Network Design in Supply Chain

- Dr. Akshay Joshi

 Network Design in Supply Chain
• Network Design consists decisions regarding the
location of plants, suppliers & distribution centres
to serve customers in cost effective manner.
• Network design plays a crucial role and has
significant implications on supply chain
performance.
• A supply chain essentially a network consisting of
nodes & linkages.
 Network Design in Supply Chain
• Nodes represent conversion or storage points or
demand point.

• Linkages represent transportation activities

through which material flow takes place.

• Network design focuses on locations of nodes for

plants & storage points for given customer nodes.

• Network operations focuses on identifying the

optimal linkages between plants & markets.
• Supply Chain network design decisions are
classified as:
 Facility Role
 Facility location
 Capacity allocation
 Market & Supply allocations
Factors influencing Network Design
Decisions
• Strategic Factors: Network design based on the
competitive strategy of the firm. The possible
strategic roles for various facilities can be:
 Offshore facility: low cost facility for export
production
 Source facility: low cost facility for global
production
 Server facility: regional production facility
 Contributor facility: regional production facility
with development skills
 Outpost facility: regional production facility built to
gain local skills
 Lead facility: that leads in development & process
technologies.

Technological factors: Comprise of characteristics

of available production technologies.
o If technology shows significant economics of scale,
a few high capacity locations are effective.
o For facilities having lower fixed costs, local facilities
are preferred for lower transportation costs.
Macroeconomic factors: Important for global
trade.
 Tariffs & Tax Incentives
 Exchange Rates
 Demand Fluctuations

Political Factors

Infrastructural Factors
Competitive Factors: Include the following:

o Positive Externalities between firms

 These are instances where collocation of multiple
firms benefit all of them.
 Competitors locate close to each other.
 Leads to development of appropriate infrastructure
in developing area.
o Locating to split the market.
 When firms do not control price but compete on
distance from the customer, they can maximize
market share by locating close to each other &
splitting the market.
 If the firms compete on price & incur the
transportation cost to the customer, then they can
locate far from each other minimizing price
competition & helps the firms to split the market &
maximize profit.
o Customer Response Time & Local Presence
 Firms targeting customers who value a short
response time must locate close to each other.
 Firms delivering products if use rapid transportation
means provide shorter response times and have
fewer facilities.
 But the transportation cost may increase.
o Logistics & Facility cost
 Changes in the number of facilities, their location &
capacity allocation incur cost in the supply chain.
 Thus designing of supply chain should consider the
inventory, transportation & facility costs.
 As number of facilities increase inventory & facility
cost increases.
 But transportation costs decrease
 For industries where volume of output is reduced
as compared to input then such facility should be
located near to the supply source.

 It reduces the cost of material transportation.

 Inventory + transportation + facility Cost = total

logistics cost.

 Facilities in supply chain network should be in a

number which optimizes the total logistics cost.
Framework for Network Design Decisions
 Frame work of Network Design Decision

Phase 1: Define a supply chain strategy

 Define Competitive Strategy
 Define internal constraints
 Identify global competition
 Frame work of Network Design Decision
Phase2: Define regional facility configuration
• Production Technologies
• Competitive Environment
• Aggregate Factors & Logistics Cost
• Tariffs & Tax incentives
• Regional Demand
• Political, Exchange Rate & Demand Risk
Phase 3: Select a set of Desirable potential sites
• Selection of Production Methods
• Hard Infrastructure Requirements
• Soft Infrastructure Requirements

Phase 4: Location Choices

• Factor cost estimations
• Logistics cost estimations
 To Summarize
•The goal of network design is to maximize the supply
chain’s long-term profitability.

•The process starts by defining the supply chain

strategy, which must be aligned with the competitive
strategy of the firm.

•The supply chain strategy, regional demand, costs,

infrastructure, and competitive environment are used
to define a regional facility configuration.
 To Summarize
•For regions where facilities are to be located,
potentially attractive sites are then selected based on
costs and available infrastructure.

