SUPPLY CHAIN DESIGN &

ANALYSIS
In Chapter 2 we used COG to determine a best location for
Logistica’s capital city. In this chapter we will build on this
idea by now selecting optimal “P” warehouses from a

CHAPTER 3 predetermined list of options.

In practice, as mentioned in Chapter 2, most supply chain

network design modeling will begin with a set of “potential”
LOCATING FACILITIES USING
facility locations from which to determine the optimal.
A DISTANCE-BASED APPROACH
(READ EBOOK 1, CHAPTER 3)

FORMAL PROBLEM DEFINITION FOR FORMAL PROBLEM DEFINITION FOR

LOCATING “P” FACILITIES
Given a set of customer locations and their demands:
 Finding the best P number of facilities (plants or warehouses)
that minimize the total weighted distance from the facility to the
customer
 Assuming that each facility can satisfy the full demand of the
customer and that all demands are always satisfied
LOCATING “P” FACILITIES
When modeling a supply chain, the customer refers to the final
delivery location for our products. A customer location can be
differently defined as:
 If we are modeling a retail supply chain, the customers may be
each of the store’s locations
 If we are modeling a manufacturing firm that sells to retailers or
wholesalers, the customers could be the warehouses of the
retailer or wholesaler
 If the manufacturing firm ships to other manufacturing firms
(say, a steel company shipping to an automaker), the customers
will be the other manufacturing sites
LOCATING “P” FACILITIES
To visualize customers on a map, we needed to link every
customer point to latitude and longitude values. This
process is called geocoding.
Some firms have this data readily available internally.
Otherwise, network modeling software can do this for you or
there are many Web sites that can provide this data as well.
LOCATING “P” FACILITIES
On the map, Al’s customers are sized by their relative demand,
and in the second map, we see demand displayed by each
state’s relative shading (the deeper the shading, the more
demand within that state).
FORMAL PROBLEM DEFINITION FOR
LOCATING “P” FACILITIES
The first question SC designer will face when beginning his demand
data collection will most likely be, “What time horizon should we
analyze?”
• Typical network design studies use an entire year’s worth of demand.
In addition to being a common reporting time period for many
companies, reviewing an entire year of activity within a supply chain
ensures that all peaks and valleys of your customers’ buying patterns
are accounted for in SC analysis.
LOCATING “P” FACILITIES
 A list of the top 25 most frequently selected locations for
warehouses in the U.S. to use as a potential list to select from.
 With a predefined set of facilities, we can then build a matrix
with the distance between each facility and each customer.
FORMULATING AND SOLVING THE PROBLEM FORMULATING AND SOLVING THE PROBLEM
In Chapter 2, we saw how finding the single best point was relatively
easy. We simply listed all the possible combinations and picked the
best one.
 The problem gets more complicated very quickly. When we pick
the best two sites, we need to figure out the best two locations and The need for the use of linear and integer programming techniques
determine which customer is served by each of these two sites. for sorting through these combinations in a systematic approach to
find the best answer.
 If we have 25 potential facility locations and need to find the best 5,
there are 53130 combinations to evaluate.
 The formula for this in Excel is =COMBIN(# of potential facilities,
# you want to pick).

FORMULATING AND SOLVING THE PROBLEM FORMULATING AND SOLVING THE PROBLEM
Index of key data elements and some terminology:
 J is the set of customers we need to serve. E.g. Al’s Athletics, the The objective:
set J would be {New York, Chicago, Los Angeles, and so on}.  an  Minimize the average demand-weighted distance from the
individual customer is defined as j. warehouses to the stores.
 dj is the demand of customer j.
 I is the set of potential facilities we can select from  an individual
facility will be designated by i. E.g. Al’s Athletics, facilities are the
25 warehouses.
 disti,j is the distance from facility i to customer j.
FORMULATING AND SOLVING THE PROBLEM
Constraints:
 We have to meet all the demands. We do not want the model to
outsmart us by minimizing the distance to a customer by not
serving the customer at all.
 We are limiting the number of facilities to P. E.g., Al’s wants to
know the best two, three, four, and so on. If we did not limit the
number, the model would likely select all facilities. The more
facilities, the closer Al’s may be to the customers (our overall
objective).
FORMULATING AND SOLVING THE PROBLEM
Decision variables:
 Do we use the facility at location i? We will denote this decision as
Xi. If Xi = 1, then we use the facility at location i; if Xi = 0, then we
do not use this facility. This is what is called a binary variable. It
can take on a value of only 0 or 1.
 Does facility i serve customer j? We will denote this decision as
Yi,j. If Yi,j = 1, then facility i will serve customer j. If Yi,j = 0, then
facility i will not serve customer j.

FORMULATING AND SOLVING THE PROBLEM HANDS-ON EXCEL EXERCISE

Mathematical model: See the book and download the Excel file “MIP for 9-city example”
for your practice.
Ensure that all customer
demands (j) are served

Locate exactly P
facilities

Ensure that Facility i (Xi)

is opened, then it can
serve customers (Yi,j)

Binary variables
SOME ANALYSIS
We can plot the objective function (in the weighted-average distance)
for each of the solutions. As you can see from the graph, there are
diminishing returns to adding more facilities. When we go from 3 to
4 facilities, distance decreases by 31%.
SOME ANALYSIS
You can see that 1% of the demand is within 100 miles, 4% of the
demand is within 100 to 400 miles, 30% of the demand is within 400
to 800 miles, and the remaining 65% is over 800 miles away.

LESSON LEARNED
When you optimize by allowing multiple sites and your objective is to
minimize the average demand-weighted distance. This model is
useful when:
 Ensuring that you are as close to your customers and demand as
possible is the most important consideration.
 Distance is a good measure of your ability to quickly deliver. The
END OF
shorter distance the shorter the response time to customers.
 Realizing exactly how much value is gained by each additional
facility in your supply chain.
CHAPTER 3
 Distance and transportation costs are highly correlated (the farther
you have to drive, the more expensive it is)