Ch05 - Designing The Distribution Model

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".
Supply Chain
Management
LECTURE 5
Network Design in the
Supply Chain
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Y S L E©A2016 I N G Education,Supply
R N Pearson Inc. Chain Management, 6e Sunil Chopra, Peter Meindl, Dharam Vir Kalra PEAR
5 – 1S O N
Learning Objectives
1. Understand the role of network design in a

supply chain.
2. Identify factors influencing supply chain network
design decisions.
3. Develop a framework for making network design
decisions.
4. Use optimization for facility location and
capacity allocation decisions.
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The Role of Network Design
• Facility role

– What role, what processes?
• Facility location
– Where should facilities be located?
• Capacity allocation
– How much capacity at each facility?
• Market and supply allocation
– What markets? Which supply sources?
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The Role of Network Design
• Revisit design decisions after

– market changes,
– mergers, or
– factor cost changes
– Policy change (state actors)
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Factors Influencing
Network Design Decisions
• Strategic factors

• Technological factors
• Macroeconomic factors
• Political
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Strategic factors
• Competitive strategy related

• Global/Local
• Supply chain strategy
• Responsive v/s Efficient
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Technological factors
• Production Technology
• Distribution/warehousing

technology
• Inventory management
• An automated storage and
retrieval system (ASRS or
AS/RS)
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Macroeconomic factors
• Tariffs and tax incentives

• Exchange-rate and demand
risk
• Freight and fuel costs
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SOCIO ECONOMIC FACTORS IN CHOICE OF
FACILITY LOCATION

• What role do socio-economic factors play in
the selection of the facility location?
• How do state policies aimed at promoting

balanced regional development, shape the
supply chain network designs?
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R N Pearson Inc. Chain Management, 6e Sunil Chopra, Peter Meindl, Dharam Vir Kalra PEAR SON
5 – 10
Factors Influencing
Network Design Decisions
• Infrastructure factors

• Competitive factors
– Positive externalities between firms
– Locating to split the market
• Customer response time and local
presence
• Logistics and facility costs
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Framework for Network Design
Decisions
• Phase I: Define a Supply Chain

Strategy/Design
– Clear definition of the firm’s competitive strategy
– Forecast the likely evolution of global competition
– Identify constraints on available capital
– Determine broad supply strategy
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Framework for Network Design Decisions
FIGURE 5-2

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Decisions
• Phase II: Define the Regional Facility

Configuration
– Forecast of the demand by country or region
– Economies of scale or scope
– Identify demand risk, exchange-rate risk, political
risk, tariffs, requirements for local production, tax
incentives, and export or import restrictions
– Identify competitors
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Decisions
• Phase III: Select a Set of Desirable Potential

Sites
– Hard infrastructure requirements
– Soft infrastructure requirements
• Phase IV: Location Choices
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Models for Facility Location and
Capacity Allocation
• Maximize the overall profitability of the supply

chain network while providing customers with
the appropriate responsiveness
• Many trade-offs during network design
• Network design models used
– to decide on locations and capacities
– to assign current demand to facilities and identify
transportation lanes
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Models for Facility Location and
Capacity Allocation
• Important information

– Location of supply sources and markets
– Location of potential facility sites
– Demand forecast by market
– Facility, labor, and material costs by site
– Transportation costs between each pair of sites
– Inventory costs by site and as a function of quantity
– Sale price of product in different regions
– Taxes and tariffs
– Desired response time and other service factors
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Phase II: Network Optimization
Models
FIGURE 5-3

B9-F9: Annual Demand, B4-F8: Costs
SunOil wants palnts in each location with two

capacity sizes (High;J4-J8 and Low; H4-H8)
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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 plant i

to market j
K i = potential capacity of plant i
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
Minå f i yi + å åc x ij ij
subject to i=1 i=1 j=1
n
åx ij
= D j for j = 1,...,m
i=1
m
åx ij
= K i yi for i = 1,...,n
j=1
yi Î {0,1} for i = 1,...,n, x ij ³ 0
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FIGURE 5-4
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Capacitated Plant Location Model FIGURE 5-5

