Designing Distribution and Supply

Chain Networks
1. Key design factors
2. Distribution options
3. Design of optimal distribution networks under
various configurations and constraints
1–2
BA5056 TRANSPORTATION AND
DISTRIBUTION MANAGEMENT
UNIT - I DISTRIBUTION 9
Role of Distribution in Supply chain, Distribution
channels – Functions, resources, Operations in
Distribution, Designing Distribution network
models - its features - advantages and
disadvantages.
The Role of Distribution
in the Supply Chain
 Distribution – the steps taken to move and store a
product from the supplier stage to the customer
stage in a supply chain
 Drives profitability by directly affecting supply
chain cost and the customer experience
 Choice of distribution network can achieve supply
chain objectives from low cost to high responsiveness
 2 phases: a) structure, b) detailed specifications
 a) directly or through intermediaries?
 b) convert the structure into locations, capabilities,
capacities, demand allocation
 Network Design
Matching Supply with Demand

Warehouses /
Suppliers DCs Cross Docks Stores Customers

Product Multiple
Normal demand curve Categorization Carriers Demand shifts quickly
Product Flow
Supplier Rates
Capacity Customer
Locations
Products
Demand
Consolidation Cross Docks Pattern
Vendors
Centers & DCs Zone Base
Warehousing Transport
Restrictions Rates for
Sourcing Product Set
Policies Warehouse
Capacity Warehouse
Capability on Utilization &
Handling Products Limitations

Constantly modify supply chain to meet new demand curve

Factors Influencing
Distribution Network Design
 Performance of a distribution network should be
evaluated along two dimensions:
1. Customer needs that are met
2. Cost of meeting customer needs

 What is the impact on customer service and cost for

different distribution network options?
 Profitability of the delivery network determined by
revenue from met customer needs and network costs
 Factors Influencing
Distribution Network Design
 Elements of customer service  There are trade-offs:
influenced by network  Amazon has high
structure: variety and “low”
 Response time response rate
 Product variety  B&N has the opposite

 Product availability  Big differences in cost:

 Customer experience (incl.  Amazon has 20
customization + ease of facilities with high
placing &receiving orders) capacity
 Time to market  B&N has hundreds of
 Order visibility stores with low
 Returnability capacity
Factors Influencing
Distribution Network Design

 Supply chain costs affected by network

structure:
 Inventories

 Transportation

 Facilities
and handling
 Information
Desired Response Time and Number of
Facilities

W.W. Grainger - 370

facilities)

McMaster-Carr (6
facilities 1-2 day lead
time most US cities)
Inventory Costs and Number
of Facilities

B&N

Amazon

Amazon turns its inventory 10 times / year, whereas …

B&N (with 100’s of facilities) turns it 3 times / year
Transportation Costs and
Number of Facilities

Inbound transport cost < outbound cost

Maintain econ of scale for inbound & increase # of facilities
Facility Costs and Number
of Facilities

B&N
PPET = 7

Amazon
PPET = 19

Consolidation of facilities allows economies of scale

Logistics Cost, Response Time, and
Number of Facilities

Have at least as many facilities to minimize total logistics cost!

Design Options for a
Distribution Network
 Distribution network choices from the
manufacturer to the end consumer
 Two key decisions
1. Will product be delivered to the customer location
or picked up from a prearranged site?
2. Will product flow through an intermediary (or
intermediate location)?
Design Options for a
Distribution Network
 One of six designs may be used
1. Manufacturer storage with direct shipping (drop-
shipping)
2. Manufacturer storage with direct shipping and in-
transit merge
3. Distributor storage with carrier delivery
4. Distributor storage with last-mile delivery
5. Manufacturer/distributor storage with customer
pickup
6. Retail storage with customer pickup
1. Manufacturer Storage with
Direct Shipping

