Networking and DSTRBN Management - IIFT - June 2019

Network Design and Distribution
Strategies
Dr. Rabindranath Bhattacharya

Adjunct Professor
8/5/2019 VGSOM, Indian Dr.Institute of Technology KGP

Rabindranath Bhattacharya 1
Watch this Video!
• https://www.youtube.com/watch?v=ALoo4vrK
KUw
8/5/2019 Dr. Rabindranath Bhattacharya 2

Network Planning
• The process by which the firm structures and
manages the supply chain order
Inventory Transportation
Right
balance
among
Manufacturing costs
Network Planning
• Matching supply and demand under
uncertainty by positioning and
managing inventory effectively
• Utilize resources effectively by sourcing

products from the most appropriate
manufacturing facility

Network Planning
Network Design
Inventory Positioning
Resource Allocation
Network Design
• Determines the physical configuration and
infrastructure of supply chain
Decisions
Appropriate number of facilities
Location of each facility
Size of each facility
Allocating space for products in each facility
Sourcing Requirements
Distribution strategies- Allocation of customers to each warehouse

What is the trade-off here?
Cost of opening new warehouses

Vs
Advantages of being close to the customer

What adds to complexity further?
• Data required for network configuration

problem
• Network related costs

Data required for network configuration
problem
• Location of all supply chain entities
• Products to be manufactured/ stored
• Special transportation modes required
• Annual demand for each product by customer
location
• Shipment sizes and frequencies for customer
delivery
• Customer service requirements and goals
• Capacities

Network related costs
• Warehousing costs: Labour carrying charges
and fixed operating costs
• Order processing cost
• Production and sourcing costs
• Transportation costs

Data Aggregation
• Why data aggregation?
– Thousands and hundreds of thousands products
flow in the supply chain
• Aggregate the customers located in the close
proximity
• Aggregation of items into a reasonable
number of product groups
– Distribution pattern: products from same source
to same destination
– Product type: various models of same product

Location Problems

Techniques for Discrete
location Problems

Qualitative Analysis

• Table 13.2

• Table 13.3

Quantitative Analysis
• Optimal Distribution of goods from a set of known plants

with known locations to a set of known customers while
satisfying supply and demand conditions.
• Suppose we have ‘m’ plants supplying ‘n’ customers and to
meet the extra demands for the next year we need to open
an additional plant out of two or three new locations.
• What should we do?

Steps
• To evaluate which of the alternate ‘p’

sites will minimize distribution cost we
can set up p transportation problems
each with ‘m+1’ plants and ‘n’ customers
where (m+1)th plant correspondences to
new location being evaluated.
• The minimum of the overall distribution
cost is the location where new
manufacturing plant is to be located.

Example
• Sears Inc. has two plants supplying Refrigerators to
four customers. Because of the extra demand
generated which may last for several years Sears Inc.
decided to choose one of the two plants at Atlanta
and Pittsburgh utilising the full capacity of the
existing plants
• We are to work out for two transportation models to
solve the problem.

Quantitative Analysis

Matrix with Atlanta

Matrix with Pittsburgh

Results
• TC for Atlanta : $7980
• TC for Pittsburgh : $9510
• Choose the location for minimum cost and hence
Atlanta.
• Minimise σ𝑖 σ𝑗 𝐶𝑖𝑗 𝑋𝑖𝑗
• S.t.
𝑛
෍ 𝑋𝑖𝑗 ≤ 𝑎𝑖 ∀ 𝑖 = 1 … 𝑚
𝑗=1
𝑚
෍ 𝑋𝑖𝑗 ≥ 𝑏𝑗 ∀ 𝑗 = 1 … 𝑛
𝑖=1
Hybrid method
• The qualitative method was based on subjective
evaluation only. But is it sufficient?
• There may be factors which are quantifiable like
transportation cost, RM cost, operations cost etc.
• There may be factors which are subjective like attitude of
community to business, potential labour unrest,
reliability of service facilities, availability of labor etc.
• There must be a method to cover all the factors like
critical, Objective and Subjective and solve the problem
of location which is termed as Hybrid method

Formulation

Formulation

Formulation

Example 3:

CF, OF and SF for all six locations

Techniques for Continuous
location Problems

Median Method

Formulation

Example
Department # X- coordinate Y - coordinate Average # of

trips to copiers
1 10 2 6
2 10 10 10
3 8 6 8
4 12 5 4

Example
Department # X- coordinate Weights Average # of

non trips to copiers
decreasing
order
1 8 8 8
2 10 6 14
3 10 10 24
4 12 4 28

Example
Department # Y- coordinate Weights Cumulative

in non weights
decreasing
order
1 2 6 6
2 5 4 10
3 6 8 18
4 10 10 28
Optimum location is found to be 10,6 using Median method.