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FIGURE 5-5
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• Constraints

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FIGURE 5-6
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FIGURE 5-7
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Phase III: Gravity Location Models
xn, yn: coordinate location of either a market or supply source n
Fn: cost of shipping one unit for one mile between the facility and
either market or supply source n

Dn: quantity to be shipped between facility and market or supply
source n
(x, y) is the location selected for the facility, the distance dn between the
facility at location (x, y) and the supply source or market n is given by
(x – x ) + ( y – y )
2 2
dn = n n
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Gravity Location Model
Transportation Quantity in Coordinates
Sources/Markets Cost $/Ton Mile (Fn) Tons (Dn) xn yn

Supply sources
Buffalo 0.90 500 700 1,200
Memphis 0.95 300 250 600
St. Louis 0.85 700 225 825
Markets
Atlanta 1.50 225 600 500
Boston 1.50 150 1,050 1,200
Jacksonville 1.50 250 800 300
Philadelphia 1.50 175 925 975
New York 1.50 300 1,000 1,080
k TABLE 5-1
Total transportation cost TC = å d n Dn Fn
n=1
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FIGURE 5-8
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FIGURE 5-8
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1. For each supply source or market n, evaluate dn

2. Obtain a new location (x’, y’) for the facility, where
k k
Dn Fn xn Dn Fn yn
å d å d
x¢ = n=1
k
n
and y¢ = n=1
k
n
Dn Fn Dn Fn
å d å d
n=1 n n=1 n
3. If the new location (x’ , y’ ) is almost the same as

(x, y) stop. Otherwise, set (x, y) = (x’ , y’ ) and go to
step 1
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Phase IV: Network Optimization
Models

Demand City
Monthly Monthly
Production and Transportation
Capacity Fixed Cost
Cost per Thousand Units (Thousand $)
(Thousand (Thousand
Supply City Atlanta Boston Chicago Denver Omaha Portland Units) K $) f
Baltimore 1,675 400 985 1,630 1,160 2,800 18 7,650
Cheyenne 1,460 1,940 970 100 495 1,200 24 3,500
Salt Lake 1,925 2,400 1,450 500 950 800 27 5,000
City
Memphis 380 1,355 543 1,045 665 2,321 22 4,100
Wichita 922 1,646 700 508 311 1,797 31 2,200
Monthly 10 8 14 6 7 11
demand
(thousand
units) Dj
TABLE 5-2
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Network Optimization Models
• Allocating demand to production facilities

n = number of factory locations
m = number of markets or demand points xij = quantity shipped from
D j = annual demand from market j factory i to market j
K i = capacity of factory i
cij = cost of producing and shipping one unit from factory i to market j
n m subject to
Minå å cij xij
n
i=1 j=1 åx = D j for j = 1,..., m
ij
i=1
m
åx ij £ Ki for i = 1,..., n
j=1
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Network Optimization Models
• Optimal demand allocation

Atlanta Boston Chicago Denver Omaha Portland
TelecomOne Baltimore 0 8 2
Memphis 10 0 12
Wichita 0 0 0
HighOptic Salt Lake 0 0 11
Cheyenne 6 7 0
TABLE 5-3
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• Merge the companies

• Solve using location-specific costs
yi = 1 if factory i is open, 0 otherwise
xij = quantity shipped from factory i to market j
n n m
Minå f i yi + å åc x ij ij
i=1 i=1 j=1
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FIGURE 5-9
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FIGURE 5-10
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FIGURE 5-10
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FIGURE 5-11
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FIGURE 5-12
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Capacitated Model With
Single Sourcing
• Market supplied by only one factory

