Ballou 13

Page1
"1"CHAPTER13
FACILITYLOCATIONDECISIONS
1
(a)ThecenterofgravitymethodinvolvesfindingtheX,Ycoordinatesaccordingtothe
formulas:
VRX
i
X =
VR
i
and
VRY
i
ii
Y =
VR
i
Theseformulascanbesolvedintabularformasfollows.
Point
P1
P2
M1
M2
M3
Vi
Ri
V iR i
ViRiXi
ViRiYi
.040
.095
.095
.095
280.0
332.5
285.0
522.5
1620.0
2240.0
665.0
1710.0
4180.0
9395.0
560.0
1662.5
1140.0
4180.0
9142.5
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8
5,000
.040
200.0
600.0
1600.0
8
2
2
5
6
4
8
8
Totals
7,000
3,500
3,000
5,500
Now,
X =
93950
,
.
= 58.
16200
,
.
and
Y =
91425
,
.
= 564
.
16200
,
.
Thissolutionhasatotalcostfortransportationof$53,614.91.Thisproblemmayalso
besolvedusingtheCOGmoduleinLOGWARE.
(b)Solvingfortheexactcenterofgravitymethodrequiresnumerouscomputations.We
nowusetheCOGmoduleofLOGWAREtoassistus.Atableofpartialresultsis
shownbelow.
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Iteration
number
Xcoord
Ycoord
Total
cost
0
1
2
3
.
.
.
50
5.799383
5.901199
5.933341
5.941554
.
.
.
5.939314
5.643518
5.518863
5.446919
5.402429
.
.
.
5.317043
53,614.91 COG
53,510.85
53,483.97
53,474.60
.
.
.
53,467.71
After50iterations,thereisnofurtherchangeintotalcost.Therevisedcoordinates
are X =5.94and Y =5.32foratotalcostof$53,467.71.
(c)Thecenterofgravitysolutioncanbeonethatisclosetooptimumwhenthereare
manypointsintheproblemandnoonepointhasadominantvolume,thatis,hasa
largervolumerelativetotheothers.Otherwise,thebestsinglelocationcanbeata
dominantlocation.Theexactcenterofgravityapproachhasthecapabilitytofindthe
minimalcostlocation.
AlthoughtheCOGmodelonlyconsiderstransportationcoststhatareconstantper
mile,thetransportationcostcanbethemajorconsiderationinsinglefacilitylocation.
However,othercostssuchaslabor,realestate,andtaxescanalsobeimportantin
selectingonelocationoveranother.Thesearenotdirectlyconsideredbythemodel.
AlthoughtheCOGmodelmayseemoflimitedcapability,itisausefultoolfor
locatingfacilitieswheretransportationcostsaredominant.Locationofoilwellsin
theGulf,truckterminals,andsinglewarehousesareexamplesofapplication.Italso
canbequiteusefultoprovideastartingsolutiontomorecomplexlocationmodels.
(d)Findingmultiplelocationsbymeansofthecenterofgravityapproachrequires
assignedsupplyanddemandvolumestospecificfacilitiesandthensolvingforthe
centerofgravityforeach.Inthisproblem,thereare3marketcombinationsthatneed
tobeconsidered.Thiscreatesthreescenariosthatneedtobeevaluated.Theycanbe
summarizedasfollows.Pointvolumesappearinthebodyofthetable.
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Scenario
Whse
1
P1
1458
35424958
27083792
22923208
37505250
12501750
P2
2042
M1
3500
M2
M3
I
3000
3500
5500
3000
II
5500
3500
5500
III
a
3000
Allocatedasaproportionofthevolumetobeservedthroughthewarehouse.That
is,50003500/(3500+3000+5500)=1458.Thevolumesassociatedwithother
supplypointsarecomputedsimilarly.
161
Page3
TheCOGmoduleinLOGWAREwasusedtofindtheexactcentersofgravityfor
eachwarehouseineachscenario.Thecomputationalresultsare:
Scenario
I
Warehouse1
X
Y
2.00
5.00
Warehouse2
X
Y
7.88
7.80
II
5.84
8.00
4.04
8.00
Total
cost
$39,050
35,699
III
7.06
7.28
6.00
4.00
46,568
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ScenarioIIappearstobethebest.
Scenario
I
X
2.00
Y
5.00
X
7.88
Y
7.80
II
5.84
4.04
8.00
8.00
III
7.06
7.28
6.00
4.00
cost
$39,050
35,699
46,568
ScenarioIIappearstobethebest.
2
(a)Thecenterofgravityformulas(Equations135and136)canbesolvedusingthe
COGmoduleofLOGWARE,ortheycanbesolvedintabularformasshownbelow.
Point
A
B
C
D
E
F
G
H
I
J
X
Y
50
0
1010
3015
4020
1025
4030
035
545
4045
2050
Totals
Vi
9,000
1,600
3,000
700
2,000
400
500
8,000
1,500
4,000
Ri
.75
.75
.75
.75
.75
.75
.75
.75
.75
.75
V iR i
6,750
1,200
2,250
525
1,500
300
375
6,000
1,125
3,000
23,025
ViRiXi
337,500
12,000
67,500
21,000
15,000
12,000
ViRiYi
0
0
30,000
45,000
60,000
600,000
12,000
33,750
10,500
37,500
9,000
13,125
270,000
50,625
150,000
586,500
Now,
X =
600000
,
23025
,
= 261.
and
Y =
586500
,
= 255.
23025
,
Thetotalcostofthislocationis$609,765.Theexactcenterofgravitycoordinates
are:
.,
X = 2351
.
Y = 2698
withatotalcostof$608,478.
(b)Thenumberofpoints,eveninthissmallproblem,requiresustoapplysome
heuristicstofindwhichpatientclustersshouldbeassignedtowhichwarehouses.We
willuseaclusteringtechniquewherebypatientclustersaregroupedbyproximity
untiltwoclustersarefound.Theprocedureworksasfollows:
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Thereareasmanyclustersastherearepoints,whichare10inthiscase.
Theclosestpointsarefoundandreplacedwithasinglepointwiththecombined
volumelocatedatthecenterofgravitypoint.Thereisnowonelesscluster.
Thenextclosesttwopoints/clustersarefound,andtheyarefurthercombinedand
locatedattheircenterofgravity.
Theprocesscontinuesuntilonlytwoclustersremain.Thecentersofgravityfor
thesetwoclusterswillbethedesiredcliniclocations.
Applyingtheclusteringtechnique,westartbycombiningpoints
cluster DF .
X =
40700075
(
)(.)
700075
(.)
+ 40400075
(
)(.)
+ 400075
(.)
D and F into
= 4000
.
and
+ 30400075
20700075
(
)(.)
(
)(.)
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= 2364
.
Y =
other options
700075
(.)
+ 400075
(.)
and
Y =
20700075
(
)(.)
700075
(.)
+ 30400075
(
)(.)
= 2364
.
+ 400075
(.)
Continuingthisprocess,wewouldformtwoclusterscontaining
B , E,G,H,I ,and J .Thecentersofgravitywouldbe:
A,C,D ,and F ,and
Cluster1 ACDF
.,
X = 5000
.
X = 000
Cluster2
BEGHIJ
.,
X = 500
.
Y = 4500
foratotalcostof$241,828.
ThesearethesameresultsobtainedfromtheMULTICOGmodulein
LOGWARE.
(c)Thesecondcliniccansave$608,278 241,828=$366,458indirectcostsannually.
Thissavingsdoesnotexceedtheannualfixedcostsof$500,000requiredtomaintain
asecondclinic.Oneconomicgrounds,itshouldnotbebuilt.
3
(a)Thecenterofgravitylocationcanbedeterminedbyformingthefollowingtableorby
usingtheCOGmoduleinLOGWARE.Thecoordinatesforeachlocationmustbe
approximated.
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Point
A
B
C
D
E
F
G
H
I
X
Y
Vi
1.56.610,000
4.77.3
5,000
8.07.170,000
1.54.030,000
5.04.940,000
8.55.112,000
1.51.390,000
4.41.8
7,000
7.81.810,000
Totals
Ri
.10
.10
.10
.10
.10
.10
.10
.10
.10
V iR i
1,000
500
7,000
3,000
4,000
1,200
9,000
700
1,000
27,400
ViRiXi
1,500
2,350
56,000
4,500
20,000
10,200
13,500
3,080
7,800
118,930
V i R iY i
6,600
3,650
49,700
12,000
19,600
6,120
11,700
1,260
1,800
112,430
Thecenterofgravitycoordinatesare:
X =
118930
,
= 434
.
27400
,
and
Y =
112430
,
= 410
.
27400
,
withatotalcostof$195,966.
(b)After100iterationsintheCOGmodule,theexactcenterofgravitywasfoundtobe:
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., Y = 462
.
X = 475
other options
withatotalcostof$195,367.Inthiscase,usingtheexactcenterofgravity
(b)After100iterationsintheCOGmodule,theexactcenterofgravitywasfoundtobe:
.,
X = 475
.
Y = 462
withatotalcostof$195,367.Inthiscase,usingtheexactcenterofgravity
coordinatesascomparedwiththeapproximateonesreducedcostsbyonly:
195966195367
,
,
10003%
= .
195966
,
(c)Additionalcostscanbeincludedintheanalysis,althoughnotnecessarilyinthe
model.TheCOGmodelcanevaluatethevariablecostsoflocation.Othercostsare
comparedwiththese.
4
Webeginbydevelopinga3dimensionaltransportationproblem.Thecostmatrixis
developedinthesamemannerasthatintextFigure1311.Theinitialthroughputof
and W isfoundbyassumingthatanequalamountofthecustomerdemandflowsthrough
eachwarehouse.Thecellcostfor
W C wouldbe:
[100(200,000/2)
0.7
]/(200,000/2)+2+4+0=3.2+2+4=9.2
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Infact,thecellcostsareidenticaltothoseintextFigure1311,exceptthatthereisno
fixedcostelement.
Usingthetransportationmethodoflinearprogramming(e.g.,theTRANLPmodulein
LOGWARE),thecellcostandsolutionmatrixforiteration1isshowninFigure131.
Thesolutionshowsthatonly
W remainsandthesolutionprocesscanbeterminated.
AsummaryofthecostsisshowninTable131.Thetotalcostis$2,213,714,andthe
productisproducedinplant
P andstockedinwarehouse
W .Nofurtheriterationsare
neededsinceonlyonewarehouseisusedandnofurtherdroppingofwarehousesis
possible.
2
TABLE131SummaryInformationfor
SolutiontoProblem4
Whse1
Whsethroughput
Costs:
Transportation
Inbound
Outbound
Inventory
Warehousing
Fixed
Production
Total
Whse2
200,000
$0
$400,000
0
0
0
0
0
300,000
513,714
200,000
0
800,000
$2,213,714
Iteration2
Arepeatoftheiteration1solution.
Stopiterating.
