Department of Industrial Engineering

MSc in Engineering Management Program

EM502 Operations Management – Spring 2017

Section 02 – İsmail Serdar BAKAL

Case Study II
1738368 Cansu Güngördü Sevine
2190395 Fatma Kantarcıoğlu Yaldız

Academic integrity is expected of all students of METU at all times, whether in the presence or
absence of members of the faculty. Understanding this, I declare that I did not give, use, or receive
unauthorized aid in this work.

NAME/SIGN: Cansu Güngördü Sevine __________________________________________________

NAME/SIGN: Fatma Kantarcıoğlu Yaldız ________________________________________________

May, 24 2017
EM 502 – Case Study II GÜNGÖRDÜ, KANTARCIOĞLU

Table of Contents

Table of Contents ....................................................................................................................................................... I

1. INTRODUCTION ................................................................................................................................................. 2
2. MAIN BODY ....................................................................................................................................................... 3
2.1. Detailed Explanation ................................................................................................................................ 3
2.2. Parameters and Decision Variables ......................................................................................................... 4
3. CONCLUSIONS AND RECOMMENDATIONS ...................................................................................................... 6
4. REFERENCES ...................................................................................................................................................... 6
5. APPENDIX .......................................................................................................................................................... 6
5.1 . GAMS Formulation of the Model ............................................................................................................. 6
EM 502 – Case Study II GÜNGÖRDÜ, KANTARCIOĞLU

1. INTRODUCTION

The IHK Co. is try to find out the optimum distribution network of its products under the
three possible scenario. The firm has just signed a long-term contract with a major FMCG
manufacturer to deliver its product to the manufacturers local warehouses dispersed over the
country via its DCs.

The IHK Co. decided to hire a consultancy firm, named E&A Consultancy, to analyze the
company’s current operations.

 The consultancy firm revealed that the idle capacity of the current DC would not be
sufficient to satisfy the needs of the new customer and opening new facilities should
considered.
 They also suggest that the logistic requirements of the new contracts should handle
separately from the firms existing business.

According to the contract signed, IHK Co., has the right to determine the DCs, to serve local
WHs. Table 1 provide information about the locations of the local warehouses to be served.
The customer provided three scenarios about the corresponding demands, which also
provided in table 1. IHK Co. has to satisfy the needs of the customer regardless of which
scenario realized.
Table 1 WH Locations and demand information

Demand (m3 per year)

W/H location Scenario 1 Scenario 2 Scenario 3
Ankara 13000 10000 17000
Adana 10000 7000 12000
Afyon 6000 12000 8000
Bursa 9000 12000 13000
İstanbul 20000 15000 30000
Kayseri 7500 8000 8000
Samsun 5500 13000 9000
Trabzon 7000 9000 10000
Erzurum 9500 11000 12000
Diyarbakır 11500 12500 12500
Antalya 10500 12000 15000
İzmir 10000 13000 13000
Konya 6000 11000 8000
Sivas 4000 9000 5500
The consultants observed that the DC in Ankara has a capacity of 30.000 m3 per year that can
dedicate for the new customer with the 400.000 TL yearly additional costs. In addition, the
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 EM 502 – Case Study II GÜNGÖRDÜ, KANTARCIOĞLU

consultants argue that it is possible to open new facilities can handle a flow of 80.000 m 3 per
year at a cost of 500.000 TL. The company should not open more than two new DCs and each
WH should assign to a single DC.
The company handles its transportation business by leasing trucks at the beginning of the each
year;
 Trucks are at a cost of 40.000 TL per year, and 0.2 TL per km per m3.
 Each truck can carry 40 m3 of load at a time.
 All shipments are considered to be full and each vehicle can make 200 shipments per
year.
 The IHK Co. insists that trucks are leased and assigned to the DCs before the exact
demand is revealed.
 If current truck capacity is not sufficient to cover the demand at a DC, an outside
logistics provider will make the shipments at a cost of 0.4 TL per km per m3.

Assume that if a DC is located in a city, the outside provider cannot satisfy the demand of
that city.
Table 2 Between DC and WH location Distances

1 2 3 4 5 6 7 8 9 10 11 12 13 14
1 0 490 256 384 453 318 413 744 875 906 544 579 258 439
2 490 0 573 839 939 333 722 845 806 525 552 900 356 423
3 256 573 0 277 454 521 669 1000 1131 1098 292 327 223 695
4 384 839 277 0 243 691 745 1076 1239 1279 541 325 489 823
5 453 939 454 243 0 771 734 1065 1228 1359 718 564 662 891
6 318 333 521 691 771 0 453 616 632 588 618 848 304 194
7 413 722 669 745 734 453 0 331 561 817 905 992 591 338
8 744 845 1000 1076 1065 616 331 0 304 628 1232 1323 918 422
9 875 806 1131 1239 1228 632 561 304 0 324 1248 1454 934 438
10 906 525 1098 1279 1359 588 817 628 324 0 1077 1425 881 479
11 544 552 292 541 718 618 905 1232 1248 1077 0 444 322 810
12 579 900 327 325 564 848 992 1323 1454 1425 444 0 550 1018
13 258 356 223 489 662 304 591 918 934 881 322 550 0 496
14 439 423 695 823 891 194 338 422 438 479 810 1018 496 0

2. MAIN BODY

2.1. Detailed Explanation

The figure below shows an ‘Possible Network Representation of the Project Information’.