• Modify decision variables
yi = 1 if factory i is open, 0 otherwise
xij = 1 if market j is supplied by factory i, 0 otherwise
n n m
Minå f i yi + å å D j cij xij
i=1 i=1 j=1
subject to
åx ij = 1 for j = 1,..., m
i=1
m
åD x j ij £ K i yi for i = 1,..., n
j=1
xij , yi Î {0,1}
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Capacitated Model With
Single Sourcing
• Optimal network configuration with single

sourcing
Open/
Closed Atlanta Boston Chicago Denver Omaha Portland
Baltimore Closed 0 0 0 0 0 0
Cheyenne Closed 0 0 0 0 0 0
Salt Lake Open 0 0 0 6 0 11
Memphis Open 10 8 0 0 0 0
Wichita Open 0 0 14 0 7 0
TABLE 5-4
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Locating Plants and Warehouses
Simultaneously

FIGURE 5-13
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Simultaneously
• Model inputs

m = number of markets or demand points
n = number of potential factory locations
l = number of suppliers
t = number of potential warehouse locations
Dj = annual demand from customer j
Ki = potential capacity of factory at site i
Sh = supply capacity at supplier h
We = potential warehouse capacity at site e
Fi = fixed cost of locating a plant at site i
fe = fixed cost of locating a warehouse at site e
chi = cost of shipping one unit from supply source h to factory i
cie = cost of producing and shipping one unit from factory i to warehouse e
cej = cost of shipping one unit from warehouse e to customer j
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Simultaneously
• Goal is to identify plant and warehouse locations and

quantities shipped that minimize the total fixed and
variable costs
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 at site i to warehouse e
xhi = quantity shipped from supplier h to factory at site i
n t l n n t t m
Minå Fi yi + å fe ye + åå chi xhi + ååcie xie +åå cej xej
i=1 e=1 h=1 i=1 i=1 e=1 e=1 j=1
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Simultaneously
subject to

n m
åx hi
£ Sh for h = 1,...,l åx ej
£ We ye for e = 1,...,t
i=1 j=1
l t t
åx hi
– å xie ³ 0 for i = 1,...,n åx ej
= D j for j = 1,...,m
h=1 e=1 e=1
t
åx ie
£ Ki yi for i = 1,...,n yi , ye Î {0,1},xej ,xie ,xhi ³ 0
e=1
n m
åx – åxie ej
³ 0 for e = 1,...,t
i=1 j=1
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Accounting for Taxes, Tariffs, and
Customer Requirements
• A supply chain network should maximize profits after

tariffs and taxes while meeting customer service
requirements
• Modified objective and constraint
m n n n m
Maxå rj å xij – å Fi yi – å å cij xij
j=1 i=1 i=1 i=1 j=1
åx ij
£ D j for j = 1,...,m
i=1
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Making Network Design Decisions
In Practice
• Do not underestimate the life span of

facilities
• Do not gloss over the cultural implications
• Do not ignore quality-of-life issues
• Focus on tariffs and tax incentives when
locating facilities
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SCND and Indian experiences
• Relience Fresh:
– 8000 Cr Investment done (Total 30k Cr)

– Dedicated SCN , Cold Chain
– Failure: Inadequate differentiation, Thin
retail margin, choice of store location,
high rental, salary, overhead, collective
competition, state govt.
• Relience Fuel Retailing

– 1432 retail store network
established (5000 Cr)
– Price/govt./people perception
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5 – 49
Summary of Learning Objectives
1. Understand the role of network design in

a supply chain
2. Identify factors influencing supply chain
network design decisions
3. Develop a framework for making network
design decisions
4. Use optimization for facility location and
capacity allocation decisions
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5 – 50

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"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

• Competitive strategy related

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

• Tariffs and tax incentives

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

• Freight and fuel costs

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

• How do state policies aimed at promoting

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

SunOil wants palnts in each location with two

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

yi Î {0,1} for i = 1,...,n, x ij ³ 0

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

3. If the new location (x’ , y’ ) is almost the same as

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"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

HighOptic Salt Lake 0 0 11

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

Salt Lake Open 0 0 0 6 0 11

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"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

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yi = 1 if factory is located at site i, 0 otherwise

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"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

"Copyright © 2016 Pearson India Education Services Pvt. Ltd".

• Relience Fuel Retailing

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