FIGURE131CellCostandSolutionMatrixforIteration1ofProblem4
Warehouses
W
PlantsP
9
0
Customers
C
99 a
99
99
99
99
99
Capacity
60,000
0
6
999,999
200,000
a
0
99
9.2
8.2
10.2
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60,000
0
0
0
60,000
WhsesW
1
99
6.2
5.2
6.2
WhsesW
99
99
99
9.2
8.2
10.2
0
5.2
100,000
0
6.2
50,000
100,000
50,000
999,999
0
0
799,999
Capacity/
Reqmts
a
99
200,000
99 a
60,000
60,000
999,999
6.2
50,000
50,000
60,000
999,999
Highrateof$99/unitforaninadmissiblecell.
5
Webeginbyformingthecellcostmatrixofathreedimensionaltransportationproblem,
asshowninFigure132.ItissimilartothetextFigure131exceptthatthecapacityfor
warehouse1issetat75,000.Solvingtheproblembymeansofthetransportationmethod
showsthesolutiongiveninFigure132.
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Page7
Warehouses
W
PlantsP
Customers
C
100
100
100
100
100
100
100,000
100
9.7
8.7
100,000
7.2
10.7
8
40,000
Capacity
60,000
60,000
999,999
999,999
899,999
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8.2
8.2
WhsesW
50,000
Capacity/
Reqmts
999,999
100,000
50,000
50,000
100,000
100,000
50,000
Giventhesolutionfromiteration1,theperunitinventoryandfixedcostsarerevised.
Inventory
$100( 100000
,
)
W1
07
.
100,000un its
$100( 100000
,
)
W2
100000
,
units
= $3./
16
unit
= $3./
16
unit
07
.
Fixed
W1
W2
$100,000/100,000=$1.00/unit
$400,000/100,000=$4.00/unit
Addingoutboundtransportationandwarehousehandlingtoperunitinventoryandfixed
costsgivesthefollowingcellcosts.
C
10.2
10.2
1
W1
W2
C
9.2
9.2
2
C
11.2
10.2
3
Revisingthewarehousecustomercellcostsandsolvinggivesthesamewarehouse
throughputs,socellcostswillnolongerchange.Astoppingpointisreached.The
solutionisthesameasthatinFigure132.
Asummaryofthecostsis:
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Asummaryofthecostsis:
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Page8
Warehouse1
Costtype
Production
Warehouse2
100,000cwt.
Inboundtransportation
Outboundtransportation
100,000cwt.
60,0004=$240,000
40,0004=
160,000
100,0004=$400,000
60,0000=
100,0002=
40,0004=
160,000
100,0003=
300,00050,0002=
100,000
50,0002=
Fixed
Inventorycarrying
Handling
100(100,000)
100,000
400,000
0.7
=316,228
100,000
0.7
=316,228100(100,000)
100,0002=
200,000
$1,476,228
Subtotal
Total
200,000
100,0001=
100,000
$1,616,228
$3,092,456
Comparedwiththecostsfromthetextexample,thecostdifferenceis$3,092,456
2,613,714=$478,742.Thisisthepenaltyforrestrictingawarehousewitheconomic
benefittothenetwork.
6
Prepareamatrixfora3dimensionaltransportationproblemlikethatintextFigure13
11,exceptthattheperunitcellcostsforwarehouse2tocustomerarereducedby$1/unit
toreflectthereductioninthatwarehousesfixedcosts.Thatis,$200,000/200,000=
$1/unitinsteadof$400,000/200,000=$2/unit.Thematrixsetupandfirstiteration
solutionareshowninFigure133.
Warehouses
W1
W2
C1
99
4
Plants
C2
C3
99
99
99
99
99
P1
6
200,000
P2
0
W1
Plant&
warehouse
capacities
60,000
Warehouses
Customers
999,999
99
9.7
8.7
10.7
60,000
60,000
99
W2
0
799,999
7.2
50,000
6.2
100,000
7.2
50,000
50,000
100,000
50,000
999,999
Warehouse
capacity&
customer
demand
a
b
c
d
60,000
999,999
Productionplusinboundtransportrates,thatis,4+0=4.
Usedtorepresentaninfinitelyhighcost.
Usedtorepresentunlimitedcapacity.
Inventorycarrying,warehousing,outboundtransportation,andfixedrates,thatis,
3.2+2+4+0.5=9.7.
3.2+1+2+1=7.2.
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Page9
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Theresultsshowthatonewarehouseistobeused.Furthercomputationsarenot
needed,asfurtherwarehouseconsolidationisnotpossible.Thetotalnetworkcostsare
thesameasthoseinthetextexampleminusthe$200,000reductioninfixedcostsfora
totalcoatof$2,413,714.
8
Thisproblemrequiresustoreworkthedynamicprogrammingsolutiontotheexample
problemgiveninthetext.Theonlychangeisthatthecostofmovingfromonelocation
toanotherisnow$300,000insteadof$100,000.Webeginwiththelastyearand
determinethebestactionbasedonthehighestnetprofits.Theactionwillbetomove(M)
ortostay(S).Forexample,giventhediscountedmovingcostof300,000/(1+0.20)(4)=
$144,676,weevaluateeachcourseofaction,assumingthatweareinlocationalternative
Aattheendofyearfour.FromthelocationprofitsoftextTable136,wegeneratethe
followingtableforlocationA.
Alter
native(x)
Location
profit
A
B
Moving
cost
$1,336,000
1,398,200144,676=
1,457,600144,676=
1,486,600144,676=
1,526,000144,676=
P 5 (A)=maxC
D
E
Net
profit
0=$1,336,000
1,253,524
1,312,924
1,341,924
1,381,324
Thebestactioninthebeginningofthefifthyear,ifwearealreadyinlocationA,isto
movetolocationE.ThisisanentryinTable132.
Onceeachofthefivealternativesisevaluatedforthefifthyear,thenthefourthyear
alternativesareevaluated.Themovingcostis300,000/(1+0.2)(3)=$173,611.Wenow
includetheprofitsforthesubsequentyearsinourcalculations.
AfterTable132iscompleted,wesearchthefirstcolumnforthehighestcumulative
profit.ThisisinitiallytolocateinlocationDandremaintherethroughoutthesubsequent
years.
9
(a)UsingPMEDsoftwareinLOGWAREandthePMED02.DATdatabase,solveforthe
numberoflocationsfromonetonine.Thebestlocationsforeachnumberofsitesare
giveninthetablebelow.
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Page10
TABLE132LocationRelocationStrategiesOveraFiveYearPlanningHorizonwithCumulativeProfitsShownfromYearj
toYearFiveforProblem8
Yearfrompresentdatej
Warehouse
th
st
rd
th
nd
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You
font
5 can change color,
1
3
4
2
location
other options
alter
Stra
Stra
Stra
Stra
Stra
Yearfrompresentdatej
Warehouse
location
alter
natives(x)
A
B
C
D b
E
a
b
st
2
Stra
tegy a
SA
SB
SC
SD
SE
P 1 (x)
$3,557,767
3,556,167
3,673,200
3,720,300
3,534,100
nd
P 2 (x)
$3,363,767
3,379,667
3,500,900
3,553,600
3,374,700
3
Stra
tegy a
SA
SB
SC
SD
SE
P 3 (x)
$3,007,667
3,007,667
3,156,200
3,216,000
3,071,300
rd
4
Stra
tegy a
MD
MD
SC
SD
SE
P 4 (x)
$2,268,289
2,268,289
2,319,800
2,459,900
2,355,800
th
5
Stra
tegy a
MD
MD
SC
SD
SE
P 5 (x)
$1,381,324
1,398,000
1,457,600
1,486,600
1,526,000
th
Stra
tegy a
ME
SB
SC
SD
SE
Strategysymbolreferstostaying(S)inthedesignatedlocationormoving(M)toanewlocationasindicated.
ArrowsindicatemaximumprofitlocationplanwhenwarehouseisinitiallylocatedatD.
169

Page11
Number
ofsites
1
2
3
4
5
6
7
8
9
Totalcost
$95,035,220
49,311,400
37,152,360
30,163,340
24,739,040
24,230,760
23,780,600
25,018,250
27,624,060
Sevensitesisoptimal,andtheyaretobelocatedatNewYork,Cincinnati,Chicago,
Phoenix,Denver,andSeattle.
(b)Theoptimalcostforfoursitesis$30,163,340asfoundinparta.Thecompany
operatesthesamesitesasfoundintheoptimalsolutionforfoursites.Therefore,the
costsavingscomesfromabetweenassignmentofcustomerstothesites.Thesavings
of$35,000,000 30,163,340=$4,836,660withoutanymajorinvestment.
Thesavingsbettertheoptimalfoursitesandtheoptimalsevensitesis
$30,163,340 23,780,600=$6,382,740.Foranadditionalthreesites,thesimple
returnoninvestmentis:
ROI=
Savings
Investment
6382740
,
,
1800000
,
,
100355%
= .
Thisisabenefitcertainlyworthconsidering.
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other options
(c)IncreasetheannualvolumeforLosAngelesandSeattlemarketsbyafactorof10and
Thisisabenefitcertainlyworthconsidering.
(c)IncreasetheannualvolumeforLosAngelesandSeattlemarketsbyafactorof10and
resolvetheproblemasinparta.Selectedresultsareasfollows:
Number
ofsites
6
7
8
9
Totalcost
30,892,720
25,468,410
25,018,250
27,624,060
Theoptimalnumberofsitesiseight.AnadditionalsiteatLosAngelesisneeded,
comparedwiththesevenlocationsfoundinparta.
10
(a)WecanapplyHuff'smodelofretailgravitationtothisproblem.Thesolutiontable
(Table133)canbedeveloped.Summarizing,branchAcanbeexpectedtoattract
11,735/(11,735+11,765)=49.9percentofthecustomers,andbranchBshould
attracttheremaining50.1percent.
170
Page12
TABLE133EstimateoftheNumberofCustomersAttractedtoEachBranchBank
Pij =
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Components
/
2
Timetoj
Customeri
1
2
Tij
ST
/
j
2
ij
ij
ST
/
j
2
ij
E ij = PC
ij
i
A
0.28
0.10
B
0.72
0.50
A
0.08
0.01
B
0.52
0.25
A
12.5
100.0
B
1.4
2.8
A
0.90
0.97
B
0.10
0.03
A
900
1,940
3
4
5
6
7
0.28
0.40
0.20
0.50
0.45
0.45
0.20
0.40
0.50
0.28
0.08
0.16
0.04
0.25
0.20
0.20
0.04
0.16
0.25
0.08
12.5
6.3
25.0
4.0
5.0
3.5
17.5
4.4
2.8
8.8
0.78
0.26
0.85
0.59
0.36
0.22
0.74
0.15
0.41
0.64
3,120
880
1,8205,180
850
150
885
625
1,4402,560
8
9
0.57
0.67
0.20
0.54
0.32
0.45
0.04
0.29
3.1
2.2
17.5
2.4
0.15
0.48
0.85
0.52
3001,700
480
520
11,73511,765
Time=
( X i X ) 2 + ( YY
)/2
B
100
60
50
(b)Theeconomicanalysisofthesiteswouldbe:
Revenue(100No.ofcustomers)
Operatingexpenses
Profit
$1,173,500
300,000
$
873,000
Returnoninvestment873,000/750,000=116.4%
TheROIseemssufficientlyhigh,sothebranchshouldbeconstructed.
