International Journal of Agile Management Systems

Network design in supply chain management

Sue Abdinnour‐Helm,
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 Network design in supply chain management
Keywords
Supply chain, Networks, Design,
Heuristics
Downloaded by University of Sri Jayewardenepura At 05:02 28 June 2018 (PT)
Abstract
The distribution function in a sup-
ply chain is an important internal
service function for any firm, and
has been increasingly recognized
as playing a strategic role in
achieving competitive advantage.
This paper proposes improving the
distribution function of the supply
chain by employing hub-and-spoke
network designs. Such designs
have proven to be effective with
third party logistics carriers such
as Federal Express, UPS, Norfolk
Southern, and Yellow Freight.
Several models and heuristic so-
lution techniques have been intro-
duced in the literature in the past
ten years. However, the perfor-
mance of such heuristics, under
different transportation environ-
ments, has not been examined.
This paper acts as a first step in
this direction. The performance of
two heuristics to solve a hub-and-
spoke network is compared
against the performance of an
optimal technique, for various
configurations of data. With the
results of this study, business
managers can, by analyzing the
structure of their data, assess the
``risk'' associated with applying
one of the two heuristics. Heuris-
tic developers can also exploit the
results of this study to give them
insight into areas where heuristics
can be developed or strengthened
in order to give rise to more robust
heuristics.
The author would like to
thank Scott W. Hadley for
his valuable suggestions
and comments regarding
this paper.
International Journal of Agile
Management Systems
1/2 [1999] 99±106
# MCB University Press
[ISSN 1465-4652]
Sue Abdinnour-Helm
Wichita State University, Wichita, Kansas, USA
Introduction
A firm's supply chain consists of three major
parts: internal functions, upstream suppliers,
and downstream customers (Handfield and
Nichols, 1996). The internal functions include
all the different processes (procurement,
production, and distribution) that are used to
transform raw materials to finished product.
The coordination and scheduling of these
processes is essential. The management of
the upstream supplier network ensures that
the right material is received at the right
time and to the right location. The focus is on
selecting a few good suppliers and maintain-
ing a good relationship with them. Maloni
and Benton (1997) review the conceptual
literature of supply chain partnerships, point
out the associated risks and benefits, and
outline the critical success factors for im-
plementing such partnerships. The manage-
ment of the downstream customer network
ensures that customers receive the products
they want in a timely manner. The focus is on
the distribution channels that the firm em-
ploys to send the product to the end custo-
mer. Throughout the supply chain, the
emphasis is on reducing inventory, hence
reducing cost. The ultimate goal is customer
satisfaction through delivering a quality
product at a good price and in a timely
fashion.
Companies that excel at various facets of
supply chain management do gain a compe-
titive advantage. A study by the research and
consulting firm of Pittiglio Rabin Todd and
McGrath (PRTM) found that companies con-
sidered to be best-practice organizations in
moving product to market enjoyed a 45
percent supply chain cost advantage over
their median competitors (Quinn, 1998). In
the chemical process industry (CPI), compa-
nies can save more than $US30 billion per
year by skilfully managing their supply
chain (Gibson, 1998). The results of two
surveys by KPMG Consulting indicate that
companies lose millions of dollars every year
because they fail to communicate efficiently
with customers and suppliers (IIE Solutions,
May 1998), and such inefficiencies can waste
as much as 25 percent of an organization's
operating cost (Quinn, 1998). Based on a brief
survey (Savoie, 1998), supply chain manage-
ment is getting attention from senior man-
agers at many companies. The two benefits
most companies expect from supply chain
integration are reduced cost and improved
cycle time.
The focus of this paper is on improving the
efficiency of the distribution function, which
is directly linked to the customer network in
the supply chain. This is considered a
significant internal service operation of any
firm and is directly related to customer
satisfaction. Narus and Anderson (1996) de-
scribe how flawless distribution can seem an
impossible goal at times, and how companies
are experimenting with their distribution
channels to make them more flexible and
responsive. The concept of reducing the time
it takes to deliver the product to the customer
is not new (Stalk, 1988). The term logistics is
more encompassing than distribution in that
it may involve inbound (incoming material
from suppliers) as well as outbound logistics
(outgoing material to customers). The logis-
tics function has been highlighted in the
context of better supply chain management.
Many businesses are aware that logistics
costs account for as much as 10-35 percent of
a company's gross revenues, making logistics
the single highest operating cost (Carter,
1998). When the US department of commerce
reported that 60 percent of all Fortune 500
companies' logistics costs are spent on
transporting products, executives began to
realize that there is money to be saved in this
area (Spalding, 1998). A team at the Graduate
School of Management and Technology at the
University of Maryland conducted a study
that investigated 20 best-practice companies
in the area of logistics management (Rich-
man, 1995). They found that the companies
viewed logistics as an important strategic
[ 99 ]
