Network

Design in the
Supply Chain

Chapter 4
Outline
• The Role of Network Design in the Supply
Chain
• Factors Influencing Network Design
Decisions
• Framework for Network Design Decisions
• Models for Facility Location and Capacity
Allocation
• The Role of IT in Network Design
• Making Network Design Decisions in
Practice

5-2
 Facility Facility
role location
Network
Design
Decisions Capacity
Market
and supply
allocation
allocation

5-3
Factors Influencing
Network Design Decisions
• Strategic
• Technological
• Macroeconomic
• Political
• Infrastructure
• Competitive
• Logistics and facility costs

5-4
The Cost-Response Time Frontier
Local FG
Hi
Mix
Regional FG

Local WIP
Cost Central FG

Central WIP

Central Raw Material and Custom production

Custom production with raw material at suppliers

Low
Low Response Time Hi

5-5
Service and Number of Facilities
Response
Time

Number of Facilities

5-6
Costs and Number of Facilities
Inventory

Facility costs
Costs

Transportation

Number of facilities

5-7
 Cost Buildup as a Function of Facilities
Total Costs
Cost of Operations
Percent Service
Level Within
Promised Time
Facilities
Inventory
Transportation
Labor

Number of Facilities

5-8
 Phase I Supply Chain Strategy

Framework for Phase II Regional Facility Configuration

Network
Design
Phase III Desirable Sites
Decisions

Phase IV Location Choices

5-9
A Framework for Network Design Decisions
Competitive STRATEGY GLOBAL COMPETITION
PHASE I
Supply Chain
INTERNAL CONSTRAINTS Strategy TARIFFS AND TAX
Capital, growth strategy,
INCENTIVES
existing network

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
 Conventional Network
Materials Customer
Vendor Finished Customer
DC Store
DC Goods DC DC

Customer
Component Store
Vendor Manufacturing
DC Plant Customer Customer
Warehouse DC Store
Components
DC Customer
Vendor Store
DC Finished
Customer
Goods DC
Final DC Customer
Assembly Store

5-11
Tailored Network: Multi-Echelon Finished
Goods Network
Local DC
Cross-Dock Store 1
Regional Customer 1
Finished DC
Goods DC Store 1
Local DC
Cross-Dock
National Store 2
Customer 2
Finished
DC
Goods DC
Local DC Store 2
Cross-Dock
Regional
Finished Store 3
Goods DC

Store 3

5-12
Gravity Methods for Location
• Ton Mile-Center Solution
• x,y: Warehouse Coordinates
( x − x n) + ( y − y n)
2 2
d =
• xn, yn : Coordinates of delivery n

nx F
location n
 D k
n n
• dn : Distance to delivery location d
n x= n =1 n

D nF
k
• Fn : Annual tonnage to delivery  d
n =1
n

location n n

D ny F
k

 d
n n

y= n =1 n

D nF
k

Min  d n Dn F n  dn =1
n

5-13
 Phase •Capacitated
Models for Plant location
II model
Facility
Location and
Capacity •Gravity
Allocation Phase location
III models

5-15
Network
Optimization
Models
Key Costs:

• Fixed facility cost

ALLOCATING DEMAND TO LOCATING FACILITIES AND
• Transportation cost PRODUCTION FACILITIES ALLOCATING CAPACITY
• Production cost
• Inventory cost
Which plants to establish? How to
• Coordination cost configure the network?

5-16
Demand Allocation Model
• Which market is served n m
by which plant? Min cij xij
i =1 j =1
• Which supply sources are s.t.
used by a plant? n

xij = Quantity shipped from

x = D
i =1
ij j
, j = 1,..., m

plant site i to customer j m

x  K , i = 1,..., n
ij i
j =1

x ij
0

5-17
Plant Location with Multiple Sourcing

• yi = 1 if plant is located at n n m
site i, 0 otherwise Min f y +  c x ij ij
i i
i =1 i =1 j =1
• xij = Quantity shipped
from plant site i to s.t.
n
customer j
 x = D , j = 1,..., m
i =1
ij j

 x  K y , i = 1,..., n
j =1
ij i i

 y  k ; y {0,1}
i =1
i i

5-18
Plant Location with Single Sourcing
• yi = 1 if plant is located at n n m

site i, 0 otherwise Min f y +  D j c x ij

i i ij
i =1 i =1 j =1

• xij = 1 if market j is s.t.

supplied by factory i, 0 n

otherwise x
i =1
ij
= 1, j = 1,..., m
n

 D j x  K y , i = 1,..., n
j =1
ij i i

xij, y {0,1} i

5-19
 STAGES IN A SUPPLY NETWORK
Supplier Plants Warehouses Markets
 The Role of IT in
Network Design

IT systems help with network design by:

1. Making the modeling of the network
design problems easier
2. Containing high-performance
optimization technologies
3. Allowing for “what-if” scenarios
4. Interfacing with planning and
operational software
5-21
 Making Network Design Decisions In Practice

1 2 3 4
Do not Do not gloss Do not ignore Focus on tariffs
underestimate over the cultural quality of life and tax
the life span of implications issues incentives when
facilities locating facilities

5-22
 • What is the role of network design decisions in
the supply chain?
• What are the factors influencing supply chain
network design decisions?
• Describe a strategic framework for facility
location.
Summary of • How are the following optimization methods
Learning used for facility location and capacity allocation
decisions?
Objectives • Gravity methods for location
• Network optimization models

5-23