CHAPTER FIVE

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Network Design in the Supply Chain
5.1 The Role of Network Design in the Supply Chain
5.2 Fators !nfluening Network Design Deisions
5." # Fra$ework for Network Design Deisions
5.% &o'els for Faility (oation an' Capaity #lloation
5.5 &aking Network Design Deisions in )ratie
5.* Su$$ary of (earning +,-eti.es
Disussion /uestions
01erises
2i,liography
Case Stu'y3 &anaging 4rowth at SportStuff.o$
Learning !"e#ti$es
#fter rea'ing this hapter5 you will ,e a,le to3
1. 6n'erstan' the role of network 'esign in a supply hain.
2. !'entify fators influening supply hain network 'esign 'eisions.
". De.elop a fra$ework for $aking network 'esign 'eisions.
%. 6se opti$i7ation for faility loation an' apaity alloation 'eisions.
!n this hapter5 we pro.i'e an un'erstan'ing of the role of network 'esign within a supply hain. 8e fous on the fun'a$ental
9uestions of faility loation an' apaity alloation when 'esigning a supply hain network. 8e i'entify an' 'isuss the role of
.arious fators that influene the faility loation an' apaity alloation 'eision. 8e then esta,lish a fra$ework an' 'isuss
.arious solution $etho'ologies for faility loation an' apaity alloation 'eisions in a supply hain.
%&' THE RLE F NET(R) DESI*N IN THE S+PPL, CHAIN
Supply hain network design decisions inlu'e the loation of $anufaturing5 storage5 or transportation-relate' failities an' the
alloation of apaity an' roles to eah faility. Supply hain network 'esign 'eisions are lassifie' as follows3
1. Facility role: 8hat role shoul' eah faility play: 8hat proesses are perfor$e' at eah faility:
2. Facility location: 8here shoul' failities ,e loate':
3. Capacity allocation: ;ow $uh apaity shoul' ,e alloate' to eah faility:
4. Market and supply allocation: 8hat $arkets shoul' eah faility ser.e:
8hih supply soures shoul' fee' eah faility:
#ll network 'esign 'eisions affet eah other an' $ust ,e $a'e taking this fat into onsi'eration. Deisions onerning
the role of eah faility are signifiant ,eause they 'eter$ine the a$ount of fle1i,ility the supply hain has in hanging the way it
$eets 'e$an'. For e1a$ple5 Toyota has plants loate' worl'wi'e in eah $arket that it ser.es. )rior to 1<<=5 eah plant was
only apa,le of ser.ing its loal $arket. This hurt Toyota when the #sian eono$y went into a reession in the late 1<<>s. The
loal plants in #sia ha' a lot of i'le apaity that oul' not ,e use' to ser.e other $arkets that ha' e1ess 'e$an'. Toyota has
now a''e' fle1i,ility to eah plant to ,e a,le to ser.e $arkets other than the loal one. This a''itional fle1i,ility helps Toyota 'eal
$ore effeti.ely with hanging glo,al $arket on'itions.
Faility loation 'eisions ha.e a long-ter$ i$pat on a supply hain?s perfor$ane ,eause it is .ery e1pensi.e to shut
'own a faility or $o.e it to a 'ifferent loation. # goo' loation 'eision an help a supply hain ,e responsi.e while keeping its
osts low. Toyota5 for e1a$ple5 ,uilt its asse$,ly plant in the 6nite' States in (e1ington5 @entuky5 in 1<AA an' has use' the plant
Page 1
sine then. The (e1ington plant pro.e' .ery profita,le for Toyota when the Ben strengthene' an' ars pro'ue' in Capan were too
e1pensi.e to ,e ost o$petiti.e with ars pro'ue' in the 6nite' Sates. The plant allowe' Toyota to ,e responsi.e to the
#$erian $arket while keeping osts low.
!n ontrast5 a poorly loate' faility $akes it .ery 'iffiult for a supply hain to perfor$ lose to the effiient frontier. For
e1a$ple5 #$a7on.o$ foun' it .ery 'iffiult to ,e ost effeti.e in supplying ,ooks throughout the 6nite' States when it ha' a sin-
gle warehouse in Seattle. #s a result5 the o$pany has a''e' warehouses loate' in other parts of the ountry.
Capaity alloation 'eisions also ha.e a signifiant i$pat on supply hain perfor$ane. 8hereas apaity alloation
an ,e altere' $ore easily than loation5 apaity 'eisions 'o ten' to stay in plae for se.eral years. #lloating too $uh
apaity to a loation results in poor utili7ation an' as a result higher osts. #lloating too little apaity results in poor
responsi.eness if 'e$an' is not satisfie' or high ost if 'e$an' is fille' fro$ a 'istant faility.
The alloation of supply soures an' $arkets to failities has a signifiant i$pat on perfor$ane ,eause it affets total
pro'ution5 in.entory5 an' transportation osts inurre' ,y the supply hain to satisfy usto$er 'e$an'. This 'eision shoul' ,e
reonsi'ere' on a regular ,asis so that the alloation an ,e hange' as $arket on'itions or plant apaities hange. #s we
$entione' earlier5 #$a7on.o$ has ,uilt ne warehouses an' hange' the $arkets supplie' ,y eah warehouse as its usto$er
,ase has grown. #s a result5 it has lowere' osts an' i$pro.e' responsi.eness. +f ourse the alloation of $arkets an' supply
soures an only ,e hange' if the failities are fle1i,le enough to ser.e 'ifferent $arkets an' reei.e supply fro$ 'ifferent
soures.
Network 'esign 'eisions ha.e a signifiant i$pat on perfor$ane ,eause they 'eter$ine the supply hain
onfiguration an' set onstraints within whih in.entory5 transportation5 an' infor$ation an ,e use' to either 'erease supply
hain ost >inrease responsi.eness. # o$pany has to fous on network 'esign 'eisions as its 'e$an' grows an' its urrent
onfiguration ,eo$es too e1pensi.e or pro.i'es poor responsi.eness. For e1a$ple5 Dell has 'ei'e' to ,uil' a faility in 2ra7il
to ser.e its South #$erian $arket ,eause the fatories in Te1as5 !relan'5 an' &alaysia oul' not 'o so in the $ost profita,le
$anner.
Network 'esign 'eisions are also .ery i$portant when two o$panies $erge. Due to the re'un'anies an' 'ifferenes
in $arkets ser.e' ,y either of the two separate fir$s5 onsoli'ating so$e failities an' hanging the loation an' role of others
an often help re'ue ost an' i$pro.e responsi.eness.
8e fous on 'e.eloping a fra$ework as well as $etho'ologies that an ,e us for network 'esign in a supply hain. !n the
ne1t setion5 we i'entify .arious fators that influene network 'esign 'eisions.
%&- FACTRS INFL+ENCIN* NET(R) DESI*N DECISINS
Strategi5 tehnologial5 $aroeono$i5 politial5 infrastruture5 o$petiti.e5 an~ operational fators influene network 'esign
'eisions in supply hains.
Strategi# Fa#tors
# fir$?s o$petiti.e strategy has a signifiant i$pat on network 'esign 'eisions within the supply hain. Fir$s fousing on ost
lea'ership ten' to fin' the lowest o. loation for their $anufaturing failities5 e.en if that $eans loating .ery far fro$ the
$arkets they ser.e. For e1a$ple5 in the early 1<A>s5 $any apparel pro'uers $o.e' all their $anufaturing out of the 6nite'
States to ountries with lower la,or osts in the hope of lowering their osts.
Fir$s fousing on responsi.eness ten' to loate failities loser to the $arket an' $ay selet a high-ost loation if this
hoie allows the fir$ to 9uikly reat to hanging $arket nee's. #pparel $anufaturers in !taly ha.e 'e.elope' .ery fle1i,le
pro'ution failities that allow the$ to pro.i'e a high le.el of .ariety 9uikly. Co$panies that .alue this responsi.eness use the
!talian $anufaturers in spite of their higher ost.
Con.eniene store hains ai$ to pro.i'e easy aess to usto$ers as part of their o$petiti.e strategy. Con.eniene
store networks thus ontain $any stores that o.er an area5 e.en though eah store is not .ery large. !n ontrast5 'isount stores
like Sa$?s Clu, ha.e a o$petiti.e strategy that fouses on pro.i'ing low pries. Thus5 their networks ha.e .ery large stores an'
usto$ers often ha.e to tra.el se.eral $iles to get to one. #n area o.ere' ,y one Sa$?s Clu, store $ay ontain $any
on.eniene stores.
4lo,al supply hain networks an ,est support their strategi o,-eti.es with failities in 'ifferent ountries playing
'ifferent roles. For e1a$ple5 Nike has pro'ution failities loate' in $any ountries in #sia. The failities in China an' !n'onesia
fous on ost an' pro'ue the $ass-$arket lower prie' shoes for Nike. !n ontrast5 failities in @orea an' Taiwan fous on
responsi.eness an' pro'ue the higher prie' new 'esigns. This 'ifferentiation allows Nike to satisfy a wi'e .ariety of 'e$an's in
the $ost profita,le $anner.
!t is i$portant for a fir$ to i'entify the $ission or strategi role of eah faility when 'esigning its glo,al network. @asra
Fer'ows D1<<=E suggests the following lassifiation of possi,le strategi roles for .arious failities in a glo,al supply hain
network.
1

1. Offshore Facility: Low-cost facility for export production. #n offshore faility ser.es the role of ,eing a low-ost supply soure for
$arkets loate' outsi'e the ountry where the faility is loate'. The loation selete' for an offshore faility shoul' ha.e low
la,or an' other osts to failitate low-ost pro'ution. 4i.en that $any #sian 'e.eloping ountries wai.e i$port tariffs if all the
output fro$ a fatory is e1porte'5 they are preferre' sites for offshore $anufaturing failities.
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2. ource Facility: Low-cost facility for glo!al production. # soure faility also has low ost as its pri$ary o,-eti.e5 ,ut its strategi
role is ,roa'er than that of an offshore faility. # soure faility is often a pri$ary soure of pro'ut for the entire glo,al network.
Soure failities ten' to ,e loate' in plaes where pro'ution osts are relati.ely low5 infrastruture is well 'e.elope'5 an' a
skille' workfore is a.aila,le. 4oo' offshore failities $igrate o.er ti$e into soure failities. # goo' e1a$ple is Nike?s plant
network in @orea an' Taiwan. )lants in ,oth ountries starte' out as offshore failities ,eause of low la,or osts. +.er ti$e5
howe.er5 these plants ha.e ,eo$e $ore in.ol.e' with new pro'ut 'e.elop$ent an' $anufature so$e pro'uts for sale all
o.er the worl'.
". er#er Facility: $egional production facility. # ser.er faility?s o,-eti.e is to supply the $arket where it is loate'. # ser.er faility
is ,uilt ,eause of ta1 inenti.es5 loal ontent re9uire$ent5 tariff ,arriers5 or high logistis ost to supply the region fro$
elsewhere. !n the late 1<=>s5 Su7uki partnere' with the !n'ian go.ern$ent to set up &aruti 6'yog. !nitially5 &aruti was set up as a
ser.er faility an' only pro'ue' ars for the !n'ian $arket. The &aruti faility allowe' Su7uki to o.ero$e the high tariffs for
i$porte' ars in !n'ia.
%. Contri!utor Facility: $egional production facility with de#elop&ent skills. # ontri,utor faility ser.es the $arket where it is loate'
,ut also assu$es responsi,ility for pro'ut usto$i7ation5 proess i$pro.e$ents5 pro'ut $o'ifiations5 or pro'ut 'e.elop$ent.
&ost well-$anage' ser.er failities ,eo$e ontri,utor failities o.er ti$e. The &aruti faility in !n'ia to'ay 'e.elops $any new
pro'uts for ,oth the !n'ian an' the o.erseas $arkets an' has $o.e' fro$ ,eing a ser.er to a ontri,utor faility in the Su7uki
network.
!@asra Fer'oFGs. 1<<=. H&aking the &ost of Bour Foreign Fatories5H 'ar#ard (usiness $e#iew D&arh-#prilE5
). Outpost Facility: $egional production facility !uilt to gain local skills. #n outpost faility is loate' pri$arily to o,tain aess to
knowle'ge or skills that $ay e1ist within a ertain region. 4i.en its loation5 it also plays the role of a ser.er faility. The pri$ary
o,-eti.e re$ains one of ,eing a soure of knowle'ge an' skills for the entire network. &any glo,al fir$s ha.e pro'ution failities
loate' in Capan in spite of the high operating osts. &ost of these ser.e as outpost failities.
*. Lead Facility: Facility that leads in de#elop&ent and process technologies. # lea' faility reates new pro'uts5 proesses5 an'
tehnologies for the entire network. (ea' failities are loate' in areas with goo' aess to a skille' workfore an' tehnologial
resoures.
