Unit06 - Network Design PDF

Dr.
Rameez Khalid, PMP, CQSSBB

Faculty, Department of Management
Institute of Business Administration, Karachi
Supply Chain Network Design Decisions
• Facility role
– What role should each facility play? What processes are
performed at each facility?
• Facility location
– Where should facilities be located?
• Capacity allocation
– How much capacity should be allocated to each facility?
• Market and supply allocation
– What markets should each facility serve? Which supply
sources should feed each facility?
Unit-6: Network Design rameezkhalid@iba.edu.pk 2
Factors Influencing
Network Design Decisions
• Strategic
• Technological
• Macroeconomic
• Political
• Infrastructure
• Competitive
• Logistics and facility costs

Factors Influencing
• Strategic factors
– Offshore Facility: low-cost facility for export production
i.e. supply outside the country where it’s located
– Source Facility: low-cost facility for global production
– Server Facility: regional production facility
– Contributor Facility: regional production facility with
development skills
– Outpost Facility: regional production facility built to
gain local skills
– Lead Facility: facility that leads in development and
process technologies
Factors Influencing
• Macroeconomic factors
– Quotas, tariffs, and tax incentives
• Economic trade agreements: Nafta, EU
– Exchange rate and demand risk
– Different states or countries often offer economic
incentives to companies that decide to set up shop there,
including tax incentives and low-interest economic
development loans

Impact of Exchange Rates
• A mobile phone retailer in the UK buys mobile phones from a manufacturer
in Germany. The German manufacturer sells the phones for €40. If the
exchange rate is £1 = €1.50, the UK business has to exchange £26.66 to buy
the phone (40/1.50).
• Now assume that the exchange rate changes and the rate goes down to £1
= €1.40. This is referred to as a fall in the value of the pound because you
are now getting less Euro for every pound. The price of the phone in
Germany has not changed - it is still €40. The UK importer, though, now has
to exchange £28.57 to buy the phone from Germany (40/1.40).
• Whilst the phone price has not changed in Germany, the effect of the fall in
the exchange rate is to give the impression that the price has risen. The UK
phone retailer finds that the cost of buying mobile phones has risen by
£1.90 - a rise of 7.12%.
• The retailer will find his costs of production rising and will have to either
increase prices to the consumer - risking a fall in demand - or accept lower
profit margins (the difference between the price charged and the cost of
production). rameezkhalid@iba.edu.pk 6
Factors Influencing
• Political factors
– Political stability
• Infrastructure factors
– Availability of transportation terminals, labor
• Most of Amazon’s distribution centers are located near airports
• Competitive factors
– Positive externalities (many stores in a mall makes it more
convenient for customers – one location for everything the
customers need)
7
Unit-6: Network Design rameezkhalid@iba.edu.pk
Factors Influencing
• Technological factors
– Compare your supplies to the final product, considering
whether value, weight, volume or other factors change
– Availability of production technologies
– High or low fixed cost
• Semiconductor manufacturing takes place only in 5-6 countries
worldwide (building one plant costs about 1 to 4 billion dollars)

Framework for Global Site Location
Competitive STRATEGY GLOBAL COMPETITION
PHASE I
Supply Chain
INTERNAL CONSTRAINTS Strategy
Capital, growth strategy, TARIFFS AND TAX
existing network INCENTIVES
PRODUCTION TECHNOLOGIES
REGIONAL DEMAND
Cost, Scale/Scope impact, support PHASE II Size, growth, homogeneity,
required, flexibility
Regional Facility local specifications
Configuration
COMPETITIVE
ENVIRONMENT POLITICAL, EXCHANGE
RATE AND DEMAND RISK
PHASE III
Desirable Sites AVAILABLE
INFRASTRUCTURE
PRODUCTION METHODS
Skill needs, response time
FACTOR COSTS PHASE IV LOGISTICS COSTS

Labor, materials, site specific Location Choices Transport, inventory, coordination

What is an Optimization Problem
• Generally, an optimization problem seeks a solution
where decisions need to be made in a constrained
or limited resource environment
– Most supply chain optimization problems require
matching demand and supply when one, the other, or
both may be limited
• An optimization problem comprises of three major
components
– Decision variables
– Constraints
– Objective