(c)Thesizeofabranchanditsproximitytocustomersmaybetoosimpletoexplainthe
marketshareofeach.Thenatureoftheservicesoffered,theaccessibilityofthesite,
andthereputationofthebankmaybejustasimportantinestimatingpatronage.
Whatwillthecountermovesbeofthecompetingbranch?Addinganotherbranch
andlocatingnearbranchAcouldsubstantiallyreduceitsmarketshare.Howlikelyis
thistohappen?
Arethecustomernumbersstable?Willathirdorfourthbankbelocating
branchesintheregion?
Canweexpectthatcustomerswilldrivesuchlongdistancestoseekbanking
services?
Pagefont
10 /and
36
other options
11
branchesintheregion?
Canweexpectthatcustomerswilldrivesuchlongdistancestoseekbanking
services?
11
ThisproblemcanbesolvedasanintegerlinearprogrammingproblemsimilartotheOhio
TrustCompanyexampleinthetext.First,wecreateatableshowingthecountiesthatare
adjacenttoeachcounty.Thatis,
171
Page13
Countiesunder
consideration
1.Williams
2.Fulton
3.Lucas
4.Ottawa
5.Defiance
6.Henry
7.Wood
8.Sandusky
9.Paulding
10.Putnam
11.Hancock
12.Seneca
13.VanWert
14.Allen
15.Hardin
16.Wyandot
17.Mercer
18.Auglaize
19.Marion
20.Shelby
21.Logan
Adjacentcounties
bynumber
2,5,6
1,3,6
2,4,6,7
3,7,8
1,6,9,10
1,2,3,5,7,10,11
3,4,6,8,10,11,12
4,7,12
5,10,13
5,6,7,9,11,13,14
6,7,10,12,14,15,16
7,8,11,16
9,10,14,17,18
10,11,13,15,18
11,14,16,18,19,21
11,12,15,19
13,18
13,14,15,17,20,21
15,16
18,21
15,18,20
Next,accordingtotheproblemformulationgivenintheOhioTrustCompanyexample,
wecanbuildthematrixasgivenintheprepareddatabasecalledILP03.DAT.The
problemformulationisshowninTable134.Thismatrixcanbesolvedbytheinteger
programmingmodule(MIPROG)inLOGWAREforsolution.Notethatallcoefficients
areonesorzeros.Acoefficientofoneisgiventoeachcountyanditsadjacentcounties.
Thesumofallconstraintsmustbeoneorgreater.TheXstakeonthevaluesofzeroor
one.AnXofonemeansthatthebranchislocatedinthecounty.
SolvingthisproblemusingtheintegerprogrammingmoduleinLOGWAREshows
thataminimumoffiveprincipalplacesofbusinessareneeded.Theyshouldbelocated
inHenry,Wood,Putnam,Hardin,andAuglaizecounties.
Pagefont
11 /and
36
other options
172
Page14
TABLE134CoefficientMatrixSetupforProblem11
X1
1
X2
1
Williams
Fulton
ObjFun
Constraints
Lucas
Ottawa
Defiance
Henry
Wood
X3
1
X4
1
X5
1
X6
1
X7
1
X8
1
X9
1
X10X11X12X13X14X15X16X17X18X19X20X21
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
Paulding
Putnam
Hancock
Seneca
1
11
VanWert
11
1
1
1
1
Sandusky
1
1
1
1
1
1
1
1
1
11
Allen
1
1
1
1
1
1
1
1
1
1
1
1
Hardin
Wyandot
Mercer
Auglaize
Marion
RHS
1
Shelby
1
1
1
1
1
1
1
1
1
1
1
Logan
1
1
173
Page15
12
ThisproblemcanbesolvedwiththeaidofthePMEDprograminLOGWARE.A
databasehasbeenpreparedforitcalledPMED04.DAT.Thedatabaseshowsthefixed
costsforasinglesite.Whenothernumbersaretobeevaluated,theFOCmustbe
recalculatedandenteredintothedatabase.Thescalingfactorissetatoneforthis
problem.Thefixedoperatingcostmustbecalculatedforeachpossiblenumberof
locations.UsingPMEDinLOGWAREgivesthefollowingresultsbasedonrecalculated
FOCvalues,anestimationofvendortolaboratoriestransportationcost,andan
enumerativesearch.
No.of
Inbound
Pagefont
12 /and
36
loca
Volume,
Outbound
distance,
Inbound
Totalcost,
other options
tions
Sites
lb.
cost,$
mi.
cost,$
FOC,$
enumerativesearch.
No.of
loca
tions
1
2
Sites
Chicago
Volume,
Outbound
lb.
cost,$
680,00028,350,000
Inbound
distance,
mi.
0
310
Inbound
cost,$
0
1
515,000
L.Angeles
Total
165,000
680,00015,083,500
1,750
5,775,000
8,968,000
3,535,534
7,071,068
31,122,568
NewYork
Chicago
L.Angeles
Total
235,000
280,000
165,000
680,00010,641,999
713
0
1,750
3,351,100
5,775,000
9,126,100
2,886,751
2,886,751
2,886,751
8,660,253
28,428,352
NewYork
Atlanta
200,000
145,000
713
585
2,852,000
1,696,500
2,500,000
2,500,000
Chicago
L.Angeles
Total
170,000
165,000
680,0007,515,250
NewYork
Atlanta
Chicago
200,000
100,000
170,000
Dallas
L.Angeles
Total
60,000
150,000
680,0006,079,249
NewYork
Atlanta
Miami
Chicago
200,000
65,000
35,000
170,000
Dallas
L.Angeles
Total
60,000
150,000
680,0005,029,250
713
585
0
790
1,750
713
585
1180
0
790
1,750
0
5,775,000
10,313,500
2,852,000
1,170,000
0
948,000
5,250,000
10,220,000
2,852,000
760,500
826,000
0
948,000
5,250,000
10,636,500
3,535,534
Cleveland
0
1,750
3,193,000
Totalcost,
$
33,350,000
FOC,$
5,000,000
2,500,000
2,500,000
10,000,00027,828,750
2,236,067
2,236,067
2,236,067
2,236,067
2,236,067
11,180,33527,479,584
2,041,241
2,041,241
2,041,241
2,041,241
2,041,241
2,041,241
12,247,44627,913,196
515,000x310x0.02=3,193,000
,5000 , 000
2 /2 =
,3535 ,534
ThePMEDprogramisusedtofindthebestcombinationofsitesforaparticular
numberofsitestobefound.Thefixedcostmustbeadjustedforthenumberofsites
beingevaluated.Itshouldberecognizedthatthemodelhandlesonlytheoutboundlegof
thenetwork(sitestoservelaboratories).Thevendortositetransportationcostis
includedexternally,asshownintheprevioustable.Calculatingthedistancesbetween
vendorandtheselectedsiteseasilycanbedonebyusingtheMILESmodulein
LOGWAREwithascalingfactorofone.Then,inboundtransportcostsareaproductof
sitevolume,distance,andtheinboundrate.
174
Page16
SearchingfromonetoNsitesshowsthatoutboundtransportationcostsdecrease
whileinboundandfixedcostsincreasewithincreasingnumbersofsites.Initially,total
costdeclinesuntilfivesitesarereachedafterwhichtotalcostincreases.Weselectfive
sitesaseconomicallythebestnumber.Theircustomerassignmentsare
Location
number
1
2
3
4
5
Assignments
NewYork
Atlanta
Chicago
Dallas
LosAngeles
Volume
Customers
200,0001,2,3,and12
100,0004and5
170,0006,7,8,9,10,and11
60,00013,14,and16
150,00015,17,18,19,and20
Amapofthesolutionisasfollows.
Pagefont
13 /and
36
other options
Thetotalcostfor5sitesis$27,479,584.
13
Afterchangingthefixedcostsintheproblemsetupmatrix,thefollowingsolutionis
found.
175
Page17
OPTIMALSOLUTION
Variable
Value
Rate
X(1)
=
.0000
8.0000
X(2)
=10000.0000
7.0000
X(3)
=50000.0000
9.0000
X(4)
=
.0000
11.0000
X(5)
=
.0000
10.0000
X(6)
=
.0000
11.0000
X(7)
=50000.0000
12.0000
X(8)
=90000.0000
11.0000
X(9)
=
.0000
13.0000
X(10)=
.0000
8.0000
X(11)=
.0000
7.0000
X(12)=
.0000
8.0000
X(13)=
.0000
6.0000
X(14)=30000.0000
5.0000
X(15)=20000.0000
7.0000
X(16)=
.0000
11.0000
X(17)=
.0000
10.0000
X(18)=
.0000
11.0000
X(19)=20000.0000
9.0000
X(20)=
.0000
8.0000
X(21)=40000.0000
10.0000
X(22)=
.0000
7.0000
X(23)=
.0000
6.0000
X(24)=
.0000
7.0000
X(25)=
1.0000100000.0000
X(26)=
.0000500000.0000
X(27)=
1.0000140000.0000
X(28)=
1.0000260000.0000
X(29)=
1.0000220000.0000
X(30)=
.000070000.0000
X(31)=
.0000130000.0000
X(32)=
.0000110000.0000
CostVariablelabel
.0000P1S1W1C1
70000.0000P1S1W1C2
450000.0000P1S1W1C3
.0000P1S1W2C1
.0000P1S1W2C2
.0000P1S1W2C3
600000.0000P1S2W1C1
990000.0000P1S2W1C2
.0000P1S2W1C3
.0000P1S2W2C1
.0000P1S2W2C2
.0000P1S2W2C3
.0000P2S1W1C1
150000.0000P2S1W1C2
140000.0000P2S1W1C3
.0000P2S1W2C1
.0000P2S1W2C2
.0000P2S1W2C3
180000.0000P2S2W1C1
.0000P2S2W1C2
400000.0000P2S2W1C3
.0000P2S2W2C1
.0000P2S2W2C2
.0000P2S2W2C3
100000.0000zW1
.0000zW2
140000.0000yW1C1
260000.0000yW1C2
220000.0000yW1C3
.0000yW2C1
.0000yW2C2
.0000yW2C3
Objectivefunctionvalue=3700000.00
Notethatwarehouse2isnolongerusedinfavorofallproductsflowingthrough
Pagefont
14 /and
36
warehouse1.
other options
Notethatwarehouse2isnolongerusedinfavorofallproductsflowingthrough
warehouse1.
14
(a)Thedemandofcustomer1forproduct1increasesto100,000cwt.Intheproblem
matrixofILP02.DATthefollowingcellvaluesarechanged.