Te#hnologi#al Fa#tors
Charateristis of a.aila,le pro'ution tehnologies ha.e a signifiant i$pat on network 'esign 'eisions. !f pro'ution
tehnology 'isplays signifiant eono$ies of sale5 few high-apaity loations are the $ost effeti.e. This is the ase in the
$anufature of o$puter hips where fatories re9uire a .ery large in.est$ent. #s a result5 $ost o$panies ,uil' few hip
pro'ution failities5 an' eah one they ,uil' has a .ery large apaity.
!n ontrast5 if failities ha.e lower fi1e' ostsI $any loal failities are preferre' ,eause this helps lower transportation
osts. For e1a$ple5 ,ottling plants for Coa Cola 'o not ha.e a .ery high fi1e' ost. To re'ue transportation osts5 Coa-Cola
sets up $any ,ottling plants all o.er the worl'5 eah ser.ing its loal $arket.
Fle1i,ility of the pro'ution tehnology i$pats the 'egree of onsoli'ation that an ,e ahie.e' in the network. !f the
pro'ution tehnology is .ery infle1i,le an' pro'ut re9uire$ents .ary fro$ one ountry to another5 a fir$ has to set up loal fail -
ities to ser.e the $arket in eah ountry. Con.ersely5 if the tehnology is fle1i,le5 it ,eo$es easier to onsoli'ate $anufaturing
in a few large failities.
.a#roe#ono/i# Fa#tors
Macroecono&ic factors inlu'e ta1es5 tariffs5 e1hange rates5 an' other eono$i fators that are not internal to an in'i.i'ual fir$.
#s tra'e has inrease' an' $arkets ha.e ,eo$e $ore glo,al5 $aroeono$i fators ha.e ha' a signifiant influene on the
suess or failure of supply hain networks. Thus5 it is i$perati.e that fir$s take these fators into aount when $aking network
'esign 'eisions.
Tari00s an1 Ta2 In#enti$es
+ariffs refer to any 'uties that $ust ,e pai' when pro'uts an'Jor e9uip$ent are $o.e' aross international5 state5 or ity
,oun'aries. Tariffs ha.e a strong influene on loation 'eisions within a supply hain. !f a ountry has .ery high tariffs5
o$panies either 'o not ser.e the loal $arket or set up $anufaturing plants within the ountry to sa.e on 'uties. ;igh tariffs
lea' to $ore pro'ution loations within a supply hain network5 with eah loation ha.ing a lower alloate' apaity. #s tariffs
ha.e o$e 'own with the 8orl' Tra'e +rgani7ation5 an' regional agree$ents like N#FT# DNorth #$eriaE an' &0RC+S6R
DSouth #$eriaE5 fir$s an now supply the $arket within a ountry fro$ a plant loate' outsi'e that ountry without inurring high
Page 3
'uties. #s a result5 fir$s ha.e ,egun to onsoli'ate their glo,al pro'ution an' 'istri,ution failities. For glo,al fir$s5 a 'erease in
tariffs has le' to a 'erease in the nu$,er of $anufaturing failities an' an inrease in the apaity of eah faility ,uilt.
+ax incenti#es are a re'ution in tariffs or ta1es that ountries5 states5 an' ities often pro.i'e to enourage fir$s to loate
their failities in speifi areas. &any ountries .ary inenti.es fro$ ity to ity to enourage in.est$ents in areas with lower eo-
no$i 'e.elop$ent. Suh inenti.es are often a key fator in the final loation 'eision for $any plants. 4eneral &otors ,uilt its
Saturn faility in Tennessee pri$arily ,eause of the ta1 inenti.es offere' ,y the state. Si$ilarly5 2&8 ,uilt its fatory5 whih
asse$,les the K"5 in Spartan,urg5 $ainly ,eause of the ta1 inenti.es offere' ,y South Carolina.
De.eloping ountries often reate free trade ,ones where 'uties an' tariffs are rela1e' as long as pro'ution is use'
pri$arily for e1port. This reates a strong inenti.e for glo,al fir$s to set up a plant in these ountries to ,e a,le to e1ploit their
low la,or osts. !n China5 for e1a$ple5 the esta,lish$ent of a free tra'e 7one near 4uangKhou has le' to se.eral glo,al fir$s
loating failities there.
&any 'e.eloping ountries also pro.i'e a''itional ta1 inenti.es ,ase' on training5 $eals5 transportation5 an' other
failities offere' to the workfore. Tariffs $ay also .ary ,ase' on the pro'ut?s le.el of tehnology. China5 for e1a$ple5 wai.es
tariffs entirely for Hhigh-tehH pro'uts in an effort to enourage o$panies to loate there an' ,ring in state-of-the-art tehnology.
&otorola loate' a large hip $anufaturing plant in China to take a'.antage of the re'ue' tariffs an' other inenti.es a.aila,le
to high-teh pro'uts.
&any ountries also plae $ini$u$ re9uire$ents on loal ontent an' li$its on i$ports. Suh poliies lea' o$panies to
set up $any failities an' soure fro$ loal suppliers. For e1a$ple5 the 6nite' States has li$its on the i$port of apparel fro$ 'if-
ferent ountries. #s a result5 o$panies 'e.elop suppliers in $any ountries to a.oi' reahing the li$it fro$ anyone ountry.
)oliies that restrit i$ports fro$ ountries lea' to an inrease in the nu$,er of pro'ution sites within the supply hain network.
E2#hange Rate an1 De/an1 Risk
Flutuation in e1hange rates has a signifiant i$pat on the profits of any supply hain ser.ing glo,al $arkets. # fir$ that
sells its pro'ut in the 6nite' States with pro'ution in Capan is e1pose' to the risk of appreiation of the Ben. The ost of pro'u-
tion is inurre' in Ben whereas re.enues are o,taine' in 'ollars. Thus5 an inrease in the .alue of the Ben inreases the
pro'ution ost in 'ollars5 'ereasing the fir$?s profits. !n the 1<A>s5 $any Capanese $anufaturers fae' this pro,le$ when the
Ben appreiate' in .alue. #t that ti$e $ost of their pro'ution apaity was loate' in Capan an' they ser.e' large $arkets
o.erseas. The appreiation of the Ben 'erease' their re.enues an' they saw their profits 'eline. &ost Capanese $anufaturers
ha.e respon'e' ,y ,uil'ing pro'ution failities all o.er the worl'.
01hange rate risks $ay ,e han'le' using finanial instru$ents that li$it5 or he'ge against5 the loss 'ue to flutuations.
Suita,ly 'esigne' supply hain networks5 howe.er5 offer the opportunity to take a'.antage of e1hange rate flutuations an'
inrease profits. #n effeti.e way to 'o this is to ,uil' so$e o.er-apaity in the
network an' $ake the apaity fle1i,le so that it an ,e use' to supply 'ifferent $arkets. T!lis fle1i,ility allows the fir$ to alter
pro'ution flows within the supply hain to pro'ue $ore in failities that ha.e a lower ost ,ase' on urrent e1hange rates.
Co$panies $ust also take into aount flutuations in 'e$an' ause' ,y flutuations in the eono$ies of 'ifferent ountries. For
e1a$ple5 the #sian eono$y slowe' 'own ,etween 1<<* an' 1<<A. Fir$s that ha' plants with little fle1i,ility saw a lot of un
utili7e' apaity in their #sian plants. Fir$s with greater fle1i,ility in their $anufaturing failities were a,le to use the e1tra
apaity in their #sian plants to $eet the nee's of other ountries where 'e$an' was high. #s $entione' earlier in the hapter5 in
1<<= Toyota ha' asse$,ly plants in #sia that were only apa,le of pro'uing for the loal $arket. The #sian risis $oti.ate'
Toyota to $ake the plants $ore fle1i,le to ,e a,le to supply 'e$an' fro$ other ountries.
8hen 'esigning supply hain networks5 o$panies $ust ,uil' appropriate fle1i,ility to help ounter flutuations in e1hange rates
an' 'e$an' aross 'ifferent HCountries.
Politi#al Fa#tors
The politial sta,ility of the ountry un'er onsi'eration plays a signifiant role in the loation hoie. Co$panies prefer to loate
failities in politially sta,le ountries where the rules of o$$ere are well 'efine'. Countries with in'epen'ent an' lear legal
syste$s allow fir$s to feel that they ha.e reourse in the ourts shoul' they nee' it. This $akes it easier for o$panies to in.est
in failities in these ountries. )olitial sta,ility is har' to 9uantify5 so a fir$ $akes an essentially su,-eti.e e.aluation when
'esigning its supply hain network.
In0rastru#ture Fa#tors
The a.aila,ility of goo' infrastruture is an i$portant prere9uisite to loating a faility in a gi.en area. )oor infrastruture a''s to
the ost of 'oing ,usiness fro$ a gi.en loation. 4lo,al o$panies ha.e loate' their fatories in China near Shanghai5 Tian-in5 or
4uangKhou5 e.en though these loations 'o not ha.e the lowest la,or or lan' ost ,eause of ,etter infrastruture at these
loations. @ey infrastruture ele$ents to ,e onsi'ere' 'uring network 'esign inlu'e a.aila,ility of sites5 la,or a.aila,ility5 pro1-
i$ity to transportation ter$inals5 rail ser.ie5 pro1i$ity to airports an' seaports5 highway aess5 ongestion5 an' loal utilities.
Page 4
Co/petiti$e Fa#tors
Co$panies $ust onsi'er o$petitors? strategy5 si7e5 an' loation when 'esigning their supply hain networks. # fun'a$ental
'eision fir$s $ake is whether to loate their failities lose to o$petitors or far fro$ the$. ;ow the fir$s o$pete an' whether
e1ternal fators suh as raw $aterial or la,or a.aila,ility fore the$ to loate lose to eah other influene this 'eision.
Positi$e E2ternalities !etween Fir/s
-ositi#e externalities are instanes where the olloation of $ultiple fir$s ,enefits all of the$. )ositi.e e1ternalities lea' to
o$petitors loating lose to eah other. For e1a$ple5 gas stations an' retail stores ten' to loate lose to eah other ,eause
'oing so inreases the o.erall 'e$an'5 thus ,enefiting all parties. 2y loating together in a $all5 o$peting retail stores $ake it
$ore on.enient for usto$ers who nee' only 'ri.e to one loation an' fin' e.erything they are looking for. This inreases the total
nu$,er of usto$ers who .isit the $all5 inreasing 'e$an' for all stores loate' there.
#nother e1a$ple of positi.e e1ternality is when the presene of a o$petitor lea's to the 'e.elop$ent of appropriate infrastruture in a
'e.eloping area. !n !n'ia5 for e1a$ple5 Su7uki was the first foreign auto $anufaturer to set up a $anufaturing faility. The o$pany
went to onsi'era,le effort an' ,uilt a loal supplier network. 4i.en the well-esta,lishe' supplier ,ase in !n'ia5 Su7uki?s o$petitors ha.e
also ,uilt asse$,ly plants there5 ,eause they now fin' it $ore effeti.e to ,uil' ars in !n'ia rather than i$port the$ to the ountry.
Lo#ating to Split the .arket
8hen there are no positi.e e1ternalities5 fir$s loate to ,e a,le to apture the largest possi,le share of the $arket. # si$ple $o'el first
propose' ,y ;otelling e1plains the issues ,ehin' this 'eision.
2

8hen fir$s 'o not ontrol prie ,ut o$pete on 'istane fro$ the usto$er5 they an $a1i$i7e $arket share ,y loating lose
to eah other an' splitting the $arket. Consi'er a situation where usto$ers are unifor$ly loate' along the line seg$ent ,etween > an'
1 an' two fir$s o$pete ,ase' on their 'istane fro$ the usto$er as shown in Figure 5.1. # usto$er goes to the losest fir$ an'
usto$ers that are e9ui'istant fro$ the two fir$s are e.enly split ,etween the$.
!f total 'e$an' is 1 an' Fir$ 1 loates at point a an' Fir$ 2 loates at point 1 - !. the 'e$an' at the two fir$s5 '1 an' d2. is gi.en
,y
2
1
and
2
1
2 1
a b
d
a b
a d
+
=

+ =
Clearly5 ,oth fir$s $a1i$i7e their $arket share if they $o.e loser to eah other an' loate at a L , L 1J2.
+,ser.e that when ,oth fir$s loate in the $i''le of the line seg$ent5 the a.erage 'istane that usto$ers ha.e to tra.el is 1J%.
!f one fir$ loates at 1J% an' the other at "J%5 the a.erage 'istane usto$ers ha.e to tra.el 'rops to 1JA. This set of loations5 howe.er5
gi.es ,oth fir$s an inenti.e to try an' inrease $arket share ,y $o.ing to the $i''le. The result of o$petition is for ,oth fir$s to
loate lose together e.en though 'oing so inreases the a.erage 'istane to the usto$er.
