 Hello everyone, welcome to this course on supply chain digitization. This course is offered by IIM Mumbai and this is jointly offered by the three faculty members including myself, Professor Priyanka Verma and my colleagues, Professor Sushmita Narayana and Professor Vibhavrata Das. So far we have covered many concepts and now we are in module 3 which is about analytics in supply chain. So this is a very, very important module as we all have seen in previous weeks and we have discussed the importance of analytics in supply chain which is one of the very critical requirement in today's time. This is mainly because of the increase in availability of the data and how the data can be further analyzed to take some of the critical decisions in supply chain. So far we have seen different types of analytics and we have also covered different approaches for solving the problems in supply chain domain. In this session, we will be focusing mainly on supply chain network related decisions. So particularly for this week, we will be talking about supply chain network optimization and here as we have seen in our previous sessions as well, we will be talking about the role of facilities in designing a given supply chain. We understand that the supply chain network is one of the very critical decision and how your supply chain is designed typically affects the requirement of the customers a lot. The supply chain network design is a strategic design and requires lot of planning which is long term planning and also the management of this supply chain network is a very critical decision in any given supply chain. The objective of any supply chain network design is always to ensure that efficiency of the supply chain increases, overall the cost of supply chain should reduce, the service levels which we are getting should improve and the customer demand at the end should be fulfilled to the maximum. When we are talking about the role of the facilities, we have already seen that how the facility is helpful in deciding your supply chain to be efficient or to be responsive. So we understand that if you want our supply chains to be efficient, we can have lesser number of facilities but larger in size whereas if you want our supply chains to be responsive, our facilities can be larger in number but smaller in size. But the next important question that comes up is that how many number of facilities are sufficient enough and what is their location means where they should be located so that overall the objective of minimization of supply chain cost is achieved and also your service levels are improved, your efficiency is better and finally the customer demands are fulfilled. So these all solutions can be obtained if we have certain analytical way of solving this problem. When we talk about like location of a facility, there are several factors which affect the facility location like what is the demand of the market and how much customer is expecting, this can be quantified in terms of the volume and the frequency and many other parameters which can be directly related with respect to the demand from the customer. Similarly, the role of supplier also plays a critical role, it means that depending upon your product what type of suppliers are available, where they are available and what is their role and how they are going to help your facility location decisions. Similarly, depending upon the type of product what is the logistics infrastructure which is already available that again plays a critical role in deciding the location of the factors. The labour again as we understand has a very critical role over here, so you can see that the availability of the labour is again a very important decision. There are several regulation tax benefits which are imposed by the government on a time to time basis. So these also needs to be taken care when we are taking decision related to facility location. Apart from it where there are other reasons like social reasons, political reasons or it can be some geographical reasons and so on. So we can say that there are several factors which affect the location decisions and when we are talking about facilities over here, the facilities in a supply chain can be anything. It can be a manufacturing plant, it can be a warehouse, it can be a retailer, it can be a distributor and so on. So it is very important that where these facilities are located so that we can achieve the target of our supply chain in a most optimal way. The target when we say it means that we want our supply chains to be efficient or we want our supply chains to be responsive. Thus when we talk about facility location decision, we are trying to find out the locations of these all these facilities which can include your manufacturing plant, your warehouses, your distribution centers, your retailers and your any other similar facilities which are required for designing your supply chain. So if we understand the location of the facilities, we can see that how these facilities are being connected and how the products will move from these facilities to fulfill the customer demand. So this is again a very critical problem, it is a long term problem, it is a strategic problem and thus it requires lot of planning to ensure that the customer demand is fulfilled with your targeted objectives. So the next question comes up is that what are the major type of decisions which can be taken up in any supply chain network optimization. So we will be focusing on three major topics in this particular week which is related to facility selection decision, facility location decision or designing a complete supply chain network by understanding its requirement. So facility selection decision is again a very interesting topic because mostly in many cases we can see that there are certain facilities or there are certain manufacturing plant or warehouses which are already existing, but we would like to select one of them which can fulfill our requirement. So how do we select this decision can be taken up using this problem. Similarly we will be talking about facility location decision which ensures that depending upon the given constraints which are related to supply, demand and location, how do we decide the exact location of the new facility to be created and