Introduction to Excel Solver
• Installing Excel Solver on Excel 2003
– Goto Tools > Add-ins…
– Select “Solver Add-in” and press OK
• Opening Excel Solver
– Goto Tools > Solver

– Click on the “Windows Office Icon” on the Top-Left Corner
– Click the “Excel Options” on the bottom of the tab just opened
– In the options menu click “Add-Ins” on the left
– Click the “Go” button adjacent to the “Manage Excel Add-Ins”
drop down menu at the bottom
– Check the box next to “Solver-Addin”

– You will find the “Solver” on the “Data” menu

– Click on “File” on the Ribbon
– Click the “Options” bottom on the left
– In the options menu click “Add-Ins” on the left
– Click the “Go” button adjacent to the “Manage Excel Add-Ins”
drop down menu at the bottom
– Check the box next to “Solver-Addin”

– You will find the “Solver” on the “Data” menu

Example: Profit Maximization Problem
• The Windsor Glass Company is planning to launch

two new products.
– 8 feet glass door with aluminum framing
– 4x6 feet window with wood framing
• Management of the company wants to determine

what mixture of both products would be most
profitable

Example: Profit Maximization Problem
8 Feet Aluminum Frame Doors
4x6 Wood Frame Windows
Windsor Glass Company

Plant 1
(Aluminum frames)
1 hour Plant 3 Profits

(Glass and assembly)
Excess cap. 4 hours
3 hours $3,000
Plant 2 2 hours $5,000
(Wood frames)
Excess cap. 18 hours
2 hours
Excess cap. 12 hours
Windsor Glass Company Model
• Inputs
Production time per batch (hours)
Plant 1 Plant 2 Plant 3 Profit per batch
Doors 1 0 3 $3,000
Windows 0 2 2 $5,000
Available time (hours) 4 12 18
• Decision variables
– Xdoors number of batches of doors produced
– Xwindows number of batches of windows produced

• Objective function
– Maximize 3000 Xdoors + 5000 Xwindows

Doors 1 0 3 $3,000
Windows 0 2 2 $5,000

• Constraints
– Hours available in Plant 1
Xdoors 4
2 Xwindows 12
3 Xdoors + 2 Xwindows 18
– Nonnegative production quantities
Xdoors 0, Xwindows 0

Doors 1 0 3 $3,000
Windows 0 2 2 $5,000
• Constraints
– Xdoors <= 4 (Available hours Plant 1)
– 2 Xwindows <= 12 (Available hours Plant 2)
– 3 Xdoors + 2 Xwindows <= 18 (Available hours Plant 3)
– Xdoors, Xwindows >= 0 (nonnegativity)

Objective function
Maximize profit =SUMPRODUCT(E4:E5,H4:H5)

• Constraints
– 0 <= 4 - Xdoors (Available hours Plant 1)
– 0 <= 12 - 2 Xwindows (Available hours Plant 2)
– 0 <= 18 -3 Xdoors- 2 Xwindows (Available hours Plant 3)
Constraints
Plant 1
Doors
Windows
Available time (hours) =B6-SUMPRODUCT(B4:B5,H4:H5)
• Constraints
– 0 <= 4 - Xdoors (Available hours Plant 1)
– 0 <= 12 - 2 Xwindows (Available hours Plant 2)
– 0 <= 18 - 3 Xdoors - 2 Xwindows (Available hours Plant 3)

using Excel Solver
Objective function
Decision variables
Constraints

Windsor Glass Company Model using Excel

Network Optimization Models
• Allocating demand to production facilities
• Locating facilities and allocating capacity
Key Costs:
• Fixed facility cost
• Transportation cost
• Production cost
• Inventory cost
• Coordination cost

Network Optimization Models
Managers use network design models in two situations:

• Market and supply allocation
– Demand allocation
• Facility location (and capacity allocation)
– Capacitated plant location model
– Capacitated plant location model with single
sourcing

Demand Allocation
n supply points m demand points
c11 D1
K1 c12
c13
D2
K2 D3
D4
K3
D5

Demand Allocation Inputs
n = number of factory/plant locations
m = number of markets/demand points
Dj = annual demand from market j
Ki = capacity of plant i
cij = cost of producing and shipping one million units

from plant i to market j (cost includes production,
inventory, transportation, and tariffs)
xij = quantity shipped from plant i to market j