!n ase the fir$s o$pete on prie an' inur the transportation ost to the usto$er5 it $ay ,e opti$al for the two fir$s to loate
as far apart as possi,le5
"
with Fir$ 1 loating at > an' Fir$ 2 loating at 1. (oating far fro$ eah other $ini$i7es prie o$petition an'
helps the fir$s split the $arket an' $a1i$i7e profits.
Custo/er Response Ti/e an1 Lo#al Presen#e
Fir$s that target usto$ers who .alue a short response ti$e $ust loate lose to the$. For e1a$ple5 usto$ers are unlikely to o$e to
a on.eniene store if they ha.e to tra.el a long 'istane to get there. !t is thus ,est for a on.eniene store hain to ha.e $any stores
'istri,ute' in an area so that $ost people ha.e a on.eniene store lose to the$. !n ontrast5 usto$ers shop for larger a$ounts
at super$arkets an' are willing to tra.el longer 'istanes to get to one. Thus5 super$arket hains ten' to ha.e stores that are
$uh larger than on.eniene stores an' not as 'ensely 'istri,ute'. &ost towns ha.e fewer super$arkets than on.eniene
stores. Disounters like Sa$? Clu, target usto$ers who are e.en less ti$e sensiti.e. These stores are e.en larger than
super$arkets an' there are fewer of the$ in an area. 8. 8. 4rainger uses a,out "5> failities all o.er the 6nite' States to
pro.i'e sa$e 'ay 'eli.ery of $aintenane an' repair supplies to $any of its usto$ers. &&aster Carr5 a o$petitor5 targets us-
to$ers who are willing to wait for ne1t 'ay 'eli.ery. &&aster has only si1 failities throughout the 6nite' States an' is a,le to
pro.i'e ne1t 'ay 'eli.ery to a large nu$,er of usto$ers.
!f a fir$ is 'eli.ering its pro'ut to usto$ers5 use of a rapi' $eans of transportation allows it to ,uil' fewer failities an' still
pro.i'e a short response ti$e. This option5 howe.er5 inreases transportation ost. &oreo.er5 there are $any situation where the
presene of a faility lose to a usto$er is i$portant. For e1a$ple5 a offe shop is likely to attrat usto$ers who li.e or work
near,y. No faster $o'e of transport an ser.e as a su,stitute an' ,e use' to attrat usto$ers that are far away.
Page 5
Logisti#s an1 Fa#ility Costs
(ogistis an' faility osts inurre' within a supply hain hange as the nu$,er of failities5 their loation5 an' apaity alloation
is hange'. Co$panies $ust onsi'er in.entory5 transportation5 an' faility osts when 'esigning their supply hain networks.
!n.entory an' faility osts inrease as the nu$,er of failities in a supply hain inrease. Transportation osts 'erease
as the nu$,er of failities is inrease'. !nreasing the nu$,er of failities to a point where in,oun' eono$ies of sale are lost
inreases transportation ost. For e1a$ple5 with few failities #$a7on.o$ ha lower in.entory an' faility osts than 2or'ers5
whih has a,out %>> stores. 2or'ers. howe.er5 has lower transportation osts.
The supply hain network 'esign is also influene' ,y the transfor$ation ourring at eah faility. 8hen there is a
signifiant re'ution in $aterial weight or .olu$e as a result of proessing5 it $ay ,e ,etter to loate failities loser to the supply
soure rather than the usto$er. For e1a$ple5 when iron ore is proesse' to $ake steel5 the a$ount of output is a s$all fration
of the a$ount of ore use'. (oating the steel fatory lose to the supply soure is preferre' ,eause it re'ues the 'istane that
the large 9uantity of ore has to tra.el.
Total logistis osts are a su$ of the in.entory5 transportation5 an' faility osts.
The failities in a supply hain network $ust at least e9ual the nu$,er that $ini$i7e total logistis ost. # fir$ $ay
inrease the nu$,er of failities ,eyon' this point to i$pro.e the response ti$e to its usto$ers. This 'eision is -ustifie' if the
re.enue inrease fro$ i$pro.e' response outweighs the inrease' ost fro$ a''itional failities.
!n the ne1t setion we 'isuss a fra$ework for $aking network 'esign 'eisions.
%&3 A FRA.E(R) FR NET(R) DESI*N DECISINS
8hen fae' with a network 'esign 'eision5 the goal of a $anager is to 'esign a network that $a1i$i7es the fir$?s profits while
satisfying usto$er nee's in ter$s of 'e$an' an' responsi.eness. To 'esign an effeti.e network a $anager $ust onsi'er all the
fators 'esri,e' in Setion 5.2. 4lo,al network 'esign 'eisions are $a'e in four phases as shown in Figure 5.2. 8e 'esri,e eah
phase in greater 'etail.
2
Cean Tirole. 1<<=. +he +heory of /ndustrial Organi,ation. Ca$,ri'ge5 &ass.3 The &!T )ress
. "
C,i'. !
Page 6
Phase I4 De0ine a Supply Chain Strategy
The o,-eti.e of the first phase of network 'esign is to 'efine a fir$?s supply hain strategy. The supply hain strategy speifies
what apa,ilities the supply hain network $ust ha.e to support a fir$?s o$petiti.e strategy Dsee Chapter 2E.
)hase ! starts with a lear 'efinition of the fir$?s o$petiti.e strategy as the set of usto$er nee's that the supply hain
ai$s to satisfy. Ne1t5 $anagers $ust foreast the likely e.olution of glo,al o$petition an' whether o$petitors in eah $arket
will ,e loal or glo,al players. &anagers $ust also i'entify onstraints on a.aila,le apital an' whether growth will ,e
ao$plishe' ,y a9uiring e1isting failities5 ,uil'ing new failities5 or partnering.
2ase' on the o$petiti.e strategy of the fir$5 an analysis of the o$petition5 any eono$ies of sale or sope5 an' any
onstraints5 $anagers $ust 'eter$ine the supply hain strategy for the fir$.
Phase II4 De0ine the Regional Fa#ility Con0iguration
The o,-eti.e of the seon' phase of network 'esign is to i'entify regions where failities will ,e loate'5 their potential roles5 an'
their appro1i$ate apaity.
#n analysis of )hase !! is starte' with a foreast of the 'e$an' ,y ountry. Suh a foreast $ust inlu'e a $easure of the
si7e of the 'e$an' as well as a 'eter$ination of whether the usto$er re9uire$ents are ho$ogenous or .aria,le aross 'ifferent
ountries. ;o$ogenous re9uire$ents fa.or large onsoli'ate' failities whereas re9uire$ents that .ary aross ountries fa.or
s$aller5 loali7e' failities.
The ne1t step is for $anagers to i'entify whether eono$ies of sale or sope an playa signifiant role in re'uing osts
gi.en a.aila,le pro'ution tehnologies. !f eono$ies of sale or sope are signifiant5 it $ay ,e ,etter to ha.e a few failities
ser.ing $any $arkets. !f eono$ies of sale or sope are not signifiant5 it $ay ,e ,etter for eah $arket to ha.e its own faility.
For e1a$ple5 Coa Cola has ,ottling plant in e.ery $arket that it ser.es ,eause the $anufaturing tehnology 'oes not inlu'e
large eono$ies of sale. Se$ion'utor $anufaturers like &otorola5 in ontrast ha.e .ery few plants for their glo,al $arkets
gi.en the eono$ies of sale in pro'ution.
Ne1t5 $anagers $ust i'entify 'e$an' risk5 e1hange rate risk5 an' politial risk assoiate' with 'ifferent regional $arkets.
They $ust also i'entify regional tariffs5 any re9uire$ents for loal pro'ution5 ta1 inenti.es5 an' any e1port or i$port restritions
for eah $arket. The ta1 an' tariff infor$ation is use' to i'entify the ,est loation to e1trat a $a-or share of the profits. !n general5
it is ,est to o,tain the $a-or share of profits at the loation with the lowest ta1 rate.
&anagers $ust i'entify o$petitors in eah region an' $ake a ase for whether a faility nee's to ,e loate' lose to or
far fro$ a o$petitor?s faility. The 'esire' response ti$e for eah $arket $ust also ,e i'entifie'. &anagers $ust also i'entify the
fator an' logistis osts at an aggregate le.el in eah region.
2ase' on all this infor$ation5 $anagers will i'entify the regional faility onfiguration for the supply hain network using
network 'esign $o'els 'isusse' in the ne1t setion. The regional onfiguration 'efines the appro1i$ate nu$,er of failities in
the network5 regions where failities will ,e set up5 an' whether a faility will pro'ue all pro'uts for a gi.en $arket or a few
pro'uts for all $arkets in the network.
Phase III4 Sele#t Desira!le Sites
The o,-eti.e of )hase !!! is to selet a set of 'esira,le sites within eah region where failities are to ,e loate'. The set of
'esira,le sites shoul' ,e larger than the 'esire' nu$,er of failities to ,e set up so that a preise seletion $ay ,e $a'e in
)hase !G.
Sites shoul' ,e selete' ,ase' on an analysis of infrastruture a.aila,ility to support the 'esire' pro'ution
$etho'ologies. ;ar' infrastruture re9uire$ents inlu'e the a.aila,ility of suppliers5 transportation ser.ies5 o$$uniation5
utilities5 an' warehousing infrastruture. Soft infrastruture re9uire$ents inlu'e the a.aila,ility of skille' workfore5 workfore
turno.er5 an' the o$$unity reepti.ity to ,usiness an' in'ustry.
Phase IV4 Lo#ation Choi#es
The o,-eti.e of this phase is to selet a preise loation an' apaity alloation for eah faility. #ttention is restrite' to the
'esira,le sites selete' in )hase !!!. The network is 'esigne' to $a1i$i7e total profits taking into aount the e1pete' $argin
an' 'e$an' in eah $arket5 .arious logistis an' faility osts5 an' the ta1es an' tariffs at eah loation.
!n the ne1t setion we 'isuss $etho'ologies for $aking faility loation an' apaity alloation 'eisions 'uring )hase !!
an' )hase !G.
%&5 .DELS FR FACILIT, LCATIN AND CAPACIT, ALLCATIN
# $anager?s goal when loating failities an' alloating apaity shoul' ,e to $a1i$i7e the o.erall profita,ility of the resulting
Page 7
supply hain network while pro.i'ing usto$ers with the appropriate responsi.eness. Re.enues o$e fro$ the sale of pro'ut
an' osts arise fro$ failities5 la,or5 transportation5 $aterial5 an' in.entories. The profits of the fir$ are also i$pate' ,y ta1es
an' tariffs. !'eally5 profits after tariffs an' ta1es shoul' ,e $a1i$i7e' when 'esigning a supply hain network.
# $anager $ust onsi'er $any tra'eoffs 'uring network 'esign. For e1a$ple5 ,uil'ing $any failities to ser.e loal
$arkets re'ues transportation ost an' pro.i'es a fast response ti$e5 ,ut it inreases the faility an' in.entory osts inurre' ,y
the fir$.
&anagers use network 'esign $o'els in two 'ifferent situations. First5 these $o'els are use' to 'ei'e on loations
where failities will ,e esta,lishe' an' the apaity to ,e assigne' to eah faility. &anagers $ust $ake this 'eision onsi'ering
a ti$e hori7on o.er whih loations an' apaities will not ,e altere' Dtypially in yearsE. Seon'5 these $o'els are use' to assign
urrent 'e$an' to the a.aila,le failities an' i'entify lanes along whih pro'ut will ,e transporte'. &anagers $ust onsi'er this
'eision at least on an annual ,asis as 'e$an'5 pries5 an' tariffs hange. !n ,oth ases5 the goal is to $a1i$i7e the profit while
satisfying usto$er nee's. The following infor$ation $ust ,e a.aila,le ,efore the 'esign 'eision an ,e $a'e3
(oation of supply soures an' $arkets
(oation of potential faility sites
De$an' foreast ,y $arket
Faility5 la,or5 an' $aterial osts ,y site
Transportation osts ,etween eah pair of sites
!n.entory osts ,y site as well as a funtion of 9uantity
Sale prie of pro'ut in 'ifferent regions
Ta1es an' tariffs as pro'ut is $o.e' ,etween loations
Desire' response ti$e an' other ser.ie fators
4i.en this infor$ation5 either gra.ity or network opti$i7ation $o'els $ay ,33 use' to 'esign the network. 8e organi7e the
$o'els aor'ing to the phase of the network 'esign fra$ework where eah $o'el is likely to ,e useful.
Phase II4 Network pti/i6ation .o1els
During )hase !! of the network 'esign fra$ework Dsee Figure 5.2E5 a $anager $ust onsi'er regional 'e$an'5 tariffs5 eono$ies of
sale5 an' aggregate fator osts to 'ei'e the regions in whih failities are to ,e loate'. #s an e1a$ple5 onsi'er Sun+il. a
$anufaturer of petrohe$ial pro'uts with worl'wi'e sales. The Gie )resi'ent of Supply Chain an onsi'er se.eral 'ifferent
alternati.es to $eet 'e$an'. +ne alternati.e woul' ,e to set up a faility in eah region. The a'.antage of suh an approah will ,e that
it lowers transportation ost an' also helps a.oi's 'uties that $ay ,e i$poser. if pro'ut is i$porte' fro$ other regions. The
'isa'.antage of this approah is that plants will ,e si7e' only to $eet loal 'e$an' an' $ay not fully e1ploit eono$ies >3 sale.
