Location Strategy

MBA (Term IV)

Location Strategy
Session 8: SC Network Planning and Optimization Models

Instructor: Prof. (Dr.) Bhavin Shah

Assistant Professor
Indian Institute of Management (IIM) Sirmaur

1
 Session Objective(s)
1. To understand the factors/decisions affecting SC/Facility Network

2. To understand the Demand Allocation Model

3. To understand the Simple-Capacitated Plant/Facility Location Models

4. To understand the Single-Multi Sourcing Models

5. To implement SC/Facility Network Planning and Optimization Models

• Focal Sectors: Logistics, Global SC, Manufacturing

2
1. Factors Influencing Facility Network Design Decisions
• Facility role
• Facility location
• Capacity allocation
• Market and supply allocation
• …………………………………………………………………………………..
• Strategic
• Technological
• Macroeconomic
• Political
• Infrastructure
• Competitive
• Logistics and facility costs

5-3
1. A Framework for Facility Network Design Decisions

Competitive STRATEGY GLOBAL COMPETITION

PHASE I
Supply Chain
INTERNAL CONSTRAINTS Strategy
Capital, growth strategy, TARIFFS AND TAX
existing network INCENTIVES
Capacitated Plant
Location Models
PRODUCTION TECHNOLOGIES
REGIONAL DEMAND
Cost, Scale/Scope impact, support PHASE II Size, growth, homogeneity,
required, flexibility Regional Facility local specifications
Configuration
COMPETITIVE
ENVIRONMENT POLITICAL, EXCHANGE
Gravity Location RATE AND DEMAND RISK
Models
PHASE III
Desirable Sites AVAILABLE
INFRASTRUCTURE
PRODUCTION METHODS
Skill needs, response time

FACTOR COSTS PHASE IV LOGISTICS COSTS

Labor, materials, site specific Location Choices Transport, inventory, coordination

Network
Optimization
Models 5-4
2. Demand Allocation Model
Objective:
Which market is served by which plant?
Which supply sources are used by a plant?

n m
cij = Cost of producing &
Min  cij x
shipping one unit from i 1 j 1
ij

plant i to customer j
s.t.
xij = Quantity shipped from
n
plant site i to customer j
Dj = Annual demand from
x
i 1
ij
 D j
, j  1,..., m
customer j m

Ki = Capacity of plant i x
j 1
ij
 K i
, i  1,..., n

x ij
0

PLANTLOC.xls
Demandallocationmodel.lng
5-5
2. Demand Allocation/Simple Plant Location Model

No. of Plants Obj. Value Plants No. of Demands Satisfied

4 25093P1, P2, P3, P5 54

City/Warehouse:
i/j Atlanta/C1 Boston/C2 Chicago/C3 Denver/C4 Omaha/C5 Portland/C6
(PLANT)/i…n            
Baltimore/P1   8       
Cheyenne/P2       6   
Salt Lake City/P3          11
Memphis/P4 10   12      
Wichita/P5         7  
Demand:
(DEM)/Dj 10 8 12 6 8 11

6
3. Capacitated Plant/Facility-Warehouse Problem
Objective:
Determine optimal no. of warehouses to satisfy demands with least costs

Assumptions:
Demand volume processed through plant is important consideration;
Each customer and plant site has known volume/capacity within limit

n n m
i is plant
j is market
Min  f y   c x
i i ij
ij
i 1 i 1 j 1
fi is annualized fixed cost
s.t.
cij is unit cost of production n
Ki is potential capacity
x  D ij j
for.. j  1,..., m
Dj is annual demand i 1
n
yi is binary value for open
xij is quantity shipped x  K y
j 1
ij i i
for..i  1,..., n
m is number of markets
n is number of plants y  {0,1}
i

PLANTLOC.xls
Capacitated Plant location.lng
5-7
3. Capacitated Plant/Facility-Warehouse Location Problem

PLANT LOCATION MODEL

Shipping Costs Per Ton / Month (COST)/Cij

Proposed Demand City (CUSTOMER)/ C1..C6 Monthly

Supply (CUSTOMER)/j…m Fixed Open Oper. Capacity
City/Warehouse: i/j Atlanta Boston Chicago Denver Omaha Portland Cost (FCOST)/ fi Plant/ OPEN/ yi Cost (CAP)Ki
(PLANT)/i…n            
Baltimore/P1 1675 400 685 1630 1160 2800 $7,650 1 $7,650 18
Cheyenne/P2 1460 1940 970 100 495 1200 $3,500 1 $3,500 24
Salt Lake City/P3 1925 2400 1425 500 950 800 $5,000 1 $5,000 27
Memphis/P4 380 1355 543 1045 665 2321 $4,100 1 $4,100 22
Wichita/P5 922 1646 700 508 311 1797 $2,500 1 $2,500 31
Demand: (DEM)/Dj 10 8 12 6 8 11