What to do if it is not feasible?

Gravity Method

Gravity Method
The non linear objective function for the
single facility location problem with Euclidean
distance can be written as:
Minimize TC
m
= ෍ ci fi [ (𝑥𝑖 −𝑥)ҧ 2 + (𝑦𝑖 −𝑦)

ത 2]
i=1
As before, substituting wi = cifi and taking the

derivative of TC with respect to x and y yields
Distance Matrix
Department # X- coordinates Y-coordinates Weights
1 10 2 6
2 10 19 10
3 8 6 8
4 12 5 4
Find the Optimum location of the new facility

Distance Matrix
Departm X- Y- Weights 𝒘 𝒊 𝒙𝒊 𝒘𝒊 𝒚 𝒊
ent # coordinat coordinat
es es
1 10 2 6 60 12
2 10 19 10 100 100
3 8 6 8 64 48
4 12 5 4 48 20
Total 28 272 180
Find the Optimum location of the new facility

272 180
𝑥ҧ = = 9.7 𝑎𝑛𝑑 𝑥ҧ = =6.4
8/5/2019 28 Dr. Rabindranath Bhattacharya 28 43
The Role of Distribution in the Supply Chain
• Distribution:
– The steps taken to move and store a product from
the supplier stage to the customer stage in a
supply chain
– Directly affects cost and the customer experience
and therefore drives profitability
– Choice of distribution strategy can achieve supply
chain objectives from low cost to high
responsiveness

Factors Influencing distribution Network Design
• Distribution network performance evaluated along

two dimensions at the highest level:
– Customer needs that are met
– Cost of meeting customer needs
• Distribution network design options must therefore

be compared according to their impact on customer
service and the cost to provide this level of service

Service and Number of Facilities
Number of
Facilities
Dominos
Response Time
Inventory Costs and Number
of Facilities
Inventory
Costs
Number of facilities

Transportation Costs and
Number of Facilities
Transportation
Costs

Facility Costs and Number
of Facilities
Facility
Costs

Total Costs Related to
Total Costs
Total Costs
Facilities
Inventory
Transportation
Time for a Break?

Distribution Strategies
•Directly shipped
•Through intermediate inventory storage
point(s)

Design Options for a Distribution Network
• Manufacturer Storage with Direct Shipping

• Milk Run from each plant (Aggregate demand
across depots )
• Manufacturer Storage with Direct Shipping and In-
Transit Merge
• Distributor Storage with Carrier Delivery
• Distributor Storage with Last Mile Delivery
• Manufacturer or Distributor Storage with Consumer
Pickup
• Retail Storage with Consumer Pickup

Manufacturer Storage Direct Shipping
• For products with high volume and low demand uncertainty

• Economies of scale: FTL shipments
• Provide good customer experience
• Postponement can be carried out

Shipping Using Milk Run
• Aggregating product-wise demand across all three depots

• Three trips as compared to nine in direct shipping for three depots
• Depots get served more often, hence more transportation costs
• Lower cycle inventory
• Works well when all depots are located in close proximity

Manufacturer Storage In-Transit Merge Network
Factories
Retailer In-Transit Merge by

Carrier
Customers
Product Flow
Information Flow
• Combines pieces of the order coming from different locations so that the customer gets
a single delivery.
• Postponement can be practiced
Example: Dell and Sony- Assembled PC, monitor from one source and keyboard from
other, merges together at hub before
8/5/2019 making aBhattacharya
Dr. Rabindranath single delivery to the customer. 56
Distributor Storage with Carrier Delivery
Factories
Warehouse Storage by
Distributor/Retailer
Customers
Product Flow
Amazon Information Flow
Distributor Storage with Last Mile Delivery
Factories
Distributor/Retailer
Warehouse
Customers
• Home delivery Product Flow

