lecture6-SupplyChain_NetworkDesignInanUnceratainEnvironment

lecture6-SupplyChain_NetworkDesignInanUnceratainEnvironment...

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ESI 6323 Network Design in an Uncertain Environment
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1 Outline The Impact of Uncertainty on Network Design Decisions Discounted Cash Flow Analysis Representations of Uncertainty Evaluating Network Design Decisions Using Decision Trees AM Tires: Evaluation of Supply Chain Design Decisions Under Uncertainty Summary of Learning Objectives
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2 The Impact of Uncertainty on Network Design Supply chain design decisions include investments in number and size of plants, number of trucks, number of warehouses These decisions cannot be easily changed in the short- term There will be a good deal of uncertainty in demand, prices, exchange rates, and the competitive market over the lifetime of a supply chain network Therefore, building flexibility into supply chain operations allows the supply chain to deal with uncertainty in a manner that will maximize profits
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3 Discounted Cash Flow Analysis Supply chain decisions are in place for a long time, so they should be evaluated as a sequence of cash flows over that period Discounted cash flow (DCF) analysis evaluates the present value of any stream of future cash flows and allows managers to compare different cash flow streams in terms of their financial value Based on the time value of money – a dollar today is worth more than a dollar tomorrow
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4 Discounted Cash Flow Analysis return of rate flows cash of stream this of lue present va net the periods T over flows cash of stream a is ,..., , where 1 1 1 1 factor Discount 1 0 1 0 = = + + = + = = k NPV C C C C k C NPV k T T t t t Compare NPV of different supply chain design options The option with the highest NPV will provide the greatest financial return
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5 NPV Example: Trips Logistics How much space to lease in the next three years Demand = 100,000 units Requires 1,000 sq. ft. of space for every 1,000 units of demand Revenue = $1.22 per unit of demand Decision is whether to sign a three-year lease or obtain warehousing space on the spot market Three-year lease: cost = $1 per sq. ft. Spot market: cost = $1.20 per sq. ft. k = 0.1
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6 NPV Example: Trips Logistics For leasing warehouse space on the spot market: Expected annual profit = 100,000 x $1.22 – 100,000 x $1.20 = $2,000 Cash flow = $2,000 in each of the next three years ( ) 471 , 5 $ 1 . 1 2000 1 . 1 2000 2000 1 1 lease) (no 2 2 2 1 0 = + + = + + + + = k C k C C NPV
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7 NPV Example: Trips Logistics For leasing warehouse space with a three-year lease: Expected annual profit = 100,000 x $1.22 – 100,000 x $1.00 = $22,000 Cash flow = $22,000 in each of the next three years ( ) 182 , 60 $ 1 . 1 22000 1 . 1 22000 22000 1 1 lease) (no 2 2 2 1 0 = + + = + + + + = k C k C C NPV The NPV of signing the lease is $54,711 higher; therefore, the manager decides to sign the lease However, uncertainty in demand and costs may cause the manager to rethink his decision
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8 Representations of Uncertainty Binomial Representation of Uncertainty Other Representations of Uncertainty
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9 Binomial Representations of Uncertainty When moving from one period to the next, the value of the underlying factor (e.g., demand or price) has only two possible outcomes – up or down
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This note was uploaded on 03/02/2012 for the course ESI 6323 taught by Professor Guan during the Spring '09 term at University of Florida.

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lecture6-SupplyChain_NetworkDesignInanUnceratainEnvironment...

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