Cell
DemP1W1C1,yW1C1
DemP1W2C1,yW2C1
CapW1,yW1C1
CapW2,yW2C1
Obj.coef.,yW2C1
Obj.coef.,yW2C1
From
50000
50000
70000
70000
140000
70000
To
100000
100000
120000
120000
240000
120000
Theresultshowsthatwarehouse2isstilltheonlywarehouseused,andthe
productsaresourcedfromplant2.However,thecostshaveincreasedto$3,500,000.
176
Page18
(b)UsingtheILP02.DATfileinMIPROGofLOGWARE,thefollowingchangesare
madetothefollowingcells.
Cell
Obj.Coef.,P2S2W1C1
Obj.Coef.,P2S2W1C2
Demo Version Obj.Coef.,P2S2W1C310
Obj.Coef.,P2S2W2C1
Obj.Coef.,P2S2W2C2
Obj.Coef.,P2S2W2C1
From
To
9
12
8
11
ExpertPDF
13
7
10
6
9
7
10
Software Components
Theresultshowsthatwarehouse2isstilltheonlywarehouseused,andtheproducts
aresourcedfromplant2.However,thecostshaveincreasedto$3,380,000.
(c)UsingtheILP02.DATfileinMIPROGofLOGWARE,thechangesaremadetothe
followingcells.
Cell
From
a
Obj.Coef.,yW2C1
70,000
Obj.Coef.,yW2C2130,000
Obj.Coef.,yW2C3110,000
To
280,000
520,000
440,000
Thesumofdemandforthesamecustomerforall
productsmultipliedbythehandlingrate,i.e.,
(50,000+20,000) $4/cwt.=280,000.
Thesolutionforproduct1showsthat50,000cwt.flowsfromplant1through
warehouse1andontocustomer1.Theremainderflowsfromplant2through
warehouse2andontocustomers2and3.
Forproduct2,plant1supplieswarehouse1andcustomer1with20,000cwt.The
remaining90,000cwt.flowsfromplant2throughwarehouse2tocustomers2and3.
Thetotalcostis$3,920,000.
(d)MakingsomeslightrevisionsinfileILP02.DATcanadjustthecapacitiesonplant1.
Thecellchangestomakeare:
Cell
CapP1S1,RHS
CapP1S2,RHS
From
60,000
999,999
To
150,000
90,000
Bothwarehousesarenowusedforbothproducts.Thesolutioncanbe
Pagefont
15 /and
36
summarizedas:
other options
CapP1S2,RHS
999,999
90,000
Bothwarehousesarenowusedforbothproducts.Thesolutioncanbe
summarizedas:
177
Page19
ProductPlant
WarehouseCustomer
1
150,000cwt.150,000
150,000cwt.
1
160,000
260,000
260,000
1
240,000
240,000
240,000
1
250,000
250,000
350,000
2
120,000
120,000120,000
2
230,000
230,000
230,000
2
260,000
260,000
360,000
Thetotalcostis$3,270,000
(e)AgainrevisingtheILP02.DATfilebychangingcellsObj.coef.,P2S1W2C3andObj.
Coef.,P2S2W2C3tohaveaveryhighcost(999),thesecellsarelockedoutof
consideration.Thesolutionisthesameasthetextexampleexceptthatboththe
customersproductsareservedfromwarehouse1.Thetotalcostis$3,340,000.
15
ThisproblemfollowstheformoftheOhioTrustCompanyexampleinthetext.First,
identifythezonesthatarewithin30minutesofanyparticularzone.Thatis,
Zone
no.
1
2
3
4
5
6
7
8
9
10
Zoneswithin30minutes
1,2,4,7,8,9,10
1,2,3,4,7,9,10
2,3,4,5,8,9,10
1,2,3,4,5,6,10
3,4,5,6,7,8
4,5,6,7,8
1,2,5,6,7,9,10
1,3,5,6,8,9,10
1,2,3,7,8,9,10
1,2,3,4,7,8,9,10
UsingtheMIPROGmoduleinLOGWARE,thefollowingmatrixcanbedefined.
178
Pagefont
16 /and
36
other options
178
Page20
ThesolutionfromMIPROGis:
OPTIMALSOLUTION
Variable
Value
X(1)
=
1.0000
X(2)
=
.0000
X(3)
=
.0000
X(4)
=
1.0000
X(5)
=
.0000
X(6)
=
.0000
X(7)
=
.0000
X(8)
=
.0000
X(9)
=
.0000
X(10)=
.0000
Objectivefunctionvalue=
Rate
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
CostVariablelabel
1.00001
.00002
.00003
1.00004
.00005
.00006
.00007
.00008
.00009
.000010
2.00
Theoptimalsolutionistoplaceclaimsadjusterstationsinzones1and4.
16
Thisisalocationproblemwherethedominantlocationfactoristransportationcostisand
thiscostisdeterminedfromoptimizingthemultistoproutesoriginatingatthematerial
yard.TheROUTERmoduleinLOGWAREcanbeusedtogeneratetheseroutesforeach
yardlocation.Adatabasefileforthisproblem(RTR13.DAT)hasbeenprepared.
Solvingthisproblemrequiresbalancingthecostoftransportingthemerchandiseto
thecustomerswiththeoperatingcostofthematerialyardsatvariouslocations.
Optimizingtheroutingfromthecurrentmaterialyardgivestheroutedesignshownin
Figure133.Aminimumofninetrucksarerequiredtomeetallconstraintsonthe
problem.Thetotaldailycostforthislocationistheroutecost+vehiclecosts+yard
operatingcost,orP4,500.87+9xP200+P350=P6,650.87.
FIGURE133OptimizedRoutingfromCurrentMaterialYardLocation
179
Page21
***SUMMARYREPORT***
TIME/DISTANCE/COSTINFORMATION
Pagefont
17 /and
36
other options
Route
RunStop
BrkStem
Routetime,time,time,time,time,
StartReturnNoof
Route
Route
***SUMMARYREPORT***
Route
RunStop
BrkStem
StartReturnNoof
Route
no
hr
hr
hr
hr
hr
time
timestopsdist,Mi
1
9.9
6.4
2.5
1.0
5.008:00AM05:56PM
4
205
2
3.4
1.6
1.8
.0
.708:00AM11:25AM
3
52
3
10.0
6.5
2.5
1.0
3.108:00AM05:58PM
4
207
4
7.4
4.1
2.3
1.0
2.208:00AM03:24PM
3
130
5
9.6
6.4
2.3
1.0
5.308:00AM05:37PM
3
204
6
9.4
5.8
2.6
1.0
4.308:00AM05:22PM
4
185
7
9.6
6.7
1.9
1.0
6.208:00AM05:34PM
2
214
8
9.6
5.9
2.7
1.0
2.808:00AM05:35PM
4
189
9
5.9
2.8
2.2
1.0
1.508:00AM01:56PM
3
89
Total
74.846.120.7
8.031.1
30
1476
Route
cost,$
602.45
220.25
608.59
416.05
599.64
552.96
625.79
563.48
311.65
4500.87
VEHICLEINFORMATION
RouteVehWeightDelvryPickupWeight
CubeDelvryPickup
notypcapctyweightweight
utilcapcty
cube
cube
1
1
1000
925
092.5%
9999
0
0
2
1
1000
625
062.5%
9999
0
0
3
1
1000
900
090.0%
9999
0
0
4
1
1000
950
095.0%
9999
0
0
5
1
1000
900
090.0%
9999
0
0
6
1
1000
950
095.0%
9999
0
0
7
1
1000
825
082.5%
9999
0
0
8
1
1000
1000
0100.0%
9999
0
0
9
1
1000
850
085.0%
9999
0
0
Total
9000
7925
088.1%89991
0
0
CubeVehicle
utildescription
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%
SubstitutingyardlocationAforthecurrentyardlocationandsolvingfortheroute
designinROUTERyieldsFigure134.Noroutescanbeputendtoendsothatonetruck
canbeusedinsteadoftwo,sotheminimumnumberoftrucksremainsatnine.Thetotal
dailycostforthislocationis3872.02+9x200+480=P6,152.092.
FIGURE134RouteDesignforYardLocationA
180
Page22
***SUMMARYREPORT***
Sample footer:
other options
Route
RunStop
BrkStem
StartReturnNoof
Route
Route
no
hr
hr
hr
hr
hr
time
timestopsdist,Mi
cost,$
1
9.8
7.0
1.8
1.0
5.408:00AM05:47PM
4
224
649.88
2
8.4
5.1
2.3
1.0
3.808:00AM04:26PM
3
163
498.40
3
8.4
5.0
2.4
1.0
3.908:00AM04:26PM
3
161
491.57
4
8.6
4.8
2.9
1.0
2.208:00AM04:37PM
5
152
470.04
5
7.2
4.0
2.2
1.0
2.608:00AM03:12PM
3
128
410.15
6
6.3
2.9
2.4
1.0
1.608:00AM02:18PM
3
93
321.27
7
5.3
2.1
2.2
1.0
1.608:00AM01:15PM
3
66
254.22
http://archivos4.movistar.cl/acani.icii/Mis_archivos/CUADERNOS/09_NIVEL/LOGISTICA/Resueltos_Ballou/ballou13_im.htm.
8
8.9
5.7
2.1
1.0
3.708:00AM04:51PM
3
183
548.68
9
5.1
1.7
2.3
1.0
.608:00AM01:03PM
3
55
227.82
Total
68.038.320.7
9.025.5
30
1225
3872.02
Pagefont
18 /and
36
4
5
6
7
8
9
Total
8.6
4.8
7.2
4.0
6.3
2.9
5.3
2.1
8.9
5.7
5.1
1.7
68.038.320.7
2.9
2.2
2.4
2.2
2.1
2.3
1.0
2.208:00AM04:37PM
1.0
2.608:00AM03:12PM
1.0
1.608:00AM02:18PM
1.0
1.608:00AM01:15PM
1.0
3.708:00AM04:51PM
1.0
.608:00AM01:03PM
9.025.5
5
3
3
3
3
3
30
152
128
93
66
183
55
1225
470.04
410.15
321.27
254.22
548.68
227.82
3872.02
VEHICLEINFORMATION
CubeDelvryPickup
utilcapcty
cube
cube
1
1
1000
475
047.5%
9999
0
0
2
1
1000
950
095.0%
9999
0
0
3
1
1000
1000
0100.0%
9999
0
0
4
1
1000
975
097.5%
9999
0
0
5
1
1000
875
087.5%
9999
0
0
6
1
1000
1000
0100.0%
9999
0
0
7
1
1000
875
087.5%
9999
0
0
8
1
1000
825
082.5%
9999
0
0
9
1
1000
950
095.0%
9999
0
0
Total
9000
7925
088.1%89991
0
0
CubeVehicle
utildescription
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%
ContinuingwithlocationB,ninetrucksarerequiredandthetotaldailycostforthe
routedesigninFigure3is3370.42+9x200+450=P5,620.42.
