Upply Network Design: Source: Getty Images

Supply network design
Source: Getty Images
Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Supply network design
Case Study: Dell
Source: Corbis/ Gianni Giansanti/ Sygma
Michael Dell started in 1984 by cutting out the ‘middle man’ and
delivering computers direct to the customer
Using its direct selling methods, Dell went on to become the number
one computer maker
There are many reasons for Dell’s success but most of them come
from the way Dell configures its supply networks
Operations network for a plastic homeware company
Second-tier First-tier First-tier Second-tier

suppliers suppliers customers customers
Chemical Wholesaler
company Plastic Retailer
stockist
Cardboard Plastic
company homeware
manufacturer Retailer
Packaging
Ink
supplier
supplier
Direct supply
Information
Operations network for a shopping mall
Second-tier First-tier First-tier Second-tier

suppliers suppliers customers customers
Recruitment
agency Security
services
Cleaning
materials Cleaning Shopping Retailers Retail
supplier services mall customers
Equipment Maintenance
supplier services
Direct supply
Information
Operations performance should be seen
as a whole supply chain issue
Benefits of looking at the whole supply chain include
It helps an understanding of competitiveness

It helps to identify the significant links in the network
It helps focus on long-term issues
Case Study
• Lizard wear
• Ford Supply Chain
Design Decisions in supply networks
• Shape of Supply chain (Outsourcing)

• Location
• Long-term Capacity Management
Configuring the Shape of Supply
Network
• Disintermediation
• Co-opetition
• Insource or Outsource (Do or Buy)

– Direction of Vertical integration
– Extent
– Balance among stages
Direction, extent and balance of vertical integration
Balance – Should excess capacity

be used to supply other companies?
Raw
material Component Assembly Wholesaler Retailer
suppliers maker operation
Extent – Narrow process span

Extent – Wide process span
Direction – Direction –
Upstream vertical Downstream vertical
integration integration
The decision logic of outsourcing
Does Is company’s Is significant

Is activity of No company have No No operations No Explore
strategic operations outsourcing
specialized performance performance
importance? knowledge? improvement this activity
superior?
likely?
Yes Yes Yes Yes
Explore keeping this activity in-house
The Location of Capacity
• Reasons for location decisions

– Changes in demand
– Changes in supply
– Case study: Disneyland Paris
• Objectives of Location decisions
– Spatial Variable cost
– Supply-side influence
– Demand-side influences
Supply-side and demand-side factors
in location decisions
Examples of supply-side Examples of demand-side

factors that vary with factors that vary with
location, influencing costs location, influencing
customer service/revenue
labour costs The
land costs operation labour skills
energy costs suitability of site
transportation costs image
community factors convenience for customers
Location Techniques
• Weighted-Score method
• Centre of Gravity method
Weighted-Score method
• You wish to take admission in a university.

Please form a group and discuss
– Factors that are crucial in making such decision
– Identify the weight of these factors.
– Slect four universities
– Rank between 0-100 against each criteria
Plant Location Methodology:
Location Factor Rating
Procedures Scores(0 to100)
1. Identify factors that are LocationFactors Weight Site 1 Site 2 Site 3
important in the location Labor pool &climate 0.30 80 65 95
decision Proximitytosupplies 0.20 100 91 75
2. Prioritize the factor by its Wage rates 0.15 60 95 80
importance. Each factor is Communityenvironment 0.15 75 80 80
weighted from 0 to 1.00
Scores(0 to100)
3. Subjective score (0 to 100) is
LocationFactors Site 1 Site 2 Site 3
assigned to each site for each
factor Labor pool &climate 24.00 19.50 28.50
4. Sum up the weighted score.

