Question

College of Administrative and Financial Sciences Department of Business Administration MGT425 – Spreadsheet Decision Modeling

Facility Location Model

Supply chain optimization has a big influence in a company’s ability to compete in a global market. In this context, an olive oil producer company intends to analyze its supply chain’s resources efficiency. In a further analysis, the company wants to know the optimal location for its production facility that minimizes the total transportation costs, in order to find possible solutions for an eventual relocation. Given that the solution space of the problem identified is continuous, a decision model based on the center of gravity method was proposed. The model was used with a variety of inputs related with the company’s supply chain. Scenarios with different demand levels, suppliers’ locations and transport costs were considered. Through the analysis of these scenarios, it was concluded that the actual plant location, in the current market conditions, is optimized. However, considering allocation scenarios for two plants, it was possible to conclude that the location of a new plant can result in a potential reduction of total transportation costs. Finally, the company validated the decision model. Given the presented results, Oliva will need to study the feasibility of opening a new facility, considering other costs and variables.

In the last two decades, the olive oil industry has grown considerably, which was mainly caused by an increased awareness of the olive oil benefits to the human health. Because of its exceptional conditions to produce olive oil, Portugal played an important role in the growth of this industry. Since the olive oil production its only possible in the Mediterranean geographic area, the Portuguese olive oil companies have an opportunity to remain growing their businesses in the foreign markets. Contrasting with the rising of the global demand, a demand increasing in the Portuguese market isn’t predictable, which amplifies the importance of this expanding strategy. Oliva is one of the companies focusing in an expansion outside of the national market. This company has only one manufactory facility, located in the central region of Portugal, from where it serves more than 40 markets. Although this company also extracts the olive oil in its olive grove, for this study, it was considered that its business model comprises only the acquisition of olive oil lots from different suppliers and their combination in a process called blending. So, the only manufacturing processes in the production plant are: selection and classification; blending; and packaging. These are the only processes executed by Oliva, which

contracts other companies, specialized in logistics management, to carry out the distribution process.

As it can be observed in the last figure, this plant receives two types of raw materials, olive oil and packaging materials, and dispatches the products for all markets. The oil arrives in tanks and the packaging materials in trucks, separated by type of material, currently by land transportation. The products are shipped to the European markets also by land transportation, in trucks that carry out a maximum of 30 pallets. For the remaining markets, the products are shipped in a multimodal transportation (land and sea) by containers, which can carry up to 20 pallets.

Oliva is predicting a demand increasing in its markets outside Europe. Therefore, this company wants to achieve a better resource efficiency in responding to the rising of raw materials and products flux within its supply chain. In order to be able to achieve their goals, the company needs to find the location for its plant that minimizes the total transportation costs. Consequently, Oliva needs a decision model which enables the analysis of the best location, taking into account different scenarios. Thus, this study addresses the development of a location model to support network design decisions of the company Oliva. After the presented summary of the problem identification, relevant published literature is reviewed in the following section. In section 3 the model development is exposed and the fourth section shows the scenarios analysed and its results, from where the conclusions are showed in the last section.

The main purpose of this study was the development of a decision model to support Oliva’s decision about the location of its manufacturing facility, with the aim of lowering transportation costs in the company’s supply chain. Since Oliva’s case corresponds to a continuous location problem, the model was developed through the center of gravity method. To assure that the model can be easily utilized by the company, it was implemented in the Excel software. When used in different scenarios of the company’s supply chain, the model obtained results that could identify the subsequent conclusions: • The current location of the factory is optimized; • The location of a second factory will result in a reduction of the total cost of transportation. However, it is not possible to guarantee, in the short-term, a reduction of the total logistic costs; • In a hypothetical scenario of a demand growth in foreign markets, it’s possible to see an increase in the difference between the costs of keeping the factory in its actual location and the costs of opening a second facility.

Throughout the analysis of the results, it was also concluded that the transportation cost and the location of the packing material suppliers (mainly the glass bottles supplier), considerably influence the final result. Therefore, these factors are of great relevance and the company must take them seriously in the final decision. Given the results obtained, Oliva will need to study the feasibility of opening a new facility, so that it occurs at the moment when the corresponding investment is inferior to the total gained from the reduction of the transportation costs. Oliva’s managers considered that the model developed was very useful for the location decision and they

expect to utilize it in the future with more scenarios, given its user friendly interface. For a future approach, it would be interesting to include the costs of opening a new facility in the mode

Answer The Following Questions:
1. What type of problem you see in Oliva Company?. (2Marks, 200-250 Words) 2. Write the decision model is used here to minimize the total transportation costs.

(2Marks, 200-250 Marks) 3. What are the changes in Oliva Company after implementation of new decision model.

(1Marks, 150-200 Marks)

Answer 1

1.Kaya Skin Clinic is one of Oliva Skin and Hair Clinic's top rivals. Kaya Skin Clinic was founded in , } in 2003. Compared to Oliva Skin and Hair Clinic, Kaya Skin Clinic generates $7.6M more revenue.

2.Kosmoderma Skin & Laser Clinic is Oliva Skin and Hair Clinic's #2 competitor. Kosmoderma Skin & Laser Clinic was founded in 2006, and is headquartered in Bangalore, Karnataka. Kosmoderma Skin & Laser Clinic competes in the Hospitals industry. Kosmoderma Skin & Laser Clinic generates $15.8M less revenue vs. Oliva Skin and Hair Clinic.

3.VLCC is a top competitor of Oliva Skin and Hair Clinic. VLCC's headquarters is in New Delhi, Delhi, and was founded in 1989. Like Oliva Skin and Hair Clinic, VLCC also competes in the Health Care Services space. VLCC generates 539% of Oliva Skin and Hair Clinic's revenue.