Network Planning

Tushar Jaruhar| Founder, SYMPLFYD

Where to Locate the Factory

▪ Company produces computer components at its plants in

Cincinnati, Kansas and Pittsburgh
▪ Plants are not able to keep up with demand for orders at
warehouses in Detroit, Houston, New York, and Los Angeles
▪ Firm is to build a new plant to expand its productive capacity
▪ Sites being considered are Seattle and Birmingham
▪ Table presents -
▪ Production costs and capacities for existing plants and
demand at each warehouse
▪ Estimated production costs of new (proposed) plants
▪ Transportation costs from plants to warehouses are also
summarized in the Table
Warehouse and Production Data

Monthly Production Monthly Cost to Produce

Warehouse Demand(Units) Plant Supply One Unit
Detroit 10,000 Cincinati 15,000 48
Houston 12,000 Kansas City 6,000 50
New York 15,000 Pittsburg 14,000 52
Los Angeles 9,000
Total 46,000 Total 35,000
Supply needed from new plant = 46,000-35,000 = 11,000 units per month

Estimated Production Cost per

Unit at Proposed Plants
Seattle 53
Birmingham 49
Transportation Cost

From to To Detroit Houston New York Los Angeles

Cincinati 25 55 40 60
Kansas City 35 30 50 40
Pittsburg 36 45 26 66
Seattle 60 38 65 27
Birmingham 35 30 41 50
Fixed Charge

Monthly fixed costs are $400,000 in Seattle and

$325,000 in Birmingham
Which new location will yield lowest cost in
combination with existing plants and warehouses?
Unit cost of shipping from each plant to warehouse is
found by adding shipping costs to production costs
Solution must consider monthly fixed costs of
operating new facility.
 Production + Transport Cost
Unit cost of shipping from each plant to warehouse is found
by adding shipping costs to production costs

From to To Detroit Houston New York Los Angeles

Cincinati 73 103 88 108
Kansas City 85 80 100 90
Pittsburg 88 97 78 118
Seattle 113 91 118 80
Birmingham 84 79 90 99
Fixed Charge Problem
 Use binary variables for each of the two locations.
YS = 1 if Seattle selected as new plant.
= 0 otherwise.
YB = 1 if Birmingham is selected as new plant.
= 0 otherwise.
 Use binary variables for representative quantities.
Xij = # of units shipped from plant i to warehouse j
where
i = C (Cincinnati), K (Kansas City), P ( Pittsburgh),
S ( Seattle), or B (Birmingham)
j = D (Detroit), H (Houston), N (New York), or
L (Los Angeles)
Fixed Charge
Objective: minimize total costs =
$73XCD + $103XCH + $88XCN + $108XCL +
$85XKD + $80XKH + $100XKN + $90XKL + $88XPD +
$97XPH + $78XPN + $118XPL + $84XSD + $79XSH +
$90XSN + $99XSL + $113XBD + $91XBH + $118XBN
+ $80XBL + $400,000YS + $325,000YB
Last two terms in above expression represent
fixed costs.
Costs incurred only if plant is built at location
that has variable Yi = 1.
Fixed Charge: Production Capacity
 Flow balance constraints at plants and warehouses:
Net flow = (Total flow in to node) - (Total flow out of node)
 Flow balance constraints at existing plants (Cincinnati, Kansas
City, and Pittsburgh) :
(0) - (XCD + XCH + XCN + XCL) = -15,000 (Cincinnati supply)
(0) - (XKD + XKH + XKN + XKL) = -6,000 (Kansas City supply)
(0) - (XPD + XPH + XPN + XPL) = -14,000 (Pittsburgh supply)

Production Plant Monthly Supply

Cincinati 15,000
Kansas City 6,000
Pittsburg 14,000
Fixed Charge: New Plant
Capacity
 Flow balance constraint for new plant - account for the 0,1 (Binary) YS and
YB variables:
(0) - (XSD + XSH + XSN + XSL) = -11,000YS (Seattle supply)
(0) - (XBD + XBH + XBN + XBL) = -11,000YB (Birmingham supply)
Fixed Charge: Demand