The retailer only receives, disaggregates (if it refers to multiple

manufacturers) and transmits the order
1. Manufacturer Storage with Direct
Shipping Network
Cost Factor Performance
Inventory Lower costs because of aggregation. Benefits of
aggregation are highest for low-demand, high-value
items. Benefits are large if product customization can be
postponed at the manufacturer.
Transportation Higher transportation costs because of increased distance
and disaggregate shipping.
Facilities and handling Lower facility costs because of aggregation. Some saving
on handling costs if manufacturer can manage small
shipments or ship from production line.
Information Significant investment in information infrastructure to
integrate manufacturer and retailer.
 1. Manufacturer Storage with Direct
Shipping Network
Service Factor Performance
Response time Long response time of one to two weeks because of increased
distance and two stages for order processing. Response time
may vary by product, thus complicating receiving.
Product variety Easy to provide a high level of variety.
Product availability Easy to provide a high level of product availability because of
aggregation at manufacturer.
Customer experience Good in terms of home delivery but can suffer if order from several
manufacturers is sent as partial shipments.
Time to market Fast, with the product available as soon as the first unit is produced.
Order visibility More difficult but also more important from a customer service
perspective.
Returnability Expensive and difficult to implement.
 2. In-Transit Merge Network

The retailer plays same role as before, but carrier merges in-transit the order
if from multiple manufacturers. Example: order a Dell PC and a Sony
monitor; carrier merges at a hub before delivering to customer
2. In-Transit Merge

Cost Factor Performance

Inventory Similar to drop-shipping.
Transportation Somewhat lower transportation costs than drop-
shipping.
Facilities and handling Handling costs higher than drop-shipping at carrier;
receiving costs lower at customer.
Information Investment is somewhat higher than for drop-
shipping.
2. In-Transit Merge
Service Factor Performance
Response time Similar to drop-shipping; may be marginally higher.
Product variety Similar to drop-shipping.
Product availability Similar to drop-shipping.
Customer experience Better than drop-shipping because only a single delivery
has to be received.
Time to market Similar to drop-shipping.
Order visibility Similar to drop-shipping.
Returnability Similar to drop-shipping.
3. Distributor Storage with
Carrier Delivery

Amazon, W.W. Grainger, MaMaster-Carr

3. Distributor Storage with
Carrier Delivery
Cost Factor Performance
Inventory Higher than manufacturer storage. Difference
is not large for faster moving items but can be
large for very slow-moving items.
Transportation Lower than manufacturer storage. Reduction is
highest for faster moving items.
Facilities and Somewhat higher than manufacturer storage.
handling The difference can be large for very slow-
moving items.
Information Simpler infrastructure compared to
manufacturer storage.
3. Distributor Storage with
Carrier Delivery
Service Factor Performance
Response time Faster than manufacturer storage.
Product variety Lower than manufacturer storage.
Product availability Higher cost to provide the same level of availability as
manufacturer storage.
Customer experience Better than manufacturer storage with drop-shipping.
Time to market Higher than manufacturer storage.
Order visibility Easier than manufacturer storage.
Returnability Easier than manufacturer storage.
4. Distributor Storage with
Last Mile Delivery

Grocery industry; automotive spare parts industry;

Amazon local express delivery for same day delivery
4. Distributor Storage with
Last Mile Delivery
Cost Factor Performance
Inventory Higher than distributor storage with package
carrier delivery, because of lower aggregation
Transportation Very high cost given minimal scale economies.
Higher than any other distribution option.
Facilities and handling Facility costs higher than manufacturer storage or
distributor storage with package carrier delivery,
but lower than a chain of retail stores.
Information Similar to distributor storage with package carrier
delivery.
4. Distributor Storage with
Last Mile Delivery
Service Factor Performance
Response time Very quick. Same day to next-day delivery.
Product variety Somewhat less than distributor storage with package
carrier delivery but larger than retail stores.
Product availability More expensive to provide availability than any other
option except retail stores.
Customer experience Very good, particularly for bulky items. Slightly higher
than distributor storage with package carrier delivery.
Time to market Less of an issue and easier to implement than manufacturer
storage or distributor storage with package carrier
delivery.
Order visibility Easier to implement than other previous options.
Returnability Harder and more expensive than a retail network.
5. Manufacturer or Distributor Storage
with Customer Pickup