•The optimal configuration is determined from the

potential sites using demand, logistics cost, factor
costs, taxes, and margins in different markets.
 To Summarize
•The robustness of the network should be checked in
the context of various risks and uncertainties faced by
the supply chain.

•The allocation of markets to facilities should be revised

as demand and costs change.
 Conventional Network

Vendor Materials
DC Finished Customer
DC DC
Goods DC
Customer
Store
Component
Vendor Manufacturing
DC Customer Customer
Plant Store
Warehouse DC
Components
DC Customer
Vendor Store
DC
Finished
Customer
Goods DC Customer
Final DC
Assembly Store
 Models for Designing a Regional
Network Configuration
• Inputs Required By Region
– Demand
– Desired response time
– Fixed cost of opening a facility
– Variable cost of labor and material
– Inventory holding cost
– Transportation cost between pairs of regions
– Sale price of product
– Taxes and tariffs
– Potential facility capacity
 Models for Designing a Regional Network
Configuration

F Cost Data (in Thousands of Dollars) and Demand Data (in Millions of
Units) for SunOil
 Capacitated Plant Location Model
n = number of potential plant locations/capacity
m = number of markets or demand points
Dj = annual demand from market j
Ki = potential capacity of plant i
fi = annualized fixed cost of keeping plant i open
cij = cost of producing and shipping one unit from plant
i to market j (cost includes production, inventory,
transportation, and tariffs)
yi = 1 if plant i is open, 0 otherwise
xij = quantity shipped from plant i to market j
 Capacitated Plant Location Model

n n m
Min fi y i   cij xij
i 1 i 1 j 1

Subject to

x
i 1
ij  D j for j  1, , m
m

 x
j 1
ij  K i y i for i  1, , n

y i  0,1 for i  1, , n,xij  0

Accounting for Taxes, Tariffs, and Customer
Requirements

• Networks should be structured to maximize profit after taxes

while meeting customer service requirements
• Objective function maximizes profits
m n n n m
Max  r j  xij   Fi y i  cij xij
j 1 i 1 i 1 i 1 j 1

• Constraint Equation becomes

n

xi=1
ij  D j for j  1, ,m
 To summarize
•The capacitated plant location model can be used to
obtain a regional configuration that minimizes total
cost or maximizes total profits.

•The model provides optimal plant locations while

ensuring that no plant supplies more than its capacity
and each market obtains enough supply to meet
demand.
Models for Identifying Potential Sites
• Gravity Location Models
– Inputs required
xn , y n : coordinate location of either a market or supply source n
Fn : cost of shipping one unit for one mile between the facility and either
market or supply source n
Dn : quantity to be shipped between facility and market or supply source
n
(x, y) is the location selected for the The total transportation cost is
facility, the distance d between the given by
n
facility at location (x, y) and the supply k
source or market n is given by TC   d n Dn Fn
n 1

dn   x – xn    y – y n 
2 2
Gravity Model
1. For each supply source or market n, evaluate dn
2. Obtain a new location (x’, y’) for the facility, where

k k
Dn Fn xn Dn Fn y n

n 1 d

n 1 dn
x'  k n
and y'  k
Dn Fn Dn Fn

n 1 d

n 1 d n
n

3. If the new location (x’ , y’ ) is almost the same as

(x, y) stop. Otherwise, set (x, y) = (x’ , y’ ) and go to step 1
 Gravity Methods for Location

– Ton Mile-Center
( x  x n)  ( y  y n)
2 2
d 
Solution n

x
 Dn F d
k

• x,y: Warehouse n n

Coordinates x n 1 n

D nF
k

• xn, yn : Coordinates of  d
n 1
n

delivery location n
D ny F
k

• dn : Distance to delivery  d
n n

y n 1 n

location n F
 Dn d
k
n

• Fn : Annual tonnage to n 1 n

delivery location n

• Min.
 d n Dn F n
 To summarize
•The gravity model can be used to identify potential
facility locations in each region.

