Networks Design in the Supply Chain

Prof. Sanjay Choudhari

T. A. Pai Management Institute
Manipal
Chapter 5
Learning Objectives
Role of network design in a supply chain.
Identify factors influencing supply chain network design
decisions.
Develop a framework for making network design decisions.
Use optimization models for facility location and capacity
allocation decisions.
Network Design Decisions
Facility role
Manufacturing, storage
Facility location
Where should facilities be located?
Toyota has many plants, Netflix
Capacity allocation
How much capacity at each facility?
Market and supply allocation
What markets (Demand)? Which sources (Supply)?
Can be changed if facility are flexible

Cost

Responsiveness
(How many plants, DCs, retail stores, etc. to build?)
Factors Influencing
Network Design Decisions
Strategic factors (competitive strategy : C or R)
Manufacturing
Flextronics located assembly in China
Zara located facility in Portugal and Spain to serve Europe
Retails stores network
Convenience store
Discount stores
Global supply chain network
Zara production facilities are in Europe and Asia

Factors Influencing
Network Design Decisions
Technological factors
Electronic chip manufacturer (Large investment : few high-capacity
locations, output easy to transport)
Coca-Cola bottling plant (Lower fixed cost : many local facilities, help to
reduce transportation cost)
Macroeconomic factors
Tariffs and tax incentives (Developing countries)
Exchange-rate and demand risk (Japanese Manf, Tata
Power)
Freight and fuel costs (Southwest Airline)
Political
Global political risk index (Govt., Society, Security and Economy)
Factors Influencing
Network Design Decisions
Infrastructure factors
Availability sites and labor, proximity to transportation
terminals, rails service, airport, seaport, highway,
congestion and utilities (in Shanghai )
Competitive factors
Positive externalities between firms
Competitors locating close to each other (malls)
Competitors develop the infrastructure (Pune developed in local
suppliers network, other located close)
Locating to split the market
Factors Influencing
Network Design Decisions
Socioeconomic factors
Industrialization in backward areas (Govt. of India)

Customer response time and local presence
Close to customers (coffee shop, Convenience store)
Transportation
Logistics and facility costs
Close to supply source (iron ore processing )
Inventory + transportation + Facility
Framework for Network Design
Phase I: Define Supply chain strategy
Broad supply chain design
Phase II : Define Regional facility configuration
Identify regions for facility locations, potential roles and
approximate capacity
Phase III : Select Desirable Sites
Selection of potential sites within each region
Suppliers, transportation services, warehousing facilities, utilities ,
workforce
Phase IV : Location Choices
Precise location and capacity allocation
Expected margin, demand, various facility and logistics cost, tax and
tariff at each location
Framework for Network Design
Models for Facility Location and
Capacity Allocation
Maximize the overall profitability of the supply chain network
Many trade-offs
Facility, Transportation and Inventory : Cost and Responsiveness
Network design models
Decision on facility locations and capacities to assign to facility
Consider time horizon for above decisions (typically one year) with
annual demand, prices, exchange rate, tariff
Assign the current demand to available facilities
Identify link along which product will be transported
Models for Facility Location and
Capacity Allocation
Important information summary
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
Phase II: Network Optimization Models
Manager considers regional demand , tariff, economies of
scale and aggregate factors cost to decide the regions where
facilities are to be located.
Manager must consider non-quantifiable factors along with
above quantifiable factors
e.g. Competitive environment, political risk
Phase II: Network Optimization Models
SunOil is a petrochemical factory with sales in N. America, S. America, Europe, Asia and
Africa. As part of SunOils expansion plans, the VP Supply Chains is considering opening
consolidated plants with capacities of 15 million at some of the demand regions.

The demand at N.America, S.America, Europe, Asia and Africa are 12, 8, 14, 16, and 7
million units respectively. The fixed costs of developing a facility is given in table below,
along with the cost of producing and shipping a million units to each of markets.
Demand 12 8 14 16 7
Type 1
Capacitated Plant Location Model
= number of potential plant locations/capacity
n
m
D
j
K
i
f
i
c
ij
= number of markets or demand points
= annual demand from 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)
y
i
x
ij
= quantity shipped from plant i
to market j
= 1 if plant i is open, 0 otherwise
Min f
i
y
i
+
i1
n

