Chapter 3-Network Design in The Supply Chain-FULL

Course:
LOGISTICS ENGINEERING AND SUPPLY

CHAIN DESIGN
International University
Vietnam National University HCMC
Chapter 3
Network Design in the Supply Chain
Lecturer: Dr. Nguyễn Hằng Giang Anh

Email: nhganh@hcmiu.edu.vn
Learning Objectives
❖ Understand the role of network design in a supply

chain.
❖ Identify factors influencing supply chain network design
decisions.
❖ Discuss a framework for making network design
decisions.
❖ Develop an optimization model to design a regional
network configuration/ to identify potential sites in a
region/ to locate plants and allocate market demand.
Main Contents
1. Role of network design in a supply chain
2. Factors influencing supply chain network design decisions
3. Framework for making network design decisions
4. Models to design a regional network configuration
5. Models to identify potential sites in a region
6. Models to locate plants and allocate market demand
1.
ROLE OF NETWORK DESIGN
IN A SUPPLY CHAIN
Network Design Decisions
❖ Facility role: What role? what processes?
❖ Facility location: Where should facilities be located?
❖ Capacity allocation: How much capacity at each facility?
❖ Market and supply allocation: What markets? Which supply

sources?
2.
FACTORS INFLUENCING
SUPPLY CHAIN NETWORK
DESIGN DECISIONS
Influencing Factors
1 Strategic factors
2 Competitive factors
3 Political factors: Political stability of the region/country
4 Infrastructure factors: Availability of good infrastructure
5 Customer response time and Service level
6 Total Logistics Costs
7 Macroeconomic factors: Tariffs, Tax incentives, Exchange-rate

and demand risk
Strategic factors
A firm’s competitive strategy has a significant impact on
network design decisions
• Firms focus on cost leadership
• Firms focus on responsiveness
• Convenience stores aim to provide easy access to customers →

their networks include many stores with each store being small. Ex:
711 and Family mart.
• Discount stores focus on providing low prices → their networks
have large stores and customers often travel long distance to get there.
Ex: Sam’s Club or Costco
Competitive factors
A fundamental decision firms make is whether to locate their

facilities close to or far from competitors.
❖ Positive externalities between firms:
• Collocation of multiple firms benefits all of them → lead to
competitors locating close to each other.
• Ex: By locating together in a mall, competing retail stores make it
more convenient for customers driving to only one location to find
everything they want → increases overall demand.
❖ 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 and splitting the market.
Competitive factors - Locating to split the market
❖ Consider a situation in which customers are uniformly located along the

line segment between 0 and 1. Two firms compete based on their
distance from the customer.
❖ If total demand is 1, Firm 1 locates at point a, and Firm 2 locates at

point (1 − b), the demand at the two firms is given by
❖ Both firms maximize their market share if they move closer to each
other and locate at 𝒂 = 𝒃 = 𝟏/𝟐.
3.
FRAMEWORK FOR MAKING
NETWORK DESIGN
DECISIONS
Framework for Network Design Decisions (1/2)
Managers use network design models in two situations:
• First, these models are used to decide on locations of

facilities and determine the capacity to be assigned to each
facility
→ make this decision considering a time horizon over which
locations and capacities will not be altered (typically in years).
• Second, these models are used to assign current demand
to the available facilities and identify lanes along which
product will be transported
→ consider this decision at least on an annual basis as demand,
prices, exchange rates, and tariffs change.
Framework for Network Design Decisions (2/2)
Phase I: Define a Supply Chain Strategy/Design
The objective of the first phase is to define a firm’s broad

supply chain design
1. Define the firm’s competitive strategy → set of customer

needs that the supply chain aims to satisfy and
2. Forecast the evolution of global competition →
competitors in each market will be local or global
3. Identify the existing network, constraints on available
capital.
4. Determine growth strategy.
Case: McDonald’s in Moscow
In 1990 the world’s largest McDonald’s hamburger restaurant with 700

