CH-3: Network design in the supply chain

Weighted score
Q.1 An electronic manufacturer must expand by building a second facility. The search has
been narrowed to four locations, all acceptable to management in terms of dominant
factors. Assessment of these sites in terms of seven location factors are shown in the
following table---
Location factors Factor Factor score for each location
weight
Dhaka Chittagong Sylhet Barishal
1. Labour climate 20 5 4 4 5
2. Quality of life 16 2 3 4 1
3. Transportation 16 3 4 3 2
system
4. Proximity to markets 14 5 3 4 4
5. Proximity to 12 2 3 3 4
materials
6. Taxes 12 2 5 5 4
7. Utilities 10 5 4 3 3

≠ Calculate the weighted score for each location. Which location should be recommended?

Ans:
Weighted score= ∑( All location factors weight × All location personal factors score)
Location factors Factor Factor score for each location
weight
Dhaka Chittagong Sylhet Barishal
1. Labour climate 20 100 80 80 100
2. Quality of life 16 32 48 64 16
3. Transportation 16 48 64 48 32
system
4. Proximity to markets 14 70 42 56 56
5. Proximity to 12 24 36 36 48
materials
6. Taxes 12 24 60 60 48
 7. Utilities 10 50 40 30 30
Total weighted score 100 348 370 374 330

Decision point: Based on weighted score in the above table, location Sylhet is the preferred
site, although location Chittagong is a close second.

Center of Gravity + Load Distance Score

Q-2: A limestone supplier to the cement industry has heavy product and transportation costs
are high. One market are includes inside Dhaka Metropolitan city and other outside the
Dhaka Metropolitan city. More than 600000 tons are to be shipped to eight major customer
locations, as shown in the following table:

Customer Location Tons shipped X,Y Coordinates

1. Holcim Cement Bangladesh ltd, 5000 7, 13
Tejgaon
2. Premier Cement mills ltd, 92000 8, 12
Munshiganj
3. Crown Cement mills ltd, 70000 11, 10
Munshiganj
4. Eastern Cement Industries ltd, 35000 11, 7
Narayanganj
5. Scan Cement International ltd, 9000 12, 4
Kanchpur
6. Akij Cement, Narayanganj 227000 13, 11
7. Anwar Cement, Gajaria 16000 14, 10
8. Shah Cement, Munshiganj 153000 15, 5

a. Calculate the center of gravity, rounding distance to the nearest tenth.

b. Calculate the load distance score for this location, using rectilinear distance.

Ans:
a) Center of gravity:

X*= X-coordinate of the center of gravity

X*= ΣliXi / Σli

= (7×5) +(8×92) + (11×70) + (11×35) + (12×9) + (13×227) + (14×16) +

(15×153) / (5+92+70+35+9+227+16+153)
=7504/607
=12.4

Y*= Y-coordinate of the center of gravity

 Y*= ΣliYi / Σli
= (13×5) + (12×92) + (10×70) +(7×35) + (4×9) + (11×227) + (10×16) +
(5×153) / (5+92+70+35+9+227+16+153)
=5572/607
=9.2

The center of gravity are 12.4 and 9.2

b) Rectilinear distance

d= |Xa-Xb|+|Ya-Yb|

Customer Tons Coordinates (d) (ld)

Location shipped X, Y |Xa-Xb|+|Ya-Yb| (In
thousand)
1. Holcim Cement 5000 7, 13 5.4+3.8= 9.2 46
Bangladesh ltd,
Tejgaon
2. Premier Cement 92000 8, 12 4.4+2.8= 7.2 662.4
mills ltd,
Munshiganj
3. Crown Cement 70000 11, 10 1.4+0.8= 2.2 154
mills ltd,
Munshiganj
4. Eastern Cement 35000 11, 7 1.4+2.2= 3.6 126
Industries ltd,
Narayanganj
5. Scan Cement 9000 12, 4 0.4+5.2= 5.6 50.4
International ltd,
Kanchpur
6. Akij Cement, 227000 13, 11 0.6+1.8= 2.4 544.8
Narayanganj
7. Anwar Cement, 16000 14, 10 1.6+0.8= 2.4 38.4
Gajaria
8. Shah Cement, 153000 15, 5 2.6+4.2= 6.8 1040.4
Munshiganj
Total 2662.4