#nother alternati.e woul' ,e to onsoli'ate plants in few regions. This woul' i$pro.e eono$ies of sale ,ut woul' inrease
transportation ost an' the 'uties to ,33 pai'. During )hase II7 the $anager $ust onsi'er these 9uantifia,le tra'eoffs along with
non9uantifia,le fators suh as the o$petiti.e en.iron$ent an' politial risk.
Network opti$i7ation $o'els are useful for $anagers onsi'ering regional onfiguration 'uring )hase !!. The first step is to
ollet the 'ata in a for$ that an ,e use' for a 9uantitati.e $o'el. For Sun+il5 the Gie )resi'ent of Supply Chain 'ei'es re.iew the
worl'wi'e 'e$an' in ter$s of fi.e regions-North #$eria5 South #$eria 0urope5 #fria5 an' #sia. The 'ata ollete' is shown in Figure
5.".
#nnual 'e$an' for eah of the fi.e regions is shown in Cells 2<3F<. Cells 2%3; ontain the .aria,le pro'ution5 in.entory5 an'
transportation ost Dinlu'ing tariffs an' 'utiesE of pro'uing in one region to $eet 'e$an' in eah in'i.i'ual region. For e1a$ple5 as
shown in Cell C%5 it osts M<25>>> Dinlu'ing 'utiesE to pro'ue 1 $illion units in North #$eria an' sell the$ in South #$eria.
+,ser.e that the 'ata ollete' at this stage is at a fairly aggregate le.el.
There are fi1e' as well as .aria,le osts assoiate' with failities5 transportation5 an' in.entories at eah faility. Fi1e'
osts are those that are inurre' no $atter how $uh is pro'ue' or shippe' fro$ a faility. Garia,le osts are those that are
inurre' in proportion to the 9uantity pro'ue' or shippe' fro$ a gi.en faility. Garia,le faility5 transportation5 an' in.entory osts
generally 'isplay eono$ies of sale an' the $arginal ost 'ereases as the 9uantity pro'ue' at a faility inreases. !n the
$o'els we onsi'er5 howe.er5 all .aria,le osts grow linearly with the 9uantity pro'ue' or shippe'.
Sun+il is onsi'ering two 'ifferent plant si7es in eah loation. (ow-apaity plants an pro'ue 1> $illion units a year
whereas high-apaity plants an pro'ue 2> $illion units a year as shown in Cells ;%3;A an' C%3CA5 respeti.ely. ;igh-apaity
plants e1hi,it so$e eono$ies of sale an' ha.e fi1e' osts that are less than twie the fi1e' ost of a low-apaity plant as
shown in Cells !%3!A. #ll fi1e' osts are annuali7e'. The .ie presi'ent woul' like to know what the lowest ost network shoul' look
like. Ne1t5 we 'isuss the apaitate' plant loation $o'el5 whih an ,e use' in this setting.
The Capa#itate1 Plant Lo#ation .o1el
The apaitate' plant loation network opti$i7ation $o'el re9uires the following inputs3
n L Nu$,er of potential plant loationsJapaity Deah apaity will ount as a separate loationE
Page 8
& L Nu$,er of $arkets or 'e$an' points
0 12 #nnual 'e$an' fro$ $arket 1
3i L )otential apaity of plant i
f
i
L #nnuali7e' fi1e' ost of keeping fatory i open
ci1 L Cost of pro'uing an' shipping one unit fro$ fatory i to $arket 1 Dost inlu'es pro'ution5 in.entory5 transportation5 an'
'utiesE
The supply hain tea$?s goal is to 'ei'e on a network 'esign that $a1i$i7es profits after ta1es. In this $o'el5 howe.er5
we assu$e that all 'e$an' $ust ,e $et an' ta1es on earnings are ignore'. The $o'el thus fouses on $ini$i7ing the ost of
$eeting glo,al 'e$an'. !t an5 howe.er5 ,e easily $o'ifie' to inlu'e profits an' ta1es. Define the following 'eision .aria,les3
yi L 1 if plant i is open5 > otherwise
xi1 L /uantity shippe' fro$ fatory i to $arket 1
The pro,le$ is then for$ulate' as the following integer progra$3

= = =
+
n
i
m
j
ij ij
n
i
i i
x c y f Min
1 1 1
The o,-eti.e funtion $ini$i7es the total ost Dfi1e' N .aria,leE of setting up an' operating the network. The onstraint in
09uation 5.1 re9uires that the 'e$an'O eah regional $arket ,e satisfie'. The onstraint in 09uation 5.2 states that no plant an
supply $ore than its apaity. DClearly the apaity is > if the plant is lose' an' @i if it is open. The pro'ut of ter$s5 3iyi aptures
this effet.E The onstraint in 09uation 5." enfores that eah plant is either open 45i L 1E or lose' 45i L >E. The solution will i'entify
the plants that are to ,e kept open5 their apaity5 an' the alloation regional 'e$an' to these plants.
The $o'el is sol.e' using the Sol.er tool in 01el. 4i.en the 'ata5 the ne1t step in 01el is to i'entify ells orrespon'ing
to eah 'eision .aria,le as shown in Figure 5.%.
Cells 21%3F1A orrespon' to the 'eision .aria,les xi1 an' 'eter$ine the a$ount pro'ue' in a supply region an' shippe'
to a 'e$an' region. Cells 41%341A ontain the 'eision .aria,les 5i orrespon'ing to the low-apaity plants an' Cells
;1%3;1Aontain the 'eision .aria,les 5i orrespon'ing to the high-apaity plants. !nitially5 all 'eision .aria,les are set to ,e >.
The ne1t step is to onstrut ells for the onstraints in 09uations 5.1 an' 5.2 an' the o,-eti.e funtion. The onstraint
ells an' o,-eti.e funtion are shown in Figure 5.5.
Cells 222322* ontain the apaity onstraints in 09uation 5.2 an' Cells 22A3F2A ontain the 'e$an' onstraints in
09uation 5.1. The o,-eti.e funtion is shown in Cell 2"1 an' $easures the total fi1e' ost plus the .aria,le ost of operating the
network.
The ne1t step is to use Tools ! Sol.er to in.oke Sol.er as shown in Figure 5.*.
Page 9
Page 10
8ithin the ol#er para&eters 'ialog ,o15 lik on ol#e to o,tain the opti$al solution as shown in Figure 5.=.
Fro$ Figure 5.=5 the supply hain tea$ onlu'es that the lowest ost network will ha.e failities loate' in South
#$eria5 #sia5 an' #fria. Further5 a high-apaity plant shoul' ,e planne' in eah region. The plant in South #$eria $eets the
North #$erian 'e$an' whereas the 0uropean 'e$an' is $et fro$ plants in #sia an' #fria.
The $o'el 'isusse' earlier an ,e $o'ifie' to aount for strategi i$perati.es that re9uire loating a plant in so$e
region. For e1a$ple5 if Sun +il 'ei'es to loate a plant in 0urope for strategi reasons5 we an $o'ify the $o'el ,y a''ing a
onstraint that re9uires one plant to ,e loate' in 0urope.
Ne1t we onsi'er a $o'el that an ,e useful 'uring )hase !!!.
Phase III4 *ra$ity Lo#ation .o1els
During )hase III Dsee Figure 5.2E5 a $anager $ust i'entify potential loations in eah region where the o$pany has 'ei'e' to loate a
plant. #s a preli$inary step5 the $anager nee's to i'entify the geographial loation where potential sites $ay ,e onsi'ere'. 4ra.ity
loation $o'els an ,e useful when i'entifying suita,le geographi alloations within a region. 4ra.ity $o'els are use' to fin'
loations that $ini$i7e the ost of transporting raw $aterials fro$ suppliers an' finishe' goo's to the $arket~ ser.e'. Ne1t5 we
'isuss a typial senario where gra.ity $o'els an ,e use'.
Consi'er5 for e1a$ple5 Steel #pplianes DS#E5 a $anufaturer of high-9uality refrigerators an' ooking ranges. S# has
one asse$,ly fatory loate' near Den.er fro$ whih it has supplie' the entire 6nite' States. De$an' has grown rapi'ly an' the
C0C of S# has 'ei'e' to set up another fatory to ser.e its eastern $arkets. The supply hair $anager is aske' to fin' a
suita,le loation for the new fatory. Three parts plants loate' in 2uffalo5 &e$phis5 an' St. (ouis will supply parts to the new
fatory5 whih will ser.e $arkets in #tlanta5 2oston5 Cakson.ille5 )hila'elphia5 an' New Bork. The oor'inate loation5 the
'e$an' in eah $arket5 the re9uire' supply fro$ eah parts plant5 an' the shipping ost for eah supply soure or $arket are
shown in Ta,le 5.l.
4ra.ity $o'els assu$e that ,oth the $arkets an' the supply soures an ,D loate' as gri' points on a plane. #ll
'istanes are alulate' as the geo$etri 'istane ,etween two points on the plane. These $o'els also assu$e that the
transportation ost grows linearly with the 9uantity shippe'. 8e 'isuss a gra.ity $o'el for loating D single faility that reei.es
raw $aterial fro$ supply soures an' ships finishe' pro'ut to $arkets. The ,asi inputs to the $o'el are as follows3
6n . 5n3 Coor'inate loation of either a $arket or supply soure n
Fn: Cost of shipping one unit for one $ile ,etween the faility an' either $arke? or supply soure n
Page 11
0n: /uantity to ,e shippe' ,etween faility an' $arket or supply soure n
!f 4x. y7 is the loation selete' for the faility5 the 'istane dn ,etween the faility at loation 4x. y7 an' the supply soure or $arket
n is gi.en ,y
( ) ( )
2 2
n n n
y y x x d + = 8%&59
The total transportation ost DTCE is gi.en ,y

=
=
k
n
n n n
F D d TC
1
The opti$al loation is one that $ini$i7es the total TC in 09uation 5.5. The opti$al solution for S# is o,taine' using the
Sol.er tool in 01el as shown in Figure 5.A. The first step is to enter the pro,le$ 'ata as shown in Cells 253412. Ne1t5 we set the
'eision .aria,les 4x. y7 orrespon'ing to the loation of the new faility in Cells 21* an' 21=5 respeti.ely. !n Cells 4534125 we
then alulate the 'istane dn fro$ the faility loation 4x. y7 to eah soure or $arket using 09uation 5.%. The total TC is then
alulate' in Cell 21< using 09uation 5.5.
The ne1t step is to use the ToolsJSol.er to in.oke Sol.er. 8ithin the Sol.er para$eters 'ialog ,o1 Dsee Figure 5.AE5 the
following infor$ation is entere' to represent the pro,le$
Set Target Cell3 21<
09ual to3 Selet Min
2y Changing Cells3 21*321=
Clik on the Sol.e ,utton. The opti$al solution is returne' in Cells 21* an' 21=.
The $anager thus i'entifies the oor'inates D15 yE L D*A15AA2E as the loation a? the fatory that $ini$i7es total ost TC.
Fro$ a $ap5 these oor'inates are lose to the ,or'er of North Carolina an' Girginia. The preise oor'inates pro.i'e' ,y the
gra.ity $o'el $ay not orrespon' to a feasi,le loation. The $anager shoul' look for 'esira,le sites lose to the opti$al
oor'inates that ha.e the re9uire' infrastruture as wet3 as the appropriate worker skills a.aila,le.
Phase IV4 Network pti/i6ation .o1els
During )hase !G Dsee Figure 5.2E5 a $anager $ust 'ei'e on the loation an' apaity alloation for eah faility. 2esi'es loating
the failities5 a $anager $ust also 'ei'e how $arkets will ,e alloate' to failities. This alloation $ust aount for usto$er
ser.ie onstraints in ter$s of response ti$e. The 'e$an' alloation 'eision an ,e altere' on a regular ,asis as osts hange
an' $arkets e.ol.e. 8hen 'esigning the network5 ,oth loation an' alloation 'eisions are $a'e -ointly. Network opti$i7ation
$o'els are ritial tools for ,oth the network 'esign an' 'e$an' alloation 'eisions.