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EM 502 – Case Study II GÜNGÖRDÜ, KANTARCIOĞLU

Figure 1 Possible Network Representation of the Project Information

2.2. Parameters and Decision Variables

Parameters:

i: Distribution Centers i:1,2,3…..14

j: Warehouses j:1,2,3…..14
s: Scenario s:1,2,3

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EM 502 – Case Study II GÜNGÖRDÜ, KANTARCIOĞLU

𝑪𝒊 : Supply capacity of DC i.
𝑫𝒋𝒔 : Demand for the WH j under the scenario s.
𝑭𝒊 : Fixed cost of the DC i.
𝒅𝒊𝒔𝒊𝒋 : Distance from DC i to WH j.
𝒑𝒔 : Probabilities of the scenarios.
Decision Variables:

𝒕𝒊 : Number of trucks assigned DC i.

1; 𝑖𝑓 𝐷𝐶𝑠 𝑖 𝑖𝑠 𝑜𝑝𝑒𝑛𝑒𝑑 1; 𝑖𝑓 𝐷𝐶𝑠 𝑖 𝑖𝑠 𝑠𝑒𝑟𝑣𝑒𝑑 𝑡𝑜 𝑊𝐻𝑠 𝑗
𝒚𝒊 :{ 𝒓𝒊𝒋 :{
0; 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒 0; 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒
𝒙𝒊𝒋𝒔 : Normal amount of shipment from DC i to WH j
𝒗𝒊𝒋𝒔 : Outsourcing amount of shipment from DC i to WH j
Objective function: is to minimize the fixed facility location costs and the transportation cost.

𝑀𝑖𝑛 𝑍 = ( ∑14 14
𝑖=1(𝐹𝑖 ∗ 𝑦𝑖 )) +(∑𝑖 (𝑡𝑖 ∗ 40000))

+(∑14 14 3
𝑖=1 ∑𝑗=1 ∑𝑠=1(𝑥𝑖𝑗𝑠 ∗ 0,2 ∗ 𝐷𝑗𝑠 ∗ 𝑝𝑠 ))

+ (∑14 14 3
𝑖=1 ∑𝑗=1 ∑𝑠=1(𝑣𝑖𝑗𝑠 ∗ 0,4 ∗ 𝐷𝑗𝑠 ∗ 𝑝𝑠 ))

Constraints:

Constraints for total number of DCs: ∑14

𝑖=2 𝑦𝑖 ≤ 2

Constraints for normal amount of shipment: xijs = 𝑟𝑖𝑗 * 𝐶𝑖

Constraints for outsource amount of shipment:vijs = 𝑟𝑖𝑗 * 𝐶𝑖

Constraints for supply capacity of DC i: ∑14 14

𝑗=1 𝑥𝑖𝑗𝑠 + ∑𝑗=1 𝑣𝑖𝑗𝑠 ≤ 𝐶𝑖 * 𝑦𝑖

Constraints for demand of WH j: ∑14 14

𝑗=1 𝑥𝑖𝑗𝑠 + ∑𝑗=1 𝑣𝑖𝑗𝑠 ≥ 𝐷𝑗𝑠

Constraints for single sourcing: ∑14

𝑖=1 𝑟𝑖𝑗 = 1 for all j

Constraints for open DCs: 𝑟𝑖𝑗 − 𝑦𝑖 = 0

Demand Constraint: ∑14

𝑗=1 𝑥𝑖𝑗𝑠 = (𝑡𝑖 ∗ 80000)

Binary Constraints: 𝑟𝑖𝑗 = {0,1} ; 𝑦𝑖 = {0,1}

Non-negativity Constraint: 𝑥𝑖𝑗𝑠 , 𝑣𝑖𝑗𝑠 , 𝑟𝑖𝑗 , 𝑦𝑖 , 𝑡𝑖 ≥ 0

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EM 502 – Case Study II GÜNGÖRDÜ, KANTARCIOĞLU

3. CONCLUSIONS AND RECOMMENDATIONS

4. REFERENCES

 Operations Management by Heizer and Render, Prentice Hall, 10th Edition, 2010.

5. APPENDIX

5.1 . GAMS Formulation of the Model