Supply Chain Network Design: Applying Optimization and Analytics to the Global Supply Chain by Cacioppi Peter

Author:Cacioppi, Peter...
Language: eng
Format: epub
Published: 2014-04-02T06:46:39.197000+00:00

Lessons Learned from Adding Facility Variable and Fixed Costs

When adding fixed and variable costs to the facilities, the optimization now has an incentive to pick facilities with the lowest cost. When optimizing based on total costs, the optimization can pick sites with low fixed and variable costs if the facility cost savings are greater than the increase in transportation costs. So you can now get locations and maps that do not seem to make sense if you are expecting sites to be close to customers.

When you’re modeling fixed and variable costs, it is important to think about them in the context of your model. The accounting definitions of these terms may not help you make the correct decisions.

For fixed costs, you need to be careful to separate the ongoing fixed costs (like keeping the lights on) from the one-time investments (like building a new building). For the latter, the one-time investments, you need to make sure you put the costs in the same units of time as the other cost elements in your model or you will not get realistic results.

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