Role of Network Design in the Supply Chain

Factors Influencing Network Design Decisions

Framework for Network Design Decisions
Facility Location and Capacity Allocation Models

Network Design in the Supply Chain

Usha Mohan
Department of Management Studies
IIT Madras

June 22, 2016

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Factors Influencing Network Design Decisions
Framework for Network Design Decisions
Facility Location and Capacity Allocation Models

Outline

1 Role of Network Design in the Supply Chain

2 Factors Influencing Network Design Decisions
3 Framework for Network Design Decisions
4 Facility Location and Capacity Allocation Models
Phase II: Network Optimization Models
Phase III: Gravity Location Models
Phase IV: Network Optimization Models
Demand Allocation Models
Capacitated Plant Location Problem
Capacitated Plant Location Model: Single Sourcing
Locating Plants and Warehouses Simultaneously

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Factors Influencing Network Design Decisions
Framework for Network Design Decisions
Facility Location and Capacity Allocation Models

Learning Objectives

Understand the role of network design in a supply chain.

Identify factors influencing supply chain network design
decisions.
Develop a framework for making network design decisions.
Use optimization for facility location and capacity allocation
decisions.

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Factors Influencing Network Design Decisions
Framework for Network Design Decisions
Facility Location and Capacity Allocation Models

Network Design Decisions

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?

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Factors Influencing Network Design Decisions
Framework for Network Design Decisions
Facility Location and Capacity Allocation Models

Factors Influencing Network Design

Strategic factors
Technological factors
Macroeconomic factors
Tariffs and tax incentives
Exchange-rate and demand risk
Freight and fuel costs
Political factors
Infrastructure factors
Competitive factors
Socio Economic factors
Customer response time and local presence
Logistics and facility costs
Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Factors Influencing Network Design Decisions
Framework for Network Design Decisions
Facility Location and Capacity Allocation Models

Competitive factors

Positive externalities between firms

Collocation benefits all
Development of infrastrucutre
Locating to split the market

Locate to capture largest market share

1−b−a 1+b−a
d1 = a + and d2 =
2 2

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Factors Influencing Network Design Decisions
Framework for Network Design Decisions
Facility Location and Capacity Allocation Models

Socio Economic Factors

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?

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Factors Influencing Network Design Decisions
Framework for Network Design Decisions
Facility Location and Capacity Allocation Models

Framework for Network Design

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Factors Influencing Network Design Decisions
Framework for Network Design Decisions
Facility Location and Capacity Allocation Models

Phase I

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 growth strategy

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Factors Influencing Network Design Decisions
Framework for Network Design Decisions
Facility Location and Capacity Allocation Models

Phase II

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

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Factors Influencing Network Design Decisions
Framework for Network Design Decisions
Facility Location and Capacity Allocation Models

Phase III

Phase III: Select a set of desirable potential sites

Hard infrastructure requirements
Includes availability of suppliers, transportation services,
communication utilities, warehousing infrastructure
Soft infrastructure requirements
availability of skilled workforce, workforce turnover,
community receptivity to business and industry

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Factors Influencing Network Design Decisions
Framework for Network Design Decisions
Facility Location and Capacity Allocation Models

Phase IV

Phase IV: Location choices

To select a precise location and capacity allocation for
each facility.
Design of network to maximize total profits taking into
account
expected margin and costs
logistics and facility costs
taxes and tariffs

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

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 and to assign current demand to facilities

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

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

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Example: Sunoil
Vice President of SunOil,is considering several options to
meet demand.
One possibility is to set up a facility in each region.
Advantage : it lowers transportation cost and also helps
avoid duties that may be imposed if product is imported
from other regions.
Disadvantage: plants are sized to meet local demand and
may not fully exploit economies of scale
An alternative approach is to consolidate plants in just a
few regions.
This improves economies of scale but increases
transportation cost and duties
The manager must consider these quantifiable trade-offs
along with nonquantifiable factors such as the competitive
environment and political risk.
Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

SunOil: Cost and Demand Data

SunOil is considering two plant sizes in each location.
Low-capacity plants can produce 10 million units a year
high-capacity plants can produce 20 million units a year
All fixed costs are annualized.
The vice president wants to know what the lowest-cost
network should look like.

