understand this graph very carefully for the practitioners those were attending
this class. It is always advisable that please understand
this break up and try to optimise the number of facilities. Otherwise you will increase the number of
facility but you will not have proportionate increase in service level, because you see
the service level curve becomes almost is stagnant after a particular type and therefore
understanding of this graph is very very important. Now moving further let us quickly see that
the PC that once we are deciding about the location of the facility, so how do we select
the site in a global environment, what are the different phases involved, you see this
is a 4 phase process, phase 1, 2, 3, 4. The process starts with the supply chain strategy,
this is the first stage of our site allocation, site selection that what is my supply chain
strategy. Because all the facility location decisions
must be in line with your supply chain strategy, so so understanding the strategy is very very
important, I discussed in my last class about Walmart and 7-11. The Walmart strategy is to provide low cost
product, the 7-11 strategy is to provide the very high level of responsiveness. If I am an emergency type of hospital, so
my condition is different and if I am a hospital for routine medicines, so in that case my
condition is slightly different. So this depends upon me whether I am a routine
type of hospital or I am there to handle the emergency cases. So as per that my first important thing is
supply chain strategy. Now supply chain strategy is we have already
discussed that for every quick brush up will like to discuss that it comes from the competitive
strategy of the organisation, what is the competitive strategy of the organisation that
derives your supply chain strategy. And then the other factors which contribute
in proper understanding of the supply chain strategy or proper you can say written framework
of the supply chain strategy one is the internal constraints and the second is the Global competition. These are the two more factors which are very
important in deciding the supply chain strategy. So totally there are three inputs. Three inputs for my supply chain strategy
one is the competitive strategy of the organisation. Second is the global competition what is going
in the global level with respect to your industry and the third is the internal constraints
related to Capital, the growth strategy, the existing network etc. These things also play important role because
if I am let say Tata Motors and I am launching Tata Nano a new vehicle in my portfolio, so
I cannot have entirely new network of distribution for Tata Nano. Because I already have a distribution network
for my other products and I will like to use I will like to have some kind of strategy
with my existing network. On the other hand we have the example of recent
example of Maruti Nexa, where Maruti to promote its exclusive type of product is not using
the existing Network and Maruti has created a separate network of distributorship named
as Nexa. So it depends upon what type of growth strategy
what type of existing network in case of Maruti though we all know Maruti is known for its
largest network among the automobiles, but still for its exclusive products if they want
to have some kind of different positioning of some of their products they gone for the
Maruti Nexa. So it depends that what type of growth strategy?,
what type of capital requirement you have and then on the basis of that you decide supply
chain strategy. The second phase is the regional facility
configuration. Now on the basis of that you have certain
regional consideration and regional considerations come from the tariffs and tax incentives like
when new states of Uttarakhand, Chhattisgarh and Jharkhand came into existence in India. Uttarakhand government, so on Chhattisgarh,
so on Jharkhand, so on Jargat gave of tax incentives to new organisations. And as a result of that many new companies,
many new MNCs they open their facilities in these new states. So some type of tax incentives, what type
of tax incentives are available in a regional area?, what is the regional demand?, whether
we have any regional demand or not, most of these states were not having any kind of regional
demand. But because of very heavy tax incentives many
facilities came in this areas. Then certain political stability type of issues
are also very important and because industry can only survive facilities can only service
where you have political stability. Then another issues related to production
technologies whether we have appropriate technologies available. This issue is more important when I look at
the global level. So because in that case the regional issue
is a particular country. If I talk in case of India a regional issues
related to a particular state, so in that case what type of technology support will
be available in country like India or any other country where I am thinking to establish
my facility and what is the competitive environment do we have a positive competitive environment
in that regional area or not, so that is also very important and with these things I draw
some conclusion about my regional configuration. I divide the global market, global arena in
certain regions and then I do this type of analysis for all those regions and on the
basis of that I may consider one or more than one reasons which are favourable for my decision
making and once I have done that third issues related to site, within that region what are
the possible sites where I can locate my facility like if I take regional issue related to Uttarakhand,if
Uttarakhand is one reason. So desirable sites can be Udham Singh Nagar,
desirable sites can be Sitarganj, desirable site can be Haridwar and out of that I will
look that what is the available infrastructure in each of these sites. Now I will go to a very specific issue related
to power availability related to manpower availability related to railroad infrastructure
related to water availability etc. and the production methods is still needs. And response times means what type of skills
are available in that particular site and what will be the response time how I will
manage the response time from this particular site. So depending upon my market and supply allocation
I will take the decision with respect to response time and on the basis of this finally I will
like to decide I will come to a particular location where I will see the issues related
to logistics costs, issues related to factor cost of labour material and some site specific
issues. So when these four stages are passed I can
take decisions with respect to location of a particular facility in a particular region
at a particular site. We will see, we are stopping our this session
at this end but in our next session we will see that some of the mathematical model, some
of the mathematical analysis which can help us in selecting the regional facility and
desirable sites on the basis of various inputs which we are required and some mathematical
models are there. And we will request you that if you can practice
some Excel solver kind of thing, if you can install Excel solver in your computer and
we will do some questions here and with the help of those questions you can also practice
at your end and then you can see that how in real-time the modelling related to networks
can be done, because the decisions related to stage one of the supply chain where we
are talking of manufacturing related decisions. These are permanent type of decisions, but
decisions related to next stages retailers, distribution centres are more dynamic into
nature and where we require more real time analysis. So thank you very much we stop at this time
and will look for your participation with Excel solver in our next session. Thank you very much.