8e illustrate the rele.ant network opti$i7ation $o'els using the e1a$ple of two $anufaturers of fi,er opti
teleo$$uniation e9uip$ent. 2oth Teleo$+ne an' ;igh+pti are $anufaturers of the latest generation of teleo$$uniation
e9uip$ent. Teleo$+ne has fouse' on the eastern half of the 6nite' States. !t has $anufaturing plants loate' in 2alti$ore5
&e$phis5 an' 8ihita5 an' ser.es $arkets in #tlanta5 2oston5 an' Chiago. ;igh+pti has targete' the western half of the 6nite'
States an' ser.es $arkets in Den.er5 +$aha5 an' )ortlan'. ;igh+pti has plant loate' in Cheyenne an' Salt (ake City.
Page 12
)lant apaities5 $arket 'e$an'5 .aria,le pro'ution an' transportation ost per thousan' units shippe'5 an' fi1e' osts
per $onth at eah plant are shown in Ta,le 5.2.
Allo#ating De/an1 to Pro1u#tion Fa#ilities
Fro$ Ta,le 5.2 o,ser.e that Teleo$+ne has a total pro'ution apaity of =15>>> units per $onth an' a total 'e$an' of ">5>>>
units per $onth whereas ;igh+pti ha a pro'ution apaity of 515>>> units per $onth an' a 'e$an' of 2%5>>> units per $onth.
0ah year5 $anagers in ,oth o$panies $ust 'ei'e how to alloate the 'e$an' to their pro'ution failities. This 'eision will ,e
re.isite' e.ery year as 'e$an' an' osts hange.
Page 13
Page 14
The onstraints in 09uation 5.* ensure that all $arket 'e$an' is satisfie' an' the onstraints in 09uation 5.= ensure that
no fatory pro'ues $ore than its apaity.
For ,oth Teleo$+ne an' ;igh+pti5 the 'e$an' alloation pro,le$ an ,e sol.e' using the Sol.er tool within 01el.
The opti$al 'e$an' alloation is presente' here in Ta,le 5.".
+,ser.e that it is opti$al for Teleo$+ne not to pro'ue anything in the 8ihita faility e.en though the faility is
operational. 8ith the 'e$an' alloation as shown in Ta,le 5."5 Teleo$+n inurs a $onthly .aria,le ost of M1%5AA*5>>> an' a
$onthly fi1e' ost of5 M1"5<5>5 for a total $onthly ost of M2A5A"*5>>>. ;igh+pti inurs a $onthly .aria,le-ost of 125A*55>>> an'
a $onthly fi1e' ost of MA55>>5>>> for a total $onthly ost of M215"*55>>>.
Lo#ating Plants4 The Capa#itate1 Plant Lo#ation .o1el
&anage$ent at ,oth Teleo$+ne an' ;igh+pti has 'ei'e' to $erge the two o$panies into a single entity to ,e alle'
Teleo$+pti. &anage$ent feels that signifiant ,enefits will result if the two networks are $erge' appropriately. Teleo$+pti
will ha.e fi.e fatories fro$ whih to ser.e si1 $arkets. &anage$ent is 'e,ating whether all fi.e fatories are nee'e'. They ha.e
assigne' a supply hain tea$ to stu'y the network for the o$,ine' o$pany an' i'entify the plants that shoul' ,e shut 'own.
The pro,le$ of seleting the opti$al loation an' apaity alloation is .ery si$ilar to the regional onfiguration pro,le$ we ha.e
alrea'y stu'ie' in )hase !!. The only 'ifferene is that instea' of using aggregate osts an' 'uties5 we $ust now use loation
speifi osts an' 'uties. The supply hain tea$ thus 'ei'es to use the apaitate' plant loation $o'el 'isusse' earlier to
sol.e the pro,le$ in )hase !G.
!'eally5 the pro,le$ shoul' ,e for$ulate' to $a1i$i7e total profits taking into aount osts5 ta1es5 an' 'uties ,y loation. 4i.en
that ta1es an' 'uties 'o not .ary ,etween the .arious loations5 the supply hain tea$ 'ei'es to loate fatories an' then
alloate 'e$an' to the open fatories to $ini$i7e the total ost of failities5 transportation5 an' in.entory. Define the following
'eision .aria,les3
5i L 1 if fatory i is open5 > otherwise
xi1 L /uantity shippe' fro$ fatory i to $arket 1
Su,-et to x an' y satisfying the onstraints in 09uations 5.155.25 an' 5.".
The apaity an' 'e$an' 'ata along with pro'ution5 transportation5 an' in.entory osts at 'ifferent fatories for the $erge' fir$
Teleo$+pti are gi.en in Ta,le 5.2. The supply hain tea$ 'ei'es to sol.e the plant loation $o'el using the Sol.er tool in
01el.
The first step in setting up the Sol.er $o'el is to enter the ost5 'e$an'5 an' apaity infor$ation as shown in Figure 5.<.
The fi1e' osts fi for the fi.e plants are entere' in ells ;% to ;A. The apaities 3i of the fi.e plants are entere' in ells 1% to 1A.
The .aria,le osts ci1 are entere' in ells 2% to 4A. The 'e$an's 0 of the si1 $arkets are entere' in ells 2< to 4<. Ne1t5
orrespon'ing to eah 'eision .aria,le xi1 an' 5i8 a ell is assigne' as shown in Figure 5.<. !nitially all .aria,les are set to ,e >.
Cells ;1% to ;1A ontain the 'eision .aria,les 5i an' ells 21% through 41A ontain the 'eision .aria,les xi1.
Page 15
The ne1t step is to onstrut ells for eah of the onstraints in 09uations 5.1 an' 5.2. The onstraint ells are as shown
in Figure 5.1>. Cells 222 to 22* ontain the apaity onstraints in 09uation 5.* whereas ells 22< to 42< ontain the 'e$an'
onstraints in 09uation 5.5. The onstraint in ell 222 orrespon's to the apaity onstraint for the fatory in 2alti$ore. The ell
22< orrespon's to the 'e$an' onstraint for the $arket in #tlanta.
The apaity onstraints re9uire that the ell .alue ,e greater than or e9ual to D3L33E > whereas the 'e$an' onstraints
re9uire the ell .alue ,e e9ual to +.
The ne1t step is to onstrut the o,-eti.e funtion in Cell 2"2. The o,-eti.e funtion $easures the total fi1e' an'
.aria,le ost of the supply hain network.
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Page 17

8ithin the Sol.er para$eters 'ialog ,o15 lik on Sol.e to o,tain the opti$al solution as shown in Figure 5.12.
Fro$ Figure 5.125 the supply hain tea$ onlu'es that it is opti$al for Teleo$+pti to lose the plants in Salt (ake City
an' 8ihita while keeping the plants in 2alti$ore5 Cheyenne5 an' &e$phis open. The total $onthly ost of this network an'
operation is M%=5%>15>>>. This ost represents sa.ings of a,out M" $illion per $onth o$pare' to the situation where
Teleo$+ne an' ;igh+pti operate separate supply hain networks.
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Page 19
The onstraints in 09uations 5.A an' 5.1> enfore that eah $arket is supplie' ,y e1atly one fatory.
&anage$ent at the $erge' o$pany Teleo$+pti 'esri,e' earlier woul' like to i'entify the opti$al supply hain
network if eah $arket is to ,e supplie' fro$ a single fatory. 6sing the 'ata in Ta,le 5.25 the plant loation $o'el with single
souring is sol.e' ,y the supply hain tea$ to o,tain the opti$al network shown in Ta,le 5.%.
!f single souring is re9uire'5 it is opti$al for Teleo$+pti to lose the fatories in 2alti$ore an' Cheyenne. This is
'ifferent fro$ the result in Figure 5.12 where fatories in Salt (ake City an' 8ihita were lose'. The $onthly ost of operating
the network in Ta,le 5.% is M%<5=1=5>>>. This ost is a,out M2." $illion higher than the ost of the network in Figure 5.125 where
single souring was not re9uire'. The supply hain tea$ thus onlu'es that single souring5 although $aking oor'ination easier
an' re9uiring less fle1i,ility fro$ the plants5 will a'' a,out M2." $illion per $onth to the ost of the supply hain network.
Lo#ating Plants an1 (arehouses Si/ultaneously
# $uh $ore general for$ of the plant loation $o'el nee's to ,e onsi'ere' if the entire supply hain network fro$ the
supplier to the usto$er $ust ,e 'esigne'. 8e onsi'er a supply hain in whih suppliers sen' $aterial to fatories that supply
warehouses that supply $arkets as shown in Figure 5.1". (oation an' apaity alloation 'eisions ha.e to ,e $a'e for ,oth
fatories an' warehouses. &ultiple warehouses $ay ,e use' to satisfy 'e$an' at a $arket an' $ultiple fatories $ay ,e use' to
replenish warehouses. !t is also assu$e' that units ha.e ,een appropriately a'-uste' suh that one unit of input fro$ a supply
soure pro'ues one unit of the finishe' pro'ut. The $o'el re9uires the following inputs3

The objective function minimize the tota! cot "fi#ed $ va%iab!e& of etting u' and o'e%ating the net(o%). The cont%aint in *+uation
5.1 %e+ui%e that the demand, each %egiona! ma%)et be atified. The cont%aint in *+uation 5.2 tate that no '!ant can u''!- mo%e than it
ca'acit-. ".!ea%!- the ca'acit- i 0 if the '!ant i c!oed and /i if it i o'en. The '%oduct of te%m0 /i-i ca'tu%e thi effect.& The cont%aint in
*+uation 5.3 enfo%ce that each '!ant i eithe% o'en "1i 2 1& o% c!oed "1i 2 0&. The o!ution (i!! identif- the '!ant that a%e to be )e't o'en0
thei% ca'acit-0 and the a!!ocation %egiona! demand to thee '!ant.
The mode! i o!ved uing the 3o!ve% too! in *#ce!. 4iven the data0 the ne#t te' in *#ce! i to identif- ce!! co%%e'onding to each
deciion va%iab!e a ho(n in 5igu%e 5.4.
.e!! 6147518 co%%e'ond to the deciion va%iab!e #ij and dete%mine the amount '%oduced in a u''!- %egion and hi''ed to a
demand %egion. .e!! 4147418 contain the deciion va%iab!e 1i co%%e'onding to the !o(8ca'acit- '!ant and .e!! 9147918contain the
deciion va%iab!e 1i co%%e'onding to the high8ca'acit- '!ant. :nitia!!-0 a!! deciion va%iab!e a%e et to be 0.
Page 20
The ne#t te' i to cont%uct ce!! fo% the cont%aint in *+uation 5.1 and 5.2 and the objective function. The cont%aint ce!! and
objective function a%e ho(n in 5igu%e 5.5.
.e!! 6227626 contain the ca'acit- cont%aint in *+uation 5.2 and .e!! 6287528 contain the demand cont%aint in *+uation 5.1. The
objective function i ho(n in .e!! 631 and meau%e the tota! fi#ed cot '!u the va%iab!e cot of o'e%ating the net(o%).
The ne#t te' i to ue Too! : 3o!ve% to invo)e 3o!ve% a ho(n in 5igu%e 5.6.
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;ithin the 3o!ve% 'a%amete% dia!og bo#0 c!ic) on 3o!ve to obtain the o'tima! o!ution a ho(n in 5igu%e 5.7.
5%om 5igu%e 5.70 the u''!- chain team conc!ude that the !o(et cot net(o%) (i!! have faci!itie !ocated in 3outh <me%ica0 <ia0 and
<f%ica. 5u%the%0 a high8ca'acit- '!ant hou!d be '!anned in each %egion. The '!ant in 3outh <me%ica meet the =o%th <me%ican demand (he%ea
the *u%o'ean demand i met f%om '!ant in <ia and <f%ica.
The mode! dicued ea%!ie% can be modified to account fo% t%ategic im'e%ative that %e+ui%e !ocating a '!ant in ome %egion. 5o%
e#am'!e0 if 3un >i! decide to !ocate a '!ant in *u%o'e fo% t%ategic %eaon0 (e can modif- the mode! b- adding a cont%aint that %e+ui%e one
'!ant to be !ocated in *u%o'e.
=e#t (e conide% a mode! that can be uefu! du%ing Phae :::.
Phase III4 *ra$ity Lo#ation .o1els
?u%ing Phae ::: "ee 5igu%e 5.2&0 a manage% mut identif- 'otentia! !ocation in each %egion (he%e the com'an- ha decided to !ocate
a '!ant. < a '%e!imina%- te'0 the manage% need to identif- the geog%a'hica! !ocation (he%e 'otentia! ite ma- be conide%ed. 4%avit-
!ocation mode! can be uefu! (hen identif-ing uitab!e geog%a'hic a!!ocation (ithin a %egion. 4%avit- mode! a%e ued to find !ocation that
minimize the cot of t%an'o%ting %a( mate%ia! f%om u''!ie% and finihed good to the ma%)et@ e%ved. =e#t0 (e dicu a t-'ica! cena%io
(he%e g%avit- mode! can be ued.