•Given the quantity coming from supply sources and

market demand, the model identifies the geographic
location in a region that minimizes the total
transportation cost.

•This geographic location can be used to identify

nearby potential sites that satisfy both hard and soft
infrastructure requirements.
Allocating Demand to Existing Production
Facilities

• Inputs required
n = number of factory locations
m = number of markets or demand points
Dj = annual demand from market j
Ki = capacity of factory i
cij = cost of producing and shipping one unit from factory i
to market j
xij = quantity shipped from factory i to market j
 Allocating Demand to Existing
Production Facilities
n m
Min cij xij
i 1 j 1

Subject to

x
i 1
ij  D j for j  1, ,m
m

x
j 1
ij  K i for i  1, ,n
 Models for Locating Production
Facilities
• Capacitated plant location model
– Merge the companies
– Solve using location-specific costs
yi = 1 if factory i is open, 0 otherwise
xij = quantity shipped from factory i to market j
n n m
Min fi y i   c x ij ij
i 1 i 1 j 1
 More Complex Capacitated Plant
Location Model
• Capacitated plant location model with single sourcing
yi = 1 if factory i is located at site i, 0
otherwise
xij = 1 if market j is supplied by factory i, 0
otherwise Min n f y  n m D c x
 i 1
i i  
i 1 j 1
j ij ij
Subject to
n

x
i 1
ij  1 for j  1, ,m
m

D x
j 1
j ij  K i y i for i  1, ,n

xij ,y i  0,1
 Locating Plants and Warehouses
Simultaneously

Stages in a Supply Network

Locating Plants and Warehouses
Simultaneously

• Inputs
m = number of markets or demand points
n = number of potential factory locations
l = number of suppliers
t = number of potential warehouse locations
Dj = annual demand from market j
Ki = potential capacity of factory at location l
Sh = supply capacity at supplier h
 Locating Plants and Warehouses
Simultaneously
We = potential warehouse capacity at location e
Fi = fixed cost of locating plant at location l
fe = fixed cost of locating a warehouse at location e
chi = cost of shipping one unit from supply source h to
factory l
cie = cost of producing and shipping one unit from
factory l to warehouse e
cej = cost of shipping one unit from warehouse e to
market j
 Locating Plants and Warehouses Simultaneously

• Decision variables
yi = 1 if factory is located at location i, 0 otherwise
ye = 1 if factory is located at location e, 0 otherwise
xej = quantity shipped from warehouse e to market j
xie = quantity shipped from factory at location i to warehouse e
xhi = quantity shipped from supplier h to factory at location i
• Objective function
n t l n n t t m
Min  Fi y i   fe y e   chi xhi   cie xie   cej xej
i 1 e 1 h 1 i 1 i 1 e 1 e 1 j 1
 Locating Plants and Warehouses
Simultaneously

• Constraint equations
n

x
m

i 1
hi  Sh for h  1, ,l x
j 1
ej  We y e for e = 1, ,t
l t

x   xie  0 for i  1, ,n
t

h 1
hi
e 1
x
e 1
ej  D j for j = 1, ,m

y i ,y e  0,1 ,xej ,xie ,xhi  0

t

x
e 1
ie  K i y i for i  1, ,n
n m

x x
i 1
ie
j 1
ej  0 for e  1, ,t
 To summarize
The capacitated plant location model can be used to
locate production facilities and ware- houses to
minimize total network costs or maximize network
profits.

A similar model can also be used to allocate market

demand across an existing set of facilities in a supply
chain network.

Both models optimize the objective function while

ensuring that capacity constraints are satisfied and
market demand is served.
 Network Optimization Models

• Allocating demand to production facilities

• Locating facilities and allocating capacity
Key Costs:

Fixed facility cost

Transportation cost
Production cost
Inventory cost
Coordination cost
Which plants to establish? How to configure the network?