seats opened just off Pushkin Square in Moscow. This is operated jointly
by McDonald’s of Canada and local Russian companies. McDonald’s has
opened branches through out the world, but this was one of the most
difficult, with negotiations starting twenty years previously with the Soviet
Union. The inside of the restaurant is exactly as you would expect, with
the standard menu, color scheme and decor, staff training, levels of
cleanliness and cooking.
Everything follows the standard McDonald's pattern, but this was only
achieved after considerable effort. As well as the initial political difficulties,
there were major practical problems. Beef in Moscow was not readily
available and the quality was variable. McDonald’s had to import breeding
cattle and start a beef farm to supply the restaurant. Potatoes were
plentiful, but they were the wrong type to make McDonald's fries. Seed
potatoes were imported and grown. Russian cheese was not suitable for
cheeseburgers, so a dairy plant was opened to make processed cheese.
Case: McDonald’s in Moscow
When the restaurant opened it was a huge success, with 27,000 people
applying for a single job, 50,000 people served a day and queues half a
mile long outside the restaurant. Now there are 58 outlets in Russia and a
workforce of 450. But the path instill not easy. Russia suffered an
economic collapse in 1998, and this has affected wages, sales and
profits. The initial set up cost was so high that the restaurant doesn't
expect to make a profit in the foreseeable future.
 Summarize the case

 What do you get from the case?
Solution
Phase II: Define the Regional Facility Configuration
The objective of the second phase is to identify regions where

facilities will be located, their potential roles, and their capacity
1. Forecast of the demand by country or region.
2. Identify fixed and variable costs associated with production,

storage and transportation activities.
3. Identify regional tariffs, requirements for local production, tax
incentives, and export/import restrictions for each market.
4. Identify demand risk, exchange-rate risk, and political risk
associated with regional markets.
5. Identify the regional facility configuration for the supply chain
network using network design models.
Phase III: Select a Set of Desirable Potential Sites
The objective of third phase is to select a set of desirable

potential sites within each region where facilities are located.
1. Models that minimize total costs are first used to identify the
broad geographic area where potential sites may be located.
2. Potential sites should then be selected based on an analysis
of infrastructure availability to support the sites.
• Hard infrastructure requirements: availability of suppliers,
transportation services, communication, utilities, and warehousing
facilities.
• Soft infrastructure requirements: availability of a skilled
workforce, workforce turnover, and the community receptivity to
business and industry.
Phase IV: Location Choices and Market Allocation
The objective of the phase is to select, from among the potential

sites, a precise location and capacity allocation for each facility.
• Given the potential sites, a more precise estimation of location

specific demand, fixed and variable logistics and facility costs,
along with tariffs and tax incentives is available.
• This information is used to design a network that maximizes
total profits while accounting for the non-quantifiable factors.
• Models are used for final network design and market
allocation.
4.
MODELS TO DESIGN A
REGIONAL NETWORK
CONFIGURATION
Input Required
To obtain the regional network configuration using network

optimization models, the following information is needed
• Demand,
• Desired response time,
• Fixed cost of opening a facility,
• Variable cost of labor and material,
• Inventory holding cost,
• Transportation cost between every pair of regions,
• Sale price of product,
• Taxes and tariffs, and
• Potential facility capacity.
Example 1 - SunOil
a manufacturer of petrochemical products
Note: Cost Data (in Thousands of Dollars) and Demand Data (in Millions of Units)
Capacitated Plant Location Model (1/4)
n = number of potential plant locations/capacity
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
K i = potential capacity of plant i market j
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)
n n m
Minå f i yi + å åc x ij ij
i=1 i=1 j=1
5.
MODELS TO IDENTIFY
POTENTIAL SITES IN A
REGION
Input Required
This stage uses the results of the regional configuration as

inputs for the gravity models, which are run separately for each
region and facility.
For the considered region, the following information is needed:
• Demand at the markets served,

• Supply quantity from each supply source,
• Coordinate location of each market served and supply
source,
• Transportation cost per unit from each supply source to
the facility and from the facility to each market.
Select a Set of Desirable Potential Sites
1. Infinite set approach – find the best location in principle

and then looks for a site nearby.
• Center of Gravity
• Gravity Location Model, Centre of Gravity
2. Feasible set approach – identify available sites,
compare them and choose the best
• Costing model
• Scoring model
• Single median Problem
• Set Covering Problem
Infinite set approach
Figure: Alternative Choices of Locations