Many times at Walmart.com, Sears.com

and more … good for bulky items …
5. Manufacturer or Distributor Storage
with Customer Pickup
Cost Factor Performance
Inventory Can match any other option, depending on the
location of inventory.
Transportation Lower than the use of package carriers, especially
if using an existing delivery network.
Facilities and handling Facility costs can be high if new facilities have to
be built. Costs are lower if existing facilities are
used. The increase in handling cost at the pickup
site can be significant.
Information Significant investment in infrastructure required.
5. Manufacturer or Distributor Storage
with Customer Pickup
Service Factor Performance
Response time Similar to package carrier delivery with manufacturer or
distributor storage. Same-day delivery possible for items
stored locally at pickup site.
Product variety Similar to other manufacturer or distributor storage
options.
Product availability Similar to other manufacturer or distributor storage
options.
Customer experience Lower than other options because of the lack of home
delivery. Experience is sensitive to capability of pickup
location.
Time to market Similar to manufacturer storage options.
Order visibility Difficult but essential.
Returnability Somewhat easier given that pickup location can handle
returns.
6. Retail Storage with Customer Pickup

Cost Factor Performance

Inventory Higher than all other options.
Transportation Lower than all other options.
Facilities and handling Higher than other options. The increase in handling
cost at the pickup site can be significant for online
and phone orders.
Information Some investment in infrastructure required for
online and phone orders.

The most traditional type of supply chain

6. Retail Storage with Customer Pickup
Service Factor Performance
Response time Same-day (immediate) pickup possible for items stored
locally at pickup site.
Product variety Lower than all other options.
Product availability More expensive to provide than all other options.
Customer experience Related to whether shopping is viewed as a positive or
negative experience by customer.
Time to market Highest among distribution options.
Order visibility Trivial for in-store orders. Difficult, but essential, for online
and phone orders.
Returnability Easier than other options because retail store can provide
a substitute.
 Comparative Performance of Delivery
Network Designs

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 4-32

 Delivery Networks for Different Product/
Customer Characteristics

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 4-33

A Framework for Network Design
Decisions
1. Role of network design in a supply chain.
2. Factors influencing supply chain network
design decisions.
3. Framework for making network design
decisions.
Network Design Decisions

 Facility role
 What is the role, what processes are performed?
 Facility location
 Where should facilities be located?
 Capacity allocation
 How much capacity at each facility?
 Market and supply allocation
 What markets each facility serve? Which supply
sources should feed each facility?
Factors Influencing
Network Design Decisions
 Strategic factors
 Technological factors
 Macroeconomic factors
 Tariffsand tax incentives
 Exchange-rate and demand risk
 Freight and fuel costs

 Political
 Infrastructure factors
 Customer response time and local presence
 Logistics and facility costs
Framework for Network Design
Decisions
Mathematical Models & Examples
1. Capacitated Plant Location Models
2. Practical considerations
3. Advanced models with multiple attributes
Models for Facility Location and
Capacity Allocation
 Network design models are used to decide on
locations and capacities, and to assign current
demand to facilities
 Objective:
 Maximize the overall profitability of the supply chain
network, while providing customers with the
appropriate responsiveness
 Many trade-offs during network design
Network Optimization Models and
Numerical Examples
 Capacitated Plant Location Models (also known as
Facility Location and Capacity Allocation Models)
 Model 1: Optimal Production Allocation or
Transshipment Problem
 Model 2: Consider location specific costs and decide
which plants should remain open
 Model 3: Enforce single sourcing for each market

 Model 4: Consider multiple plant capacity scenarios

Network Model 1: Transportation
Problem
The (simple) Transportation Problem
Shipment of a single product from a set of suppliers

to a set of customers (or similarly allocating demand

to production facilities)
Input parameters:

 Capacities: the maximum amount of products a supplier

can ship in a given amount of time
 Demand: the customer demand (typically estimated
from demand forecasting models)
 Shipping cost: the shipping cost (per unit of product) for
each possible supplier-customer pair
Network Model 1
 Mathematical Model
n = number of factory locations
m = number of markets or demand points xij = quantity shipped from
D j = annual demand from market j factory i to market j

K i = capacity of factory i
cij = cost of producing and shipping one unit from factory i to market j

subject to
n
n m
x  D j for j  1,..., m
Min  cij xij
ij
i 1
m
i 1 j 1
x
j 1
ij  K i for i  1,..., n
 Network Model 1

