Lecture 04

Designing the Supply Chain Network

4.2 Network Design in the Supply Chain
Lecture #4 Outline
4.2.1 The Role of Network Design in the Supply Chain
4.2.2 Factors Influencing Network Design Decisions
4.2.3 Framework for Network Design Decisions
4.2.4 The Role of Information Technology in Network Design
4.2.5 Greening Strategies Applicable for Designing the Supply Chain Network

Lecture 4 – Week 5 (28/06/2020) 1

By, Hasini Siriwardana
4.2.1 The Role of Network Design in the Supply Chain

ØFacility role
e.g., Toyota, Honda
ø Flexibility costs!
ØFacility location
e.g., Toyota assembly plant in U.S. when Yen strengthened
ØCapacity allocation
Allocating much vs. less
ø Capacity costs!
ØMarket and supply allocation

Lecture 4 – Week 5 (28/06/2020) 2

By, Hasini Siriwardana
4.2.2 Factors Influencing Network Design Decisions
§ Strategic factors:
ü Efficiency vs. responsiveness
ü Strategic role of each facility: Offshore facility, Source facility, Server facility, Contributor
facility, Outpost facility and Lead facility.
§ Technological factors: technology fixed cost and flexibility
§ Macroeconomic factors: taxes, tariffs, free trade zones, limits on import, exchange rates and
demand risk.
§ Political factors: Stability and clarity of legal systems.
§ Infrastructure: availability of sites and labor, access to transportation
§ Competitive factors:
ü Hotelling’s law (http://en.wikipedia.org/wiki/Hotelling's_law)
§ Competing on distance?
§ Competing on price?

§ Logistics and facility costs:

Total logistics costs = inventory + transportation + facility costs

Minimum cost network regarding responsiveness

Lecture 4 – Week 5 (28/06/2020) 3

By, Hasini Siriwardana
4.2.3 Framework for Network Design Decisions

Lecture 4 – Week 5 (28/06/2020) 4

By, Hasini Siriwardana
4.2.3 Framework for Network Design Decisions
Phase II: Capacitated Plant Location Model
n = number of potential plant locations/capacity
m = number of markets or demand points yi = 1 if plant i is open, 0 otherwise
D j = annual demand from market j xij = quantity shipped from
K i = potential capacity of plant i plant i to market j
f i = annualized fixed cost of keeping plant i open
cij = cost of producing and shipping one unit from plant i to market j (cost
includes production, inventory, transportation, and tariffs)
n n m
Min∑ f i yi + ∑ ∑c x ij ij
i=1 i=1 j=1

subject to
n

∑x ij
= D j for j = 1,...,m
i=1
m

∑x ij
= K i yi for i = 1,...,n
j=1

yi ∈ {0,1} for i = 1,...,n, x ij ≥ 0 Lecture 4 – Week 5 (28/06/2020) 5

By, Hasini Siriwardana
4.2.3 Framework for Network Design Decisions
Phase II: Gravity Location Model
§ Input
§ n: number of markets and supply sources
§ (xi, yi): location of either market or supply source i
§ Fi: cost of shipping one unit for one mile to or from location i
§ Di: quantity to be shipped to or from location i
§ Decision
§ (x, y): facility location d i = ( x - xi ) 2 + ( y - yi ) 2
§ di: distance to or from location i
§ Objective
n
min. TC = å d i Di Fi
i =1

Lecture 4 – Week 5 (28/06/2020) 6

By, Hasini Siriwardana
4.2.4 The Role of Information Technology in Network Design
Network design solutions

§ Making the modeling of the network design problems easier

§ Containing high-performance optimization technologies

§ Allowing for “what-if” scenarios

§ Interfacing with planning and operational software

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By, Hasini Siriwardana
4.2.5 Greening Strategies Applicable for Designing the
Supply Chain Network

§ Carbon emissions over the supply chain

§ Life Cycle Assessments

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By, Hasini Siriwardana
Thank You!
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By, Hasini Siriwardana