Xa-Xb Ya-Yb
7-12.4 13-9.2

8- 12.4 12-9.2
 11-12.4 10-9.2

11-12.4 7-9.2

12-12.4 4-9.2

13-12.4 11-9.2

14-12.4 10-9.2

15-12.4 5-9.2

Q. 3- An operation manager has narrowed his search for a new facility locations to four
communities. The annual fixed costs (land, property, taxes, insurance, equipment and
building) and the variable costs (labour, material, transportation and variable overhead) are-

Community Fixed cost Variable cost

(per year) (per unit)
A 150000 62
B 300000 38
C 500000 24
D 600000 30

a. Plot the total cost curve for all the communities on a single graph. Identify on the graph the
approximate range over which each community provides the lowest cost?

b. Using break-even analysis, calculate the break-even quantities over the relevant ranges.

c. If the expected demand is 15000 units per year, what is the best location?

Ans:
Assume that,

Q= 20000 units & the total cost is

Community Fixed Variable Cost(cost per Total cost (FC+VC)

cost unit X no of units)
A 150,000 62 × 20000=1,240,000 1,390,000
B 300,000 38 × 20000=760,000 1,060,000
C 500,000 24 × 20000=480,000 980,000
D 600,000 30 × 20000=600,000 1,200,000
 a)

b) Break even quantity between A and B:

(A)= (B)

FC+VC (per unit) = FC+VC (per unit)

 150,000 + 62Q = 300,000 + 38Q

 62Q - 38Q = 300,000 - 150,000
 24 Q = 150,000
 Q = 150,000 / 24
= 6250 units

The break even quantity between A and B lies at the end of the first range, where A is the
best if Q is less than 6250 than B and the beginning of second range, where B is the best if Q
is more than 6250.

Break even quantity between B and C:

FC+VC (per unit) = FC+VC (per unit)

 300,000 + 38Q = 500,000 + 24Q

 38Q - 24Q = 500,000 - 300,000
 14Q = 200,000
 Q = 200,000 / 14
= 14286 units
The break even quantity between B and C lies at the end of the range over which B is best if
Q is less than 14286 and the beginning of final range, where C is the best if Q is more than
14286.

(c) Decision point: Management located the new facility at community C, because 15000
units per year demand forecast lies at the high volume range.

Decision Tree Analysis (Follow book)

Problem:

One thousand square feet of warehouse space is required for every 1,000 units of demand,
and the current demand at Trips Logistics is for 100,000 units per year. The manager
forecasts that from one year to the next, demand may go up by 20 percent with a
probability of 0.5 or go down by 20 percent with a probability of 0.5. The probabilities of the
two outcomes are independent and unchanged from one year to the next. The general
manager can sign a three-year lease at a price of $1 per square foot per year. Warehouse
space is currently available on the spot market for $1.20 per square foot per year. From one
year to the next, spot prices for warehouse space may go up by 10 percent with probability
0.5 or go down by 10 percent with probability 0.5, according to a binomial process. The
probabilities of the two outcomes are independent and unchanged from one year to the
next. The general manager believes that prices of warehouse space and demand for the
product fluctuate independently. Each unit Trips Logistics handles results in revenue of
$1.22, and Trips Logistics is committed to handling all demand that arises. Trips Logistics
uses a discount rate of k = 0.1 for each of the three years. The general manager assumes
that all costs are incurred at the beginning of each year and thus constructs a decision tree
with T =2. The decision tree is shown in Figure 6-2, with each node representing demand (D)
in thousands of units and price (p) in dollars. The probability of each transition is 0.25
because price and demand fluctuate independently.

Answer the following questions upon the evaluations of Trips Logistics by analyzing decision
tree method:

 Draw a decision Tree

 Evaluate the spot market purchase option.

EXTRA--------------

 Calculate the profit of each decision tree node from period 1 and period 2.

 Calculate the expected profit (EP) .

 Calculate the present value of expected profit (PVEP)

 Calculate the present value of future expected profit (PV of FEP)

 Evaluate the NPV of Spot Market.

Solution

According to the question, here:

 Demand= 100 (Trips Logistics is committed to handling all demand that arises)

 One thousand square feet of warehouse space is required for every 1,000 units of
demand

 Demand may go up by 20 percent with a probability of 0.5 or go down by 20 percent

with a probability of 0.5.

 Price=$1.20

 Price for warehouse space may go up by 10 percent with probability 0.5 or go down
by 10 percent with probability 0.5,

 Revenue= $1.22

 Discount rate k = 0.1 or 10%

 T /Time Period= 2.