 Numerical Example

Demand City
Monthly
Production and Transportation Cost
Capacity
per Thousand Units (Thousand $)
(Thousand
Supply City Atlanta Boston Chicago Denver Omaha Portland Units) K
Baltimore 1,675 400 985 1,630 1,160 2,800 18
Cheyenne 1,460 1,940 970 100 495 1,200 24
Salt Lake City 1,925 2,400 1,450 500 950 800 27

Memphis 380 1,355 543 1,045 665 2,321 22

Wichita 922 1,646 700 508 311 1,797 31
Monthly demand 10 8 14 6 7 11
(thousand units) Dj
Network model 1
 Formulation of the model

Min Z = 1675x11 + 400X12 + ... + 311X55 + 1797X56

s.t.
X11 + X21 + ... + X51 = 10
…. Satisfy the demand
of each demand city
X16 + X26 + ... + X56 = 7

X11 + X12 + ... + X16 ≤ 18 Do not exceed

…. the capacity
X51 + X52 + ... + X56 ≤ 31
Xij  0
Solution of Network Model 1
 Optimal demand allocation

Atlanta Boston Chicago Denver Omaha Portland

Baltimore 0 8 2 0 0 0

Cheyenne 0 0 0 6 0 0

Salt Lake 0 0 0 0 0 11

Memphis 10 0 12 0 0 0

Wichita 0 0 0 0 7 0

Z = $26,463
Network Model 2: Selecting plants
 Given that you can meet supply with less plants,
decide which plants should remain open
 There are now location-specific costs to consider!
yi = 1 if factory i is open, 0 otherwise
xij = quantity shipped from factory i to market j
 Network Model 2: Selecting Plants
n = number of potential plant locations/capacity
m = number of markets or demand points yi = 1 if plant i is open, 0 otherwise
Dj = annual demand from market j xij = quantity shipped from plant i
to market j
Ki = potential capacity of plant i
fi = 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
Min  f i yi   c x ij ij
subject to i 1 i 1 j 1
n

x ij  D j for j  1,..., m
i 1 Note!
m

x
j 1
ij  K i yi for i  1,..., n

yi  0,1 for i  1,..., n, x ij  0

 Network Model 2

 Numerical Example

Demand City
Monthly Monthly
Production and Transportation Cost
Capacity Fixed Cost
per Thousand Units (Thousand $)
(Thousand (Thousand
Supply City Atlanta Boston Chicago Denver Omaha Portland Units) K $) f
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 1,925 2,400 1,450 500 950 800 27 5,000
City
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 10 8 14 6 7 11
demand
(thousand
units) Dj
Network Model 2
 Formulation of the model

Min Z = 7650Y1+…+ 2200Y5+

+1675x11 + 400X12 + ... + 311X55 + 1797X56
s.t.
X11 + X21 + ... + X51 = 10
Satisfy the demand
….
of each demand city
X16 + X26 + ... + X56 = 7

X11 + X12 + ... + X16 ≤ 18Y1 Do not exceed

…. the capacity
X51 + X52 + ... + X56 ≤ 31Y5
Xij  0
Yi = 0/1
Solution of Network Model 2
 Optimal network configuration with fixed costs

Open/
Closed Atlanta Boston Chicago Denver Omaha Portland
Baltimore Open 0 8 2 0 0 0
Cheyenne Open
0 0 0 6 7 11
Salt Lake Closed
0 0 0 0 0 0
Memphis Open
10 0 12 0 0 0
Wichita Closed
0 0 0 0 0 0

Z= $ 47,401
Network Model 3: Single sourcing
 Each market should be supplied by only one factory
 Modify objective, constraints & decision variables as
follows:
yi = 1 if factory i is open, 0 otherwise
xij = 1 if market j is supplied by factory i, 0 otherwise
n n m
Min  f i yi   D j cij xij
i 1 i 1 j 1
subject to

x
i 1
ij  1 for j  1,..., m
m Note!
D x
j 1
i ij  K i yi for i  1,..., n

xij , yi  0,1
Network Model 3
 Present the formulation of the model

Min Z = 7650*Y1+…+ 2200*Y5+

+10*1675*x11 + 8*400*X12 + ... + 7*311*X55 + 11*1797X56
s.t.
X11 + X21 + ... + X51 = 1
One supplier
….
for each demand city
X16 + X26 + ... + X56 = 1