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Capacitated Plant Location Model: Inputs

n = number of potential plant locations/capacity

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 plant iopen
cij = cost of producing and shipping one unit from plant
i to market j
Goal is to decide on a network design that maximizes profits
after taxes.

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Formulation
Decision variables
yi = 1 if plant i is kept open , 0 otherwise
xij = quantity shipped from plant i to market j
Objective Function
n
X n X
X m
Min fi yi + cij xij
i=1 i=1 j=1

Constraints
n
X
xij = Dj j = 1, . . . , m
i=1
Xm
xij ≤ Ki yi i = 1, . . . , n
j=1
yi Binary xij ≥ 0 i = 1, . . . , n; j = 1, . . . , m
Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Solution

The lowest-cost network will have facilities located in South

America, Asia, and Africa
A high-capacity plant should be planned in each region.
The plant in South America meets the North American
demand, whereas the European demand is met from
plants in Asia and Africa
How can you modify the model if SunOil decides to locate
a plant in Europe for strategic reasons?

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Gravity Location Models

Gravity location models can be useful when identifying

suitable geographic locations within a region.
Gravity models are used to find locations that minimize the
cost of transporting raw materials from suppliers and
finished goods to the markets served.

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Example: Steel Appliances

Steel Appliances (SA), a manufacturer of high-quality

refrigerators and cooking ranges. SA has one assembly factory
located near Denver, from which it has supplied the entire
United States. Demand has grown rapidly and the CEO of SA
has decided to set up another factory to serve its eastern
markets. The supply chain manager is asked to find a suitable
location for the new factory. Three parts plants, located in
Buffalo, Memphis, and St. Louis, will supply parts to the new
factory, which will serve markets in Atlanta, Boston,
Jacksonville, Philadelphia, and New York.

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Gravity Location Model

To identify the geographic location for potential sites.
(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
q
dn = (x − xn )2 + (y − yn )2
k
X
Total cost: TC = dn Dn Fn
n=1
Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Locations of Supply Sources and Markets for Steel

Appliances

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Solution and Intepretation

The manager thus identifies the coordinates (x, y) = (681,

882) as the location of the factory that minimizes total cost
TC.
From a map, these coordinates are close to the border
between North Carolina and Virginia.
The precise coordinates provided by the gravity model may
not correspond to a feasible location, though.
The manager should look for desirable sites close to the
optimal coordinates that have the required infrastructure as
well as the appropriate worker skills available.

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Gravity Model: Iterative Procedure

1 For each supply source or market n, evaluate dn

0 0
2 Obtain a new location (x , y ) for the facility, where
k k
X Dn Fn xn X Dn Fn yn
0
dn 0
dn
n=1 n=1
x = ,y =
k k
X Dn Fn X Dn Fn
dn dn
n=1 n=1

0 0
3 If the new location (x , y ) is almost the same as (x, y )
0 0
stop. Otherwise, set (x, y ) = (x , y ) and go back to step 1.

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Phase IV: Network Optimization Models

During Phase IV, a manager decides on the location and

capacity allocation for each facility.
Besides locating the facilities, a manager also decides how
markets are allocated to facilities.
This allocation must account for customer service
constraints in terms of response time. item The demand
allocation decision can be altered on a regular basis as
costs change and markets evolve. When designing the
network, both location and allocation decisions are made
jointly.

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Example: TelecomOne and HighOptic

TelecomOne and HighOptic, two manufacturers of

telecommunication equipment.
TelecomOne has focused on the eastern half of the United
States.
It has manufacturing plants located in Baltimore, Memphis,
and Wichita and serves markets in Atlanta, Boston, and
Chicago.
item HighOptic has targeted the western half of the United
States
Serves markets in Denver, Omaha, and Portland from
plants located in Cheyenne and Salt Lake City.

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Data
Plant capacities, market demand, variable production and
transportation cost per thousand units shipped, and fixed costs
per month at each plant are shown below

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Demand Allocation Problem

TelecomOne has a total production capacity of 71,000 units

per month and a total demand of 32,000 units per month
HighOptic has a production capacity of 51,000 units per
month and a demand of 24,000 units per month.
Each year, managers in both companies must decide how
to allocate the demand to their production facilities as
demand and costs change.