 Sue Abdinnour-Helm
Network design in supply
chain management
International Journal of Agile
Management Systems
1/2 [1999] 99±106
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[ 100 ]
function to differentiate themselves, add
value, and reduce costs. There was a striking
shift towards the centralization of logistics
responsibility and authority into a single
group at headquarters. In a follow-up study, a
team member emphasized that ``an organiza-
tion needs to build even stronger core-
logistics competency at headquarters to ef-
fectively orchestrate and manage the ever
widening network of external relationships
required in the global supply chain'' (Rheem,
1997).
This paper proposes improving the distri-
bution function of the supply chain by
employing hub-and-spoke network designs.
Such designs have been used by Federal
Express for a long time (Chan and Ponder,
1976; Chestler, 1985), and are also used by
UPS (www.ups.com), Norfolk Southern
(http://www.nscorp.com), and Yellow
Freight (http://www.yellowfreight.com/) in
some form or another. With the growing
trend of outsourcing part or all of the
distribution function (Rheem, 1997; Minahan,
1997; Allnoch, 1998; Bradley et al., 1999), such
carriers can benefit from the rich literature
on hub location to reevaluate their current
design and find room for improvement. Out-
sourcing has its risks as well, and some
companies opt to have more control over
their distribution function (Richman, 1995;
Rheem, 1997; Cooke, 1998). Such companies
may also want to consider hub-and-spoke
network designs for their distribution net-
works to achieve lower cost and better
performance.
The idea in hub location models, is to
consolidate traffic from different origins and
send it directly or via another hub to
different destinations (nodes that are not
destined as hubs are referred to as spokes),
thus achieving economy of scale on hub-to-
hub links. Such designs have been popular
with airlines as well (Northwest, United,
etc.), but a clear advantage of using them in
the distribution network of a supply chain
versus the airline is that products, unlike
passengers, are insensitive to how many hub
stops they need to make. This makes it easier
to achieve the goal of making the distribution
channel more flexible and responsive to
customer needs.
The motivation to do this paper is to
highlight the fact that even though the hub
location literature is rich with models and
heuristic solution techniques, the quality of
heuristics has not been tested under different
transportation environments. This is an
important step since the quality of solutions
that are generated by heuristics is almost
always dependent on the structure and the
distribution of the data. This paper takes a
first step in testing two heuristics for a hub-
and-spoke network design. Data sets with
various configurations that could simulate
flow of goods in different parts of the world
are generated. This makes it easier to relate
to the problems and helps in visualizing the
solutions and assessing them from a non-
quantitative point of view.
The paper is organized as follows. The
background to hub location models is re-
viewed in the next section. In subsequent
sections two heuristic solution techniques
and an optimal approach for the hub-and-
spoke model are briefly described, the gen-
eration of data sets is presented, and the
analysis of results is discussed. Finally, some
conclusions are made.
Hub location
The field of hub location started with a paper
by O'Kelly (1987), who formulated a quadratic
integer program for a p-Hub Median Problem
(p-HMP) and showed that it was NP-hard. The
p-HMP tries to find p hubs in a network of
interacting nodes to minimize the overall
transportation cost. The underlying assump-
tions are:
1 all hubs are connected
2 each spoke is assigned to a single hub
3 the hubs have unlimited capacity.
Heuristics for the p-HMP were developed by
O'Kelly (1987), Klincewicz (1991), Klincewicz
(1992), Campbell (1996), Skorin-Kapov and
Skorin-Kapov (1994), Ernst and Krishna-
moorthy (1996a, 1996b), and Smith et al.
(1996). An optimal approach was introduced
by Skorin-Kapov et al. (1996) and Ernst and
Krishnamoorthy (1996a, 1996b).
O'Kelly (1992) introduced another hub
location model called the uncapacitated hub
problem (UHP). This model is different from
the p-HMP in that the number of hubs is not
pre-determined. Therefore, a fixed cost for
establishing a hub is included in the formu-
lation. Heuristics for the UHP were devel-
oped by O'Kelly (1992), Aykin (1995),
Abdinnour-Helm and Venkataramanan
(1995), and Abdinnour-Helm (1996). An opti-
mal approach was introduced by Abdinnour-
Helm and Venkataramanan (1995) and by
Aykin (1995).
In this paper the focus is on the UHP. The
performance of the two heuristics: GA-ge-
netic algorithm (Abdinnour-Helm and Ven-
kataramanan, 1995) and GATS-genetic
algorithm and tabu search (Abdinnour-Helm,
1996) is examined. So far, the performance of
most heuristics in the area of hub location
has been tested on the CAB data set (O'Kelly,
1987). The data are based on airline passenger
 Sue Abdinnour-Helm
Network design in supply
chain management
International Journal of Agile
Management Systems
1/2 [1999] 99±106
Downloaded by University of Sri Jayewardenepura At 05:02 28 June 2018 (PT)
flow between 25 US cities in 1970 as evaluated
by the civil aeronautics board (CAB). A new
data set in the literature called the Australia
Post (AP) has been introduced and tested by
Ernst & Krishnamoorthy (1996a, 1996b). The
AP data set consists of 200 nodes representing
postcode districts. The purpose of this study,
however, is not to find how large a data set
can be solved with existing hub location
heuristics. Rather, the purpose is to study the
performance of hub location heuristics under
different scenarios of flow and distribution.
