Case Study
Hub location at Digital Equipment Corporation: A comprehensive analysis of qualitative and quantitative factors

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Abstract

The economic growth of countries in the Asia–Pacific (AP) region has caused many US-based businesses to consider the strategic initiative of setting up facilities therein. In this paper, we describe a study to locate a repair-parts warehouse for Digital Equipment Corporation, a world leader in the computer and electronics market. Digital's management was charged to consider not only the long-term strategic (or qualitative) issues typical of such problems, but they also had to ensure that any facility that is located would also be viable from a freight-cost (or quantitative) perspective. We show how the analytical network process (ANP) model combined with an optimization model can be used to conduct a comprehensive evaluation of these varied issues.

Introduction

The growth rate of emerging economies has been steadily increasing during the last decade, and is projected to exceed that of the advanced ones during the next decade. To cater to the high level of service demanded by businesses situated in this emerging economic sector, many US-based companies, especially those in the high-technology area, have been decentralizing their operations by setting up facilities internationally (i.e., near these growth regions). The issue of international facility location has, therefore, been gaining in importance as a practical and research topic (Badri, 1996, Hoffman and Schniederjans, 1994, Min, 1994a, Min, 1994b).

Models for the location of manufacturing units, retail outlets, distribution warehouses, and obnoxious facilities (e.g., garbage dumps, water purification plants) have been proposed and extensively studied over a few decades. Typically, the objective of these models is to deliver products/services at a minimum cost. The optimal redesign, determination, development and implementation of a domestic service-parts network considering only tangible factors such as cost is in itself a difficult problem (see Drezner, 1996). Further complications associated with international facility location are geopolitical uncertainties and the complexities of international trade. While cost reduction does remain a primary factor in international facility location, the aforementioned strategic factors of the problem necessitate the evaluation of a number of intangible attributes as well. Working somewhat at cross-purposes with this necessity is the pressure on management to arrive at a timely solution that reconciles the varied opinions pertaining to the intangible factors.

Although the location of international facilities is not new any longer, the research literature that considers the unique aspects of such problems is not as extensive as their domestic counterparts. Some of the works in this area include Hoffman and Schniederjans (1994) who propose a two-stage model for international site selection. Their approach relied on goal programming only, and therefore, did not consider a number of qualitative factors relevant to this type of problem. Badri (1999) describes an analytical hierarchy process combined with goal programming for a global facility location problem. In our paper, we describe a combination of models (analytical network process (ANP) and optimization) that were utilized for making a decision to locate a distribution facility (or “hub”) that stocks parts for after-market service. Our approach is conceptually similar to Badri's, but is an enhancement in two senses. First, we consider a more comprehensive set of factors. Second, by employing the ANP, we are able to also handle complexities (i.e., feedback) among the factors considered.

This problem considered in our paper arose from Digital Equipment Corporation's (Digital's) evolving service-parts business. Digital, founded in 1957 in MA (USA), is a world leader in implementing and supporting networked business solutions in multivendor environments based on high-performance platforms, and global service and support. The Corporation does business in over 100 countries, deriving more than 65% of its revenue from outside of the US. During the completion of this modeling effort, Digital had approximately 55,000 employees worldwide. Total operating revenues were over $13 billion. The Corporation directly sells, markets, and supports its products and services via multiple locations throughout the world. Arrangements with third parties, including software developers, value added resellers (VARs) and authorized distributors, are an increasingly important part of the Corporation's focus on providing complete solutions to its customers, and on expanding distribution of its products and services through indirect channels. As more of Digital's products and services are distributed through indirect channel partners, service-parts management becomes more critical.

Section snippets

Problem statement

Digital is currently faced with the issue of locating service-parts facilities internationally. Management accorded top priority to this issue, because of increased competition, and the realization of the need to provide cost-effective, quality delivery of service and of service parts to customers across the globe (US, Europe, and Asia–Pacific (AP) regions). From a solution perspective, the location problem is intractable if each and every one of the varied alternatives is to be considered in

Assessing qualitative and strategic factors

The qualitative evaluation of the factors was completed using the ANP methodology. ANP is a multiattribute, decision-making approach based on the reasoning, knowledge, experience, and perceptions of experts in the field. Even though it does not provide an optimal solution (from a cost perspective), it is valuable for decision-making involving intangible attributes that are associated with strategic factors present in this case study. ANP relies on the process of eliciting managerial inputs,

ANP results

The supermatrix resulting from one of the managers is shown in Table 2. Convergence (at 10−4 level) occurred after raising this matrix to the 16th power. After applying this approach for the other managers, simple averaging of the weights was completed for the final evaluation, since it was assumed that the importance (i.e., knowledge, expertise, perceptions, etc.) of all managers was equal. In the case of unequal importance, instead of a simple average, a weighted average may be used. This

Assessing impact of location on operational costs

Optimization models for site location have been proposed and studied for over three decades (e.g., [Current et al., 1990; Cornuejols et al., 1990; Drezner, 1996] give details). Typically, by minimizing the sum of the fixed costs of locating sites and the transportation costs of moving goods among sites, these models determine:

  • (a) the number of sites;

  • (b) the locations of the sites;

  • (c) the quantities of goods that must be transported among the sites.


In our case, however, the ANP model

Cost model results

Using data supplied by Digital, we conducted a sensitivity analysis of the rt parameter on the freight-cost model, (M). This analysis was conducted for two reasons. First, management wanted to determine the potential savings attainable by implementing the recommendations of the model. The second and more important reason arose out of business compulsions. Digital had a number of outstanding contracts with vendors to supply to its US hub. Moreover, transportation services between some AP

Conclusions

In this paper, we have considered the problem of locating an international repair-parts hub warehouse for Digital Equipment Corporation. Besides cost, a solution to this problem has to deal with a wide range of issues, including strategic ones such as geopolitical, fiscal and trade uncertainties. Based on the ANP model for addressing the strategic factors and a transshipment-like optimization model for evaluating costs, we concluded that the location of a warehouse in the AP region can yield

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