c
ij
x
ij
j1
m

i1
n

subject to
x
ij
D
j
for j 1,...,m
i1
n

x
ij
j1
m

K
i
y
i
for i 1,...,n
y
i
0,1
{ }
for i 1,...,n, x
ij
0
Capacitated Plant Location Model
Cij 1 2 3 4 5 Fi Ki Objective
Supply N.America S. America Europe Asia Africa Fixed Cost Capacity Cost
1 N.America 81 92 101 130 115 7000 15
2 S.America 117 77 108 98 100 5500 15 $0
3 Europe 102 105 95 119 111 7500 15
4 Asia 115 125 90 59 74 5100 15
5 Africa 142 100 103 105 71 5000 15
Decision Variables
Xij 1 2 3 4 5 Yi
Supply N.America S. America Europe Asia Africa Lhs Rhs Plant open
1 N.America 0 <= 0
2 S.America 0 <= 0
3 Europe 0 <= 0
4 Asia 0 <= 0
5 Africa 0 <= 0
Lhs 0 0 0 0 0
= = = = =
Rhs Demand 12 8 14 16 7
Type 1
Capacitated Plant Location Model
Cij 1 2 3 4 5 Fi Ki Objective
Supply N.America S. America Europe Asia Africa Fixed Cost Capacity Cost
1 N.America 81 92 101 130 115 7000 15
2 S.America 117 77 108 98 100 5500 15 $27,119
3 Europe 102 105 95 119 111 7500 15
4 Asia 115 125 90 59 74 5100 15
5 Africa 142 100 103 105 71 5000 15
Decision Variables
Xij 1 2 3 4 5 Yi
Supply N.America S. America Europe Asia Africa Lhs Rhs Plant open
1 N.America 12 0 3 0 0 15 <= 15 1
2 S.America 0 8 3 1 0 12 <= 15 1
3 Europe 0 0 0 0 0 0 <= 0 0
4 Asia 0 0 0 15 0 15 <= 15 1
5 Africa 0 0 8 0 7 15 <= 15 1
Lhs 12 8 14 16 7
= = = = =
Rhs Demand 12 8 14 16 7
Type 1
Phase II: Network Optimization Models

Now, if the VP Supply Chains is toying the options of opening plants with capacities of
either 10 million or 20 million at some of the demand regions, which should he choose?
Demand 12 8 14 16 7
Type 2
Capacitated Plant Location Model
Cij 1 2 3 4 5 Fi(L) Ki(L) Fi(H) Ki(H) Objective
Supply N.America S. America Europe Asia Africa Fixed Cost Capacity Fixed Cost Capacity Cost
1 N.America 81 92 101 130 115 6000 10 9000 20
2 S.America 117 77 108 98 100 4500 10 6750 20 $0
3 Europe 102 105 95 119 111 6500 10 9750 20
4 Asia 115 125 90 59 74 4100 10 6150 20
5 Africa 142 100 103 105 71 4000 10 6000 20
Decision Variables
Xij 1 2 3 4 5 Yi(L) Yi(H)
Supply N.America S. America Europe Asia Africa Lhs Rhs Plant open Plant open
1 N.America 0 <= 0
2 S.America 0 <= 0
3 Europe 0 <= 0
4 Asia 0 <= 0
5 Africa 0 <= 0
Lhs 0 0 0 0 0
= = = = =
Rhs Demand 12 8 14 16 7
Type 2
Capacitated Plant Location Model
Cij 1 2 3 4 5 Fi(L) Ki(L) Fi(H) Ki(H) Objective
Supply N.America S. America Europe Asia Africa Fixed Cost Capacity Fixed Cost Capacity Cost
1 N.America 81 92 101 130 115 6000 10 9000 20
2 S.America 117 77 108 98 100 4500 10 6750 20 $23,751
3 Europe 102 105 95 119 111 6500 10 9750 20
4 Asia 115 125 90 59 74 4100 10 6150 20
5 Africa 142 100 103 105 71 4000 10 6000 20
Decision Variables
Xij 1 2 3 4 5 Yi(L) Yi(H)
Supply N.America S. America Europe Asia Africa Lhs Rhs Plant open Plant open
1 N.America 0 0 0 0 0 0 <= 0 0 0
2 S.America 12 8 0 0 0 20 <= 20 0 1
3 Europe 0 0 0 0 0 0 <= 0 0 0
4 Asia 0 0 4 16 0 20 <= 20 0 1
5 Africa 0 0 10 0 7 17 <= 20 0 1
Lhs 12 8 14 16 7
= = = = =
Rhs Demand 12 8 14 16 7
Type 2
Phase III: Gravity Location Models
Manager identifies potential locations in each region where
the company has decided to locate a plant.
Gravity location models can be used when identifying
suitable geographic locations within a region.
Gravity location model is used to find locations that
minimize the cost of transporting raw materials from
suppliers and finished goods to the market served.

