Applied Materials Uses Operations Research to Design Its Service and Parts Network

Applied Materials, Inc. is the global leader in nanomanufacturing technology solutions, with a broad portfolio of innovative equipment, service and software products. The company supports its customers worldwide with an extensive service and parts network of over 100 locations. At the end of 2006, the company decided to evaluate and rationalize its network design in North America. A detailed optimization model (with 50,000 parts) was set up to develop a network and distribution strategy. To our knowledge, this is the first large-scale multi-echelon network design model that incorporates safety stock inventory costs with proper consideration of lead time and risk-pooling effects. Using the model, Applied Materials was provided with various improvement recommendations to reduce cost while maintaining or improving the service to customers. The recommendations included simplifying the distribution network through consolidating depot locations for certain customers and skipping an echelon for certain others, leading to a projected inventory reduction of $10 million. The company is currently acting on these recommendations and has already eliminated five depots. It is estimated that $5.24 million of inventory reductions in the first year of implementation can be attributed to these changes in the network and total savings during this period are $1.1 million.