10*X11 + 8*X12 + ... + 11*X16 ≤ 18*Y1 Do not exceed

…. the capacity
10*X51 + 8*X52 + ... + 11*X56 ≤ 31*Y5
Yi,Xij = 0/1
Solution to Network Model 3
 Optimal network configuration with single sourcing

Open/
Closed Atlanta Boston Chicago Denver Omaha Portland
Baltimore Closed 0 0 0 0 0 0

Cheyenne Closed 0 0 0 0 0 0

Salt Lake Open 0 0 0 6 0 11

Memphis Open 10 8 0 0 0 0

Wichita Open 0 0 14 0 7 0

Z= $49,717
Network Model 4: Multiple
Capacity Options
 We need to decide both the location and capacity
allocation for each facility as earlier, however:
 We have multiple capacity options for each location (in
particular a high and a low option)
Network Model 4
 Modelling approach:
 Treat each scenario option as a separate facility and
introduce binary variables for each one of them as
earlier. For example:
 Binaryvariables Y1 and Y5 will refer to N. America, and will
denote the low and high capacity, respectively.
 Add a constraint to make sure that only one capacity
will be realized!
 e.g. Y1+Y5 ≤ 1
 Network Model 4
 Formulation of the model
Min Z = 6000Y1+…+ 4000Y5+
+ 9000Y6+…+6000Y10
+1675x11 + 400X12 + ... + 311X55 + 1797X56
+1675x61 + 400X62 + ... + 311X12,5 + 1797X10,6
s.t.
(X11 + X21 + ... + X51) + (X61 + X71 + ... + X101) = 10
…. Satisfy the demand
of each demand city
(X16 + X26 + ... + X56) + (X66 + X76 + ... + X10,6) = 7

(X11 + X12 + ... + X16) + (X61 + X62 + ... + X66) ≤ 18(Y1+Y6)

…. Do not exceed
the capacity
(X51 + X52 + ... + X56) + (X10,1 + X10,2 + ... + X10,6) ≤ 31(Y5+Y10)
Make sure that at most only one capacity
Y1+Y6 ≤ 1 …. Y5+Y10 ≤ 1 scenario will be realized for each location

Xij  0 and Yi = 0/1

Solution to Network Model 4
Network Optimization Models and
Examples cont.
 What happens if I have a complex network with
multiple transshipment points and transportation
capacities?

 If the supply chain network is given, and no fixed

costs are associated with the use of particular
facilities or locations, then the problem can be
initially modeled as the so-called minimum cost
network flow problem!
Minimum Cost Network Flow
 Basic Assumptions
 Ship products from a set of locations to another set of
locations
 Assume a network with multiple nodes and links

 The nodes can be suppliers, demanders and

transshipment points
 The demand of demanders and the supply capacities
of suppliers are know
 Each link has a known capacity and unit cost

 Inflows and outflows can be associated with any node

Network Model 5: Network Flow
for Single Product
Minimum cost network flow model - Single Product
 All plants (or suppliers) have the same production cost

 A single product and a single mode of transportation

 Shipping cost among all connections are known

 Capacity of the plants (in ton per year) and demand from
customers is also known
 Uniform flow restrictions among all arcs of the network

 Capacity constraints on the amount of product that can be

moved between any two nodes

 Determine the minimum cost shipping schedule so that demand

is met and plant capacities are not exceeded
Network Model 5
 Mathematical Model
xij = quantity shipped from node i to node j

Dj = demand or supply of a node j, and it can be positive or negative or

zero
u ij = capacity of an arc ij of the network

cij = cost of producing and shipping one unit from node i to node j

subject to

n n n n

Min  cij xij x x

j 1
ij
j 1
ji  Di for i  1,..., n
i 1 j 1
0  xij  uij forall i, j
Network Model 5
Numerical Example
 Nodes 1, 2 & 3 represent plants

 Nodes 4 & 5 represents transshipment point (e.g. warehouses)

 Nodes 6 & 7 represent demand points (e.g. customers)

 There are linear costs and capacities 4

T:0

D:400
across each arc.
S:200
6
 There are production costs
1
and storage costs.
2 7