.onide%0 fo% e#am'!e0 3tee! <''!iance "3<&0 a manufactu%e% of high8+ua!it- %ef%ige%ato% and coo)ing %ange. 3< ha one aemb!-
facto%- !ocated nea% ?enve% f%om (hich it ha u''!ied the enti%e Anited 3tate. ?emand ha g%o(n %a'id!- and the .*. of 3< ha decided to
et u' anothe% facto%- to e%ve it eate%n ma%)et. The u''!- chai% manage% i a)ed to find a uitab!e !ocation fo% the ne( facto%-. Th%ee 'a%t
'!ant !ocated in 6uffa!o0 Bem'hi0 and 3t. Coui (i!! u''!- 'a%t to the ne( facto%-0 (hich (i!! e%ve ma%)et in <t!anta0 6oton0
Dac)onvi!!e0 Phi!ade!'hia0 and =e( 1o%). The coo%dinate !ocation0 the demand in each ma%)et0 the %e+ui%ed u''!- f%om each 'a%t '!ant0 and
the hi''ing cot fo% each u''!- ou%ce o% ma%)et a%e ho(n in Tab!e 5.!.
4%avit- mode! aume that both the ma%)et and the u''!- ou%ce can b" !ocated a g%id 'oint on a '!ane. <!! ditance a%e
ca!cu!ated a the geomet%ic ditance bet(een t(o 'oint on the '!ane. Thee mode! a!o aume that the t%an'o%tation cot g%o( !inea%!- (ith
the +uantit- hi''ed. ;e dicu a g%avit- mode! fo% !ocating " ing!e faci!it- that %eceive %a( mate%ia! f%om u''!- ou%ce and hi' finihed
'%oduct to ma%)et. The baic in'ut to the mode! a%e a fo!!o(7
6n . 5n3 Coor'inate loation of either a $arket or supply soure n
Fn: Cost of shipping one unit for one $ile ,etween the faility an' either $arke? or supply soure n
0n: /uantity to ,e shippe' ,etween faility an' $arket or supply soure n
Page 23
!f 4x. y7 is the loation selete' for the faility5 the 'istane dn ,etween the faility at loation 4x. y7 an' the supply soure or $arket
n is gi.en ,y
( ) ( )
2 2
n n n
y y x x d + = 8%&59
The total transportation ost DTCE is gi.en ,y

=
=
k
n
n n n
F D d TC
1
The o'tima! !ocation i one that minimize the tota! T. in *+uation 5.5. The o'tima! o!ution fo% 3< i obtained uing the 3o!ve% too!
in *#ce! a ho(n in 5igu%e 5.8. The fi%t te' i to ente% the '%ob!em data a ho(n in .e!! 657412. =e#t0 (e et the deciion va%iab!e "#0 -&
co%%e'onding to the !ocation of the ne( faci!it- in .e!! 616 and 6170 %e'ective!-. :n .e!! 4574120 (e then ca!cu!ate the ditance dn f%om
the faci!it- !ocation "#0 -& to each ou%ce o% ma%)et uing *+uation 5.4. The tota! T. i then ca!cu!ated in .e!! 619 uing *+uation 5.5.
The ne#t te' i to ue the Too!E3o!ve% to invo)e 3o!ve%. ;ithin the 3o!ve% 'a%amete% dia!og bo# "ee 5igu%e 5.8&0 the fo!!o(ing
info%mation i ente%ed to %e'%eent the '%ob!em
Set Target Cell3 21<
09ual to3 Selet Min
2y Changing Cells3 21*321=
.!ic) on the 3o!ve button. The o'tima! o!ution i %etu%ned in .e!! 616 and 617.
The manage% thu identifie the coo%dinate "#0 -& 2 "6810882& a the !ocation aF the facto%- that minimize tota! cot T.. 5%om a ma'0
thee coo%dinate a%e c!oe to the bo%de% of =o%th .a%o!ina and Gi%ginia. The '%ecie coo%dinate '%ovided b- the g%avit- mode! ma- not
co%%e'ond to a feaib!e !ocation. The manage% hou!d !oo) fo% dei%ab!e ite c!oe to the o'tima! coo%dinate that have the %e+ui%ed
inf%at%uctu%e a (et7 a the a''%o'%iate (o%)e% )i!! avai!ab!e.
Phase IV4 Network pti/i6ation .o1els
?u%ing Phae :G "ee 5igu%e 5.2&0 a manage% mut decide on the !ocation and ca'acit- a!!ocation fo% each faci!it-. 6eide !ocating the
faci!itie0 a manage% mut a!o decide ho( ma%)et (i!! be a!!ocated to faci!itie. Thi a!!ocation mut account fo% cutome% e%vice cont%aint
in te%m of %e'one time. The demand a!!ocation deciion can be a!te%ed on a %egu!a% bai a cot change and ma%)et evo!ve. ;hen
deigning the net(o%)0 both !ocation and a!!ocation deciion a%e made joint!-. =et(o%) o'timization mode! a%e c%itica! too! fo% both the
net(o%) deign and demand a!!ocation deciion.
;e i!!ut%ate the %e!evant net(o%) o'timization mode! uing the e#am'!e of t(o manufactu%e% of fibe% o'tic te!ecommunication
e+ui'ment. 6oth Te!ecom>ne and 9igh>'tic a%e manufactu%e% of the !atet gene%ation of te!ecommunication e+ui'ment. Te!ecom>ne ha
focued on the eate%n ha!f of the Anited 3tate. :t ha manufactu%ing '!ant !ocated in 6a!timo%e0 Bem'hi0 and ;ichita0 and e%ve ma%)et in
<t!anta0 6oton0 and .hicago. 9igh>'tic ha ta%geted the (ete%n ha!f of the Anited 3tate and e%ve ma%)et in ?enve%0 >maha0 and
Po%t!and. 9igh>'tic ha '!ant !ocated in .he-enne and 3a!t Ca)e .it-.
P!ant ca'acitie0 ma%)et demand0 va%iab!e '%oduction and t%an'o%tation cot 'e% thouand unit hi''ed0 and fi#ed cot 'e% month at
each '!ant a%e ho(n in Tab!e 5.2.
Page 24
Allo#ating De/an1 to Pro1u#tion Fa#ilities
5%om Tab!e 5.2 obe%ve that Te!ecom>ne ha a tota! '%oduction ca'acit- of 710000 unit 'e% month and a tota! demand of 300000 unit
'e% month (he%ea 9igh>'tic ha a '%oduction ca'acit- of 510000 unit 'e% month and a demand of 240000 unit 'e% month. *ach -ea%0
manage% in both com'anie mut decide ho( to a!!ocate the demand to thei% '%oduction faci!itie. Thi deciion (i!! be %eviited eve%- -ea% a
demand and cot change.
Page 25
The cont%aint in *+uation 5.6 enu%e that a!! ma%)et demand i atified and the cont%aint in *+uation 5.7 enu%e that no facto%-
'%oduce mo%e than it ca'acit-.
5o% both Te!ecom>ne and 9igh>'tic0 the demand a!!ocation '%ob!em can be o!ved uing the 3o!ve% too! (ithin *#ce!. The o'tima!
demand a!!ocation i '%eented he%e in Tab!e 5.3.
>be%ve that it i o'tima! fo% Te!ecom>ne not to '%oduce an-thing in the ;ichita faci!it- even though the faci!it- i o'e%ationa!. ;ith
the demand a!!ocation a ho(n in Tab!e 5.30 Te@ecom>n@ i@cu% a month!- va%iab!e cot of H1408860000 and a month!- fi#ed cot of0
H1309500@fo% a tota! month!- cot of H2808360000. 9igh>'tic incu% a month!- va%iit%!8e8cot of@208650>>tDIand a month!- fi#ed cot of
H805000000 fo% a tota! month!- cot of H2103650000.
Lo#ating Plants4 The Capa#itate1 Plant Lo#ation .o1el
Banagement at both Te!ecom>ne and 9igh>'tic ha decided to me%ge the t(o com'anie into a ing!e entit- to be ca!!ed
Te!ecom>'tic. Banagement fee! that ignificant benefit (i!! %eu!t if the t(o net(o%) a%e me%ged a''%o'%iate!-. Te!ecom>'tic (i!! have five
facto%ie f%om (hich to e%ve i# ma%)et. Banagement i debating (hethe% a!! five facto%ie a%e needed. The- have aigned a u''!- chain
team to tud- the net(o%) fo% the combined com'an- and identif- the '!ant that hou!d be hut do(n.
The '%ob!em of e!ecting the o'tima! !ocation and ca'acit- a!!ocation i ve%- imi!a% to the %egiona! configu%ation '%ob!em (e have
a!%ead- tudied in Phae ::. The on!- diffe%ence i that intead of uing agg%egate cot and dutie0 (e mut no( ue !ocation 'ecific cot and
dutie. The u''!- chain team thu decide to ue the ca'acitated '!ant !ocation mode! dicued ea%!ie% to o!ve the '%ob!em in Phae :G.
:dea!!-0 the '%ob!em hou!d be fo%mu!ated to ma#imize tota! '%ofit ta)ing into account cot0 ta#e0 and dutie b- !ocation. 4iven that
ta#e and dutie do not va%- bet(een the va%iou !ocation0 the u''!- chain team decide to !ocate facto%ie and then a!!ocate demand to the
o'en facto%ie to minimize the tota! cot of faci!itie0 t%an'o%tation0 and invento%-. ?efine the fo!!o(ing deciion va%iab!e7
5i L 1 if fatory i is open5 > otherwise
xi1 L /uantity shippe' fro$ fatory i to $arket 1
3ubject to # and - atif-ing the cont%aint in *+uation 5.105.20 and 5.3.
The ca'acit- and demand data a!ong (ith '%oduction0 t%an'o%tation0 and invento%- cot at diffe%ent facto%ie fo% the me%ged fi%m
Te!ecom>'tic a%e given in Tab!e 5.2. The u''!- chain team decide to o!ve the '!ant !ocation mode! uing the 3o!ve% too! in *#ce!.
The fi%t te' in etting u' the 3o!ve% mode! i to ente% the cot0 demand0 and ca'acit- info%mation a ho(n in 5igu%e 5.9. The fi#ed
cot 1J fo% the five '!ant a%e ente%ed in ce!! 94 to 98. The ca'acitie /i of the five '!ant a%e ente%ed in ce!! 14 to 18. The va%iab!e cot cij
a%e ente%ed in ce!! 64 to 48. The demand ? of the i# ma%)et a%e ente%ed in ce!! 69 to 49. =e#t0 co%%e'onding to each deciion @a%iab!e #ij
and 1iF a ce!! i aigned a ho(n in 5igu%e 5.9. :nitia!!- a!! va%iab!e a%e et to be >.
.e!! 914 to 918 contain the deciion va%iab!e 1i and ce!! 614 th%ough 418 contain the deciion va%iab!e # 9.
The ne#t te' i to cont%uct ce!! fo% each of the cont%aint in *+uation 5.1 and
5.2. The cont%aint ce!! a%e a ho(n in 5igu%e 5.10. .e!! 622 to 626 contain the ca'acit- cont%aint in *+uation 5.6 (he%ea ce!!
629 to 429 contain the demand cont%aint in *+uation 5.5. The cont%aint in ce!! 622 co%%e'ond to the ca'acit- cont%aint fo% the facto%- in
6a!timo%e. The ce!! 629 co%%e'ond to the demand cont%aint fo% the ma%)et in <t!anta.
The ca'acit- cont%aint %e+ui%e that the ce!! va!ue be g%eate% than o% e+ua! to "7277& 0 (he%ea the demand cont%aint %e+ui%e the ce!!
va!ue be e+ua! to >.
The ne#t te' i to cont%uct the objective function in .e!! 632. The objective function meau%e the tota! fi#ed and va%iab!e cot of the
u''!- chain net(o%).
The ne#t te' i to ue Too! : 3o!ve% to invo)e 3o!ve% a ho(n in 5igu%e 5.1!. ;ithin 3o!ve%0 the goa! i to minimize the tota! cot in
Page 26
ce!! 632. The va%iab!e a%e in ce!! 6147918. The cont%aint a%e a fo!!o(7
;1%3;1A !inary P(oation .aria,les 5i are ,inaryI that is5 > or 1Q
;ithin the 3o!ve% 'a%amete% dia!og bo#0 c!ic) on 3o!ve to obtain the o'tima! o!ution a ho(n in 5igu%e 5.12.
5%om 5igu%e 5.120 the u''!- chain team conc!ude that it i o'tima! fo% Te!ecom>'tic to c!oe the '!ant in 3a!t Ca)e .it- and
;ichita (hi!e )ee'ing the '!ant in 6a!timo%e0 .he-enne0 and Bem'hi o'en. The tota! month!- cot of thi net(o%) and o'e%ation i
H4704010000. Thi cot %e'%eent aving of about H3 mi!!ion 'e% month com'a%ed to the ituation (he%e Te!ecom>ne and 9igh>'tic o'e%ate
e'a%ate u''!- chain net(o%).