The GA heuristic
The main idea in genetic algorithms (Gold-
berg, 1989) is to employ the mechanics of
natural selection and natural genetics to
evolve a population of initial solutions. Given
the population of solutions at any iteration,
each solution is evaluated to give some
measure of its ``fitness''. A new population is
then formed for the next iteration by choos-
ing individuals to act as parents. The parents
then breed using some ``genetic operators'' to
produce the children of the next generation.
The GA heuristic (Abdinnour-Helm and
Venkataramanan, 1995) describes the imple-
mentation of genetic algorithms to the UHP.
A solution is represented by a string of 0s
(zeros) and 1s (ones). The string has length
equal to the number of nodes in the network
under consideration. The value 1 indicates
that a node is a hub and the value 0 indicates
otherwise. The individual strings in the
initial population are randomly generated so
that a bit position in a given string can
become a hub (take the value 1) with a
probability greater than zero. The fitness
value of each string is calculated by assign-
ing each node in the network (bit value equal
to zero) to the closest hub node (bit value
equal to one). This has been referred to in the
literature as the ``distance based'' rule. The
initial population of solutions is randomly
generated. The genetic operator used is the
one-point crossover and mutate operator.
The roulette wheel selection method (Gold-
berg, 1989) is used to choose parents that will
mate and produce the children of the next
generation.
The drawback of the GA heuristic is its use
of the ``distance based'' rule to assign spokes
to hubs. The rule has been used in other
heuristic approaches to hub location pro-
blems (O'Kelly, 1987; Klincewicz, 1992), This
may not necessarily yield the optimal as-
signment of spokes to hubs, since a pair of
spokes, which would be assigned to the same
hub in an optimal solution because of a high
volume of traffic between them, may end up
being assigned to two different hubs based on
distance. In this paper, the testing of the GA
heuristic with data sets that have different
configurations will also lend some insight
into the effect of the ``distance based'' rule on
the quality of the solution.
The GATS heuristic
The GATS heuristic (Abdinnour-Helm, 1996)
was introduced to overcome the primary
shortcoming of using the distance based rule
for assigning spokes to hubs in the GA
heuristic. This is accomplished by embed-
ding a tabu search component within the
genetic algorithm heuristic.
The fundamental principles underlying
tabu search (TS) are fully explained by
Glover (1986, 1989). TS is an iterative search
procedure that moves from one feasible
solution to another. The key idea in TS is that
the move chosen at each iteration may or
may not be an improving one (i.e. a cost
saving move). The selection of non-improv-
ing moves is what facilitates the TS strategy
from getting trapped in locally optimal solu-
tions.
In the implementation of TS to the UHP,
two types of moves are considered: Exchange
moves switch the assignments of a pair of
spokes and Shift moves switch the assign-
ment of a single city from one hub to another.
Given that the two types of moves are
different in nature, two separate tabu lists
are kept: one for the exchange moves, and
another for the shift moves. The two lists are
initialized to zero at the start of the TS, and
the appropriate tabu list is updated whenever
a move is executed. Updating requires pre-
venting the same move from occurring for a
number of iterations into the future.
The GATS heuristic has proven to be
superior to the GA heuristic when testing is
done using the CAB data set and several of its
subsets (Abdinnour-Helm, 1996). This paper
will examine if this superiority still holds
given different data sets.
The optimal approach
The solutions of the GA and the GATS
heuristics will be compared against optimal
solutions that can be obtained from running
the linear programming relaxation of the
mixed integer programming formulation to
the p-HMP (Skorin-Kapov and Skorin-Kapov,
1994). The results of such relaxations yielded
optimal integer solutions for the majority of
the problems tested using the CAB data set.
To obtain the optimal solution to the UHP
using the p-HMP model, different runs for an
[ 101 ]
 Sue Abdinnour-Helm
Network design in supply
chain management
International Journal of Agile
Management Systems
1/2 [1999] 99±106
Downloaded by University of Sri Jayewardenepura At 05:02 28 June 2018 (PT)
applicable range of fixed number of hubs
were made.
In the mixed integer programming model,
n = the number of nodes in the network, p =
the number of hubs, xijkm = the fraction of
flow from location i to location j routed via
hubs at location j and m in that order, Wij =
the flow from location i to location j, Cijkm =
the transportation cost from location i to
location j routed via hubs at location k and m
in that order, zik = 1 if location i is assigned to
hub k. The formulation is as follows:
Minimize
X n Xn X n X n
Wij Cijkm xijkm
iˆ1 jˆ1 kˆ1 mˆ1
The size of the relaxation and the comput-
ing resources required to solve the optimal
model grow exponentially in the number of
cities. For instance, a ten-city problem can be
solved in about one minute whereas a 25-city
problem takes in the range of three to four
hours (Skorin-Kapov and Skorin-Kapov, 1994).
The problems have 10,010 variables and 2,101
constraints as compared to 391,250 variables
and 31,901 constraints respectively. A 50 city
problem will give rise to a linear program
with 127,551 constraints and 6,252,500 vari-
ables. The largest problems that could be
solved with available computing resources
were 18-city problems. Therefore, the size of
all the data sets is limited to 18 cities.
Lists of the cities, population, and coordi-