Proximitytosupplies 20.00 18.20 15.00
Wage rates 9.00 14.25 12.00
5. The site with highest score is
the most attractive
Communityenvironment 11.25 12.00 12.00
64.25 63.95 67.50
Example
(x1,y1) d1
• Customer Location Demand Customer Location Demand
• 1 (151,264) 1.1 6 (146,246) 0.4
• 2 (159,261) 0.7 7 (161,242) 0.8
• 3 (130,254) 0.8 8 (142,239) 0.1
• 4 (128,252) 1.4 9 (163,236) 0.5
• 5 (163,247) 2.1 10 (148,232) 0.6
• F ( xF , yF )
10
Objective: minimise  d x
i 1
i i  xF 2   yi  yF 2
Euclidean distance metric
270
265
260
255
250
245
240
235
230
120 140 160 180
Centre of gravity: initial solution
Initial solution
x 0 (
 j
d j x j ) /(
j
dj) y 0 (
 j
d j y j ) /(
 j
dj)
Iterative improvements
x n1  (

j
d j x j / w nj ) /(
 j
d j / w nj ) y n1  (
 j
d j y j / w nj ) /(
 j
d j / w nj )
n
where w j is the distance from the nth location to customer j
The iteration results
x y ton-miles
Original choice 150 250 135.57
Centre of gravity 149.95 249.52 135.50
Iterative method 151.63 249.23 134.10

152.69 249.06 133.53
153.37 248.92 133.28
153.81 248.80 133.17
154.10 248.71 133.12
154.30 248.65 133.10
154.44 248.60 133.09
154.54 248.56 133.08
154.61 248.54 133.08
Problem
• A city is reviewing the location of its fire
stations. The city is made up of a number of
neighborhoods, as illustrated in Figure
Problem Description
• A fire station can be placed in any
neighborhood. It is able to handle the fires for
both its neighborhood and any adjacent
neighborhood (any neighborhood with a non-
zero border with its home neighborhood).
• The objective is to minimize the number of fire
stations used.
Problem Formulation (by using
Linear Programming)
• We can create one variable for each neighborhood j. This variable will be 1 if we
place a station in the neighborhood, and will be 0 otherwise. This leads to the
following formulation
Set Covering Problem Solution
• The first constraint states that there must be a station either in neighborhood 1 or in
some adjacent neighborhood. The next constraint is for neighborhood 2 and so on.
Notice that the constraint coefficient is 1 if neighborhood i is adjacent to
neighborhood j or if i=j and 0 otherwise. The jth column of the constraint matrix
represents the set of neighborhoods that can be served by a fire station in
neighborhood j. We are asked to find a set of such subsets j that covers the set of all
neighborhoods in the sense that every neighborhood appears in the service subset
associated with at least one fire station.
• One optimal solution to this is and the rest equal to 0.
• This is an example of the set covering problem. The set covering problem is
characterized by having binary variables, constraints each with a right hand side of
1, and having simply sums of variables as constraints. In general, the objective
function can have any coefficients, though here it is of a particularly simple form.
Long-Term Capacity management
The balance of capacity
Capacity can either lead or lag demand
Inventory can be used to smooth out the peaks
Spare capacity can be used to supply other

operations
The danger of this is that the original operation

may receive a lower level of service
Unit cost curves for individual service centres of
varying capacities
Real cost per customer served Cost curve for 5
bay service centre
Cost curve for 10
Cost curve for 15
bay service centre bay service centre
‘Economy of scale’
curve for hotel
Economies Diseconomies
capacity
of scale of scale
5 10 15
Average number of bays in use
Capacity leading demand and capacity lagging demand
Capacity leads demand Capacity lags demand
Capacity
Volume
Volume
Demand Demand
Capacity
Time Time
Smoothing with inventory
Capacity
Volume
Demand
Time

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Supply network design

Source: Getty Images

Source: Corbis/ Gianni Giansanti/ Sygma

Second-tier First-tier First-tier Second-tier

Second-tier First-tier First-tier Second-tier

Benefits of looking at the whole supply chain include

It helps an understanding of competitiveness

• Ford Supply Chain

• Shape of Supply chain (Outsourcing)

• Insource or Outsource (Do or Buy)

Balance – Should excess capacity

Extent – Narrow process span

Does Is company’s Is significant

Yes Yes Yes Yes

Explore keeping this activity in-house

• Reasons for location decisions

Examples of supply-side Examples of demand-side

• You wish to take admission in a university.

4. Sum up the weighted score.

Original choice 150 250 135.57

Centre of gravity 149.95 249.52 135.50

Iterative method 151.63 249.23 134.10

Capacity can either lead or lag demand

Inventory can be used to smooth out the peaks

Spare capacity can be used to supply other

The danger of this is that the original operation

Capacity leads demand Capacity lags demand

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