 Flow balance constraints at existing warehouses (Detroit,

Houston, New York, and Los Angeles):
XCD + XKD + XPD + XSD + XBD = 10,000 (Detroit demand)
XCH + XKH + XPH + XSH + XBH = 12,000 (Houston demand)
XCN + XKN + XPN + XSN + XBN = 15,000 (New York demand)
XCL + XKL + XPL + XSL + XBL = 9,000 (Los Angeles demand)
Monthly
Warehouse Demand(Units)
Detroit 10,000
Houston 12,000
New York 15,000
Los Angeles 9,000
Total 46,000
Fixed Charge: Plant Selection

 Ensure exactly one of two sites is selected for new plant

 Mutually exclusive variable:
YS + YB = 1
 Fixed Charge Problems
 Including fixed costs, total costs would be:
Seattle: $3,704,000 + $400,000 = $4,104,000
Birmingham: $3,741,000 + $325,000 = $4,066,000
 Cost of shipping was $3,704,000 if new plant built at Seattle
 Cost was $3,741,000 if new plant built at Birmingham
 Because Fixed Cost is Lower in Birmingham the overall cost is
lower between Seattle and Birmingham
 Select Birmingham as site for new plant.
Appendix
More on Integer Programming
 Learning Objectives

Formulate integer programming (IP) models

Set up and solve IP models using Excel’s Solver
Understand the difference between general
integer and binary integer variables
Understand use of binary integer variables in
formulating problems involving fixed (or setup)
costs
Integer Programming Models
Some business problems can be solved only if
variables have integer values.
Airline decides on the number of flights to operate
in a given sector must be an integer or whole
number amount.
The number of aircraft purchased this year
The number of machines needed for production
The number of trips made by a sales person
The number of police officers assigned to the
night shift.
 Some Facts

➢ Integer variables may be required when the model represents a

one time decision (not an ongoing operation)

➢ Integer Linear Programming (ILP) models are much more

difficult to solve than Linear Programming (LP) models

➢ Algorithms that solve integer linear models do not provide

valuable sensitivity analysis results
 Types of Integer Variables
- General integer variables and
- Binary variables

General integer variables can take on integer

value that satisfies all constraints in the model

Binary variables can only take on either of two

values: 0 or 1
Types of Integer Programming Problems
1. Pure integer programming
All decision variables must have integer solutions.
2. Mixed integer programmin
Some, but not all, decision variables must have integer
solutions.
Non-integer variables can have fractional optimal values.
3. Pure binary (or Zero - One) integer programming
All decision variables are of special type known as binary.
Variables must have solution values of either 0 or 1.
4. Mixed binary integer programming
Some decision variables are binary, and other decision
variables are either general integer or continuous valued.
 Models With General Integer Variables

• A model with general integer variables (IP) has objective function and
constraints identical to LP models.
• No real difference in basic procedure for formulating an IP model and LP
model.
• Only additional requirement in IP model is one or more of the decision
variables have to take on integer values in the optimal solution.
• Actual value of this integer variable is limited by the model constraints. (Values
such as 0, 1, 2, 3, etc. are perfectly valid for these variables as long as these
values satisfy all model constraints.)
 Complexities of ILPS

• If an integer model is solved as a simple linear

model, at the optimal solution non-integer values
may be attained

• Rounding to integer values may result in:

– Infeasible solutions
– Feasible but not optimal solutions
– Optimal solutions
 Some Features of Integer Programming

• Rounding non-integer solution values up to the

nearest integer value can result in an infeasible
solution
• A feasible solution is ensured by rounding down
non-integer solution values but may result in a
less than optimal (sub-optimal) solution
Integer Programming Example
Graphical Solution of Maximization Model

Maximize Z = $100x1 + $150x2

subject to:
8,000x1 + 4,000x2  $40,000
15x1 + 30x2  200 ft2
x1, x2  0 and integer

Feasible Solution Space with Integer Solution Points