s.t.
nates for the five data sets (Continental USA,
P
n
zkk ˆ p …1† East USA, Southwest USA, Canada, and
kˆ1 Western Europe), can be obtained from the
X
n author upon request. Figures 1, 2, 3, 4, and 5
zik ˆ 1 i ˆ 1::::n …2† display the location of the cities on the
kˆ1
respective maps. The figures are helpful in
zik  zkk i ˆ 1::::n; k ˆ 1::::n …3† displaying the shape of the networks, and
X
n later on in locating the hubs for the different
xijkm ˆ zik i ˆ 1::::n; j ˆ 1::::n; k ˆ 1::::n solution procedures.
mˆ1 The distance between a pair of cities is
…4† defined to be the Euclidean distance between
X
n the points as given by the coordinates.
xijkm ˆ zjm i ˆ 1::::n; j ˆ 1::::n; m ˆ 1::::n
kˆ1
…5† Flow distribution
zik 2 f0; 1g i ˆ 1::::n; k ˆ 1::::n …6† In order to generate flow, two different
xijkm  0 environments are considered. The first one
may be thought of as being indicative of an
i ˆ 1::::n; j ˆ 1::::n; k ˆ 1::::n; m ˆ 1::::n …7† unrestricted or global flow of goods, i.e. the
flow between a pair of locations is not heavily
The objective is to minimize overall transpor- influenced by the proximity of other loca-
tation cost subject to the following constraints: tions. The second environment is more
the problem has p hubs (constraint 1); each indicative of local economies where the flow
spoke is assigned to a single hub (constraint 2); of goods between a pair of locations is
a node becomes a hub if another node is influenced by the proximity of other loca-
assigned to it (constraint 3); for every destina- tions, e.g. the majority of flow tends to occur
tion j, the sum term on the left will be nonzero between the few nearest neighbors.
only if location i is allocated to hub k In the global flow model, the flow of goods
(constraint 4); for every origin i and every hub is assumed to be inversely proportional to the
k, a flow through the path i-k-m-j is feasible distance between cities. For example, con-
only if j is allocated to hub m. sider the flow leaving city A and assume that
city B is 50 miles from A and C is 150 miles
from A. In this case, three times as much
Generation of data sets (=150/50) flow will go to B than to C. This
relationship can be expressed mathemati-
Four different geographical layouts are con-
cally as:
sidered, consisting of major urban centers in:
1 Continental USA; 1 1
2 Regional USA; flow…T; I† ˆ 
i 1=a ‡ 1=b ‡ ::: ‡ 1=n
3 Canada; and
4 Western Europe. total flow…T† …8†