Lo#ating Plants4 The Capa#itate1 Plant Lo#ation .o1el with Single Sour#ing
:n ome cae0 com'anie (ant to deign u''!- chain net(o%) (he%e a ma%! i u''!ied f%om on!- one facto%-0 %efe%%ed to a a ing!e
ou%ce. .om'anie ma- im'K thi cont%aint becaue it !o(e% the com'!e#it- of coo%dinating the net(o%) a %e+ui%e !e f!e#ibi!it- f%om each
faci!it-. The '!ant !ocation mode! dicued ea%! need ome modification to accommodate thi cont%aint. The deciion va%iab!e a%e %edefined
a fo!!o(7
5i L 1 if fatory is loate' at site i. > otherwise
xi1 L 1 if $arket 1 is supplie' ,y fatory i. > otherwise
The '%ob!em i fo%mu!ated a the fo!!o(ing intege% '%og%am7
The cont%aint in *+uation 5.8 and 5.10 enfo%ce that each ma%)et i u''!ied b- e#act!- one facto%-.
Banagement at the me%ged com'an- Te!ecom>'tic dec%ibed ea%!ie% (ou!d !i)e to identif- the o'tima! u''!- chain net(o%) if each
ma%)et i to be u''!ied f%om a ing!e facto%-. Aing the data in Tab!e 5.20 the '!ant !ocation mode! (ith ing!e ou%cing i o!ved b- the u''!-
chain team to obtain the o'tima! net(o%) ho(n in Tab!e 5.4.
:f ing!e ou%cing i %e+ui%ed0 it i o'tima! fo% Te!ecom>'tic to c!oe the facto%ie in 6a!timo%e and .he-enne. Thi i diffe%ent f%om
the %eu!t in 5igu%e 5.12 (he%e facto%ie in 3a!t Ca)e .it- and ;ichita (e%e c!oed. The month!- cot of o'e%ating the net(o%) in Tab!e 5.4 i
H4907170000. Thi cot i about H2.3 mi!!ion highe% than the cot of the net(o%) in 5igu%e 5.120 (he%e ing!e ou%cing (a not %e+ui%ed. The
u''!- chain team thu conc!ude that ing!e ou%cing0 a!though ma)ing coo%dination eaie% and %e+ui%ing !e f!e#ibi!it- f%om the '!ant0 (i!!
add about H2.3 mi!!ion 'e% month to the cot of the u''!- chain net(o%).
Lo#ating Plants an1 (arehouses Si/ultaneously
< much mo%e gene%a! fo%m of the '!ant !ocation mode! need to be conide%ed if the enti%e u''!- chain net(o%) f%om the u''!ie% to
the cutome% mut be deigned. ;e conide% a u''!- chain in (hich u''!ie% end mate%ia! to facto%ie that u''!- (a%ehoue that u''!-
ma%)et a ho(n in 5igu%e 5.13. Cocation and ca'acit- a!!ocation deciion have to be made fo% both facto%ie and (a%ehoue. Bu!ti'!e
(a%ehoue ma- be ued to atif- demand at a ma%)et and mu!ti'!e facto%ie ma- be ued to %e'!enih (a%ehoue. :t i a!o aumed that unit
have been a''%o'%iate!- adjuted uch that one unit of in'ut f%om a u''!- ou%ce '%oduce one unit of the finihed '%oduct. The mode! %e+ui%e
the fo!!o(ing in'ut7
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Page 28
The objective function minimize the tota! fi#ed and va%iab!e cot of the u''!- chain net(o%). The cont%aint in *+uation 5.11
'ecifie that the tota! amount hi''ed f%om a u''!ie% cannot e#ceed the u''!ie%F ca'acit-. The cont%aint in *+uation 5.12 tate that the
amount hi''ed out of a facto%- cannot e#ceed the +uantit- of %a( mate%ia! %eceived. The cont%aint in *+uation 5.13 enfo%ce that the amount
'%oduced in the facto%- cannot e#ceed it ca'acit-. The cont%aint in *+uation 5.14 'ecifie that the amount hi''ed out of a (a%ehoue cannot
e#ceed the +uantit- %eceived f%om the facto%ie. The cont%aint in *+uation 5.15 'ecifie that the amount hi''ed th%ough a (a%ehoue cannot
e#ceed it ca'acit-. The cont%aint in *+uation 5.16 'ecifie that the amount hi''ed to a cutome% mut cove% the demand. The cont%aint in
*+uation 5.17 enfo%ce that each facto%- o% (a%ehoue i eithe% o'en o% c!oed.
The mode! dicued ea%!ie% can be modified to a!!o( di%ect hi'ment bet(een facto%ie and ma%)et. <!! the mode! '%eviou!-
dicued can a!o be modified to accommodate economie of ca!e in '%oduction0 t%an'o%tation0 and invento%- cot. 9o(eve%0 thee
%e+ui%ement ma)e the mode! mo%e difficu!t to o!ve.
A##ounting 0or Ta2es7 Tari00s7 an1 Custo/er Re:uire/ents
=et(o%) deign mode! hou!d be t%uctu%ed uch that the %eu!ting u''!- chain net(o%) ma#imize '%ofit afte% ta%iff and ta#e (hi!e
meeting cutome% e%vice %e+ui%ement. The mode! dicued ea%!ie% can eai!- be modified to ma#imize '%ofit accounting fo% ta#e0 even
(hen %evenue a%e in diffe%ent cu%%encie. :f %j i the %evenue
The cont%aint in *+uation 5.18 i mo%e a''%o'%iate becaue it a!!o( the net(o%) deigne% to identif- the demand that can be atified
'%ofitab!- and the demand that i atified at a !o to the fi%m. The '!ant !ocation mode! (ith *+uation 5.18 intead of *+uation 5.1 and a '%ofit
ma#imization objective function (i!! on!- e%ve that 'o%tion of demand that i '%ofitab!e to e%ve. Thi ma- %eu!t in ome ma%)et (he%e a
'o%tion of the demand i d%o''ed becaue it cannot be e%ved '%ofitab!-.
.utome% '%efe%ence and %e+ui%ement ma- be in te%m of dei%ed %e'one time and the choice of t%an'o%tation mode o%
t%an'o%tation '%ovide%. .onide%0 fo% e#am'!e0 t(o mode of t%an'o%tation avai!ab!e bet(een '!ant !ocation i and ma%)et j. Bode 1 ma- be ea
and mode 2 ma- be ai%. The '!ant !ocation mode! i modified b- defining t(o ditinct deciion va%iab!e # ij 1and # ij 2 co%%e'onding to the
+uantit- hi''ed f%om !ocation i to ma%)et j uing Bode 1 and 20 %e'ective!-. The dei%ed %e'one time uing each t%an'o%tation mode i
Page 29
accounted fo% b- on!- a!!o(ing hi'ment (he%e the time ta)en i !e than the dei%ed %e'one time. 5o% e#am'!e0 if the time f%om !ocation i
to ma%)et j uing Bode 1 "ea& i !onge% than (ou!d be acce'tab!e to the cutome%0 (e im'!- d%o' the deciion va%iab!e LiM f%om the '!ant
!ocation mode!. The o'tion among eve%a! t%an'o%tation '%ovide% can be mode!ed imi!a%!-.
%&% .A)IN* NET(R) DESI*N DECISINS IN PRACTICE
Banage% hou!d )ee' the fo!!o(ing iue in mind (hen ma)ing net(o%) deign deciion fo% a u''!- chain.
?o not unde%etimate the !ife 'an of faci!itie. 5aci!itie !at a !ong time and have an endu%ing im'act on a fi%mF 'e%fo%mance.
The%efo%e0 it i ve%- im'o%tant that !ongte%m cone+uence be thought th%ough (hen ma)ing faci!it- deciion. Banage% mut not on!-
conide% futu%e demand and cot but a!o cena%io (he%e techno!og- ma- change. 5ai!u%e to do o ma- !ead to faci!itie that a%e ue!e
(ithin a fe( -ea% and become a financia! bu%den to the fi%m. 5o% e#am'!e0 an inu%ance com'an- moved it c!e%ica! !abo% f%om a met%o'o!itan
!ocation to a ubu%ban !ocation to !o(e% cot. ;ith inc%eaing automation0 the need fo% c!e%ica! !abo% dec%eaed ignificant!- and (ithin a fe(
-ea% the faci!it- (a no !onge% needed. The com'an- found it ve%- difficu!t to e!! the faci!it- given it ditance f%om %eidentia! a%ea and
ai%'o%t.4 ;ithin mot u''!- chain0 '%oduction faci!itie a%e ha%de% to change than to%age faci!itie. 3u''!- chain net(o%) deigne% mut
conide% that an- facto%ie that the- 'ut in '!ace (i!! ta- the%e fo% an e#tended 'e%iod of a decade o% mo%e. ;a%ehoue o% to%age faci!itie0
'a%ticu!a%!- thoe that a%e not o(ned b- the com'an-0 can be changed (ithin a -ea% of ma)ing the deciion. Banage% mut conide% thi
diffe%ence in the !ifetime of a faci!it- (hen deigning u''!- chain net(o%).
?o not gloss over the cultural implications. =et(o%) deign deciion %ega%ding faci!it- !ocation and faci!it- %o!e have a ignificant
im'act on the cu!tu%e of each faci!it- and the fi%m. The cu!tu%e at a faci!it- (i!! be inf!uenced b- othe% faci!itie in it vicinit-. =et(o%)
deigne% can ue thi fact to inf!uence the %o!e of the ne( faci!it- and the focu of 'eo'!e (o%)ing the%e. 5o% e#am'!e0 (hen 5o%d Boto%
.om'an- int%oduced the Cinco!n Ba%) VIII mode!0 management (a faced (ith a di!emma. <t that time0 the Ba%) VIII ha%ed a '!atfo%m (ith
the Be%cu%- .ouga%. 9o(eve%0 the Ba%) VIII i 'a%t of 5o%dF !u#u%- Cinco!n diviion. Cocating the Ba%) VIII !ine (ith the .ouga% (ou!d
have obviou o'e%ationa! advantage becaue of ha%ed 'a%t and '%ocee. 9o(eve%0 5o%d decided to !ocate the Ba%) VIII !ine in the ;i#om
'!ant (he%e othe% Cinco!n ca% (e%e '%oduced. The '%ima%- %eaon fo% doing o (a to enu%e that the focu on +ua!it- fo% the Ba%) VIII (ou!d
be conitent (ith othe% 5o%d !u#u%- ca% that (e%e '%oduced in ;i#om.
The !ocation of a faci!it- ha a ignificant im'act on the e#tent and fo%m of communication that deve!o' in the u''!- chain net(o%).
Cocating a faci!it- fa% f%om head+ua%te% (i!! !i)e!- give it mo%e of a cu!tu%e of autonom-. Thi ma- be beneficia! if the fi%m i ta%ting a ne(
diviion that need to function in a manne% diffe%ent f%om the %et of the com'an-. In cont%at0 !ocating t(o faci!itie c!oe% togethe% i !i)e!- to
encou%age communication bet(een them. *#tenive communication can be ve%- uefu! if deciion made at eithe% faci!it- have a t%ong im'act
on the 'e%fo%mance of the othe% faci!it-.
Do not ignore quality of life issues. The +ua!it- of !ife at e!ected faci!it- !ocation ha a ignificant im'act on 'e%fo%mance becaue it
inf!uence the (o%) fo%ce avai!ab!e and thei% mo%a!e. :n man- intance0 a fi%m ma- be bette% off e!ecting a highe% cot !ocation if it '%ovide a
much bette% +ua!it- of !ife. 5ai!u%e to do o can have di%e cone+uence. 5o% e#am'!e0 an ae%o'ace u''!ie% decided to %e!ocate an enti%e
diviion to an a%ea (ith a !o(e% tanda%d of !iving to %educe cot. Bot of the ma%)eting team0 ho(eve%0 %efued to %e!ocate. < a %eu!t0
cutome% %e!ation dete%io%ated and the com'an- had a ve%- difficu!t t%anition. The effo%t to ave cot hu%t the com'an- and effective!-
cu%tai!ed the fi%mF tatu a a majo% '!a-e% in it ma%)et.

Focus on tariffs and tax incentives hen locating facilities. Banage% ma)ing faci!it- !ocation deciion hou!d ca%efu!!- conide% ta%iff
and ta# incentive. ;hen conide%ing inte%nationa! !ocation0 it i atounding ho( often ta# incentive d%ive the choice of !ocation0 often
ove%coming a!! of the othe% cot facto% combined. 5o% intance0 :%e!and ha deve!o'ed a !a%ge high8tech indut%- b- enticing com'anie (ith
thei% 1>FF ta#e to !ocate thei% *u%o'ean faci!itie the%e. *ven (ithin nation0 !oca! gove%nment ma- offe% gene%ou 'ac)age of !o( to no ta#e
and f%ee !and (hen fi%m decide to !ocate faci!itie (ithin thei% ju%idiction. To-ota0 6B;0 and Be%cede have a!! choen thei% faci!it- !ocation
in the Anited 3tate due in !a%ge 'a%t to ta# incentive offe%ed b- diffe%ent tate.
