Lecture 4

Network Design in the Supply Chain

 Debriefing

Network Design in Supply Chains

2
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?

3
 Factors Influencing
Network Design Decisions

• Strategic factors
• Technological factors
• Macroeconomic factors
– Tariffs and tax incentives
– Exchange-rate and demand risk
– Freight and fuel costs
• Political
• Infrastructure factors
• Competitive factors
– Positive externalities between firms
– Locating to split the market
• Customer response time and local presence
• Logistics and facility costs

4
Framework for Network
Design Decisions
Figure 5-2

5
 Framework for Network Design
Decisions
• Phase I: Define a Supply Chain Strategy/Design
– Clear definition of the firm’s competitive strategy
– Forecast the likely evolution of global competition
– Identify constraints on available capital
– Determine growth strategy

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Framework for Network Design
Decisions
• Phase II: Define the Regional Facility Configuration
– Forecast of the demand by country or region
– Economies of scale or scope
– Identify demand risk, exchange-rate risk, political risk, tariffs,
requirements for local production, tax incentives, and export or
import restrictions
– Identify competitors
• Phase III: Select a Set of Desirable Potential Sites
– Hard infrastructure requirements
– Soft infrastructure requirements
• Phase IV: Location Choices

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 Models for Facility Location and
Capacity Allocation
• Maximize the overall profitability of the supply chain
network while providing customers with the
appropriate responsiveness
• Many trade-offs during network design
• Network design models used to decide on locations
and capacities and to assign current demand to
facilities

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Models for Facility Location and
Capacity Allocation
• Important information
– Location of supply sources and markets
– Location of potential facility sites
– Demand forecast by market
– Facility, labor, and material costs by site
– Transportation costs between each pair of sites
– Inventory costs by site and as a function of
quantity
– Sale price of product in different regions
– Taxes and tariffs
– Desired response time and other service factors
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Phase II: Network Optimization Models

Figure 5-3

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 Capacitated Plant Location Model

= number of potential plant locations/capacity

= number of markets or demand points = 1 if plant i is open, 0 otherwise
= annual demand from market j = quantity shipped from plant
i to market j
= potential capacity of plant i

= annualized fixed cost of keeping plant i open

= cost of producing and shipping one unit from plant i to market j (cost
includes production, inventory, transportation, and tariffs)

subject to
n

x
i 1
ij  D j for j  1,..., m (5.1)
m

x
j 1
ij  K i yi for i  1,..., n (5.2)

yi  0,1 for i  1,..., n, x ij  0 (5.3)

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Capacitated Plant Location Model

Figure 5-4

12
 Capacitated Plant Location Model
Figure 5-5

13
Capacitated Plant Location Model

Figure 5-6
Capacitated Plant Location
Model

Figure 5-7

15
 Some scenario analysis

1- What if a plant must be built in Europe?

Answer: In this case add the constraint I16 ≥ 1 in Solver and rerun.

2-What if plants must be built in every market?

Answer: In this case, we need to add constraints I14:18 ≥ 1 in Solver and

rerun.

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 Phase III: Gravity Location Model

Coordinates
Transportation Cost Quantity in Tons
Sources/Markets $/Ton Mile (Fn) (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

Table 5-1
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 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

 x – xn    y – yn 
2 2
dn  (5.4)
k
Total transportation cost TC   d n Dn Fn (5.5)
n 1
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Gravity Location Model

 x – xn    y – yn 
2 2
dn  (5.4)

k
Total transportation cost TC   d n Dn Fn (5.5)
n 1

Figure 5-8
Gravity Location Model(Optimal Solution)

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 Some sensitivity Analysis
1. Change tonnage from St. Lous in Cell D7 to 1,700. How do
you expect location of facility to change? Try using Solver.

2. Change tonnage from St. Lous in Cell D7 to 2,700. How do

you expect location of facility to change? Try using Solver.