For Regional USA, two regions will be where flow(T,I) represents the flow origi-
considered, East and Southwest. All together, nating at T and terminating at I, total_-
five data sets are generated. flow(T) represents the total amount of flow
[ 102 ]
 Sue Abdinnour-Helm
Network design in supply
chain management
International Journal of Agile
Management Systems
1/2 [1999] 99±106
Downloaded by University of Sri Jayewardenepura At 05:02 28 June 2018 (PT)
originating at T, and a,b, . . ., n represent the Figure 2
distances from city T to cities A,B, . . ., N
Cities in the East Region of the United States
respectively. The expression in (8) describes
the assumption made above and ensures
that the total flow generated is total_flow(T).
Note that total_flow(T) is set equal to the
population size for city T.
In the local flow model, the flow of goods is
assumed to be inversely proportional to the
square of the relative distances between
cities. For example, consider the flow leaving
city A and assume B is 50 miles from A and C
is 150 miles from A. In this case, nine times as
much (=150/50)2 flow will go to B than to C.
This relationship can be expressed mathe-
matically as:

1 1
flow…T; I† ˆ 
i2 1=a2 ‡ 1=b2 ‡ ::: ‡ 1=n2
total flow…T† …9†
Figure 3
where flow(T,I), total_flow(T), and a,b, . . ., n Cities in the Southwest Region of the United
are defined as in the global flow model. This States
expression describes the assumption made
above and also ensures that the total flow
generated is total_flow(T).
The lists of the cities, population, and
coordinates for the five data sets (available
from the author upon request) can be used to
generate the local and global flows.

