MBD-S21

ESM 640: Supply Chain Management

Homework # 1
Due: Sunday February 21, 2021
Variable Production Costs, Transportation Costs and Duties From Plants to Markets

N. S. Europe Euro Japan Rest of Africa

Americ Ameri (EU) pe Asia/Austra
a ca (Non lia
EU)
  Europe
(EU)
7.88 10.24 7.00 9.03 8.31 10.49 10.50
Sleekfon N.
Americ
a 6.50 9.40 7.48 9.15 7.69 10.25 10.88
  S.
Americ
a 7.18 6.30 7.52 9.30 7.73 10.47 10.88
  Europe
(EU) 7.88 10.24 7.00 9.03 8.31 10.49 10.50
Sturdyfon N.
Americ
a 6.50 9.40 7.48 9.15 7.69 10.25 10.88
  Rest of
Asia 7.36 9.64 7.17 8.34 6.65 6.00 9.75

(a)
Starting from the basic models in (a), we will build more advanced models in the subsequent parts of
this question. Prior to merger, Sleekfon and Sturdyfon operate independently, and so we need to build
separate models for each of them.

Optimization model for Sleekfon:

n = 3: Sleekfon production facilities.

m = 7: number of regional markets.

Dj = Annual market size of regional market j

Ki = maximum possible capacity of production facility i

cij = Variable cost of producing, transporting and duty from facility i to market j

fi = Annual fixed cost of facility i

xij = Number of units from facility i to regional market j.

It should be integral and non-negative.

 n n m
Min  f   c x
i 1
i
i 1 j 1
ij ij

Subject to
n

x
i 1
ij  D j for j  1,...,m (5.1)
m

x
j1
ij  K i for i  1,...,n (5.2)

Please note that we need to calculate the variable cost cij before we plug it into the optimization model.
Variable cost cij is calculated as follows:

cij = production cost per unit at facility i + transportation cost per unit from facility i to market j + duty*(
production cost per unit at facility i + transportation cost per unit from facility i to market j + fixed cost
per unit of capacity)

The above model gives optimal result as in following table:

N. S. Europe Europe Japan Rest of Africa Capacity
Quantity Shipped America America (EU) (Non EU) Asia/Australia

Europe
(EU) 0.00 0.00 20.00 0.00 0.00 0.00 0.00 0.00
Sleekfon N.
America 10.00 0.00 0.00 3.00 2.00 2.00 0.00 3.00
S.
America 0.00 4.00 0.00 0.00 0.00 0.00 1.00 5.00
Demand 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total Cost for Sleekfon = $ 564.39

And we use the same model but with data from Sturdyfon to get following optimal production and
distribution plan for Sturdyfon:
N. S. Europe Europe Japan Rest of Africa Capacity
Quantity Shipped America America (EU) (Non EU) Asia/Australia

Europe
(EU) 0.00 0.00 4.00 8.00 0.00 0.00 1.00 7.00
Sturdyfon N.
America 12.00 1.00 0.00 0.00 0.00 0.00 0.00 7.00
Rest of
Asia 0.00 0.00 0.00 0.00 7.00 3.00 0.00 0.00
Demand 0 0 0 0 0 0 0

Total cost for Sturdyfon = 512.68

(b) Under conditions of no plant shutdowns, the previous model is still applicable. However, we need to
increase the number of facilities to 6, i.e., 3 from Sleekfon and 3 from Sturdyfon. And the market demand
at a region needs revised by combining the demands from the two companies. Decision maker has more
facilities and greater market share in each region, and hence has more choices for production and
distribution plans. The optimal result is summarized in the following table.
 N. S. Europe Europe Japan Rest of Africa Capacity
America America (EU) (Non EU) Asia/Australia