Answer: Question 1 Answer: Question 2

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Phase IV: Network Optimization Models

Table 5-2

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 Network Optimization Models
• Allocating demand to production facilities
= number of factory locations
= number of markets or demand points xij = quantity shipped from
= annual demand from market j factory i to market j
= capacity of factory i
= cost of producing and shipping one unit from factory i to market
j

n
subject to
x
i 1
ij  D j for j  1,..., m (5.6)
m

x
j 1
ij  K i for i  1,..., n (5.7)

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Network Optimization Models
Optimal demand allocation( Table 5-3)

Total cost=28,836+21,365=50,201,000
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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

x ij  D j for j  1,..., m (5.1)

subject to i 1
m

x
j 1
ij  K i yi for i  1,..., n (5.2)

yi  0,1 for i  1,..., n, x ij  0 (5.3)

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Capacitated Plant Location Model

Figure 5-9

26
Capacitated Plant Location Model

Figure 5-10

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Capacitated Plant Location Model

Figure 5-11

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 Capacitated Model With
Figure 5-12 merged companies
Insight: From Figure 5-12, the supply
chain team concludes that it is optimal
for TelecomOptic to close the plants in
Salt Lake City and Wichita while keeping
the plants in Baltimore, Cheyenne, and
Memphis open. The total monthly cost of
this network and operation is
$47,401,000. This cost represents
savings of about 3 million per month
compared to the situation in which
TelecomOne and HighOptic operate
separate supply chain networks.

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 Capacitated Model With
Single Sourcing
• Market supplied by only one factory
• Modify decision variables
yi = 1 if factory i is open, 0 otherwise
xij = 1 if market j is supplied by factory i, 0 otherwise

subject to n

x
i 1
ij  1 for j  1,..., m (5.8)
m

D x
j 1
i ij  K i yi for i  1,..., n (5.9)

xij , yi  0,1 (5.10)

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 Capacitated Model With
Single Sourcing
Table 5-4

If single sourcing is required, it is optimal for Telecom

Optic to close the factories in Baltimore and
Cheyenne. This is different from the result in Figure 5-
12, in which facto­ries in Salt Lake City and Wichita
were closed. The monthly cost of operating the net­
work in Table 5-4 is $49,717,000. This cost is about
$2.3 million higher than the cost of the network in
Figure 5-12, in which single sourcing was not
required. The supply chain team thus concludes that
single sourcing adds about $2.3 million per month to
the cost of the supply chain network, although it
makes coordination easier and requires less flexibility
from the plants.

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Locating Plants and Warehouses
Simultaneously

Figure 5-13

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Locating Plants and Warehouses
Simultaneously
• Model 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 customer j
Ki = potential capacity of factory at site i
Sh = supply capacity at supplier h
We = potential warehouse capacity at site e
Fi = fixed cost of locating a plant at site i
fe = fixed cost of locating a warehouse at site e
chi = cost of shipping one unit from supply source h to
factory i
cie = cost of producing and shipping one unit from
factory i to warehouse e
cej = 33 cost of shipping one unit from warehouse e to
Locating Plants and Warehouses
Simultaneously
• Goal is to identify plant and warehouse
locations and quantities shipped that
minimize the total fixed and variable costs

yi = 1 if factory is located at site i, 0

otherwise
ye = 1 if warehouse is located at site e, 0
otherwise
xej = quantity shipped from warehouse e
to nmarket j t l n n t t m
Min 
i 1

e 1

xie Fi yi = f e ye quantitychishipped
h 1 i 1
xhi  from 
i 1 e 1
ie 
cie xfactory  at csite
e 1 j 1
ej xej

i to warehouse e
xhi = quantity shipped from supplier h to
factory at site i
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Locating Plants and Warehouses
Simultaneously
subject to
n m

x hi  S h for h  1,..., l (5.11) x

j 1
ej  We ye for e  1,..., t (5.15)
i 1

l t t

x –x
h 1
hi
e 1
ie  0 for i  1,..., n (5.12) x
e 1
ej  D j for j  1,..., m (5.16)

x
e 1
ie  K i yi for i  1,..., n (5.13) yi , ye  0,1 , xej , xie , xhi  0 (5.17)

n m

x –x
i 1
ie
j 1
ej  0 for e  1,..., t (5.14)

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Class Exercise

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 Discussion Questions

1. How do the location and size of warehouses affect the performance of a firm such as
Amazon.com? What factors should Amazon.com take into account when making this decision?

2. How do import duties and exchange rates affect the location decision in a supply chain?

3. How is the rise in transportation costs likely to affect global supply chain networks?

4. Amazon.com has built new warehouses as it has grown. How does this change affect various
cost and response times in the Amazon.com supply chain?

5. Consider a firm such as Dell, with very few production facilities worldwide. List the pros and
cons of this approach and why it may or may not be suitable for the computer industry.

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