S:300
D:180

3 S:100 5 T:0
 Network Model 5
Numerical Example (cont.)

Shipping Costs (in thousand dollars for shipping a ton)

Nodes 1 2 3 4 5 6 7
1 0.0 5.0 3.0 5.0 5.0 20.0 20.0
2 9.0 0.0 9.0 1.0 1.0 8.0 15.0
3 0.4 8.0 0.0 1.0 0.5 10.0 12.0
4 0.0 0.0 0.0 0.0 1.2 2.0 12.0
5 0.0 0.0 0.0 0.8 0.0 2.0 12.0
6 0.0 0.0 0.0 0.0 0.0 0.0 1.0
7 0.0 0.0 0.0 0.0 0.0 7.0 0.0

 At most 200 tons of product can be moved between

any two nodes
 Network model 5
 Formulation of the model
Min Z = 5X12+3X13+5X14+5X15+20X16+20X17+ ... + 1X67 + 7X76

s.t.
Node 1: (X12 + X13 + ... + X17) – (X21 + X31) = 200
Node 2: (X21 + X23 + ... + X27) – (X12 + X32) = 300
Node 3: (X32 + X31 + ... + X37) – (X13 + X23) = 100

Node 4: (X14 + X24 + X34 + X54) – (X45 + X46 + X47) = 0

Node 5: (X15 + X25 + X35 + X45) – (X54 + X56 + X57) = 0

Node 6: X67 - (X16 + X26 + ... + X76) = - 180

Node 7: X76 - (X17 + X27 + ... + X67) = - 400

Xij  0 and Xij ≤ 200

 Solution of the
Network structure, flows and arc
capacity constraints

Network model 5
Origin Destination Unit Cost Flow
1 2 5.0 0
1 3 3.0 180
1 4 5.0 0
1 5 5.0 0
1 6 20.0 0
T:0 1 7 20.0 0
4
2 1 9.0 0
D:400
2 3 9.0 0
S:200 6 2 4 1.0 300
2 5 1.0 0
1
2 6 8.0 0
2 7 15.0 0
2 7 3 1 0.4 0
S:300
3 2 8.0 0
D:180
3 4 1.0 0
3 5 0.5 280
3 6 10.0 0
3 S:100 5 T:0 3 7 12.0 0
4 5 1.2 0
4 6 2.0 300
4 7 12.0 0
5 4 0.8 0
Z: 2320 5 6 2.0 280
5 7 12.0 0
6 7 1.0 180
7 6 7.0 0
Network Model 6: Network flow
for multiple products
Minimum cost network flow model - Multiple Products
 Same network structure as before (this can easily relaxed)

 Shipment of 2 products (P1 and P2)

 The arc capacity represent the maximum flow for both

products
 Note that in this case the 2 products are competing for the arc
capacity
 Each plant has separate capacity for each product and each
customer separate demand for each product
Network Model 6:
 Numerical Example (cont.)
T:0
4
D1:400
D2:200
S1:200
S2:200 6

2 7

S1:300
D1:180
S2:100
D2:140

3 S1:100 T:0
5
S2:100

 Assume that the unit shipping costs are the same for both
products (this can be easily relaxed)
 Network Model 6
 Mathematical Model
xijp = quantity shipped of product p from node i to node j

D jp = demand or supply of a node j, and it can be positive or negative or

zero for product p
uij = capacity of an arc ij of the network

cij = cost of producing and shipping one unit from node i to node j

p n n
Min   c x ij ijp
subject to

p 1 i 1 j 1 n n

x
j 1
ijp   x jip  Di for all p and i  1,..., n
j 1

0   xiijp  uij forall i, j

p
 Network model 6
 Formulation of the model
Min Z = 5X121+3X131+5X141+5X151+20X161+20X171+ ... + 1X671 + 7X761 +
5X122+3X132+5X142+5X152+20X162+20X172+ ... + 1X672 + 7X762

s.t.
Node 1, P1: (X121 + X131 + ... + X171) – (X211 + X311) = 200
Node 1, P2: (X122 + X132 + ... + X172) – (X212 + X312) = 200
…
Node 7, P1: X761 - (X171 + X271 + ... + X671) = - 400
Node 7, P2: X762 - (X172 + X272 + ... + X672) = - 200