Demand Allocation Model
Allocate Demand from different Markets to various Plants to minimize Total Cost
Objective Function:
Subject to Constraints:

c11 D1
Dj = annual demand from market j K1 c12
c13
Ki = capacity of plant i D2
K2
cij = cost of producing and shipping one million D3
units from plant i to market j (cost includes
production, inventory, transportation, and tariffs) K3 D4
xij = quantity shipped from plant i to market j D5

Demand Allocation
• Which market is served by which
plant? n m
– Given m Demand Points, j=1..m with

Min
i 1 j 1
cx ij ij
demands Dj
– Given n Supply Points, i=1..n with s.t.
capacity Ki n
– Each unit of shipment from supply x D

ij j
point i to demand point j Costs cij i 1
m
• Serve markets from supply points x K
ij i
to demand points j 1
– xij = Quantity Shipped from plant site i x ij

0
to customer j

Capacitated Plant Location
Which supply point n supply points m demand points

operates?
c11 D1
y1 = yes or no K1
c12
c13
D2
y2 = yes or no K2 D3
y3 = yes or no D4
K3
D5

Capacitated Plant Location Inputs
Dj = annual demand from market j
Ki = potential capacity of plant i
fi = annualized fixed cost of keeping factory i open
cij = cost of producing and shipping one million units

from plant i to market j (cost includes production,
inventory, transportation, and tariffs)
yi = 1 if plant i is open, 0 otherwise

Capacitated Plant Location Model
Minimize Total Cost (Fixed + Variable) of establishing and operating the network
Objective Function:
Subject to Constraints:
n = number of factory/plant locations yi = 1 if plant i is open, 0

m = number of markets/demand points otherwise
Dj = annual demand from market j c11 D1

K1 c
c1312
Ki = capacity of plant i D2
cij = cost of producing and shipping one million K2 D3

units from plant i to market j (cost includes
production, inventory, transportation, and tariffs) K3 D4
D5
• Which market is served by n n m

which plant? Min f y
i i cx
ij ij
– None of the plants are open, a i 1 i 1 j 1
Cost fi is paid to open plant i s.t.

– yi = 1 if plant is located at site i,
n
0 otherwise i 1
x D
ij j
– xij = Quantity Shipped from m
plant site i to customer j

j 1
x Ky
ij i i
y i
{0,1}

Capacitated Plant Location With Single Source
(each customer has exactly one supplier)
Which supply point n supply points m demand points

operates?
c11 D1
y1 = yes or no K1 c12
c13
D2
y2 = yes or no K2 D3
y3 = yes or no D4
K3
D5
• In some cases, companies want to design

supply chain networks in which a market is
supplied from only one factory
• Reasoning: it lowers the complexity of
coordinating the network and requires less
flexibility from each facility

which plant?
Min f y i i Dc x
j ij ij
i 1 i 1 j 1
– None of the plants are open, a s.t.
Cost fi is paid to open plant i n
– yi = 1 if plant is located at site i, x
ij
1
0 otherwise i 1
m
– xij = 1 if market j is supplied by Dx K y
j
factory i, 0 otherwise j 1
ij i i
yi , xi , j {0,1}

SunOil
• Formerly SunOil and now Sunoco Inc. is a
Fortune 100 company
• American Petroleum and Petrochemical
manufacturer with worldwide sales
• One of the largest gasoline distribution companies
in the USA and the official fuel of NASCAR®
• Sunoco brand gasoline is sold in over 4,700 outlets;
just over a third of these outlets are Sunoco gas
stations and convenience stores
• Needs to decide the regions in which facilities are
to be located 40
Unit-6: Network Design rameezkhalid@iba.edu.pk
SunOil
12
14 16
7
8
Dj = annual demand from market j (in million units)

SunOil
10
10 20
20
10
20
10 10
20 20
Ki = capacity of plant i
SunOil
$6500
$6000 $9750
$9000
$4100
$6150
$4500 $4000
$6750 $6000
fi = annualized fixed cost of keeping plant i open

SunOil


which plant? Min f y
i i cx
ij ij
– None of the plants are open, a i 1 i 1 j 1
Cost fi is paid to open plant i s.t.