 The probability of each transition = 0.25 or 25%

Expected profit of Period 1 Node 1:
 Expected Profit of node 1
 Probability x Summation of all profits from the nodes stretching from node 1
 .25 x ($ -33,120 + $4320 -$22,080 + $2880)
= -$ 12,000

Present Value of Expected profit (PVEP) of Period 1

Node 1
• PVEP= Expected Profit/ 1+K
• PVEP of NODE 1(D=120, P= $ 1.32)
• = -$12000/1+.1
• =-$12000/1.1
• =-$10,909
 Present Value of Future Expected profit
( PV of FEP) of Period 1 Node 2
• PV of FEP = (Profit* Unit)+ PVEP
• PV of FEP of NODE 2 D=120, P= $ 1.08)
• = (1.22-1.08)*(120*1000) +PVEP
• =- $ 12000+ (- 10,909)
• =- $ 12000-10909
= - $ 22,909

Expected profit of Period 1 Node 2

 Expected Profit of node 2
 Probability x Summation of all profits from the nodes stretching from node 2
 .25x ($ 4320+ 36000+2880+24000)
= $16,800

Present Value of Expected profit

( PVEP) of Period 1 Node 2
• PVEP= Expected Profit/ 1+K
• PVEP of NODE 2( D=120, P= $ 1.08)
• = $16,800 /1+.1
• =- $16,800 /1.1
• =$15273

Present Value of Future Expected profit

( PV of FEP) of Period 1 Node 2
• PV of FEP = (Profit* Unit)+ PVEP
• PV of FEP of NODE 2 D=120, P= $ 1.08)
• = (1.22-1.08)*(120*1000) +PVEP
• =(.14*120000)+ PVEP
• =16,800+15273
= $ 32,073

Expected profit of Period 1 Node 3

 Expected Profit of node 3
 Probability x Summation of all profits from the nodes stretching from node 3
 .25x ($ -22,080+2880-14720+1920)

= -$8000

Present Value of Expected profit

( PVEP) of Period 1 Node 3
• PVEP= Expected Profit/ 1+K
• PVEP of NODE 3( D=80, P= $ 1.32)
• = -$8000 /1+.1
• = -$8000 /1.1
• = -$7273

Present Value of Future Expected profit

( PV of FEP) of Period 1 Node 3
• PV of FEP = (Profit* Unit)+ PVEP
• PV of FEP of NODE 3 ( D=80, P= $ 1.32)
• = (1.22-1.32)*(80*1000) +PVEP
• =(-.1*80,000)+ PVEP
• =- $ 8000+( -$7273)
• = - $ 8000- $ 7273
• = -$15273

Expected profit of Period 1 Node 4

 Expected Profit of node 4
 Probability x Summation of all profits from the nodes stretching from node 4
 .25x ($ 2880+24000+1920+16000)
 = $11,200

Present Value of Expected profit

( PVEP) of Period 1 Node 4
• PVEP= Expected Profit/ 1+K
• PVEP of NODE 4( D=80, P= $ 1.08)
• = $11,200 /1+.1
• = $11,200 /1.1
• = $10,182

Present Value of Future Expected profit

( PV of FEP) of Period 1 Node 4
• PV of FEP = (Profit* Unit)+ PVEP
• PV of FEP of NODE 4 ( D=80, P= $ 1.08)
• = (1.22-1.08)*(80*1000) +PVEP
• =(.14*80,000)+ PVEP
• =- $11,200+( $10,182)
• = $11200+ $10,182
• = $ 21,382

Calculation of Expected Profit, PVEP and PV of FEP of PERIOD 0

• The Expected Profit in Period 0

• =Probability* Summation of PV of FEP of four nodes in period 1:
 • In Period 1:

Nodes PV of FEP

Node 1 -$22,909

Node 2 $32,073

Node 3 -$15,273

Node 4 $21,382

So The Expected Profit in Period 0 Node 1 ( D=100, P=$ 1.20)

=Probability* Summation of PV of FEP of four nodes in period 1

= .25 * (-$22,909 +$32,073 -$15,273 +$21,382

= .25* $15,273

= $3,818

Present Value of Expected profit

( PVEP) of Period 0 Node 1( D=100, P= $ 1.20)
 PVEP= Expected Profit/ 1+K
 PVEP of NODE 1( D=120, P= $ 1.20)
 = $3,818/1+.1
 =-$3818/1.1