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Demand Allocation Model: Inputs

n= number of factory locations

m= number of markets or demand points
Dj = annual demand from market j
Ki = capacity of factory i
cij = cost of producing and shipping one unit from factory
i to market j
(cost includes production, inventory, and transportation)

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Formulation
Decision variables
xij = quantity shipped from i to market j
Objective Function
Xn X m
Min cij xij
i=1 j=1

Constraints
n
X
xij = Dj j = 1, . . . , m
i=1
Xm
xij ≤ Ki i = 1, . . . , n
j=1
xij ≥0 i = 1, . . . , n; j = 1, . . . , m

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Optimal Demand Allocation

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Solution and Interpretation

It is optimal for TelecomOne not to produce anything in the

Wichita facility because of high costs of production and
shipping even though the facility is operational and the
fixed cost is incurred.
TelecomOne incurs a monthly variable cost of $14,886,000
and a monthly fixed cost of $13,950,000, for a total
monthly cost of $28,836,000.
HighOptic incurs a monthly variable cost of $12,865,000
and a monthly fixed cost of $8,500,000, for a total monthly
cost of $21,365,000.

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Merger

Management executives at both TelecomOne and

HighOptic have decided to merge the two companies into a
single entity to be called TelecomOptic.
Management believes that significant benefits will result if
the two networks are merged appropriately.
TelecomOptic will have five factories from which to serve
six markets.
Management is debating whether all five factories are
needed.

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Model

Merge the companies

Solve using location-specific costs
Decision variables
yi = 1 if factory i is kept open , 0 otherwise
xij = quantity shipped from factory i to market j
Objective Function
n
X n X
X m
Min fi yi + cij xij
i=1 i=1 j=1

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Solution

It is optimal for TelecomOptic to close the plants in Salt

Lake City and Wichita, while keeping the plants in
Baltimore, Cheyenne, and Memphis open.
The total monthly cost of this network and operation is
$47,401,000.
This cost represents savings of about $3 million per month
compared with the situation in which TelecomOne and
HighOptic operate separate supply chain networks.

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Single Sourcing

Market supplied by only one factory

Modify decision variables
yi = 1 if factory i is kept open , 0 otherwise
xij = 1 if market j is supplied by factory i, 0 otherwise
n
X n X
X m
Objective Function Min fi yi + Dj cij xij
i=1 i=1 j=1

Constraints
n
X
xij =1 j = 1, . . . , m
i=1
m
X
Dj xij ≤ Ki yi i = 1, . . . , n
j=1
yi , xij Binary i = 1, . . . , n; j = 1, . . . , m

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Optimal Network Solution with Single Sourcing

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Locating Plants and Warehouses Simultaneously

Consider a supply chain in which suppliers send material to

factories that supply warehouses that supply markets,

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

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
Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Model Formulation

Goal is to identify plant and warehouse locations and quantities

shipped that minimize the total fixed and variable costs
Decision Variables
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
Objective Function
n
X t
X l X
X n n X
X t t X
X m
Min Fi yi + fe ye + chi xhi + cie xie + cej xej
i=1 e=1 h=1 i=1 i=1 e=1 e=1 j=1

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Constraints

The total amount shipped from a supplier cannot exceed

the supplier’s capacity.
The amount shipped out of a factory cannot exceed the
quantity of raw material received.
The amount produced in the factory cannot exceed its
capacity.
The amount shipped out of a warehouse cannot exceed
the quantity received from the factories.
The amount shipped through a warehouse cannot exceed
its capacity.
Each factory or warehouse is either open or closed

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

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
m
X n
X n
X n X
X m
Max rj xij − Fi yi − cij xij
j=1 i=1 i=1 i=1 j=1

Modified Constraint
n
X
xij ≤ Dj for j = 1, . . . , m
i=1

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

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

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain
 Role of Network Design in the Supply Chain
Phase II: Network Optimization Models
Factors Influencing Network Design Decisions
Phase III: Gravity Location Models
Framework for Network Design Decisions
Phase IV: Network Optimization Models
Facility Location and Capacity Allocation Models

Summary

Understand the role of network design in a supply chain

Identify factors influencing supply chain network design
decisions
Develop a framework for making network design decisions
Use optimization for facility location and capacity allocation
decisions

Usha MohanDepartment of Management StudiesIIT Madras Network Design in the Supply Chain