Centre of Gravity - Compromise location
• A simple way for finding the best compromise location is

to calculate the Centre of gravity of supply and
demand.
• The co-ordinates of the centre of gravity are
where,
(𝑋0 , 𝑌0 ): co-ordinates of the centre of gravity which gives the facility location
(𝑋𝑖 , 𝑌𝑖 ): co-ordinates of each customer or supplier, 𝑖
𝑊𝑖 : expected demand at customer 𝑖, or expected supply from supplier 𝑖
Example 2
𝑿, 𝒀 Supply or
Location co-ordinates demand
• Van Hendrick Industries is Supplier 1 (91, 8) 40
building a logistics centre that
will collect components from Supplier 2 (93, 35) 60
three suppliers, and send Supplier 3 (3, 86) 80
finished goods to six regional
warehouses. Warehouse 1 (83, 26) 24
• The locations of these and the Warehouse 2 (89, 54) 16
amounts supplied or demanded Warehouse 3 (63, 87) 22
are shown in the next table.
Warehouse 4 (11, 85) 38
• Where should they start looking
for a site to build the logistics Warehouse 5 (9, 16) 52
centre? Warehouse 6 (44, 48) 28
Solution – Centre of gravity
Locations for Van Henrick Industries
Gravity Location Model
xn, yn: 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
If (x, y) is the location selected for the facility, the distance dn

between the facility at location (x, y) and the supply source or
market n is given by
(5.4)
Example 3
Transportation Cost Quantity in Coordinates
Sources/Markets $/Ton Mile (Fn) Tons (Dn) xn yn
Supply sources
Buffalo 0.90 500 700 1,200
Memphis 0.95 300 250 600
St. Louis 0.85 700 225 825
Markets
Atlanta 1.50 225 600 500
Boston 1.50 150 1,050 1,200
Jacksonville 1.50 250 800 300
Philadelphia 1.50 175 925 975
New York 1.50 300 1,000 1,080
Total transportation cost:

Example 3 - Solution
(5.4)
Vietnam National University HCMC (5.5)
Gravity Location Model – Iterative procedure
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 yn
å d å d
x¢ = n=1
k
n
and y¢ = n=1
k
n
Dn Fn Dn Fn
å d å d
n=1 n n=1 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.
Costing model
Step 1: Calculate Distance for each site. There are two ways
to measure the distance between two facilities.
• Rectilinear Distance
• Euclidean Distance
Step 2: Compute Load-Distance value for each site.
Step 3: Choose site with lowest (Load x Distance).
Rectilinear - Euclidean Distance
• Suppose two facilities are located at points represented by

(𝑋1 , 𝑌1 ) and (𝑋2 , 𝑌2 ) → the distance between the facilities
will be calculated as:
Rectilinear Distance Euclidean Distance
Load-Distance value
Load-Distance value of site 𝑎 (𝑳𝑫𝒂 ) is calculated as:
𝑳𝑫𝒂 = ෍ 𝒍𝒊 ∗ 𝒅𝒊𝒂
𝒊=𝟏
where
𝑙𝑖 : load expressed as a weight or units being shipped to location 𝑖.
𝑑𝑖𝑎 : Rectilinear/Euclidean distance between the proposed
site 𝑎 and location 𝑖.
𝑛: total number of locations considered for each site.
Example 4
Example 3
• Bannerman Industries want to build a depot to serve 7
customers with different loads. Three locations A, B and C
are available.
• Which is the best site if operating costs and transport costs to
its suppliers are the same for each location?
Customer X Y Load Potential

X Y
Location/Site
1 100 110 20 A 120 90
2 120 130 5
3 220 150 9 B 160 170
4 180 210 12 C 180 130
5 140 170 24
6 130 180 11
7Vietnam National
170University HCMC
80 8
Costing model
Map for Bannerman Industries
Scoring model
Emphasize the factors that are important for locations

but cannot easily be costed or quantified.
Step 1: Decide the relevant factors in a location decision.