= $3,471

Present Value of Future Expected profit

( PV of FEP) of Period 0 Node 1 ( D=100, P= $ 1.20)
 PV of FEP = (Profit* Unit)+ PVEP
 PV of FEP of NODE 1(D=100, P= $ 1.20)
 = (1.22-1.20)*(100*1000) +PVEP
 =.02*100,000+ PVEP
 =$2000+ 3471
 = $ 5,471
 Thus, the expected NPV (Net Present Value) of not signing the lease and obtaining
all warehousing space from the spot market is given by,
 NPV ( Spot Market)= $5,471

Demand Forecasting (Follow book)

Problem
 • Here,

• D1=120

• D2= 127

• D3= 114

• D4= 122

• n= 4

• a= .1

• For each period ,We have to find out the following values:

• . Level of period t = Lt

• . Forecast of period t+1= F t+1

• Error of period t+1= = E t+1= F t+1- D t+1 ( If asked in the question)

• Revised estimated level of period t+1= L t+1

Simple Exponential Smoothing

Step 1: Initialize

• Here , L0=(D4+D3+D2+D1)/ 4

=(120+127+114+122)/4
 = 120.75

• So the initial estimate of level is 120.75 gallons

Step 2: Forecast

• The forecast for Period 1 is thus given by

• F1=L0= 120.75

• Step 3: Measure Error

• The observed demand for Period 1 is D1= 120. The forecast error for Period 1 is given by

• E1 = F1 - D1 = 120.75 - 120 = 0.75

Step 4: New estimate of level

• With the revised estimate of level for Period 1 using Equation 7.13 is given by:

• L1 = aD1 +(1 – a)L0 =

• =0.1 * 120 + 0.9 * 120.75 = 120.68

• We thus obtain,

• F2= L1= 120.68

• D2= 127

• E2= F2-D2= 120.68-127= -6.32

• So, L2= aD2 +(1 – a)L1

• = 0.1 * 127 +0.9 *120.68 = 121.31.

• We thus obtain F3= L2= 121.31

• D3= 114

• E3= F3- D3= 121.31-114= 7.31

• So, L3 = aD3 +(1 – a)L2

= 0.1 * 114 + 0.9 * 121.31 = 120.58

We thus obtain,

• F4= L3= 120.58

• D4= 122

• E4= F4-D4= 120.58- 122= -1.42

• So, L4= aD4 +(1 – a)L3

= 0.1 * 122 +0.9 * 120.58 = 120.72.

• Thus we get, F5= L4= 120.72

 • So Forecast demand for Period 5 using simple exponential smoothing Is 120.72 gallon.

Problem 2
An electronics manufacturer has seen demand for its latest MP3 player increase over the past six
months.

• Observed demand (in thousands) has been

• D1 = 8,415,

• D2 = 8,732,

• D3 = 9,014,

• D4 = 9,808,

• D5 = 10,413, and

• D6 = 11,961.

Forecast demand for Period 7 using trend-corrected exponential smoothing with

@=.1, β =.2

Solution

Step 1: Initialize

• For the MP3 player data, we obtain:

• L0 = 7,367 and T0 = 673

;Step 2: Forecast

• The forecast for Period 1 (using Equation 7.14) is thus given by:

• F1 = L0 + T0 = 7,367 + 673 = 8,040

Step 3: Measure Error

• The observed demand for Period 1 is D1 = 8,415. The error for Period 1 is thus given by

• E1 = F1 - D1 = 8,040 - 8,415 =-375

• Step 4: New estimate of level and trend:

• With the revised estimate of level and trend for Period 1 using Equations 7.15 and 7.16 is
given by:

• L1= @D1+ (1-@)(Lo+To)= (.1* 8415)+.9*8040= 8078

• T1= β( L1-L0) + (1- β)To= .2* (8078-7367)+ .8 *673= 681

• Observe that the initial estimate for demand in Period 1 is too low.
• As a result, our updates have increased the estimate of level L1 for Period 1 from 8,040 to
8,078.

• And the estimate of trend from 673 to 681.

• Forecast of Period 2

• F2 = L1 + T1 = 8,078 + 681 = 8,759

• Continuing in this manner, we obtain

• L2= 8755, T2= 680

• L3= 9393, T3= 672

• L4= 10,039, T4= 666

• L5= 10,676, T5= 661

• L6=11,399, T6= 673

• This gives us a forecast for Period 7 of

• F7 = L6 + T6 = 11,399 + 673 = 12,072

Problem 3