Phase III: Gravity Location Model
x
n
, y
n
: Coordinate location of either a market or supply source
n
F
n
: Cost of shipping one unit for one mile between the
facility and either market or supply source n
D
n
: Quantity to be shipped between facility and market or
supply source n
(x, y) is the location selected for the facility, the distance d
n

between the facility at location (x, y) and the supply source or
market n is given by
d
n
x x
n
( )
2
+ y y
n
( )
2
Gravity Location Model
Sources/Markets
Transportation
Cost
$/Ton Mile (F
n
)
Quantity in Tons
(D
n
)
Coordinates
x
n
y
n
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

k
n
n n n
F D d TC
1
Gravity Location Model
Phase IV: Network Optimization Models
Manager decides on the location and capacity allocation for
each facility.
Manager also decides how markets are allocated to each
facilities

Phase IV: Network Optimization Models
Supply City
Demand City
Production and Transportation Cost
per Thousand Units (Thousand $)
Monthly
Capacity
(Thousand
Units) K
Monthly
Fixed Cost
(Thousand
$) f Atlanta Boston Chicago Denver Omaha Portland
Baltimore 1,675 400 985 1,630 1,160 2,800 18 7,650
Cheyenne 1,460 1,940 970 100 495 1,200 24 3,500
Salt Lake
City
1,925 2,400 1,450 500 950 800 27 5,000
Memphis 380 1,355 543 1,045 665 2,321 22 4,100
Wichita 922 1,646 700 508 311 1,797 31 2,200
Monthly
demand
(thousand
units) D
j
10 8 14 6 7 11
HighOptic TelecomOne
Network Optimization Models
Allocating demand to production facilities
= Number of factory locations
n
m
D
j
K
i
c
ij
= Number of markets or demand points
= Annual demand from market j
= Capacity of factory i
= Cost of producing and shipping one unit from factory i to market j
x
ij
= Quantity shipped from factory i to
market j

n
i
m
j
ij ij
x c Min
1 1
subject to
n i K x
m j D x
i
m
j
ij
n
i
j ij
,..., 1 for
,..., 1 for
1
1

Network Optimization Models

Optimal demand allocation
Atlanta Boston Chicago Denver Omaha Portland
TelecomOne Baltimore 0 8 2
Memphis 10 0 12
Wichita 0 0 0
HighOptic Salt Lake 0 0 11
Cheyenne 6 7 0
TelecomOne HighOptic BothCombined
Fixed Cost 13950 8500 22450
Transporation cost 14886 12865 26463
Total Cost 28836 21365 48913
48913 50201
Capacitated Plant Location Model
Merge the companies
Solve using location-specific costs
y
i
= 1 if factory i is open, 0 otherwise
x
ij
= quantity shipped from factory i to market j
Min f
i
y
i
+
i1
n

c
ij
x
ij
j1
m

i1
n

Capacitated Plant Location Model

Cij 1 2 3 4 5 6 Fi Ki Objective
Supply Atlanta Boston Chicago Denver Omaha Portland Fixed Cost Capacity Cost
1 Baltimore 1675 400 685 1630 1160 2800 7,650 18
2 Cheyenne 1460 1940 970 100 495 1200 3,500 24 $0
3 Salt Lake 1925 2400 1425 500 950 800 5,000 27
4 Memphis 380 1355 543 1045 665 2321 4,100 22
5 Wichita 922 1646 700 508 311 1797 2,200 31
Decision Variables
Xij 1 2 3 4 5 6 Yi
Supply Atlanta Boston Chicago Denver Omaha Portland Lhs Rhs Plant open
1 Baltimore 0 <= 0
2 Cheyenne 0 <= 0
3 Salt Lake 0 <= 0
4 Memphis 0 <= 0
5 Wichita 0 <= 0
Lhs 0 0 0 0 0 0
= = = = = =
Rhs Demand 10 8 14 6 7 11
Capacitated Plant Location Model
Cij 1 2 3 4 5 6 Fi Ki Objective
Supply Atlanta Boston Chicago Denver Omaha Portland Fixed Cost Capacity Cost
1 Baltimore 1675 400 685 1630 1160 2800 7,650 18
2 Cheyenne 1460 1940 970 100 495 1200 3,500 24 $47,401
3 Salt Lake 1925 2400 1425 500 950 800 5,000 27
4 Memphis 380 1355 543 1045 665 2321 4,100 22
5 Wichita 922 1646 700 508 311 1797 2,200 31
Decision Variables
Xij 1 2 3 4 5 6 Yi
Supply Atlanta Boston Chicago Denver Omaha Portland Lhs Rhs Plant open
1 Baltimore 0 8 2 0 0 0 10 <= 18 1
2 Cheyenne 0 0 0 6 7 11 24 <= 24 1
3 Salt Lake 0 0 0 0 0 0 0 <= 0 0
4 Memphis 10 0 12 0 0 0 22 <= 22 1
5 Wichita 0 0 0 0 0 0 0 <= 0 0
Lhs 10 8 14 6 7 11
= = = = = =
Rhs Demand 10 8 14 6 7 11
Capacitated Model with Single Sourcing
Market supplied by only one factory
Modify decision variables
y
i
= 1 if factory i is open, 0 otherwise
x
ij
= 1 if market j is supplied by factory i, 0 otherwise
Min f
i
y
i
+ D
j
c
ij
x
ij
j1
m