4
.ha%!e 5. 9a%ding. 1988. FNOuantif-ing <bt%act 5acto% in 5aci!it-8Cocation Decisions!.lnduslrial Developl""em "Ba-8Dune&7 24. 5Dbid.
%&; S+..AR, F LEARNIN* <=ECTIVES
1. Ande%tand the %o!e of net(o%) deign deciion in u''!- chain.
=et(o%) deign deciion inc!ude identif-ing faci!it- !ocation0 %o!e0 and ca'acitie a (e!! a a!!ocating ma%)et to be e%ved b- dif8
fe%ent faci!itie. Thee deciion a%e t%ategic in natu%e and define the 'h-ica! cont%aint (ithin (hich the net(o%) mut be o'e%ated a ma%)et
condition change. 4ood net(o%) deign deciion inc%eae u''!- chain '%ofit (he%ea 'oo% net(o%) deign hu%t '%ofit.
2. :dentif- facto% inf!uencing u''!- chain net(o%) deign deciion.
=et(o%) deign deciion a%e inf!uenced b- t%ategic0 techno!ogica!0 mac%oeconomic0 'o!itica!0 inf%at%uctu%e0 com'etitive0 and o'e%8
ationa! facto%.
3. ?eve!o' a f%ame(o%) fo% ma)ing net(o%) deign deciion.
The goa! of net(o%) deign i to ma#imize the u''!- chainF !ong8te%m '%ofitabi!it-. The '%oce ta%t b- defining the u''!- chain
t%ateg-0 (hich mut be a!igned (ith the com'etitive t%ateg- of the fi%m. The u''!- chain t%ateg-0 %egiona! demand0 cot0 inf%at%uctu%e. and
the com'etitive envi%onment a%e ued to define a %egiona! faci!it- configu%ation. 5o% %egion (he%e faci!itie a%e to be !ocated. 'otentia!!-
att%active ite a%e then e!ected baed on avai!ab!e inf%at%uctu%e. The o'tima! configu%ation i dete%mined f%om the 'otentia! ite uing
Page 30
demand0 !ogitic cot0 facto% cot and ma%gin in diffe%ent ma%)et.
4. Ae o'timization fo% faci!it- !ocation an ca'acit- a!!ocation deciion.
4%avit- !ocation mode! identif- a !ocation that minimize inbound and outbound t%an'o%tation cot. The- a%e im'!e to im'!ement
but do not account fo% othe% im'o%tant cot. =et(o%) o'timization mode! can inc!ude cont%ibution ma%gin0 ta#e0 ta%iff0 and '%oduction0
t%an'o%tation0 and invento%- cot and a%e ued to ma#imize '%ofitabi!it-. Thee mode! a%e uefu! (hen !ocating faci!itie0 a!!ocating ca'acit-
to faci!itie0 and a!!ocating ma%)et to faci!itie.
DISC+SSIN >+ESTINS
1. 9o( do the !ocation and ize of (a%ehoue im'act the 'e%fo%mance of a fi%m !i)e <mazon.comP ;hat facto% hou!d <mazon.com ta)e
into account (hen ma)ing thi deciionP
2. 9o( do im'o%t dutie and e#change %ate im'act the !ocation deciion in a u''!- chainP
3. ;hat a%e diffe%ent %o!e '!a-ed b- '%oduction faci!itie (ithin a g!oba! net(o%)P
4. <mazon.com ha inc%eaed the numbe% of (a%ehoue a it ha g%o(n. 9o( doe thi change affect va%iou cot and %e'one time in the
<mazon.com u''!- chainP
5. BcBate% .a%% e!! maintenance0 %e'ai%0 and o'e%ation e+ui'ment f%om i# (a%ehoue in the Anited 3tate. ;. ;. 4%ainge% e!! '%oduct
(ith ove% 300 %etai! !ocation0 u''o%ted b- eve%a! (a%ehoue. :n both cae0 cutome% '!ace o%de% uing the ;eb o% on the 'hone.
?icu the '%o and con of the t(o t%ategie.
6. .onide% a fi%m !i)e ?e!! (ith ve%- fe( '%oduction faci!itie (o%!d(ide. Cit the '%o and con of thi a''%oach and (h- it ma-o% ma- not
be uitab!e fo% the com'ute% indut%-.
7. .onide% a fi%m !i)e 5o%d (ith ove% 150 faci!itie (o%!d(ide. Cit the '%o and con of thi a''%oach and (h- it ma-o% ma- not be uitab!e
fo% the automobi!e indut%-.
E?ERCISES
1. 3. .onu!ting0 a u''!- chain conu!ting fi%m0 ha to decide on the !ocation of it home office. Thei% c!ient a%e '%ima%i!- !ocated in the 16
tate in Tab!e 5.5. The%e a%e fou% 'otentia! ite fo% home office7 Co <nge!e0 Tu!a0 ?enve%0 and 3eatt!e. The annua! fi#ed cot of !ocating
an office in Co <nge!e i H16504280 Tu!a i H13102300 ?enve% i H14000000 and 3eatt!e i H1450000. The e#'ected numbe% of t%i' to each
tate and the t%ave! cot f%om each 'otentia! ite a%e ho(n in Tab!e 5.5.
TA<LE %&% Tra$el Costs an1 Nu/!er o0 Trips 0or SC Consulting
Travel Costs 497 #umber of
$tate %os &ngeles Tulsa Denver $eattle Trips
;ahington 150 250 200 25 40
>%egon 150 250 200 75 35
.a!ifo%nia 75 200 150 125 100
:daho 150 200 125 125 25
=evada 100 200 125 150 40
Bontana 175 175 125 125 25
;-oming 150 175 100 150 50
Atah 150 150 100 200 30
<%izona 75 200 100 250 50
.o!o%ado 150 125 25 250 65
=e( Be#ico 125 125 75 300 40
=o%th ?a)ota 300 200 150 200 30
3outh ?a)ota 300 175 125 200 20
=eb%a)a 250 100 125 250 30
/ana 250 75 75 300 40
>)!ahoma 250 25 125 300 55
Page 31
TA<LE %&; Pro1u#tion an1 Transport Costs 0or Dryl#e In#&
#ell' (ork &tlanta Chicago $an Diego
<nnua! fi#ed cot
of 2000000 '!ant H6 mi!!ion H5.5 mi!!ion H5.6 mi!!ion H6.1 mi!!ion
<nnua! fi#ed cot
of 4000000 '!ant H10 mi!!ion H9.2 mi!!ion H9.3 mi!!ion H10.2 mi!!ion
*at H211 H232 H238 H299
3outh H232 H212 H230 H280
Bid(et H240 H230 H215 H270
;et H300 H280 H270 H225
*ach conu!tant i e#'ected to ta)e at mot 25 t%i' each -ea%.
"a& :f the%e a%e no %et%iction on the numbe% of conu!tant at a ite and the goa! i to minimize cot0 (he%e hou!d the home office be !ocated
and ho( man- conu!tant hou!d be aigned to each officeP ;hat i the annua! cot in te%m of the faci!it- and t%ave!P
"b& :f at mot 10 conu!tant a%e to be aigned to a home office0 (he%e hou!d the office be et u'P 9o( man- conu!tant hou!d be aigned
to each officeP ;hat i the annua! cot of thi net(o%)P
"c& ;hat do -ou thin) of a %u!e (he%e a!! conu!ting '%oject out of a given tate a%e aigned to one home officeP 9o( much i thi 'o!ic-
!i)e!- to add to cot com'a%ed to a!!o(ing mu!ti'!e office to hand!e a ing!e tateP
2. ?%-:ce :nc. i a manufactu%e% of ai% conditione% that ha een it demand g%o( ignificant!-. The- antici'ate nation(ide demand fo% the
-ea% 2001 to be 1800000 unit in the 3outh0 1200000 unit in the Bid(et0 1100000 unit in the *at0 and 1000000 unit in the ;et.
Banage% at ?%-:ce a%e deigning the manufactu%ing net(o%) and have e!ected fou% 'otentia! ite8=e( 1o%)0 <t!anta0 .hicago0 and 3an
?iego. P!ant cou!d have a ca'acit- of eithe% 2000000 o% 4000000 unit. The annua! fi#ed cot at the fou% !ocation a%e ho(n in Tab!e 5.60
a!ong (ith the cot of '%oducing and hi''ing an ai% conditione% to each of the fou% ma%)et. ;he%e hou!d ?%-:ce bui!d it facto%ie and
ho( !a%ge hou!d the- beP
3. 3unchem0 a manufactu%e% of '%inting in)0 ha five manufactu%ing '!ant (o%!d(ide. Thei% !ocation and ca'acitie a%e ho(n in Tab!e 5.7
a!ong (ith the cot of
TA<LE %&@ Capa#ity7 De/an17 Pro1u#tion and T%an'o%tation Costs 0or Sun#he/
Capacity
#orth &merica $outh &merica )urope *apan &sia Tons+(ear ,roduction Cost+Ton
Anited 3tate 600 10200 10300 20000 10700 185 H100000
4e%man- 10300 10400 600 10400 10300 475 150000 Ba%)
Da'an 20000 20100 10400 300 900 50 1800000 1en
6%azi! 10200 800 10400 20100 20100 200 Qea!
:ndia 20200 20300 10300 10000 800 80 4000000 Qu'ee
?emand
"tonE-ea%& 270 190 200 120 100
TA<LE %&A Anti#ipate1 E2#hange Rates 0or -BB'
:9 Mark (en -eal -upee
A3H 1.000 1.993 107.7 1.78 43.55
Ba%) 0.502 1 54.07 0.89 21.83
1en 0.0093 0.0185 1 0.016
0.40
5
Qea! 0.562 1.124 60.65 1 24.52
Qu'ee 0.023 0.046 2.47 0.041 1
'%oducing one ton of in) at each faci!it-. The '%oduction cot a%e in the !oca! cu%%enc- of the count%- (he%e the '!ant i !ocated. The majo%
ma%)et fo% the in) a%e =o%th <me%ica0 3outh <me%ica0 *u%o'e0 Da'an0 and the %et of <ia. ?emand at each ma%)et i ho(n in Tab!e 5.7.
T%an'o%tation cot f%om each '!ant to each ma%)et in A.3. do!!a% a%e ho(n in Tab!e 5.7. Banagement ha to come u' (ith a '%oduction '!an
fo% 200!.
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"a& :f e#change %ate a%e e#'ected a in Tab!e 5.80 and no '!ant can %un be!o( 50 'e%cent of ca'acit-0 ho( much hou!d each '!ant
'%oduce and (hich ma%)et hou!d each '!ant u''!-P
"b& :f the%e a%e no !imit on the amount '%oduced in a '!ant0 ho( much hou!d each '!ant '%oduceP
" c& .an adding 10 ton of ca'acit- in an- '!ant %educe cotP
"d& 9o( hou!d 3unchem account fo% the fact that e#change %ate f!uctuate ove% timeP
<Ll*RAPH,
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?a)in0 Ba%) 3. 1995. #etork and Discrete %ocation. =e( 1o%)7 Dohn ;i!e- R 3on.
5e%%do(0 /a%a. 1997. RBa)ing the Bot of 5o%eign 5acto%ie.R /arvard .usiness -evie "Ba%ch8<'%i!&0 83888.
9a%ding0 .ha%!e 5. 1988. ROuantif-ing <bt%act 5acto% in 5aci!it-8Cocation ?eciion.R 0ndustrial Development S!a-8Dune&024824.
/o%'e!a0 Du))a0 <ntti Cehmuvaa%a0 and Ba%))u 87uominen. 2001. R.utome% 3e%vice 6aed ?eign of 3u''!- .hain.R 0nternational *ournal of ,roduction
)conomics 690 1938204.
Bac.o%mac)0 <!an ?.0 Ca(%ence 1. =e(man :::0 and ?ona!d 6. Qoenfie!d. 1994. RThe =e( ?-namic of 4!oba! Banufactu%ing 3ite Cocation.R $loan
Management -evie "3umme%&0 69879.
#ote on Facility %ocation. 1989. 9a%va%d 6uine 3choo! note 986898059.
Qobeon0 Dame 5.0 and ;i!!iam .. .o'acino0 ed. 1994. The %ogistics /andbook. =e( 1o%)7 5%ee P%e.
Ta-u%0 3%idha%0 Qam 4anehan0 and Bichae! Bagazine0 ed. 1999. 1uantitative Models for $upply Chain Management. 6oton7 /!u(e% <cademic Pub!ihe%.
Ti%o!e0 Dean. 1997. The Theory of 0ndustrial 2rgani3ation. .amb%idge0 Ba.7 The B:T P%e.
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