Europe
(EU) 0.00 0.00 4.00 11.00 0.00 0.00 2.00 3.00
Sleekfon N.
America 16.00 0.00 0.00 0.00 4.00 0.00 0.00 0.00
S.
America 0.00 5.00 0.00 0.00 0.00 0.00 0.00 5.00
Europe
(EU) 0.00 0.00 20.00 0.00 0.00 0.00 0.00 0.00
Sturdyfon N.
America 6.00 0.00 0.00 0.00 0.00 0.00 0.00 14.00
Rest of
Asia 0.00 0.00 0.00 0.00 5.00 5.00 0.00 0.00
Demand 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total Cost for Merged Network = 1066.82

(c) This model is more advanced since it allows facilities to be scaled down or shutdown. Accordingly we
need more variables to reflect this new complexity.
n = 6: Sleekfon and Sturdyfon production facilities.

m = 7: number of regional markets.

Dj = Annual market size of regional market j, sum of the Sleekfon and Sturdyfon market share.

Ki =capacity of production facility i

Li =capacity of production facility if it is scaled back

cij = Variable cost of producing, transporting and duty from facility i to market j

fi = Annual fixed cost of facility i

gi = Annual fixed cost of facility i if it is scaled back

hi = Shutdown cost of facility i

xij = Number of units from facility i to regional market j.

It should be integral and non-negative.

yi = Binary variable indicating whether to scale back facility i. yi = 1 means to scale it back, 0 otherwise.

Since two facilities, Sleekfon S America and Sturdyfon Rest of Asia, can not be scaled back, the index i

doesn’t include these two facilities.

zi = Binary variable indicating whether to shutdown facility i. z i =1 means to shutdown it, 0 otherwise.

(1-yi –zi) would be the binary variable indicating whether the facility is unaffected.
 n n m
Min  ( f (1  y  z )  g y  h z )   c x
i 1
i i i i i i i
i 1 j 1
ij ij

Subject to
n

x
i 1
ij  D j for j  1,..., m (5.1)
m

x
j 1
ij  K i (1  yi  zi )  Li yi for i  1,..., n (5.2)

1  yi  zi  0 for i  1,..., n (5.3)

yi , zi are binary for i  1,..., n (5.4)

Please note that we need to calculate the variable cost cij before we plug it into the optimization model.
Variable cost cij is calculated as following:

cij = production cost per unit at facility i + transportation cost per unit from facility i to market j + duty*(
production cost per unit at facility i + transportation cost per unit from facility i to market j + fixed cost
per unit of capacity)

And we also need to prepare fixed cost data for the two new scenarios: shutdown and scale back. As
explained in the problem description, fixed cost for a scaled back facility is 70% of the original one; and it
costs 20% of the original annual fixed cost to shutdown it.

Above model gives optimal solution as summarized in the following table. The lowest cost possible in
this model is $988.93, much lower than the result we got in (b) $1066.82. As shown in the result, the
Sleekfon N.America facility is shutdown, and the market is mainly served by Sturdyfon N.America
facility. The N.America market share is 22, and there are 40 in terms of production capacity, hence it is
wise to shutdown one facility whichever is more expensive.

N. S. Europe Europe Japan Rest of Africa Scale back Shut down Plant Capacity
Quantity Shipped America America (EU) (Non EU) Asia/Australia unaffected

Europe
(EU) 0.00 0.00 5.00 11.00 0.00 0.00 2.00 0.00 0.00 1.00 2.00
Sleekfon N.
America 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 0.00
S.
America 2.00 5.00 0.00 0.00 3.00 0.00 0.00 0 0.00 1.00 0.00
Europe
(EU) 0.00 0.00 19.00 0.00 1.00 0.00 0.00 0.00 0.00 1.00 0.00
Sturdyfon N.
America 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 0.00 0.00
Rest of
Asia 0.00 0.00 0.00 0.00 5.00 5.00 0.00 0.00 0.00 1.00 0.00
Demand 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total Cost for Merged Network = 988.93

For questions (d) and (e), we need to change the duty to zero and run the optimization model again to
get the result.