MODELS FOR FACILTY LOCATION AND CAPACITY

ALLOCATION
Objective :
to maximize the overall profitability of the resulting supply chain
network while providing customers with the appropriate
responsiveness
profit = revenue – costs
revenue from sale of the product/service
costs from facilities, labor, transportation, material, and
inventories
profits are impacted by taxes and tariffs
profits should mean profits after tariffs and taxes

Decision Phases
I. Location and capacity of facilities
(long-term)
II. Assignment of current demand to available facilities and
Identification of lanes of transportation
Kripa Shanker IIT Kanpur 1
(intermediate–term)
MODELS FOR FACILTY LOCATION AND CAPACITY
ALLOCATION
Inputs :
• location of supply sources and markets
• location of potential facility sites
• demand forecast by market
• facility, labor, and material costs site wise
• transportation costs between each pair of sites
• inventory costs by site as well as a function of quantity
• sales price of product in different regions
• taxes and tariffs as product is moved between locations
• desired response time and other service factors
Models :
I. Network Optimization Models
Kripa Shanker IIT Kanpur 2
II. Gravity Location Models
 NETWORK OPTIMIZATION MODELS
COMPETITIVE STRATEGY
PHASE I
GLOBAL COMPETITION
INTERNAL CONSTRAINTS
Supply Chain
Capital, Growth Strategy,
Strategy TARIFFS AND
Existing Network
TAX INCENTIVES
PRODUCTION
TECHNOLOGIES REGIONAL DEMAND
PHASE II Size, Growth, Homogeneity,
Cost, Scale/Scope Impact,
Support Required, Flexibility Regional Local Specifications
Facility
Configuration
COMPETITIVE POLITICAL, EXCHANGE
ENVIRONMENT RATE, AND DEMAND
RISK
PHASE III
Desirable
Sites

►Phase II
Kripa Shanker IIT Kanpur 3
MODELS FOR FACILTY LOCATION AND CAPACITY
ALLOCATION
Phase II : Network Optimization Models
The Capacitated Plant Location Model
Objective:
To decide on a network design that maximizes profits after taxes and
meets all the demands

Inputs :
• n = number of potential plant location/capacity
(each capacity will count as a separate location)
• m = number of markets or demand points
• 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 unit from factory i to
market j
Kripa Shanker IIT Kanpur 4
(cost includes production, inventory, transportation, and duties)
 MODELS FOR FACILTY LOCATION AND CAPACITY ALLOCATION

The Capacitated Plant Location Model

Inputs :
• n = number of potential plant location/capacity
(each capacity will count as a separate location)
• m = number of markets or demand points
• 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 unit from factory i to
market j
(cost includes production, inventory, transportation, and duties)
Decision Variables :
• yi = 1 if plant i is open, o otherwise
• Kripa Shanker IIT Kanpur
xij = quantity shipped from factory i to market j 5
 MODELS FOR FACILTY LOCATION AND CAPACITY ALLOCATION

The Capacitated Plant Location Model

Objective Function :
Minimize the total cost (fixed + variable) of setting up and
operating the network
n n m
Min  f y    c x
i1 i i i1 j1 ij ij

Constraints :
• Demand on each market point j be satisfied.
n
 x D for j  1,2,......, m (all market points)
i1 ij j
• No plant can supply more than its capacity.
m
 xij  Ki yi for i 1,2,......, n (all plants)
j1
• Each plant is either open or closed.
yi =0 if the plant i is closed
1 KripaiShanker
if the plant is openIIT Kanpur 6
 MODELS FOR FACILTY LOCATION AND CAPACITY ALLOCATION

Phase III : Gravity Location Models

PHASE III
PRODUCTION METHODS AVAILABLE
Desirable
Skill Needs, Response Time INFRASTRUCTURE
Sites

Gravity location models are used to find locations that minimize the cost of
transportation of raw materials from suppliers and finished goods to the markets
served

INPUTS :
(xn, yn) : coordinate location of either a market or supply source n
Fn : cost of shipping one unit for one unit of distance between facility and either
market or supply source n
Dn : quantity to be shipped between facility and either market or supply source n

Kripa Shanker IIT Kanpur 7

MODELS FOR FACILTY LOCATION AND CAPACITY ALLOCATION

Gravity Location Models

Supply source

(xn, yn)
(x, y)
Market

Facility

The distance dn between the facility at location (x,y) and the supply source or
market n is given by d  ( x  x ) 2  ( y  y ) 2
n n n

The total cost is given by k

TC   d n Dn Fn
n 1

Kripa Shanker IIT Kanpur 8

MODELS FOR FACILTY LOCATION AND CAPACITY
ALLOCATION
Phase IV : Network Optimization Models
Allocating Demand to Production Facilities
Objective:
To decide on how the markets will be allocated to various production
facilities (factories)

Inputs :
• n = number of factory locations xij j

Factories
i

Markets
• m = number of markets or demand points
• Dj = annual demand from market j
• Ki = capacity of factory i n m
• cij = cost of producing and shipping one unit from factory i to market j
(cost includes production, inventory, and transportation)
Decision Variables : xij = quantity shipped from factory i to market j
Kripa Shanker IIT Kanpur 9
 MODELS FOR FACILTY LOCATION AND CAPACITY
ALLOCATION

Objective Function
n m xij j

Factories
Min   cij xij i

Markets
i1 j 1

Constraints :
•Demand on each market point j be satisfied.
n m
n
 x D for j  1,2,......, m (all market points)
i1 ij j
•No plant can supply more than its capacity.
m
 xij  K for i  1,2,......, n (all factories)
j1 i