i1
n

i1
n

subject to
x
ij
1 for j 1,...,m
i1
n

D
i
x
ij
K
i
y
i
j1
m

for i 1,...,n
x
ij
, y
i
0,1
{ }
Capacitated Model with Single Sourcing
Cij 1 2 3 4 5 6 Fi Ki Objective
Supply Atlanta Boston Chicago Denver Omaha Portland Fixed Cost Capacity Cost
1 Baltimore 1675 400 685 1630 1160 2800 7,650 18
2 Cheyenne 1460 1940 970 100 495 1200 3,500 24 $49,717
3 Salt Lake 1925 2400 1425 500 950 800 5,000 27
4 Memphis 380 1355 543 1045 665 2321 4,100 22
5 Wichita 922 1646 700 508 311 1797 2,200 31
Xij 1 2 3 4 5 6 Yi
Supply Atlanta Boston Chicago Denver Omaha Portland Lhs Rhs Plant open
1 Baltimore 0 0 0 0 0 0 0 <= 0 0
2 Cheyenne 0 0 0 0 0 0 0 <= 0 0
3 Salt Lake 0 0 0 6 0 11 17 <= 27 1
4 Memphis 10 8 0 0 0 0 18 <= 22 1
5 Wichita 0 0 14 0 7 0 21 <= 31 1
Lhs 10 8 14 6 7 11
= = = = = =
Rhs Demand 10 8 14 6 7 11
Decision Variables
Xij 1 2 3 4 5 6
Supply Atlanta Boston Chicago Denver Omaha Portland
1 Baltimore 0 0 0 0 0 0
2 Cheyenne 0 0 0 0 0 0
3 Salt Lake 0 0 0 1 0 1
4 Memphis 1 1 0 0 0 0
5 Wichita 0 0 1 0 1 0
1 1 1 1 1 1
10 8 14 6 7 11
10 8 14 6 7 11
10 8 14 6 7 11
10 8 14 6 7 11
10 8 14 6 7 11
Optimal network
configuration with
single sourcing
Locating Plants and Warehouses
Simultaneously
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
D
j
= Annual demand from customer j
K
i
= Potential capacity of factory at site i
S
h
= Supply capacity at supplier h
W
e
= Potential warehouse capacity at site e
F
i
= Fixed cost of locating a plant at site i
f
e
= Fixed cost of locating a warehouse at site e
c
hi
= Cost of shipping one unit from supply source h to factory i
c
ie
= Cost of producing and shipping one unit from factory i to
warehouse e
c
ej
= Cost of shipping one unit from warehouse e to customer j
Locating Plants and Warehouses
Simultaneously
Goal is to identify plant and warehouse locations and
quantities shipped that minimize the total fixed and variable
costs
Y
i
= 1 if factory is located at site i, 0 otherwise
Y
e
= 1 if warehouse is located at site e, 0 otherwise
x
ej
= Quantity shipped from warehouse e to market j
x
ie
= Quantity shipped from factory at site i to warehouse e
x
hi
= Quantity shipped from supplier h to factory at site i
Min F
i
y
i
+ f
e
y
e
+ c
hi
x
ie
i1
n

+ c
ej
x
ej
j1
m

e1
t

h1
l

e1
t

i1
n

Locating Plants and Warehouses

Simultaneously
subject to
x
hi
S
h
for h 1,...,l
i1
n

x
hi
x
ie
e1
t

0 for i 1,...,n
h1
l

x
ie
K
i
y
i
for i 1,...,n
e1
t

x
ie
x
ej
j1
m

0 for e 1,...,t
i1
n

x
ej
W
e
y
e
for e 1,...,t
j1
m

x
ej
D
j
for j 1,...,m
e1
t

y
i
, y
e
0,1
{ }
, x
ej
, x
ie
, x
hi
0
Accounting for Taxes, Tariffs, and
Customer Requirements
A supply chain network should maximize profits after tariffs
and taxes while meeting customer service requirements

Modified objective and constraint
Max r
j
x
ij
F
i
y
i
c
ij
x
ij
j1
m

i1
n

i1
n

i1
n

j1
m

x
ij
D
j
for j 1,...,m
i1
n

Making Network Design Decisions in

Practice
Do not underestimate the life span of facilities
Do not gloss over the cultural implications
Do not ignore quality-of-life issues
Focus on tariffs and tax incentives when locating facilities
Summary of Learning Objectives
Understand the role of network design in a supply chain
Identify factors influencing supply chain network design
decisions
Develop a framework for making network design decisions
Use optimization for facility location and capacity allocation
decisions