FIGURE3DesignforYardLocationB
181
Page23
***SUMMARYREPORT***
Route
RunStop
BrkStem
StartReturnNoof
Route
no
hr
hr
hr
hr
hr
time
timestopsdist,Mi
1
7.1
3.7
2.4
1.0
2.308:00AM03:06PM
4
120
2
6.5
3.1
2.3
1.0
1.808:00AM02:27PM
3
100
3
7.9
4.6
2.4
1.0
3.008:00AM03:56PM
4
146
4
5.9
2.8
2.2
1.0
1.408:00AM01:56PM
3
89
5
5.9
2.6
2.3
1.0
1.108:00AM01:55PM
3
84
6
6.7
3.6
2.1
1.0
2.308:00AM02:41PM
3
114
7
5.8
2.5
2.3
1.0
2.108:00AM01:50PM
3
80
8
6.1
3.3
1.9
1.0
2.808:00AM02:07PM
2
104
9
9.7
5.8
2.8
1.0
3.008:00AM05:40PM
5
187
Total
61.732.020.7
9.019.8
30
1024
Route
cost,$
389.30
340.53
454.97
311.84
300.41
375.39
290.22
350.46
557.31
3370.42
VEHICLEINFORMATION
Sample footer:
other options
CubeDelvryPickup
CubeVehicle
utilcapcty
cube
cube
utildescription
1
1
1000
825
082.5%
9999
0
0
.0%Truck#1
2
1
1000
950
095.0%
9999
0
0
.0%Truck#1
3
1
1000
825
082.5%
9999
0
0
.0%Truck#1
4
1
1000
850
085.0%
9999
0
0
.0%Truck#1
5
1
1000
925
092.5%
9999
0
0
.0%Truck#1
6
1
1000
825
082.5%
9999
0
0
.0%Truck#1
http://archivos4.movistar.cl/acani.icii/Mis_archivos/CUADERNOS/09_NIVEL/LOGISTICA/Resueltos_Ballou/ballou13_im.htm.
7
1
1000
950
095.0%
9999
0
0
.0%Truck#1
8
1
1000
825
082.5%
9999
0
0
.0%Truck#1
Pagefont
19 /and
36
3
4
5
6
7
8
9
Total
1
1
1
1
1
1
1
1000
1000
1000
1000
1000
1000
1000
9000
825
850
925
825
950
825
950
7925
082.5%
9999
085.0%
9999
092.5%
9999
082.5%
9999
095.0%
9999
082.5%
9999
095.0%
9999
088.1%89991
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%
Finally,theroutedesignfromlocationCisshowninFigure4.Although10routes
areinthedesign,twoofthesecanbedovetailedsothatonlyninetrucksareneeded.The
totaldailycostis4479.99+9x200+420=P6,699.99.
FIGURE4DesignforYardLocationC
182
Page24
***SUMMARYREPORT***
Route
RunStop
BrkStem
StartReturnNoof
Route
no
hr
hr
hr
hr
hr
time
timestopsdist,Mi
1
1.5
.6
.9
.0
.608:00AM09:30AM
1
20
2
6.7
3.7
2.0
1.0
1.908:00AM02:41PM
2
120
3
8.0
4.1
2.9
1.0
1.508:00AM04:00PM
5
132
4
9.4
5.6
2.8
1.0
3.408:00AM05:25PM
5
180
5
7.5
4.2
2.3
1.0
2.708:00AM03:29PM
3
134
6
7.7
4.2
2.4
1.0
1.908:00AM03:39PM
3
136
7
7.0
3.7
2.3
1.0
2.808:00AM02:59PM
3
117
8
7.3
4.0
2.3
1.0
3.508:00AM03:18PM
3
127
9
9.6
7.2
1.4
1.0
5.608:00AM05:35PM
2
229
10
9.8
7.4
1.4
1.0
6.308:00AM05:47PM
3
236
Total
74.544.720.7
9.030.3
30
1432
Route
cost,$
140.91
389.21
420.20
540.48
425.69
429.10
383.04
408.53
663.40
679.42
4479.99
VEHICLEINFORMATION
CubeDelvryPickup
utilcapcty
cube
cube
1
1
1000
375
037.5%
9999
0
0
2
1
1000
875
087.5%
9999
0
0
3
1
1000
975
097.5%
9999
0
0
4
1
1000
925
092.5%
9999
0
0
5
1
1000
925
092.5%
9999
0
0
6
1
1000
1000
0100.0%
9999
0
0
7
1
1000
950
095.0%
9999
0
0
8
1
1000
950
095.0%
9999
0
0
9
1
1000
550
055.0%
9999
0
0
10
1
1000
400
040.0%
9999
0
0
Total
10000
7925
079.3%99990
0
0
CubeVehicle
utildescription
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%Truck#1
.0%
Fromaneconomicanalysis,itappearsthatyardlocationBisthebestchoice.
Pagefont
20 /and
36
other options
183
Page25
SUPERIORMEDICALEQUIPMENTCOMPANY
TeachingNote
Strategy
ThepurposeoftheSuperiorMedicalEquipmentCompanycasestudyistoencourage
studentstoapplythecenterofgravitymethodologytoaprobleminvolvingasingle
warehouselocation.Althoughthemethodologyissomewhatelementary,itcanbeuseful
inprovidingsomefirstapproximationstogoodwarehouselocations.Itallowsstudents
toevaluatethefinancialimplicationsofalternativenetworkdesigns,anditisintendedto
besolvedwiththeaidoftheCOGmoduleprovidedintheLOGWAREsoftware.
AnswerstoQuestions
(1)Basedoninformationforthecurrentyear,isKansasCitythebestlocationfora
warehouse?Ifnot,whatarethecoordinatesforabetterlocation?Whatcost
improvementcanbeexpectedfromthenewlocation?
Whenasinglewarehouseistobelocated,theprimarylocationcostsaretransportation,
bothinboundtothewarehouseandoutboundfromit,andthewarehouselease,which
varieswiththelocation.Thecurrentlocationservesasabenchmarkagainstwhichthe
costsforotherlocationscanbecompared.Thatis,basedoninformationgiveninthe
case,thetotalrelevantcostfortheKansasCitylocationis:
Inboundtransportation
Outboundtransportation
Lease$2.75/sq.ft.200,000sq.ft.
Totalrelevantcost$
2,162,535
4,819,569
550,000
7,532,104
UsingtheCOGmodulewithinboundtransportratesfromPhoenixsetat$16.73/1163=
$0.014/cwt./mileandfromMonterreysetat$9.40/1188=$0.008/cwt./mile,andthe
outboundtransportratefromtheunknownwarehouselocationsetat$0.0235/cwt./mile,
thecoordinatesforthebestlocationareX=7.61andY=4.51,orapproximately
OklahomaCity.Totaltransportationcostforthislocationwouldbe$6,754,082.The
totalrelevantcostwouldbe:
Transportation
Total
$6,754,082
650,000
$7,404,082
Theannualcostsavingscanbeprojectedas$7,532,104 7,404,082=$128,022.
Pagefont
21 /and
36
other options
(2)Infiveyears,managementexpectsthatSeattle,LosAngeles,andDenvermarketsto
Theannualcostsavingscanbeprojectedas$7,532,104 7,404,082=$128,022.
(2)Infiveyears,managementexpectsthatSeattle,LosAngeles,andDenvermarketsto
growby5percent,buttheremainingmarketstodeclineby10percent.Transportcosts
areexpectedtobeunchanged.Phoenixoutputwillincreaseby5percent, and
Monterrey'soutputwilldecreaseby10percent.Wouldyourdecisionaboutthelocation
ofthewarehousechange?Ifso,how?
184
Page26
AnewbenchmarkforthefifthyearcanbecomputedfromthedatagiveninTables1
and2.Afteradjustingtheplantandmarketvolumesaccordingtothechangesindicated,
thefifthyearbenchmarkcostscanbecomputedasfollows:
Volume,
Point
1
cwt.
64,575
Rate,Transport
$/cwt.
$16.73
cost,$
$1,080,340
108,540
9.40
3
4
17,850
33,600
33.69
30.43
601,367
1,022,448
13,125
25.75
337,969
6
7
8,550
26,550
18.32
25.24
156,636
670,122
18,900
19.66
371,574
9
10
37,170
7,740
26.52
26.17
985,748
202,556
11
1,020,276
9,630Version - ExpertPDF
27.98
269,447 Components
Demo
Software
Totals346,230
$6,718,483
Thetotal5thyearbenchmarkrelevantcostwouldbe:
Transportation
$6,718,483
Lease$2.75/sq.ft.200,000sq.ft.550,000
Total
$7,268,483
OptimizingthelocationwiththefifthyeardatagivesalocationatX=7.05andY=
4.52.Therelevantcostsforthislocationare:
Transportation
Total
$6,464,206
650,000
$7,114,206
Theannualizedcostsavingswouldbe$7,268,483 7,114,206=$154,277.
Theaverageannualcostsavingsare(128,022+154,277)/2=$141,150.Thesimple
annualreturnoninvestment(movingcost)canbecomputedas:
$141, 150
ROI=
$300, 000
100471%
=
.
Managementmustnowjudgewhether47.1percentannualreturnisworththeriskof
changingwarehouselocations.
(3)Ifbyyearfiveincreasesareexpectedof25percentinwarehouseoutboundtransport
ratesand15percentinwarehouseinboundrates,wouldyourdecisionchangeaboutthe
warehouselocation?
Pagefont
22 /and
36
185
other options
185
Page27
Itisassumedherethatthefifthyeardemandlevelapplies.Arevisedfifthyear
benchmarkcanberecomputedbyapplyingthecostgrowthfactorstotheoverallfifth
yeartransportcosts.Thatis,
Inbound1.152,100,616=$2,415,708
Outbound1.254,617,867=5,772,334
Subtotal$8,188,042
Lease
550,000
Total$8,738,042
RunningCOGshowsthattheminimumtransportcostlocationwouldbeatcoordinates
X=7.20andY=4.62,whichisnearthepreviouslocationinquestiontwo.Theshiftin
locationisminimal.Thecostforthislocationis:
Transportation
Total$8,589,545
7,939,545
650,000
Theannualizedcostsavingswouldbe$8,738,042 8,589,545=$148,497.
Itcanbeconcludedthat:
1.Locationissimilartotheoptimizedfifthyearlocation.
2.TheincreaseinpossiblecostsavingsfurtherencouragesrelocationfromKansasCity
andtowardasitenearOklahomaCity,OK.
(4)Ifthecenterofgravitymethodisusedtoanalyzethedata,whatareitsbenefitsand
limitationsforlocatingawarehouse?
Thecenterofgravitymethodlocatesafacilitybasedontransportationcostsalone.This
isreasonablewhenonlyonefacilityisbeinglocatedandthegenerallocationforitis
beingsought.Suchcostsasinventorycarrying,production,andwarehousefixedarenot
included,buttheyarenotparticularlyrelevanttotheproblem.However,costssuchas
warehousestorageandhandling,andothercoststhatvarybytheparticularsitearenot
includedbutmayberelevantinagivensituation.Transportationcostsareassumed
linearwithdistance.Thismaynotbestrictlytrue,althoughdistancemaybenonlinear.