Analysis of results
The optimal solutions were obtained by
generating MPS files to represent the linear
program for each data set. The program
called CPlex running under the SunOS was
used to solve the linear program. The GA and
GATS heuristic programs were written in
Figure 1
Cities in the continental United States
ANSI C, and were run on a RISC 6000 IBM
computer.
The results for the three US data sets
appear in Table I and the results for the
Canadian and the European data sets appear
in Table II. The optimal and the two heuristic
solutions, GA and GATS, are reported for
both the global and the local flow models. The
solution represents the value of the overall
transportation cost and the hubs selected.
The value of the fixed cost associated with
constructing/maintaining a hub facility is
also listed.
Reviewing the results (see Table III), one
can conclude that on the limited set of data, it
appears that both GA and GATS are robust
techniques providing optimal or near opti-
mal solutions in all cases (with GA never out-
performing GATS).
As one might expect, the effect of relying
exclusively on the distance based rule (e.g.
GA) yields sub-optimal solutions more fre-
quently in ``global flow'' problems than in
``local flow'' problems. The justification for
this is that distance between locations in a
``global flow'' environment has a lesser effect
[ 103 ]
 Sue Abdinnour-Helm
Network design in supply
chain management
International Journal of Agile
Management Systems
1/2 [1999] 99±106
Figure 4
Cities in Canada
Downloaded by University of Sri Jayewardenepura At 05:02 28 June 2018 (PT)
on the volume of flow between the locations
relative to ``local flow'' environments.
There is also an indication that both GA
and GATS are more susceptible to ``local
flow'' environments. However, GATS still
appears to be very robust (e.g. very small
gaps) in local flow problems.
Conclusions
This paper has introduced the rich litera-
ture on hub location. Companies or third
part logistics carriers can use models and
solution techniques from the literature to
improve the design of the distribution func-
tion in their supply chain. The quality of the
available heuristic solution techniques has
not been properly tested under different
transportation environments. This study is
a first step in this direction. The solution
quality of two published heuristics (GA and
GATS) for the uncapacitated hub location
problem is examined. The data sets are
classified as either ``global flow'' or ``local
flow''. In local flow environments the vo-
lume of flow between a pair of locations is
strongly influenced by the distance separat-
ing them. In global flow environments inter-
location distance has a lesser influence on

the volume of flow.

Experimental results indicate that both
GA and GATS are robust heuristics that give
high quality solutions in both environ-
ments. It appears that the more ``local'' an
environment becomes, the quality of the GA
solution degrades much quicker than the
GATS solution. Further, there is an indica-
tion that both heuristics are relatively
insensitive to the shape of the network. For
example, the continental US data is rela-
tively dispersed in two-dimensional space,
whereas the Canadian data is almost one-
dimensional, and the regional US data re-
sides in between.

Table I
Results for the three US data sets
Global flow solution Local flow solution
Continental US
Fixed cost 125 Fixed cost 125
Optimal 1,563.7 Optimal 1,162.7
(1,11,15) (5,7,10,14)
GA 1,563.7 GA 1,162.7
(1,11,15) (5,7,10,14)
GATS 1,563.7 GATS 1,162.7
(1,11,15) (5,7,10,14)
East US
Fixed cost 20 Fixed cost 20
Optimal 282.1 Optimal 230
(10) (2,16)
GA 282.1 GA 235.7
(10) (8,18)
GATS 282.1 GATS 231.5
(10) (16,17)
Southwest US
Fixed cost 40 Fixed cost 60
Optimal 618.3 Optimal 593.8
(7,8) (4,5,7,11)
GA 629.6 GA 619.9
(7) (4,7,8)
GATS 618.3 GATS 595.9
(7,8) (7,11)

[ 104 ]
 Sue Abdinnour-Helm Table II
Network design in supply
chain management Results for the Canadian and the Western European data sets
International Journal of Agile Global flow solution Local flow solution
Management Systems
1/2 [1999] 99±106 Canada
Fixed cost 180 Fixed cost 180
Optimal 1,595.9 Optimal 1,189.7
(6,13) (5,15,16)
GA 1,601.8 GA 1,189.7
(6,13) (5,15,16)
GATS 1,595.9 GATS 1,189.7
(6,13) (5,15,16)
Western Europe
Fixed cost 75 Fixed cost 75
Optimal 1,072.7 Optimal 938.8
(2,12) (7,11,12)
GA 1,073.4 GA 938.8
Downloaded by University of Sri Jayewardenepura At 05:02 28 June 2018 (PT)

(2,12) (7,11,12)
GATS 1,072.7 GATS 938.8
(2,12) (7,11,12)

Table III
Summary of results
Global flow (total of five problems) Local flow (total of five problems)
Heuristic No. Optimal Largest gap No. Optimal Largest gap
GA 2 1.83% 3 4.40%
GATS 5 0.00% 3 0.65%

An avenue for future work involves further
developing a benchmark test suite that has
identifiable characteristics, such as net-
work shape, distribution of flow volume
(based on e.g. populations, distances, . . .)
Figure 5
Cities in Western Europe
and network size. This suite of benchmarks
can then be used to assess a broader range
of heuristics for general hub location
problems.
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