SUPPLY CHAIN DESIGN SERVICE

SUPPLY CHAIN DESIGN & LEVELS

ANALYSIS
• The term “Service Level” is used too much without definition
• It has many different meanings
• Unclear definitions do not lead to clear solutions

CHAPTER 4 • Valid definitions for network design

• Average distance to customers (MINIMIZE)
• Percent of customers within a certain distance (MAXIMIZE)

ALTERNATIVE SERVICE LEVELS

(READ EBOOK 1, CHAPTER 4)

SUPPLY CHAIN DESIGN SERVICE Chen’s Cosmetics – Case study

LEVELS • Chun Chen, a former makeup artist decided to team with her brother, a chemist
to begin producing a line of affordable, professional quality cosmetics to be sold
across China. Her new company was called Chen’s Cosmetics.
• The company began with a single production facility in Guangzhou, China which
• Other definitions (may not be applicable to network design): served the entire customer base made up of distributor’s warehouse locations
across China
• Fill rate: The percentage of orders that are filled from inventory. Yet, the
facility location has nothing to do with whether they have enough of all
the key ingredients when customers want them.
• Late orders: The measure of how late the shipments. Yet, the lateness
includes other times (such as cooking time at the restaurant), not only
the delivery time.

Existing Distribution from Chen’s

Plant to all Customers
Chen’s Cosmetics – Case study
 The cosmetic line immediately become very popular and Chen’s now
finds themselves with more demand than their existing plant can
produce. As the CEO, Chun Chen decides they will add two new plants
in China to alleviate this problem and offer better service to their
customers.
 After some initial research, Chen knew that building a plant in any of
their potential locations would cost just about the same and decided that
their decision for locating these additional facilities should then be
focused on locations that would enable the best service to their existing
customer base.
Chen’s Cosmetics – Problem definition
• The Logistics team at Chen’s Cosmetics decided to use a commercial
Network Design application to help them find the optimal answer to their
question.
• The team generated a list of 24 potential locations where there was
space and favorable conditions for building new plants. You can see
these locations plotted as light blue rectangles with flags on top within the
network graphic below.

The question was… how do they determine the Dark Plant = Existing
Guangzhou Location
location for these additional plants based solely on Light Plants = Potential Plant
Locations
Service Level?

Chen’s Cosmetics Current Network Layered with

24 Potential sites where they could Locate their
additional Plants

CHEN’S COSMETICS – CHINA

SCENARIO RESULTS
Chen’s Cosmetics – Problem definition Objective 1: Minimize the average distance Objective 2: Maximize the demand you
can serve within 800km (in 2-Day Service)

 Knowing what they did about the constant cost of building a plant the team
set out to focus the model on Service Level, which would require asking the
model to minimize the weighted average distance to all customers or
maximize the percentage of customers within a certain distance when
selecting the optimal two plant locations
 CHEN’S COSMETICS – EUROPE CHEN’S COSMETICS – EUROPE
PROBLEM DEFINITION PROBLEM DEFINITION
• Chen’s Cosmetics does so well in the Chinese market that they find the opportunity
to expand the sale of their products to the European Market as well.

• The company will continue to produce all products from their three plants in China
but has teamed with successful 3PL in Europe to distribute the imported product
from key warehouse facilities across the country.
 The 3PL provides them with a list of 48 potential warehouse locations to
select from. The lease cost would remain the same at all locations, therefore
the team was again looking to offer the best service level possible with the
three warehouse locations they were to select.

 Theteam also determined that they would solve the scenario with both
service level objectives, previously discussed and then select the optimal
solution

Chen’s current European Customer Base layered

with the potential warehouse locations (red
triangles) presented to them by the 3PL

CHEN’S COSMETICS – EUROPE CHEN’S COSMETICS – QUESTIONS

SCENARIO RESULTS
Objective 1: Minimize the average distance Objective 2: Maximize the demand you
can serve within 800km (in 2-Day Service)

 1. What are the problems of Chen’s cosmetics?

 2. How can Chen’s cosmetics solve its problems in China and Europe?

 3. Which
objectives and constraints are needed to solve the problems of
Selects: Selects:
Paris, France Paris, France
Chen’s cosmetics?
Rome, Italy Belgrade, Serbia
Kremencug, Ukraine Voronezh, Russia
 MATH FORMULATION FOR MAXIMIZING
NEW CONSTRAINTS FOR SERVICE
DEMAND WITHIN A GIVEN DISTANCE
• If you don’t specify any other constraints, the customers that
• To maximize the demand within a given distance, we change our are outside of the HighServiceDist will be assigned randomly
objective function to: (there is nothing to direct the optimization otherwise)
• The AvgServiceDist constraint can help:

We are The This is just an expression that says for every i,j In the end, we are just This is the same as our objective The AvgServiceDist is just a factor. This factor is then
maximizing objective combination, we test whether the distance is multiplying the demand when minimizing the total multiplied by the sum of the demand. The end result is a
now still sums up greater than HighServiceDist. If it is, we give it a by whether we made the weighted distance. This is simply single number that can be compared to the total weighted
over all 0. A 0 is bad b/c it says that if this combination assignment. If the the distance multiplied by the distance (except here we are using a single number
customers is used it adds nothing to our objective (it adds previous term is a 0 the demand for each assignment. (If instead of the average).
and facilities zero). If it is within the HighServiceDist, then we objective function gets no we divide by the total demand, we If you set the AvgServiceDist factor relatively tight, this
get a 1 and if this combination is used it helps credit, so it has incentive get the weighted average constraints will clean up the solution by making sure
the objective function. This expression is to find a 113from the distance.) customers are assigned to the closest open warehouse.
14
nothing more than a matrix in Excel HighServiceDist matrix

FULL FORMULATION SETTING A MAXIMUM DISTANCE

RESTRICTION
Sometimes it is helpful to set an overall maximum distance for
any customer (you can do this by types of customers if you want).
Here is this family of constraints:

These
We read this just like the previous example. the This indicates
constraints
MaximumDist is just a factor that we input. If the distance that we have a
are going to
from i to j is greater than this factor (meaning it is further family of
control the
than we will allow), then we assign this term a 0. If it is less constraints. A
legitimate
than or equal to it, then it is assigned a 1. constraint for
values of Yi,j
every
When it is assigned a 0, this constraint means that Yi,j must combination
15 also be 0 (and thus not allowing customer j to be assigned of i 16
and j.
to facility i). If it is a 1, it means that there are no
restrictions on Yi,j because Yi,j can only be 0 or 1.
 SECOND MODEL: FULL
FIRST MODEL: FORMULATION FORMULATION SHOWING THE
WITH MAX DISTANCE CONSTRAINT HIGHSERVICEDIST AS A
CONSTRAINT

17 18

MODEL STEPS - REVIEW SUMMARY

1. Run this model and note the answer
(as HighServiceDemand). This is the • There are different measures of service level
most demand you can meet in the
2. Now run this model. The constraint • Only some are valid for network design
service distance.
basically makes sure that the same
facilities are picked and they have the
same assignments as before (barring
multiple optimal solutions). But, the • Service levels can be modeled as the objective or as a constraint
objective will assign all the remaining
demand to the closest facility.
• When we add these constraints, we can create models that are
no longer feasible
• The solver is faced with contradictory constraints

• Running many different scenarios is a great way to test the

19 sensitivity of your solution 20
 END OF
CHAPTER 4