X121+X122 ≤ 300
…
X761+X762 ≤ 300

Xij  0
 Solution of Network Model 6
Origin Destination Unit Cost Flow Product 1 Flow Product 2 Total flow Arc Capacity
1 2 5.0 0 0 0 <= 300
1 3 3.0 180 120 300 <= 300
1 4 5.0 0 20 20 <= 300
1 5 5.0 0 0 0 <= 300
1 6 20.0 0 0 0 <= 300
1 7 20.0 0 0 0 <= 300
2 1 9.0 0 0 0 <= 300
2 3 9.0 0 0 0 <= 300
2 4 1.0 100 0 100 <= 300
2 5 1.0 0 0 0 <= 300
2 6 8.0 200 100 300 <= 300
2 7 15.0 0 0 0 <= 300
3 1 0.4 0 0 0 <= 300
3 2 8.0 0 0 0 <= 300
3 4 1.0 0 180 180 <= 300
3 5 0.5 280 20 300 <= 300
3 6 10.0 0 0 0 <= 300
3 7 12.0 0 20 20 <= 300
4 5 1.2 0 0 0 <= 300
4 6 2.0 100 200 300 <= 300
4 7 12.0 0 0 0 <= 300
5 4 0.8 0 0 0 <= 300
5 6 2.0 280 20 300 <= 300
 Z=5570 5
6
7
7
12.0
1.0
0
180
0
120
0
300
<=
<=
300
300
7 6 7.0 0 0 0 <= 300
Network Optimization Models and
Examples cont.
 More enhanced Capacitated Plant Location Models
 Model 7: Simultaneous location of plants and warehouses
 Model 8: Accounting for Taxes, Tariffs, and Customer
Requirements
 Model 9: Adding restrictions on the number of locations +
alternative objective functions (see excel file “AI's
Athletic.xls”)
 Model 10: Production and shipping through transshipment
points with multiple modes of transportation + location
decisions (see excel file “MIP network flow with multiple
trans modes and location.xls”
Network Model 7

Locating Plants and Warehouses Simultaneously

Network Model 7
 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 = cost of shipping one unit from warehouse e to customer j
 Network Model 7
 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 market j
xie = quantity shipped from factory at site i to warehouse e
xhi = quantity shipped from supplier h to factory at site i

n t l n n t t m
Min  Fi yi   f e ye    chi xhi   cie xie  cej xej
i 1 e 1 h 1 i 1 i 1 e 1 e 1 j 1
 Network Model 7
subject to

x  S h for h  1,..., l m

x
hi
i 1 ej  We ye for e  1,..., t
j 1
l t

x –x  0 for i  1,..., n t

x
hi ie
h 1 e 1 ej  D j for j  1,..., m
e 1
t

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

n m

x –x
i 1
ie
j 1
ej  0 for e  1,..., t
Network Model 8

 A supply chain network should maximize profits after

tariffs and taxes while meeting customer service
requirements
 If rj is the revenue of selling one product unit to market
j, then the objective and constraint are modified as:
m n n n m
Max  rj  xij –  Fi yi –  cij xij
j 1 i 1 i 1 i 1 j 1

x
i 1
ij  D j for j  1,..., m
Network Model 9

Yij = 1 if location i serves customer j; 0 otherwise

Xi = 1 if a warehouse is located at site i, 0 otherwise
distij = distance between warehouse at site i to customer j
P = total number of warehouses to locate
dj = demand of customer j

Min  dist ij d jYij

iI jJ

Y
i 1
ij  1 for j  1,..., J
Yij  X i i  I , j  J
x
iI
i P
Network Models 9 & 10
 AI’s Athletic excel file
 MIP network flow with multiple trans modes and
location excel file
Network Optimization Models and
Examples cont.
 Multiple products and modes of transportation?
 DHL Supply Chain Case
 Multiple products, modes of transportation +
location decisions but no fixed costs?
 Logistics
Network Design Problem see paper of
Cordeau, Pasin and Solomon 2003
 Multiple products, location decisions + fixed costs?
 Mixed Integer Non-Linear Programming (see Floudas
1995)
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