Theobviousbenefitsofthemethodare(1)itisafastsolutionmethodology(2)it
considersallpossiblelocations(continuous)(3)itissimpletouse(4)itsdataarereadily
availableand(5)itgivespreciselocationsthroughacoordinatesystem.Somepotential
limitationsare(1)coordinatesneedtobelinear(2)transportationratesonapermile
basisareconstant(3)volumesareknownandconstantforgivendemandandsource
pointsand(4)locationsmaybesuggestedthatarenotfeasiblesuchasinlakes,central
cities,orrestrictedlands.
186
Page28
ConcludingComments
Pagefont
23 /and
36
TheanalysisinthecaseseemstosuggestamovefromKansasCitytoaregionaround
other options
OklahomaCitywouldbeadvantageous.Areturnoninvestmentof47percentorhigher
ConcludingComments
TheanalysisinthecaseseemstosuggestamovefromKansasCitytoaregionaround
OklahomaCitywouldbeadvantageous.Areturnoninvestmentof47percentorhigher
ispossible,howevermanagementmustnowseekaparticularsiteintheareawhose
choicemayaddordetractfromthissavingspotential.Inanycase,theCOGmethodhas
assistedintheselectionofgoodpotentiallocationsandtestingtheirsensitivitytochanges
incostsandvolumes.
APPENDIX1LOGWARECOGModuleInputDatafortheCurrentYear
Title:SUPERIORMEDICALEQUIPMENTCOMPANY
Powerfactor:
Point
.5
Scalefactor:
Xcoordinate
Ycoordinate
230
Volume
Rate
1
2
3.60
6.90
3.90
1.00
61,500
120,600
0.0140
0.0080
0.90
9.10
17,000
0.0235
4
5
1.95
5.60
4.20
6.10
32,000
12,500
0.0235
0.0235
7.80
3.60
9,500
0.0235
10.20
6.90
29,500
0.0235
8
9
11.30
14.00
3.95
6.55
21,000
41,300
0.0235
0.0235
10
11
12.70
14.30
7.80
8.25
8,600
10,700
0.0235
0.0235
187
Page29
OHIOAUTO&DRIVER'SLICENSEBUREAUS
TeachingNote
Strategy
Thepurposeofthiscasestudyistointroducestudentstoalogisticsprobleminaservice
area.Italsoprovidesanapplicationforthemultiplecenterofgravitylocation
methodology.TheMULTICOGmoduleintheLOGWAREsoftwarecaneffectivelybe
applied.Themoduleallowsstudentstoquicklyevaluatealternativesastothenumberof
bureaustouse,thebureaulocations,andthesizeoftheterritorythateachbureaushould
serve.
Thecasemaybeassignedasahomeworkproblem,ashortcasestudyproject,orasa
Pagefont
24 /and
36
caseforclassdiscussion.Thelaterwouldbeappropriateespeciallyifadequateattention
other options
isgiventotheissuesofhowDanshouldgoaboutsolvingaproblemsuchasthis,what
bureaustouse,thebureaulocations,andthesizeoftheterritorythateachbureaushould
serve.
Thecasemaybeassignedasahomeworkproblem,ashortcasestudyproject,orasa
caseforclassdiscussion.Thelaterwouldbeappropriateespeciallyifadequateattention
isgiventotheissuesofhowDanshouldgoaboutsolvingaproblemsuchasthis,what
dataheneedsandwheretoobtainit,andwhatconcernsheshouldhaveaboutchanging
theexistingnetworkdesign.Thiswouldencouragestudentstothinkbeyondthe
computationalaspectsoftheproblem.
AnswerstoQuestions
(1)Doyouthinkthereisanybenefittochangingthenetworkoflicensebureausinthe
Clevelandarea?Ifso,howshouldthenetworkbeconfigured?
Thenatureofthecostsandthenumberofpossiblealternativenetworkdesignsmakeit
impracticaltoseekanoptimalsolution.Therefore,apossibleapproachtotheanalysisis
outlinedasfollows.
First,establishabenchmarkagainstwhichchangestothenetworkcanbecompared.
Muchofthedataforthisisgiveninthecasewriteup.Thecostscansimplybeappliedto
thesizeofeachbureauanditsassociatedstaff.Thecostforresidentstravelingtothe
bureausisnotknownbecausethebureauterritoriesarenotknown.However,anestimate
canbemadeoftravelcostsbysolvingtheprobleminMULTICOGforeightbureaus.
SinceMULTICOGattemptstooptimizebureaulocation,thistravelcostisprobably
understated.ThebenchmarkcostsaresummarizedinTable1.Thelocationcostsforthe
currentoperationareestimatedtobe$1,355,706.
Second,whatimprovementscanbemadeontheexistingeightlocations?Besides
movingthelocationsofthebureaus,whichresultsinresizingthefacilitiesandadjusting
thestaffnumbers,therearenoobviousimprovementstobemade.Therefore,the
benchmarkremainsthebaseforcomparison.
Third,itisnownecessarytoestimatetheapproximatenumberofbureausthatare
neededtoservethearea.Sincethecostsforaparticularnetworkdesigndependonthe
sizeofeachbureau,whichcannotbeknownuntiltheproblemissolved,aninitial
assumptionmustbemade.Itwillbeassumedthatallbureausareofthesamesize.
Hence,for5bureaus,theaveragenumberofresidentsineachbureausterritorywouldbe
thetotalnumberofresidentsdividedbythenumberofbureaus,or691,700/5=138,340.
Rent,staffsalaries,andutilityexpensescanbederivedfromthisestimate.Table2is
developedtoshowthebureausizeandthenumberofstaffforoneto10bureaus.Table3
extendstheaveragecostsfromtheseestimates.Areducednumberofbureaus,inthe
rangeoftwo,isaboutright.
188
Page30
TABLE1BenchmarkCostsfortheCurrentNetworkofLicenseBureaus
Bureau
1
2
3
4
5
6
7
8
Totals
Size,
sq.ft.
1,700
1,200
2,000
1,800
1,500
2,200
2,700
1,500
14,600
Staff
4
Rent,
$
37,400
Salaries,
$
84,000
Utilities,
$
6,800
4
5
4
4
5
5
5
36
26,400
44,000
39,600
33,000
48,400
59,400
33,000
321,200
84,000
105,000
84,000
84,000
105,000
105,000
105,000
756,000
4,800
8,000
7,200
6,000
8,800
10,800
6,000
58,400
Customer
Travel,
$
220,106 *
*ApproximatedbyrunningMULTICOGat8bureaus.
TABLE2AverageSizeandStaffforVariousNumbersofBureaus
(1)
691,700/(1)
Avg.
Avg.no.of
bureau
No.of
residentsper
size,
Staffper
Pagefont
25 /and
36
bureaus
bureau
sq.ft.
bureau
other options
1
691,700
4,500
10
(1)
No.of
bureaus
1
2
3
4
5
6
7
8
9
10
691,700/(1)
Avg.no.of
residentsper
bureau
691,700
345,850
230,567
172,925
138,340
115,283
98,814
86,463
78,855
69,170
Avg.
bureau
size,
sq.ft.
4,500
3,000
2,500
2,000
2,000
2,000
1,500
1,500
1,500
1,500
Staffper
bureau
10
7
6
5
5
5
4
4
4
4
189
Page31
TABLE3AverageCostsbyNumberofBureaus
No.of
bureaus
1
2
3
4
5
6
7
8
9
10
Rent,
$
99,000
132,000
165,000
176,000
220,000
264,000
231,000
264,000
297,000
330,000
Staffsalaries,
$
210,000
294,000
378,000
420,000
525,000
630,000
588,000
672,000
756,000
840,000
Utilities,
$
18,000
24,000
30,000
32,000
40,000
48,000
42,000
48,000
54,000
60,000
Resident
travel,$
662,319
430,922
354,239
298,000
278,181
249,287
237,635
220,106
206,496
198,600
Annualtotal
cost,$
989,319
880,922
927,239
926,965
1,063,181
1,191,287
1,098,636
1,204,106
1,313,496
1,428,600
Thecostestimatescannowberefinedaroundtwobureaus.Acomparisonwiththe
benchmarkcostsandareturnoftheinitialinvestment(costsrelatedtochangingthe
networkdesign)aresought.Asampleanalysisfortwobureaus,basedonadesign
providedbyMULTICOG,isshownbelow.
Bureau
1
2
Totals
Resi
dents
290,200
401,500
691,700
Size,
sq.ft.
2,500
3,500
6,000
Staff
6
8
14
Staff
Rent,
salaries,
$
$
55,000126,000
77,000168,000
132,000294,000
Utilities,
$
10,000
14,000
24,000
Resident
travelcost,
$
166,332
264,590
430,922
Thetotalannualvariablecostis$132,000+294,000+24,000+430,922=$880,922.
Thereareonetimecostsduetostaffseparationandequipmentmoves.Compared
Pagefont
26 /and
36
withthebenchmark,36 14=22staffmemberswillbeseparatedforacostof22
other options
$8,000=$176,000.Equipmentmovementcoststotwobureauswouldbe2 10,000=
Thetotalannualvariablecostis$132,000+294,000+24,000+430,922=$880,922.
Thereareonetimecostsduetostaffseparationandequipmentmoves.Compared
withthebenchmark,36 14=22staffmemberswillbeseparatedforacostof22
$8,000=$176,000.Equipmentmovementcoststotwobureauswouldbe2 10,000=
$20,000.Totalmovementcostswouldbe$176,000+20,000=$196,000.
Annualvariablecostsavingscomparedwiththebenchmarkwouldbe$1,355,706
880,922=$474,784.Asimplereturnoninvestmentwouldbe:
$474, 784
ROI=
$196, 000
100242%
=
Similarcalculationsarecarriedoutforvariousnumbersofbureaus.Theseresultsare
tabulatedinTable4.
190
Page32
TABLE4CostSavingsandReturnofInvestmentforAlternateNetworkDesigns
asProducedbyMULTICOG
Total
Annual
No.of
size,sq.
Total
variablecost,
Moving
bureaus
ft.
staff
$
cost,$
Demo Version
- ExpertPDF
Software
1
4,500
10
989,319
218,000
2
6,000
14
880,922
196,000
3
7,500
18
927,239
176,000
4
8,500
21
960,965
160,000
5
9,500
24
1,029,181
146,000
6
11,500
29
1,157,287
106,000
7
12,000
31
1,200,635
110,000
8
13,000
34
1,272,106
96,000
Benchmark14,600
36
1,355,706
Returnon
Savings,
invest
$
ment,%
Components
366,387
168
242
474,784
428,467
243
394,741
246
326,525
223
198,419
187
155,071
141
83,600
87
Themaximumannualsavingsoccurswithanetworkcontainingtwobureaus.
However,themaximalreturnoninvestmentoccurswithfourbureaus.ROIisselectedas
theappropriatemeasureonwhichtobasethiseconomicdecision.Thedetailsfora
designwithfourbureausaregiveninTable5.ThedesignisshownpictoriallyinFigure
1ofthisnote.
