Network Design in the

5 Supply Chain

PowerPoint presentation
to accompany
Chopra and Meindl
Supply Chain Management, 6e Pages 108-124, and 132-133 (textbook)
Copyright © 2016 Pearson Education, Inc. 5–1
 Capacitated Plant Location Model
Inputs
n = number of potential plant locations/capacity Decision variables
m = number of markets or demand points yi = 1 if plant i is open, 0 otherwise
D j = annual demand from market j xij = quantity shipped from plant i
to market j
K i = potential capacity of plant i
f i = 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)

fy 
n n m

Min i 1 i i
 c
i 1 j 1 ij
x
ij
Objective function

The model minimizes the fixed and variable costs.

subject to

 D for j  1,..., m
n The demand for each regional
x
i 1 ij j
market should be satisfied.


≤ K y for i  1,..., n
Constraints m No plant can supply more than
x
j 1 ij i i its capacity.

y  0,1 for i  1,..., n, x  0

i ij
Each plant is either
open (yi = 1) or
Copyright © 2016 Pearson Education, Inc. closed (yi = 0). 5–2
 Capacitated Plant Location Model FIGURE 5-4

Spreadsheet Area for Decision Variables for SunOil

Cells B14:F18 correspond to the decision variables xij and determine the amount is
produced in a supply region and shipped to a demand region. Cells G14:G18 contain the
decision variables yi corresponding to the low-capacity plants, and cells H14:H18 contain
the decision variables yi corresponding to the high-capacity plants.
Copyright © 2016 Pearson Education, Inc. 5–3
 Capacitated Plant Location Model

Cells B22:B26
contain the
capacity
constraints,
and cells
B28:F28
contain the
demand
constraints.

The objective
function is
shown in cell
B31.

FIGURE 5-5 Spreadsheet Area for Constraints and Objective Function for SunOil
Copyright © 2016 Pearson Education, Inc. 5–4
 Capacitated Plant Location Model

We type the formulas in the cells.

FIGURE 5-5 Spreadsheet Area for Constraints and Objective Function for SunOil

Copyright © 2016 Pearson Education, Inc. 5–5

 Capacitated Plant Location Model
The model is solved using Solver tool in Excel.
The next step is to use Data in Solver, as shown in Figure 5-6.
Within Solver, the goal is to minimize the total cost in cell B31.

• Constraints

Copyright © 2016 Pearson Education, Inc. 5–6

 Capacitated Plant Location Model

Copyright © 2016 Pearson Education, Inc. FIGURE 5-6 Using Solver to Set Regional Configuration for SunOil 5–7
 Capacitated Plant Location Model
Within the Solver Parameters dialog box, select Simplex LP and then click on Solve.

We conclude that
facilities are
located in South
America (cell
H15=1), Asia (cell
H17=1), and Africa
(cell H18=1).

The plant in south

America meets
the North
American
demand, whereas
the European
demand is met
from plants in
Asia and Africa.
Copyright © 2016 Pearson Education, Inc. FIGURE 5-7 Optimal Regional Network Configuration for SunOil 5–8
 Strategic Profit Model (SPM)

The strategic profit model, another name for the DuPont

Equation, provides one method for calculating the return on
equity (ROE). Return on equity refers to a business’s profit
relative to shareholder equity or, put another way -- the
effectiveness of the business at turning assets and investments
into profit. The strategic profit model employs three key
components:

Profit Margin

Asset Turnover

Leverage
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 Profit Margin

Determine profit margin by subtracting total costs, such as

materials, from the total sales to arrive at net income. Then
divide your net income by your sales revenue to arrive at a
percentage. That percentage represents your net profit
margin. For example, say your company achieved $1.5 million
in sales last year with total costs of $1 million. Your net
income equals $1.5 million minus $1 million, or $500,000.
Dividing that figure by $1.5 million leaves you with a profit
margin of approximately 33 percent. Higher profit margins
result in higher return on equity.

Copyright © 2016 Pearson Education, Inc. 5 – 10

Asset Turnover
The second key component, asset turnover, measures a business’s
efficiency at creating revenue from its assets. Calculate asset turnover
by taking your sales revenue and dividing it by your total assets. Say your
company generates $1.2 million in sales with $4.6 million in assets. You
divide $1.2 million by $4.6 million to determine your asset turnover
hovers around 26 percent. If asset turnover decreases, the return on
equity decreases.

Leverage (debt-load)
Leverage represents the final component of the strategic profit model. In
essence, leverage refers to the debt-to-equity ratio, or how much debt you
take on relative to your business’s equity. Calculate leverage by taking
your total liabilities, such as mortgages and revolving lines of credit, and
dividing them by your total equity (total assets minus total liabilities). If
your business’s total liabilities equal $2.2 million and your business’s total
equity is $5.9 million, you wind up with leverage around 37 percent.

Copyright © 2016 Pearson Education, Inc. 5 – 11

 Return on Equity (ROE)

Determine return on equity by multiplying your net profit

margin, asset turnover, and leverage. If your company holds
a 36 percent profit margin, a 40 percent asset turnover and 37
percent leverage, you end up with a return on equity of
approximately 5 percent. A return on equity of approximately
10 percent to 12 percent represents the norm.

Copyright © 2016 Pearson Education, Inc. 5 – 12