Session 11 Chapter 5 Chopra 5thed

Network Design in the Supply Chain
Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.
Chapter 5
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.
Learning Objectives
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?
Network Design Decisions
Strategic factors
Technological factors
Macroeconomic factors
Factors Influencing
Tariffs and tax incentives

Exchange-rate and demand risk
Freight and fuel costs
Political
Contd
Infrastructure factors
Competitive factors
Positive externalities between firms
Locating to split the market
Customer response time and local presence
Logistics and facility costs
Factors Influencing
Framework for Network Design Decisions
Figure 5-2
Phase I: Define a supply chain strategy/design

Clear definition of the firms competitive strategy
Forecast the likely evolution of global competition
Identify constraints on available capital
Determine growth strategy
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
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
Models for Facility Location and Capacity

Allocation
What role do socio-economic factors play in the selection of the

facility location?
How do state policies aimed at promoting balanced regional

development, shape the supply chain network designs?
Socio Economic Factors in Choice of

Facility Location
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
Models for Facility Location and Capacity

Allocation
n = number of potential plant locations/capacity

m = number of markets or demand points
D j = annual demand from market j
y
=i 1 if plant i is open, 0 otherwise
xij = quantity shipped from plant
i to market j
K i = 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
Min fi yi
i1
subject to
ij
i1
c x
ij
ij
j1
D j for j 1,...,m
i1
m
ij
K i yi for i 1,...,n
j1
yi 0,1 for i 1,...,n, x ij 0

Capacitated Plant 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
(x, y) is the location selected for the facility, the distance dn
between the facility at location (x, y) and the supply source
2
2
or market n is given by
dn
x x y y
n
Gravity Location Model
Allocating demand to production facilities

n = Number of factory locations
m = Number of markets or demand points
D j = Annual demand from market j
xij = Quantity shipped from 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
Min cij xij

i 1 j 1
subject to
n
x
i 1
ij
D j for j 1,..., m
ij
K i for i 1,..., n
x
j 1
Network Optimization Models
Merge the companies

Solve using location-specific costs
yi
xij
= 1 if factory i is open, 0 otherwise

= quantity shipped from factory i to market j
n
Min fi yi
i1
i1
c x
ij
ij
j1
Capacitated Plant Location Model
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
Min fi yi Dj cij xij

i1
ij
i1 j1
1 for j 1,...,m
i1
m
Dx
i ij
j1
xij , yi 0,1
Capacitated Model with Single Sourcing
Locating Plants and Warehouses

Simultaneously
Figure 5-13

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
Supply Chain
Management:warehouse
Strategy, Planning, ande
Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
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
n
x
Quantity
at
hi =
Min
Fi yi shipped
fe ye fromchisupplier
xie h tocejfactory
xej
site ii1
e1
h1 i1
e1 j1

Simultaneously
subject to
n
hi
Sh for h 1,...,l
i1
l
x x
hi
ie
0 for i 1,...,n
e1
ie
m
x x
ie
i1
ej
We ye for e 1,...,t
ej
ej
Dj for j 1,...,m
e1
e1
x
j1
h1
yi , ye 0,1 , xej , xie, xhi 0
0 for e 1,...,t
j1

Simultaneously
A supply chain network should maximize profits after tariffs and

taxes while meeting customer service requirements
Modified objective and constraint

m
j1
i1
i1
Max rj xij Fi yi cij xij

n
ij
i1 j1
Dj for j 1,...,m
i1
Accounting for Taxes, Tariffs, and

Customer Requirements
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
Making Network Design Decisions in

Practice
1. Understand the role of network design in a supply chain.
Network design decisions include identifying facility roles, locations,

and capacities and allocating markets to be served by different
facilities.
These decisions define the physical constraints within which the
network must be operated as market conditions change.
Good network design decisions increase supply chain profits
Summary of Learning Objectives
Broadly speaking, network design decisions are influenced

by strategic, technological, macroeconomic, political,
infrastructure, competitive, and operational factors.
2. Identify factors influencing supply chain network design decisions.
3. Develop a framework for making network design decisions.

The goal of network design is to maximize the supply chains long-term
profitability.
The process starts by defining the supply chain strategy, which must be
aligned with the competitive strategy of the firm.
The supply chain strategy, regional demand, costs, infrastructure, and
the competitive environment are used to define a regional facility
configuration.
For regions where facilities are to be located, potentially attractive sites
are then selected based on available infrastructure.
The optimal configuration is determined from the potential sites using
demand, logistics cost, factor costs, taxes, and margins in different
markets.
4. Use optimization for facility location and capacity allocation decisions.

Gravity location models identify a location that minimizes inbound and
outbound transportation costs.
They are simple to implement but do not account for other important
costs.
Network optimization models can include contribution margins, taxes,
tariffs, production, transportation, and inventory costs and are used to
maximize profitability.
These models are useful when locating facilities allocating capacity to
facilities, and allocating markets to facilities.
Group work for review next week

Identify various SCM decisions made during Network Design phase and
determine effectiveness evaluation criteria for each decision

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Network Design in the Supply Chain

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Understand the role of network design in a supply chain.

Develop a framework for making network design decisions.

Use optimization for facility location and capacity allocation

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Market and supply allocation

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Network Design Decisions

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Tariffs and tax incentives

Customer response time and local presence

Logistics and facility costs

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Framework for Network Design Decisions

Phase I: Define a supply chain strategy/design

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Framework for Network Design Decisions

Phase II: Define the regional facility configuration

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Framework for Network Design Decisions

Phase III: Select a set of desirable potential sites

Phase IV: Location choices

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Framework for Network Design Decisions

Maximize the overall profitability of the supply chain network while

Many trade-offs during network design

Network design models used to decide on locations and capacities

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Models for Facility Location and Capacity

What role do socio-economic factors play in the selection of the

How do state policies aimed at promoting balanced regional

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Socio Economic Factors in Choice of

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Models for Facility Location and Capacity

n = number of potential plant locations/capacity

K i = potential capacity of plant i

fi = annualized fixed cost of keeping plant i open

yi 0,1 for i 1,...,n, x ij 0

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Capacitated Plant Location Model

xn, yn: Coordinate location of either a market or supply

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Gravity Location Model

Allocating demand to production facilities

xij = Quantity shipped from factory i to

Min cij xij

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Network Optimization Models

Merge the companies

= 1 if factory i is open, 0 otherwise

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Capacitated Plant Location Model

Market supplied by only one factory

= 1 if factory i is open, 0 otherwise

= 1 if market j is supplied by factory i, 0 otherwise

Min fi yi Dj cij xij

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Capacitated Model with Single Sourcing

Copyright 2013 Dorling Kindersley (India) Pvt. Ltd.

Locating Plants and Warehouses