this is again a very interesting problem. In the last phase we will be talking about how the complete supply chain network can be designed and do we have any analytical approach for solving this problem. So in particularly in this problem we will be talking about the optimization approach which we will be using for designing a complete supply chain network. So in today's session we will be focusing on the example for facility selection decision and in order to understand this particular decision we will be using a very simple analytical method approach over here which is called as break even analysis. It is a very standard method widely used and very useful in taking decisions related to facility selection. So how does this looks like? If you can see from here we are trying to show you a graph over here where we have plotted the volume of the product to be made to be manufactured along the x axis and on the y axis what is the revenue cost is shown over here and we have tried to calculate some cost over here and using this we are trying to find out the break even point. Now this is the break even point. So let us look into the details of this graph and try to understand this method of break even analysis first which we will be using for taking our decision related to facility selection. So what is break even analysis? What we do over here is that in break even analysis it helps us in understanding the level of activity at which a company neither generates profit and neither any loss. So there is a balance of both profit and loss over here as you can see from this. So what is the point which is called as the break even point at which the company is neither at profit nor at loss and that is why this is called as break even point. Now in order to get this break even point we have to consider two type of cost. The first cost is called as the fixed cost as you can see from here also the fixed cost and the second cost is called as the variable cost. Now what is fixed cost? The fixed cost will include all your installations like your machine re-cost, your buildings cost, your spending on R and D and so on. So these are generally one time cost and obviously these are the basic requirement for establishing the system. Whereas the other type of cost is the variable cost which is talking about the different cost which keeps on changing depending upon the volume of products being used. A simple example can be your raw material cost and similar cost like that. So how do we calculate the break even point? Break even point or in short we also call it as BEP is nothing but this is a point at which you can see this is a sales volume where if we draw a line which is calculating the total cost including your fixed cost and the variable cost. So that is added gives you the total cost this is the line of your total cost and the second if you also plot the sales revenue this is the line for the sales revenue. So break even point is that point at where both the sales revenue and the total cost actually intersect. So as you can see from here this is point A right where both your sales revenue and your total cost intersect and this point if I bring it down and find out at that at what volume this two cost intersect it means at this point neither there is a profit nor there is a loss for the company this point is called as the break even point. How do we calculate that? So there is a very simple formula which is attached with this. So in order to calculate the break even point this is given as fixed cost divided by revenue per unit minus variable cost per unit. So we can see that break even point is equals to fixed cost divided by the revenue that is the selling price or revenue per unit minus the variable cost per unit. So this will give you the break even point that is the volume at which the company is facing neither profit nor loss. So let us see how this simple analysis which is which can be done through a method called as break even analysis can be used for taking a critical decision related to facility selection. So in order to understand this let us see a case which is given over here. So there is a company which is engaged in manufacturing luggage bags and now they have launched a new bag category which is coming because of the new features which customer has demanded and now they have found out that the estimated demand for the new bag category is coming to be around 145,000 units. So this data they have found using some market analysis. The company now has to locate a warehouse to manage this particular new bag category and the potential locations already has obtained and they have done some basic analysis by understanding the factors which we have discussed previously and based on those factors they have found that these are the three potential locations where they can create a warehouse. These locations are at Noida, Lucknow and Chandigarh and now if you look into this three locations all these locations have got a fixed cost associated with them and in parallel there is also a variable cost which is attached with them. So if we have been given with this data how do we use this for deciding that out of these three locations which is the best location where the warehouse can be made which can manage this new category of luggage bags. So here our goal is to identify the most cost effective location which will help us in meeting the demand. So let us summarize the given information once again as you can see we have got three locations Noida, Lucknow and Chandigarh which we have named it over here as location X, location Y and location Z and corresponding to these three locations the fixed cost and the variable cost are given as you can see from here the location X has got a fixed cost of 1,45,000 and the variable cost has 11 units. Similarly location Y has got a fixed cost of 4,50,000 and a variable cost of 7 rupees per unit and location Z has got the fixed cost of 7,80,000 and a variable cost of 6 rupees per unit. If you are aware of these three cost which are related to the fixed cost and the variable cost let us use this information to decide which location is best for making your new warehouse. So here there are few steps which you will be following to apply this method. The first step is about entering your data. So