Operating Cost:
(SCTOT) $22,750
Trans. Cost $0 $0 $0 $0 $0 $0 Trans. Costs: $0

TOTAL
OPERATING
COST: $22,750
TTL_COST
VOL/xij returned as output
Amount shipped from plant to city

8
3. Capacitated Plant/Facility-Warehouse Location Problem

No. of Plants Obj. Value Plants No. of Demands Satisfied

1Infeasible . .

2 55569P2, P5 54

3 46031P1, P2, P4 54

4 44943P1, P3, P4, P5 54

5 44943P1, P3, P4, P5 54

9
4. Plant Location with Single Sourcing
Objective:
Determine optimal no. of warehouses/plants to satisfy demands with least costs

Assumptions:
Each customer must have all of its volumes assigned to a single plant/warehouse

n n m
• yi = 1 if plant is located at site i, 0
Min f y   D j c x
otherwise i 1
i i
i 1 j 1
ij ij

• xij = 1 if market j is supplied by

factory i, 0 otherwise
s.t.
n

x
i 1
ij
 1, j  1,..., m
n

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

xij , y {0,1}i

5-10
4. Plant Location with Multiple Sourcing
Objective:
Determine optimal no. of warehouses to satisfy demands with least costs

Assumptions:
Each customer may have all of its volumes can be assigned to multiple plants
n n m
• yi = 1 if plant is located at site i, 0 Min f y   c x ij ij
i i
otherwise i 1 i 1 j 1
• xij = Quantity shipped from plant site i
to customer j
s.t.
n

 x  D , j  1,..., m
i 1
ij j

 x  K y , i  1,..., n
j 1
ij i i

 y  k ; y {0,1}
i 1
i i

5-11
5. Model for Revenue Maximization

i is plant m n n n m
j is market Max  rj  xij   F i y   cijxij
i
fi is annualized fixed cost j 1 i 1 i 1 i 1 j 1

cij is unit cost of production s.t.

Ki is potential capacity n
Dj is annual demand
yi is binary value for open
x  D
i 1
ij j
for.. j  1,..., m
xij is quantity shipped n
m is number of markets
n is number of plants
x  K y
j 1
ij i i
for..i  1,..., n

y {0,1}
i

rj is revenue for selling one unit in market j

5-12
6. Facility Network Optimization Models

• Allocating demand to production facilities

• Locating Plants & Warehouses simultaneously

Key Costs:
• Fixed facility cost
• Transportation cost
• Production cost
• Inventory cost
• Coordination cost

Which plants to establish? How to configure the network?

5-13
6. Locating Plants & Warehouses simultaneously
n t l n n t t m
Min  Fiyi   feye   chi x hi   cie xie   cej x ej
i 1 e 1 h 1 i 1 i 1 e 1 e 1 j 1

s.t.
n

x
i 1
hi
 S h
for h  1,..., l
l t

x
h 1
hi
  xie  0
e 1
for i  1,..., n
t

x
e 1
ie
 Kiyi for i  1,..., n
n m

x
i 1
ie
  x ej  0
j 1
for e  1,..., t

x
j 1
ej
 Weye for e  1,..., t

x
e 1
ej
 Dj for j  1,..., m

yi , ye {0,1}
x ej
, x ,x ie hi
0
5-14
6. Locating Plants & Warehouses simultaneously

yi => plant exists (and working) or plant does not exist (or not working)
ye => warehouse exists or not (or working or not) at e
xhi => quantity shipped from supplier site at h to plant site at i
xie => quantity shipped from plant at i to warehouse at e
xej => quantity shipped from warehouse e to market j
chi => cost of shipping one unit from supplier site h to plant I
cie => cost of producing & shipping
cej => cost of shipping one unit from warehouse at e to market at j
Sh => capacity of the supplier warehouse at h
We => potential capacity of the warehouse that may be setup at site e
Fi => fixed cost of locating plant at site I
fe => fixed cost of locating warehouse at site e
Ki => potential capacity of the plant that may be erected at site I
Dj => annual demand from market (or customer) j