– yi = 1 if plant is located at site i,
n
0 otherwise i 1
x D
ij j
– xij = Quantity Shipped from m
plant site i to customer j

j 1
x Ky
ij i i
y i
{0,1}

SunOil
Dj n xij = 0 for all j = 1, …, m (unmet demand)

i=1
SunOil
10
20
Kiyi m xij 0 for all i = 1, …, n (excess capacity)

j=1
which plant?
Min f y i i Dc x
j ij ij
i 1 i 1 j 1
– None of the plants are open, a s.t.
Cost fi is paid to open plant i n
– yi = 1 if plant is located at site i, x
ij
1
0 otherwise i 1
m
– xij = 1 if market j is supplied by Dx K y
j
factory i, 0 otherwise j 1
ij i i
yi , xi , j {0,1}

REFERENCES
•Supply Chain Management (3ed.)

Chopra, Meindl and Kalra
•Principles of Supply Chain Management

Wisner, Leong & Tan

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Dr.

Rameez Khalid, PMP, CQSSBB

Unit-6: Network Design rameezkhalid@iba.edu.pk 3

Unit-6: Network Design rameezkhalid@iba.edu.pk 5

Unit-6: Network Design rameezkhalid@iba.edu.pk 8

FACTOR COSTS PHASE IV LOGISTICS COSTS

Unit-6: Network Design rameezkhalid@iba.edu.pk 9

Unit-6: Network Design rameezkhalid@iba.edu.pk 11

– Goto Tools > Add-ins…

– Select “Solver Add-in” and press OK

• Opening Excel Solver

– Goto Tools > Solver

Unit-6: Network Design rameezkhalid@iba.edu.pk 12

• Opening Excel Solver

Unit-6: Network Design rameezkhalid@iba.edu.pk 13

• Opening Excel Solver

Unit-6: Network Design rameezkhalid@iba.edu.pk 14

• The Windsor Glass Company is planning to launch

• Management of the company wants to determine

Unit-6: Network Design rameezkhalid@iba.edu.pk 15

Windsor Glass Company

1 hour Plant 3 Profits

Unit-6: Network Design rameezkhalid@iba.edu.pk 17

Production time per batch (hours)

Unit-6: Network Design rameezkhalid@iba.edu.pk 18

Production time per batch (hours)

Unit-6: Network Design rameezkhalid@iba.edu.pk 20

Unit-6: Network Design rameezkhalid@iba.edu.pk 21

Unit-6: Network Design rameezkhalid@iba.edu.pk 23

Unit-6: Network Design rameezkhalid@iba.edu.pk 24

Unit-6: Network Design rameezkhalid@iba.edu.pk 25

Unit-6: Network Design rameezkhalid@iba.edu.pk 27

Managers use network design models in two situations:

Unit-6: Network Design rameezkhalid@iba.edu.pk 28

n supply points m demand points

Unit-6: Network Design rameezkhalid@iba.edu.pk 29

cij = cost of producing and shipping one million units

Unit-6: Network Design rameezkhalid@iba.edu.pk 30

n = number of factory/plant locations

xij = quantity shipped from plant i to market j D5

– Given m Demand Points, j=1..m with

– Each unit of shipment from supply x D

– xij = Quantity Shipped from plant site i x ij

Unit-6: Network Design rameezkhalid@iba.edu.pk 32

Which supply point n supply points m demand points

Unit-6: Network Design rameezkhalid@iba.edu.pk 33

fi = annualized fixed cost of keeping factory i open

cij = cost of producing and shipping one million units

Unit-6: Network Design rameezkhalid@iba.edu.pk 34

n = number of factory/plant locations yi = 1 if plant i is open, 0

Dj = annual demand from market j c11 D1

cij = cost of producing and shipping one million K2 D3

• Which market is served by n n m

Cost fi is paid to open plant i s.t.

– xij = Quantity Shipped from m

plant site i to customer j

Unit-6: Network Design rameezkhalid@iba.edu.pk 36

Which supply point n supply points m demand points

• In some cases, companies want to design

Unit-6: Network Design rameezkhalid@iba.edu.pk 38

• Which market is served by n n m

Unit-6: Network Design rameezkhalid@iba.edu.pk 39

Dj = annual demand from market j (in million units)