TABLE5DesignDetailsforaNetworkwithFourBureaus
Column
grid
coordi
nate
3.36
Rowgrid
coordi
nate
2.74
7.00
3.00
9.74
5.66
10.00
2.00
Bureau
1
ResidentsGridboxnumberassignment
218,200
1,2,3,4,5,6,7,8,9,10,11,12,13,
14,15,16,17,18,19,20,21,22,23,
24,25,26,27,28,29,30,31,32,33
168,700
34,35,36,37,38,39,40,41,43,44,
45,46,47,50,51,52,53
195,000
42,48,49,54,55,56,60,61,62,63,
67,68,69,70,74,75,76,77,81,82,83,84,
109,800
57,58,59,64,65,66,71,72,73,78,79,80
(2)DoyouthinkDanRoger'sstudyapproachissound?
OverallDancanbepraisedforthesimplicityofthemethodologythathehaschosen.The
Pagefont
27 /and
36
centerofgravityapproachisappropriateinthisproblemsincetherearenocapacity
other options
limitationsonthefacilities,locationsacrossacontinuousspacearedesired,and
OverallDancanbepraisedforthesimplicityofthemethodologythathehaschosen.The
centerofgravityapproachisappropriateinthisproblemsincetherearenocapacity
limitationsonthefacilities,locationsacrossacontinuousspacearedesired,and
transportationcost(exceptforsomefixedcosts)istheprimarylocationvariable.The
datarequirementsarerelativelystraightforward,althoughtheyarenotalwayseasyto
fulfill.Thiswouldlikelybeaproblemwithanyothersolutionapproachaswell.
Theresultsofthismethodologycanonlybeusedasafirstapproximationatbest.
Severalcriticismsofthisparticularapproachcanbeofferedasfollows:
191
Page33
Theeffectofbureaulocationontheresident'sperceptionofserviceisnotaswell
knownasportrayedinthecase.Inaddition,servicemayneedtoberepresentedby
morethanlocation.
Traveltothebureausisassumedstraightline.However,locationintheareais
likelytobeinfluencedbyaroadnetwork.Timemaybemoreimportantthan
distancetoresidents.
Thefixedcostsassociatedwithlocationarenothandleddirectlybythecenterof
gravityapproach.
Residentsareassumedtotraveltothelocationswithintheirassignedterritories.
Theymaynotstrictlydothis.
Goodfacilitiesmaynotbeavailableattheindicatedlocationcoordinates.
Theanalysisisparticularlyweakaroundtheestimateoftheresidenttravelcost.
Whileanexactcostisnotlikelytobeknown,Danshouldconductasensitivityanalysis
aroundthiscost.Hemayfindthatthedesigndoesnotchangeagreatdealoverawide
rangeofassumedvalues.Ifthisisthecase,hecanfeelcomfortablethathis
recommendationisfundamentallysound.Ifnot,heshouldseektofindamoreprecise
value.
(3)WhatconcernsbesideseconomiconesshouldDanhavebeforesuggestingthatany
changesbemadetothenetwork?
Aquantitativeapproachtolocationwillrarelygivethepreciselocationstobe
implemented.Rather,itprovidesastartingpointforfurtheranalysis.Therearea
numberofotherfactorstobeconsideredbeforetherevisednetworkdesigncanbe
implemented.First,therearesiteselectionfactorstobetakenintoaccountsuchasthe
availabilityofadequatespacenearthelocationcoordinates,proximitytogoodhighway
linkages,andreasonableneighborhoodreactionstothistypeofoperation.
Second,therearepoliticalconcerns.Reducingthenumberoflocationswillresultin
areleasingsomeofthestaff.Danmayexperiencesomepoliticalresistancetothis.Since
staffisalargeexpenseintheoperation,currentlyabout2/3ofthecosts,retentionofa
largernumberofbureausmayberequired.Ofcourse,transferringstafftoother
governmentaloperationsmaybeawayofdealingwiththisissue.Thisassumestheir
willingnesstoberelocated,althoughthisisnotlikelytobeastrongissueifrelocation
weretooccurinthesamearea.
Third,theremaybedifficultyindemonstratingtheeconomicsofnetworkredesign.
Althoughothersmayappreciatethecostsofrent,salaries,andutilities,thecostof
residenttravelissubjecttomuchinterpretation.Thosefavoringmanybureausmayargue
thehighcostwhilethosewantingtoreducethenumberofbureausmayperceiveitasnot
verysignificant.
Pagefont
28 /and
36
other options
192
192
Page34
FIGURE1FourBureauLocationsandTheirTerritories
r
e
b
m
u
wn
ro
di
Gr
Gridcolumnnumber
Currentbureaulocations
Revisedbureaulocations
SUPPLEMENTSampleInputDataFileforMULTICOGinLOGWAREforthe
OhioAuto&Driver'sLicenseBureauCaseStudy
Title:LICENSEBUREAU
Numberofsources:4
Numberofdemandpoints:84
Scalingfactor:2.5
POINT
XCOORDINATE
1
1
2
1
3
4
5
6
7
8
9
10
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12
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1
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1
1
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YCOORDINATE
1
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3
4
5
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7
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VOLUME
4100
6200
RATE
.12
.12
7200
10300
200
0
0
7800
8700
9400
11800
100
0
0
8100
10500
15600
10500
200
0
0
.12
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.12
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.12
193
Page35
Pagefont
29 /and
36
SUPPLEMENT(Continued)
other options
POINT
XCOORDINATE
YCOORDINATE
VOLUME
RATE
SUPPLEMENT(Continued)
POINT
22
23
24
25
26
27
28
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30
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34
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XCOORDINATE
4
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11
YCOORDINATE
1
2
3
4
5
6
7
1
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3
4
5
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7
1
2
3
4
5
6
7
1
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7
1
2
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1
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1
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VOLUME
10700
12800
13800
15600
400
0
0
11500
13900
14500
13700
600
0
0
9300
14900
13700
10200
1200
0
0
10100
12600
16700
15800
12400
2600
0
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13700
15200
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10800
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500
5300
16700
13800
11900
13500
18600
12000
5100
17400
10300
9800
10300
15500
11700
7700
9200
7500
8500
RATE
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
.12
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194
Page36
POINT
XCOORDINATE
YCOORDINATE
VOLUME
RATE
75
11
5
7800
.12
76
11
6
9900
.12
77
11
7
8700
.12
78
12
1
4300
.12
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12
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6700
.12
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12
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5800
.12
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.12
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5400
.12
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7100
.12
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7
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.12
Pagefont
30 /and
36
other options
81
82
83
84
12
12
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12
4
5
6
7
6800
5400
7100
6400
.12
.12
.12
.12
195
Page37
SOUTHERNBREWERY
TeachingNote
Strategy
Thepurposeofthiscasestudyistoprovidestudentswiththeopportunitytodesigna
distributionnetworkwhereplantlocationisatissue.Theyfirstshouldidentifythemajor
costsandalternativesthatareimportanttosuchadesignproblem.Second,theyshould
beencouragedtoapplythetransportationmethodoflinearprogrammingtoassistinthe
analysisofalternativesusingtheTRANLPmoduleinLOGWARE.Finally,theyshould
considerfactorsotherthanthoseintheanalysisthatmightalterthecourseoftheir
recommendationandbesensitivetothelimitationsandbenefitsoflinearprogrammingas
asolutionmethodology.
AnswerstoQuestions
(1)IfyouwereCarolynCarter,wouldyouagreewiththeproposaltobuildthenew
brewery?Ifyoudo,whatplanfordistributionwouldyousuggest?
Ifgrowthisuniformoverthenextfiveyears,Southerncanexpectthatdemandforits
productswillexceedthecurrentlyavailableplantcapacity.Thatis,demandisincreasing
Pagefont
31 /and
36
attherateof(0+(595,000 403,000))5=38,400barrelsperyear.Thus,thecurrent
other options
annualcapacityof500,000barrelswillbeusedupin(500,000 403,000)38,400=2.5
Ifgrowthisuniformoverthenextfiveyears,Southerncanexpectthatdemandforits
productswillexceedthecurrentlyavailableplantcapacity.Thatis,demandisincreasing
attherateof(0+(595,000 403,000))5=38,400barrelsperyear.Thus,thecurrent
annualcapacityof500,000barrelswillbeusedupin(500,000 403,000)38,400=2.5
years.Amajorconcerniswhetheritwouldbeprofitabletoconstructthenewplant.
Roughestimatesofitsprofitabilitycanbemade,projectingprofitswithandwithoutthe
newplant.Weknowthat595,000 500,000=95,000barrelsofbeerwouldnotbesold
annuallyinthefifthyearifadditionalcapacityisnotconstructed.Thisrepresentsa
potentialaveragelostrevenueof$280/barrel 0.20 [(0+95,000)2.5]=$2,128,000.
(Thefigureof2.5yearsassumesthatthenewbrewerycanbebroughtonstreamat
approximatelythetimewhencapacitywillbeusedupintheexistingplants.)Fromthe
1
benchmark
costsforthecurrentsystem,asshowninTable1,Southerniscurrently
producinganddistributing403,000barrelsatatotalcostof$60,015,000.Thisisan
averagecostperbarrelof$60,015,000403,000=$148.92.Theoverheadandsales
expenseis27percent,or$280 0.27=$75.60perbarrel.Totalcostsperbarrelare
$148.92+75.60=$224.52,whichisabout80percentofthesalesdollar.The20percent
profitmarginseemsvalid.Therefore,thebenefitofservingthepotentiallylostdemand
withanewbrewerycanbeestimatedusingonasimplereturnoninvestment:
ROI =
$2,128,000
$10,000,00 0
= 0.21, or 21%
Ifmanagementfeelsthatthisisanadequatereturnforsuchaproject,Carolynshould
proceedwithheranalysis.Let'sassumethatshehasthisapproval.
Next,shemaywishtoexploretheopportunitiesavailablebyimprovinguponthe
existingdistributionsystemwithoutthepresenceofthenewplant.Thisisanimproved
1
Abenchmarkreferstothecostsofproducinganddistributingdemandascurrentlyallocatedthroughout
thenetwork.
196

Page38
benchmark
anditcanbefoundbysolvingatransportationtypelinearprogramming
problemofthetypeshowninTable2.TheresultsgivenintheTRANLPmoduleof
LOGWAREcanbesummarizedinTable3.Thisshowsthatwithsomeslight
reallocationofdemandamongtheplants,productionanddistributioncostscanbe
reducedby$60,015,000 59,804,000=$211,000annually.Acomparisonofthe
benchmarkresultsinTable1andtheimprovedbenchmarkresultsinTable3showsthat
Knoxville'sdemandshouldbeshiftedfromColumbiatoMontgomeryand28,000barrels
ofColumbia'smarketshouldbeshiftedfromtheColumbiaplanttotheMontgomery
plant.TheColumbiaplantisahighcostproducerandcostsavingsareachievedby
tradingproductioncostsfortransportationcosts.Thatis,productioncostswillbe
reducedby$400,000whiletransportationcostswillbeincreasedby$189,000.Notethat
this$211,000savingscanberealizedwithoutanycapitalinvestment.