Kripa Shanker IIT Kanpur 10

MODELS FOR FACILTY LOCATION AND CAPACITY
ALLOCATION
The Capacitated Plant Location Model with Single Sourcing
(single sourcing : a market is supplied from only one factory)
Objective : To decide on a network design that maximizes profits after
taxes and meets all the demands

Inputs :
• n = number of factories
• m = number of markets or demand points
• Dj = annual demand from market j
• Ki = capacity of factory i
• fi = annualized fixed cost of keeping factory i open
• cij = cost of producing and shipping one unit from factory i to
market j (cost includes production, inventory, transportation, and duties)
Decision Variables :
• yi = 1 if factory is located at site i , 0 otherwise
Kripa Shanker IIT Kanpur 11
• xij = 1 if market j is supplied by factory i
 MODELS FOR FACILTY LOCATION AND CAPACITY ALLOCATION

The Capacitated Plant Location Model with Single Sourcing

Objective Function :
Minimize the total cost (fixed + variable) of setting up and
operating the network
n n m
Min  fi yi    D j cij xij
i 1 i 1 j 1
Constraints :
• Each market is supplied by exactly one factory.
n
 xij 1 for j  1,2,......, m (all market points)
i 1
• No plant can supply more than its capacity.
m
 D j xij  Ki yi for i  1,2,......, n (all plants)
j 1
 Shanker
xij , yi Kripa 0,1 IIT Kanpur 12
 MODELS FOR FACILTY LOCATION AND CAPACITY
ALLOCATION
Locating Plants and Warehouses Simultaneously
Suppliers Plants Warehouses Markets
(h) Site (i) Site (e) (j)

Fixed cost =fi Fixed cost =fe

Capacity=Sh Capacity=Ki Capacity=We Demand=Dj

Unit cost =chi Unit cost =cie Unit cost =cej

numbers] [l] [n] [t] [m]

DECSION VARAIBLES
yi = 1 if factory is located at site i; 0 otherwise
ye = 1 if warehouse is located at site e; 0 otherwise
xej = quantity shipped from warehouse e to market j
xie = quantity shipped from factory site i to warehouse e
xhi = quantity shipped from supplier h to factory at site i

Kripa Shanker IIT Kanpur 13

 MODELS FOR FACILTY LOCATION AND CAPACITY
ALLOCATION
Locating Plants and Warehouses Simultaneously

Objective :
To decide on plant and warehouse locations as well as quantities
shipped between various points that minimize the total fixed and
variable costs.

Suppliers Plants Warehouses Markets

(h) Site (i) Site (e) (j)

Fixed cost =fi Fixed cost =fe

Capacity=Sh Capacity=Ki Capacity=We Demand=Dj

Unit cost =chi Unit cost =cie Unit cost =cej

[l] [n] [t] [m]

n t l n n t t m
Min  fi yi   f e ye    chi xhi    cie xie    cej xej
i 1 e 1 h 1 i 1 i 1 e 1 e 1 j 1
Kripa Shanker IIT Kanpur 14
MODELS FOR FACILTY LOCATION AND CAPACITY ALLOCATION
Locating Plants and Warehouses Simultaneously
Constraints :
1. Total amount shipped from a supplier cannot exceed the supplier’s capacity
Supplier (h)

Capacity=Sh n
n  xhi
 xhi  sh for h 1,2,....,l (all supliers) Number=[ l ]
i1
i1
2. Total amount shipped out of a factory cannot exceed the quantity of raw material received

l t Factory (i)
 hi  xie for i 1,2,....., n (all factories)
x 
l t
h1 e1  xhi  xi
h1 Capacity=Ki
e1

3. Total amount produced in the factory cannot exceed its capacity Number=[ n ]

t
 xie  Ki yi for i 1,2,....., n (all factories)
e1

Kripa Shanker IIT Kanpur 15

MODELS FOR FACILTY LOCATION AND CAPACITY ALLOCATION
Locating Plants and Warehouses Simultaneously
Constraints :
4. Total amount shipped out of a warehouse cannot exceed the quantity received from the factories
n m Warehouse
 ie  xej for e 1,2,....., t (all warehouses)
x  (e)
i1 j1 n m
 xej
 xie
i1 j1
5. Total amount shipped out of a warehouse cannot exceed its capacity Capacity=We

i i y , x  0,1 Number=[ t ]
m
 ejx  W y
e e for e 1,2,....., t (all warehouse)
j1

6. The amount shipped to a customer must cover the demand Customer

(j)
t t
 xej  D j for j 1,2,....., m (all customers)  xej
e1
e1
Demand=Dj
7. Each factory or warehouse is either open or closed Number=[ m ]
yi , xi   0,1
Kripa Shanker IIT Kanpur 16
 MODELS FOR FACILTY LOCATION AND CAPACITY ALLOCATION

The Capacitated Plant Location Model

Objective Function : Maximize the profits after tariffs and taxes
Profits = Total revenues - total cost (fixed + variable) of setting up and
operating the network
m n n n m
Max  r  x   f y    c x
j1 j i1 ij i1 i i i1 j1 ij ij

Constraints :
• Total shipment to a market point should not exceed the demand
(Demand on each market point j be satisfied).
n
 xij  D j for j1,2,......,m (all market points)
i1
• No plant can supply more than its capacity.
m
 xij  Ki yi for i 1,2,......, n (all plants)
j1
• Each plant is either open or closed.
yi = 0 if the plantKripa
i is Shanker
closed; 1IIT
if Kanpur
the plant i is open. 17