Step 2: Give each factor a Maximum possible score (usually
0-100) or a Weight (0.00-1.00) that shows its
importance.
Step 3: Consider each location in turn and give an actual score
for each factor, up to this maximum
Step 4: Calculate the Total score or Total weighted score (Site
Score x Factor Weight) for each location and find the
highest.
Step 5: Discuss the result and make a final decision.
Example 4 Example 5
• Samson Ltd. is considering three alternative locations

for its new facility. After many discussions they
compiled a list of important factors, their actual scores
(0-100), and weight for each site.
→ Which site would you recommend?
Example 4 Example 5 - Solution
Single median problem
• Suppose a network of towns connected by roads. There are demands

for some products in each town, and you want to locate a depot to
deliver to these towns.
→ Standard analysis shows that the best location is always in a town.
• We only have to compare locations in each town and identify the one
that gives the best value for some measure of performance.
• A common measure is average travel distance or time, and finding the
shortest is called the single median problem.
50
How to find the Single median
Step 1: Starts with a matrix of the shortest distances between

towns.
Step 2: To find the shortest average distance, we have to
combine these distances with the loads carried.
Step 3: Multiply the distances by the demands at each town, to
get a matrix of the weight-distances.
Step 4: Add these for each town, and find the lowest overall
value.
Example 6
• Ian Bruce delivers goods to

eight towns, with locations and
demands as shown in the next
figure.
• He wants to find the location
for a logistics centre that
minimises the average delivery
time to these towns.
• Where should he start looking?
Example 6 - Find the shortest way
Example: Find the shortest way from AL to EN
20
10 10
DI 8
AL 15 15 9 GO
BE
7 14
8
22 EN
HT
20 5
CP 6 15
Ways from AL to EN
25 6 FR
RED= 15+9+7= 31 (smallest)
GREEN= 15+8+6+6= 35
10
YELLOW= 22+6+6=
Vietnam National 34
University HCMC
Weight-distance of a center at AL = (10 × 0) + (15 × 15) + (25 × 22) +

(20 × 24) + (20 × 31) + (10 × 28) + (10 × 32) + (15 × 36)54= 3015.
Set Covering Problem
• Locate facilities that provide some service required by customers.

• Two types of the problem:
❖ Look for the single location that gives the best service to all
towns
❖ Find the number of facilities needed to achieve a level of
service and their best locations.
• Two objectives:
❖ cover all customers in the network with the smallest number
of facilities, or
❖ cover as many customer as possible with the given number
of facilities.
55
Example 7
The below figure shows part of a road network, with the travel
time (in minutes) shown on each link.
Q1. Where would you locate a depot to give best customer service?
56
Q2. How many depots would be needed to give a maximum journey
of 11 minutes?
Example 7 – Solution Q1
Solution (1/2)
57
Example 7 – Solution Q2
A B C D E F G H I J
A 0 10 24 10 29 29 25 20 35 32
B 10 0 14 20 19 19 15 30 25 22
C 24 14 0 15 11 5 15 25 11 14
D 10 20 15 0 26 20 30 10 25 29
E 29 19 11 26 0 6 4 23 8 3
F 29 19 5 20 6 0 10 21 6 10
G 25 15 15 30 4 10 0 27 12 7
H 20 30 25 10 23 21 27 0 15 20
I 35 25 11 25 8 6 12 15 0 5
J 32 22 14 29 3 10 7 20 5 0
6.
MODELS TO LOCATE PLANTS
AND ALLOCATE MARKET
DEMAND
Input Required
To obtain the regional network configuration using network

optimization models, the following information is needed
• Demand at each market
• Desired response time,
• Fixed cost of opening a facility,
• Variable cost of labor and material,
• Inventory holding cost,
• Transportation cost between every potential location and
market,
• Sale price of product,
• Taxes and tariffs, and
• Potential facility capacity.
Example 8 - TelecomOne and HighOptic
Manufacturers of Telecommunication Equipment
• TelecomOne has How to allocate