TABLE1BenchmarkofProductionandTransportationCosts($000s)forCurrent
Demand
Marketarea
1Richmond
2Raleigh
3Knoxville
4Columbia
5Atlanta
6Savannah
7Montgomery
8Tallahassee
9Jacksonville
Breweryof
origin
Richmond
Richmond
Columbia
Columbia
Montgomery
Montgomery
Montgomery
Montgomery
Montgomery
Total
Demand
in000s
barrels
56
31
22
44
94
13
79
26
38
403
Trans
Produc
port
tioncosts
costs
$7,840
$475
4,340
332
3,190
282
6,380
306
12,878
959
1,781
179
10,823
550
3,562
355
5,206
577
$56,000$4,015
Totalcosts
$8,315
4,672
3,472
6,686
13,837
1,960
11,373
3,917
5,783
$60,015
Pagefont
32 /and
36
other options
TABLE2TRANLPProblemSetup
8Tallahassee
9Jacksonville
Montgomery
Montgomery
Total
26
38
403
3,562
355
5,206
577
$56,000$4,015
3,917
5,783
$60,015
TABLE2TRANLPProblemSetup
RICH
RA
KNOX
COL
AT
SAVAN
MONT
TALL
JACK
From\To
MOND
LEIGH
VILLE
UMBIA
LANTA
NAH
GOMRY
AHAS
SONVL
RICHMD
148.49
150.70
156.38
152.54
155.48
154.64
159.98
164.30
158.84
100
COLMBA
157.54
154.78
157.81
151.96
156.85
154.54
157.93
160.18
157.27
100
MONTGM
156.98
153.35
150.80
149.93
147.20
150.80
143.69
150.65
152.18
300
JACKVL
152.13
149.25
150.48
146.16
148.80
144.54
148.80
144.72
142.68
Demand
56
31
22
44
94
13
79
26
38
Supply
Animprovedbenchmarkreferstoareallocationofcurrentdemandinanoptimalway,respectingplant
capacityrestrictions.
197
Page39
TABLE3ImprovedBenchmarkofProductionandTransportationCosts($000s)
forCurrentDemand
Demand
Trans
Breweryof
in000sSoftware
Produc
port
Demo Version
- ExpertPDF
Components
Marketarea
1Richmond
2Raleigh
3Knoxville
4Columbia
4Columbia
5Atlanta
6Savannah
7Montgomery
8Tallahassee
9Jacksonville
origin
Richmond
Richmond
Montgomery
Columbia
Montgomery
Montgomery
Montgomery
Montgomery
Montgomery
Montgomery
Total
barrels
56
31
22
16
28
94
13
79
26
38
403
tioncosts
costs
$7,840
$475
4,340
332
3,014
304
2,320
111
3,836
362
12,878
959
1,781
179
10,823
550
3,562
355
5,206
577
$55,600$4,204
Totalcosts
$8,315
4,672
3,318
2,431
4,198
13,837
1,960
11,373
3,917
5,783
$59,804
AddingaplantatJacksonvillewithacapacityof100,000barrelsperyearprovides
enoughcapacitytosatisfydemandouttothefifthyear.Ifthenewplantwereconstructed
andproducingimmediately,totalcostscouldbereducedfromtheimprovedbenchmark
by$59,804,000 59,090,000=$714,000peryear(comparethetotalcostsinTables3
and4.)TheColumbiaplantwouldnotbeneededifthelowercostJacksonvilleplant
wereonline.
Wedonotknowthesavingsforthefifthyeardemandlevelsincenotalldemandcan
beservedwithoutthepresenceofthenewplant.Therefore,afutureyearbenchmark
cannotbedetermined.However,wedoknowhowthenewplantshouldbeutilized
withinthesystem(seeTable5)andhowdemandallocationshouldbeadjustedto
accommodateit.Also,notethattheColumbiaplantisneededonceagainalthoughits
capacityisnotrequireduntilthelastonehalfyearofthefifthyearplanninghorizon.
ThissuggeststhattheColumbiaplantshouldnotbesold,butperhapssomealternateuse
couldbemadeofthefacilityintheinterim,suchassubcontractingbeerproductiontoa
noncompetingcompany.
Thenewplantisnotlikelytobebroughtonstreamimmediatelynorisitneededfor
twoandahalfyears,soCarolynmightsuggestadistributionplansimilartothatinTable
5.Acarefulinspectionofthisplanshowsthatonlyonebarrelofdemandinthe
KnoxvilleregionisassignedtoRichmond.Splittingdemandtothisextentisprobably
notpracticalandcanbeassignedtoColumbiawherethereisexcesscapacity.Costswill
Pagefont
33 /and
36
riseonlyslightly.
other options
AninterestingquestioniswhethertheColumbiaplant,throughmodernization,could
5.Acarefulinspectionofthisplanshowsthatonlyonebarrelofdemandinthe
KnoxvilleregionisassignedtoRichmond.Splittingdemandtothisextentisprobably
notpracticalandcanbeassignedtoColumbiawherethereisexcesscapacity.Costswill
riseonlyslightly.
AninterestingquestioniswhethertheColumbiaplant,throughmodernization,could
bemadeasefficientasthenewbrewery,andwhattheimplicationsfordistributionmight
be.Weknowthatthiscouldpotentiallysave$145 135=$10perbarrelinproduction
costs.Ata100,000barrelcapacity,thisis$1,000,000incostsavings.Ifthe
modernizationwheretocostnomorethan$5,000,000,thisoptionmightbeattractive.Of
course,wewouldneedtoresolvethelinearprogrammingproblemwithColumbia'sper
barrelcostsat$135plustransportationcosts.Thiswouldtellushowandtowhatextent
demandwouldbeallocatedtoColumbiaandgiveamoreaccuratebasisfordetermining
198
Page40
thecostsavings.Similarly,itwouldbeinterestingtoexplorewhatitmeanstoexpandthe
capacityofanexistingbreweryatalowerinvestmentcostperbarrelthantheconstruction
ofanewfacility.
TABLE4ProductionandTransportationCosts($000s)forCurrentDemandwith
theJacksonvillePlant
Demand
Trans
Breweryof
in000s
Produc
port
Marketarea
origin
barrels
tioncosts
costs
Totalcosts
1Richmond
Richmond
56
$7,840
$475
$8,315
2Raleigh
Richmond
31
4,340
332
4,672
3Knoxville
Montgomery
22
3,014
304
3,318
4Columbia
Montgomery
21 Software
2,877
272
3,149
Demo Version
- ExpertPDF
Components
4Columbia
Jacksonville
23
3,105
257
3,362
5Atlanta
Montgomery
94
12,878
959
13,837
6Savannah
Jacksonville
13
1,755
124
1,879
7Montgomery
Montgomery
79
10,823
550
11,373
8Tallahassee
Jacksonville
26
3,510
253
3,763
9Jacksonville
Jacksonville
38
5,130
292
5,422
Total
403
$55,272
$3,818
$59,090
(2)Ifthenewbreweryisnottobeconstructed,whatdistributionplanwouldyoupropose
totopmanagement?
Table6showsalinearprogrammingsolutionwherethenewplantisnotbroughton
streamandthedemandinthemarketsissetatthefiveyearlevel.Aninterestingsolution
occurswhendemandexceedscapacity.Themostcostlydemandregiontoserveisnot
assignedtoanyplant.AscanbeseeninTable6,portionsofthedemandinTallahassee
andJacksonvilleshouldnotbeserved,andessentiallytheentireKnoxvillemarketshould
notbeservedatall.Topmanagementmaywishtoadjustthisplanforreasonsotherthan
economicones.
Pagefont
34 /and
36
other options
199
Page41
TABLE5ProductionandTransportationCosts($000s)forProjectedFifthYear
DemandWiththeJacksonvillePlant
Marketarea
1Richmond
2Raleigh
3Knoxville
3Knoxville
3Knoxville
4Columbia
5Atlanta
6Savannah
7Montgomery
8Tallahassee
8Tallahassee
9Jacksonville
Breweryof
origin
Richmond
Richmond
Richmond
Columbia
Montgomery
Columbia
Montgomery
Columbia
Montgomery
Montgomery
Jacksonville
Jacksonville
Total
Demand
in000s
barrels
64
35
1
20
12
55
141
20
119
28
24
76
595
Produc
tioncosts
$8,960
4,900
140
2,900
1,644
7,975
19,317
2,900
16,303
3,836
3,240
10,260
$82,375
Trans
port
costs
$543
375
16
256
166
383
1,438
191
828
382
233
584
$5,395
Totalcosts
$9,503
5,275
156
3,156
1,810
8,358
20,755
3,091
17,131
4,218
3,473
10,844
$87,770
TABLE6ProductionandTransportationCosts($000s)forProjectedFifth
YearDemandWithouttheJacksonvillePlant
Demo Version - ExpertPDF

Software
Expected
Served Components
Marketarea
1Richmond
2Raleigh
3Knoxville
4Columbia
5Atlanta
6Savannah
7Montgomery
8Tallahassee
9Jacksonville
Breweryof
origin
Richmond
Richmond
Richmond
Columbia
Montgomery
Columbia
Montgomery
Montgomery
Columbia
Total
demandin
000s
barrels
64
35
33
55
141
20
119
52
76
595
demandin
000s
barrels
64
35
1*
55
141
20
119
40*
25*
500
Totalcosts
$9,503
5,275
156
8,358
20,755
3,091
17,131
6,026
3,931
$74,226
*Indicatesmarketdemandisnotfullyservedduetoinadequateplantcapacity.
(3)Whatadditionalconsiderationsshouldbetakenintoaccountbeforereachingafinal
decision?
Anumberofassumptionshavebeenimpliedintheanalysisshownabove.Forexample,
Demandhasbeenassumedtogrowataconstantrateinthemarkets.
Productionisassumedlimitedtoexactlythevaluesgivenwithoutthepossibilityfor
expansionthroughovertime,additionalshifts,orsubcontracting.
200
Page42
Pagefont
35 /and
36
other options
Perunitproductionandtransportationcostsareassumedtoremainunchangedwith
Perunitproductionandtransportationcostsareassumedtoremainunchangedwith
thereallocationofdemandthroughoutthenetwork.
Customerserviceeffectsarenotconsideredinreallocationofdemand.
Thereisnochangeinperunitcoststhroughoutthefiveyearplanninghorizon.
Thiscasemightendwithadiscussionoftheappropriatenessofusinglinear
programmingasavehicleforanalysisinaproblemsuchasthis.Mentioningthatlinear
programmingdoesnotconsidersuchfactorsasfixedcosts,returnoninvestment,orthe
manysubjectivefactors(topmanagement'sintuitionaboutlocation,vestedinterests,etc.)
thataretypicallyapartofsuchproblemsmeansthatlinearprogramming,atbest,isa
facilitatingvehicleforanalysis.Itdoesnotprovidethefinalanswer.
201
Pagefont
36 /and
36
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