Facilities in the Supply Chain

In this section, we discuss the role that facilities play in the supply chain and critical facility- related decisions that supply chain managers need to make.

1. Role in the Supply Chain

Firms can increase responsiveness by increasing the number of facilities, making them more flexible, or increasing capacity. Each of these actions, however, comes at a cost. Increasing the number of facilities increases facility and inventory costs but decreases transportation costs and reduces response time. Increasing the flexibility or capacity of a facility increases facility costs but decreases inventory costs and response time. Thus, each supply chain must find the appropri­ate tradeoff when designing its facilities network. Whereas IKEA has become profitable by opening a few hundred large stores (no more than one or two per city) to grow efficiency, Seven- Eleven Japan has grown profitability by opening a highly dense network of stores (often hun­dreds per city) to provide responsiveness. Both companies are successful because the facility decisions are aligned with the supply chain strategy.

EXAMPLE 3-1 Toyota and Honda

Both Toyota and Honda use facilities decisions to be more responsive to their customers. These companies have an end goal of opening manufacturing facilities in every major market that they enter. Although there are other benefits to opening local facilities, such as protection from cur­rency fluctuation and trade barriers, the increase in responsiveness plays a large role in Toyota’s and Honda’s decision to place facilities in their local markets. The flexibility of Honda facilities to assemble both SUVs and cars in the same plant allowed the company to keep costs down in the downturn of 2008. While competitors’ SUV production facilities were idle, Honda facilities maintained a high level of utilization.

2. Components of Facilities Decisions

Decisions regarding facilities are a crucial part of supply chain design. We now identify compo­nents of facilities decisions that companies must analyze.

ROLE Firms must decide whether production facilities will be flexible, dedicated, or a combi­nation of the two. Flexible capacity can be used for many types of products but is often less efficient, whereas dedicated capacity can be used for only a limited number of products but is more efficient. Firms must also decide whether to design a facility with a product focus or a functional focus. A product-focused facility performs all functions (e.g., fabrication and assem­bly) needed for producing a single type of product. A functional-focused facility performs a given set of functions (e.g., fabrication or assembly) on many types of products. A product focus tends to result in more expertise about a particular type of product at the expense of the func­tional expertise that comes from a functional methodology.

For warehouses and DCs, firms must decide whether they will be primarily cross-docking facilities or storage facilities. At cross-docking facilities, inbound trucks from suppliers are unloaded; the product is broken into smaller lots and is quickly loaded onto store-bound trucks. Each store-bound truck carries a variety of products, some from each inbound truck. For storage facilities, firms must decide on the products to be stored at each facility.

location Deciding where a company will locate its facilities constitutes a large part of the design of a supply chain. A basic trade-off here is whether to centralize to gain economies of scale or to decentralize to become more responsive by being closer to the customer. Companies must also consider a host of issues related to the various characteristics of the local area in which the facility is situated. These include macroeconomic factors, quality of workers, cost of work­ers, cost of facility, availability of infrastructure, proximity to customers, the location of that firm’s other facilities, tax effects, and other strategic factors.

CAPACITY Companies must also determine a facility’s capacity to perform its intended func­tion or functions. A large amount of excess capacity allows the facility to respond to wide swings in the demands placed on it. Excess capacity, however, costs money and therefore can decrease efficiency. A facility with little excess capacity will likely be more efficient per unit of product it produces than one with a lot of unused capacity. The high-utilization facility, however, will have difficulty responding to demand fluctuations. Therefore, a company must make a trade-off to determine the right amount of capacity to have at each of its facilities.

Facility-Related Metrics facility-related metrics Facility-related decisions affect both the financial performance of the firm and the supply chain’s responsiveness to customers. On the financial side, facilities decisions have an impact on the cost of goods sold, assets in PP&E (if facilities are owned), and selling, general, and administrative expense (if facilities are leased). A manager should track the following facility-related metrics that influence supply chain performance:

• Capacity measures the maximum amount a facility can process.
• Utilization measures the fraction of capacity that is currently being used in the facility. Utilization affects both the unit cost of processing and the associated delays. Unit costs tend to decline (PPET increases) and delays increase with increasing utilization.
• Processing/setup/down/idle time measures the fraction of time that the facility was pro­cessing units, being set up to process units, unavailable because it was down, or idle because it had no units to process. Ideally, utilization should be limited by demand and not setup or downtime.
• Production cost per unit measures the average cost to produce a unit of output. These costs may be measured per unit, per case, or per pound, depending on the product.
• Quality losses measure the fraction of production lost as a result of defects. Quality losses hurt both financial performance and responsiveness.
• Theoretical flow/cycle time of production measures the time required to process a unit if there are absolutely no delays at any stage.
• Actual average flow/cycle time measures the average actual time taken for all units pro­cessed over a specified duration, such as a week or a month. The actual flow/cycle time includes the theoretical time and any delays. This metric should be used when setting due dates for orders.
• Flow time efficiency is the ratio of the theoretical flow time to the actual average flow time. Low values for flow time efficiency indicate that a large fraction of time is spent waiting.
• Product variety measures the number of products or product families processed in a facility. Processing costs and flow times are likely to increase with product variety.
• Volume contribution of top 20 percent SKUs and customers measures the fraction of total volume processed by a facility that comes from the top 20 percent of SKUs or cus­tomers. An 80/20 outcome, in which the top 20 percent contribute 80 percent of volume, indicates likely benefits from focusing the facility so separate processes are used to process the top 20 percent and the remaining 80 percent.
• Average production batch size measures the average amount produced in each produc­tion batch. Large batch sizes will decrease production cost but increase inventories.
• Production service level measures the fraction of production orders completed on time and in full.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.