o a total production capacity of units per month the demand to
o a total demand of units per month, their production
• HighOptic has facilities as
o a production capacity of units per month demand and
o a demand
Internationalof
University units per month. costs change?
Demand Allocation Model
n = number of factory locations
m = number of markets or demand points
K i = 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
Optimal Demand Allocation
Locating Plants
TelecomOne and HighOptic have decided to merge the two

companies into a single entity called TelecomOptic. TelecomOne
will have 5 factories to serve 6 markets. The manager wonders if
all 5 factories are needed. Determine how many factories they
should open and where? Assign the demand from 6 markets to
the factories (if any) so that TelecomOptic can minimize their total
cost.
Capacitated Plant Location Model
n = number of factory locations
m = number of markets or demand points yi = 1 if factory i is open, 0 otherwise
xij = quantity shipped from factory i
K i = potential capacity of factory i to market j
f i = annualized fixed cost of keeping factory i open
cij = cost of producing and shipping one unit from factory i to market j
Decision variables & Constraints for TelecomOptic
Solver Dialog Box for TelecomOptic
Optimal Network Design for TelecomOptic

Chapter 3-Network Design in The Supply Chain-FULL

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Course:

LOGISTICS ENGINEERING AND SUPPLY

Lecturer: Dr. Nguyễn Hằng Giang Anh

❖ Understand the role of network design in a supply

1. Role of network design in a supply chain

2. Factors influencing supply chain network design decisions

3. Framework for making network design decisions

4. Models to design a regional network configuration

5. Models to identify potential sites in a region

6. Models to locate plants and allocate market demand

❖ Facility role: What role? what processes?

❖ Facility location: Where should facilities be located?

❖ Capacity allocation: How much capacity at each facility?

❖ Market and supply allocation: What markets? Which supply

3 Political factors: Political stability of the region/country

4 Infrastructure factors: Availability of good infrastructure

5 Customer response time and Service level

6 Total Logistics Costs

7 Macroeconomic factors: Tariffs, Tax incentives, Exchange-rate

• Firms focus on responsiveness

• Convenience stores aim to provide easy access to customers →

A fundamental decision firms make is whether to locate their

❖ Consider a situation in which customers are uniformly located along the

❖ If total demand is 1, Firm 1 locates at point a, and Firm 2 locates at

Managers use network design models in two situations:

• First, these models are used to decide on locations of

The objective of the first phase is to define a firm’s broad

1. Define the firm’s competitive strategy → set of customer

In 1990 the world’s largest McDonald’s hamburger restaurant with 700

 Summarize the case

The objective of the second phase is to identify regions where

1. Forecast of the demand by country or region.

2. Identify fixed and variable costs associated with production,

The objective of third phase is to select a set of desirable

The objective of the phase is to select, from among the potential

• Given the potential sites, a more precise estimation of location

To obtain the regional network configuration using network

This stage uses the results of the regional configuration as

For the considered region, the following information is needed:

• Demand at the markets served,

1. Infinite set approach – find the best location in principle

Figure: Alternative Choices of Locations

• A simple way for finding the best compromise location is

xn, yn: coordinate location of either a market or supply source n

If (x, y) is the location selected for the facility, the distance dn

Total transportation cost:

1. For each supply source or market n, evaluate 𝑑𝑛.

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

• Suppose two facilities are located at points represented by

Rectilinear Distance Euclidean Distance

Load-Distance value of site 𝑎 (𝑳𝑫𝒂 ) is calculated as:

Customer X Y Load Potential

Emphasize the factors that are important for locations

Step 1: Decide the relevant factors in a location decision.

• Samson Ltd. is considering three alternative locations

• Suppose a network of towns connected by roads. There are demands

Step 1: Starts with a matrix of the shortest distances between

• Ian Bruce delivers goods to

Weight-distance of a center at AL = (10 × 0) + (15 × 15) + (25 × 22) +

• Locate facilities that provide some service required by customers.

To obtain the regional network configuration using network

• TelecomOne has How to allocate

TelecomOne and HighOptic have decided to merge the two