when we talk about entering the data you here we will be using simple excel sheet for solving this problem. So in a simple excel sheet you can first add all your cost about your fixed cost and about your variable cost and here because we have to analyze for three different locations that is location X, location Y and location Z. So here we have to what we have to now do is that we have to calculate the total cost for all these three locations. But what we change is we will do is that we will assume that the quantity is varying in an interval of 50,000 and for starting from 50,000 till 3 lakh in a step size of 50,000 again we will try to calculate the total cost for all of these step sizes and this exercise again will be repeated for the three locations. In the next step we will finalize our total cost as we have already discussed the total cost is given as the summation of fixed cost plus the variable cost into quantity. Initially as we have not been given with the quantity value that is why we have assumed that we will be calculating the total cost for quantity varying from 50,000 to 3 lakh in a step size of 50,000. So in this way we will be calculating the different cost. So how the calculation is done the formulas over here are demonstrated for your reference and we are also providing you one excel sheet for the same example where all these calculations are done. So you can easily refer to that formulas which we have used in the excel sheet and accordingly you can follow the steps which are discussed over here. So here you can see that after following the simple formula of calculation of total cost we can find out the total cost for the location x, location y and location z for these quantities which are varying from 50,000 to 3 lakh rupees and corresponding to the fixed cost and variable cost the total cost can be easily calculated like this. In the next step we will try to plot the graph and try to analyze the situation. So here when we are talking about plotting the graph as we have already seen that in break even analysis we will keep all the quantities along the x axis and the cost on the y axis. So we will put these values and try to plot them in as a line graph and further in the next step we will try to see find out the points where these lines are intersecting and we will try to find out those points by drawing horizontal lines for the reference and find out that way which are the points at which these intersecting points are touching the x axis and thus that will help us in identifying that quantity at which the two cost becomes same. So even for that because we are trying to find out the location of a warehouse which has to manage a volume of 145,000 bags we will be using this quantity to take a decision about the facility which will serve this requirement. So here we have just consolidated all the cost together in one frame as you can see from this table and using this cost and the quantity we have tried to plot these three values along x axis the quantity along x axis and the cost along the y axis. Now here if you can see let us look into this whatever we have discussed so far in the given excel sheet so that you can also correlate with our discussions that we have done. Just trying to reiterate the steps that we have discussed so far we know that there are three potential locations, location x, location y and location z and their fixed cost and variable cost are given to us now we are trying to find out that which location is best considering that the requirement is that the new location has to serve the market requirement of 145,000 bags. So we have repeated the same steps to what whatever we have discussed so far in a step size of 50,000 for quantity or the volume the prepared the fixed cost is already given to us for location x as you can see from here. The total cost is calculated for the location x using the formula of fixed cost plus variable cost into the quantity. Similarly, the same steps are done for location y and for location z as well and in this table you can see from here the summary of all these three location and their cost for varying volume are mentioned over here. So when we use this information and when we try to plot them over here in form of a simple straight lines we found that there are two points at which these two lines are intersecting. So this is the first point if you can see over here so we found out the intersecting points and we have drawn a line which is touching the x axis and similarly this is an second point where which is again we have found where the intersection is happening and we are extending it till the horizontal line to find out the point at which it is touching it. So we found that these are the two values over where the break even can be achieved. But now let us look into our requirement our requirement is to find out that where should I make the warehouse which can serve the requirement of fulfilling customer demand of 1,45,000 but at a minimum cost. So when we look into this figure we can see that the volume of 1,45,000 is lying beyond this line is lying beyond this line and here when we referred facility which can serve this volume at the minimum cost we can see from the figure over here the orange line is coming with the minimum cost. So let us see which is the facility which or the cost represented in orange line is from the facility y and that is why we can say that the facility y can serve the customer demand of 1,45,000 in minimum cost. So we can see that from this example when we were trying to select the facility which can cater the requirement of 1,45,000 we found out that using the break even analysis the location y is the most cost effective location because for this volume of 1,45,000 it can serve this in the minimum cost. Thus we can see that how break even analysis can be simply used for deciding the selection of a facility out of a given choice considering the volume that it is required to handle. So with this we have covered in this session about the usage of analytics for taking a simple decision related to facility selection. So with this we will be closing today's session and we will be taking it forward with advanced problems related to facility location in the upcoming session. Thank you everyone have a nice day.