• Distributor warehouse closer
to the customer Information Flow
Manufacturer or Distributor Storage with
Customer Pickup
Factories
Retailer Cross Dock DC
Pickup Sites
Customers
Customer Flow
Product Flow
Information Flow
Cross Docking
Transfer points for inventory
• Goods unloaded from incoming vehicles at the DC are
straightway loaded on to trucks that originates from DC
• The warehouse is flow through warehouse as inventory is
not stocked at warehouse
• The schedule of all incoming and outgoing trucks are tightly
coupled
• Require more control over vehicles
Examples:
Wal-Mart prefer to own vehicles for cross docking
Auto assembler companies: Maruti and Tata motors

Retailer storage with customer pick up
• Inventory is stored locally at retail stores

• Customer walks into retail store/ order online/
order over phone and pick up at the retail
store
• Higher inventory costs
• Lower transportation costs

Hub and Spoke Model
All destinations in the region are connected through a central hub

Fedex: Overnight package delivery
Hub is at Memphis for sorting the
8/5/2019 packagesBhattacharya
Dr. Rabindranath 62
Conventional Network
Materials Customer
Vendor Finished Customer
DC Store
DC Goods DC DC
Customer
Component Store
Vendor Manufacturing
DC Plant Customer Customer
Warehouse DC Store
Components
DC Customer
Vendor Store
DC Finished
Customer
Goods DC
Final DC Customer
Assembly Store
Tailored Network: Multi-Echelon Finished
Goods Network
Local DC
Cross-Dock Store 1
Regional Customer 1
Finished DC
Goods DC Store 1
Local DC
Cross-Dock
National Store 2
Customer 2
Finished
DC
Goods DC
Local DC Store 2
Cross-Dock
Regional
Finished Store 3
Goods DC
Use of different transport networks and modes based on Store 3
customer and product characteristics

Comparison of Distribution Network Design
Options: Illustration
• Manufacturing firm has three plants (A, B &C), each
manufacturing a different product line and serving a stable
market through three depots ( X, Y &Z). Plant A is manufacturing
menswear, plant B is manufacturing ladies wear and plant C is
manufacturing children’s wear.
• Weekly demand = 100 units for each of the three types of
garments at each of the three depots
• Truck can carry 300 units of garments and the transport cost is Rs
2 per km. for FTL shipments. To obtain economies of scale firm
has decided to work with FTL shipments. Inventory carrying cost
is at 20% per annum.
• All the products cost Rs 200 per unit, so inventory carrying cost
is Rs 40 per unit per year. Facility cost of maintaining a DC is Rs
12,000 per year.
Transportation Strategy:
Linking Plants to Markets
d  ( x  xn )  ( y  y n )
2 2
n

Comparison of the Three Transportation Strategies
Rectilinear distances
For Direct shipping- Distance travelled: 2XA+2XB+2XC…… =3744 km
Travel cost per cycle = 3744x 2 =Rs. 7488
Number of cycles per year = 52/3
Annual transport cost = 7488x 52/3 = Rs. 129781
Inventory carrying cost
• Cycle stock inventory
• Direct shipment
– Each depot receives 300 units of each of the products.
Average stock is 150 units for each product line. Three depots
carrying 3 x 450 (150x3) units = 1350 units
– Inventory carrying cost =1350 x 40 = Rs 54000
• Milk run and Shipping via DC
– Each depot receives 100 units of each of the products.
Average stock is 50 units for each product line. Three depots
carrying 3 x 150 (50x3) units = 450 units
– Inventory carrying cost =450 x 40 = Rs 18000
Network Optimization Models
• Allocating demand to production facilities
• Locating facilities and allocating capacity
Key Costs:
Fixed facility cost
• Transportation cost
• Production cost
• Inventory cost
• Coordination cost
Which plants to establish? How to configure the network?
5-69
Network Design & Operations
• Design : Location and capacity of plants and
distribution centres ( warehouses) so as to serve
customers in a cost-effective way
– Strategic decision
– Relevant cost : Facility cost, Variable production cost,
Transportation cost
• Operations: For a given design decide optimal
linkages between plants and markets
– Tactical decision
– Relevant cost : Variable production cost, Transportation cost

Indian Paints: Five Plants and Six Markets
Data
Total demand =1060 units

Total Capacity =1900 units
Indian Paints: Transportation Cost*
*per unit

Indian Paints: Production Plus Transportation
Cost*
*per unit

Network Optimization: Parameters and Variables*
M= Number of plants, let i= 1..m describe m respective

manufacturing plants.
N= Number of markets, let j= 1..n describe n respective
markets
Demj , Pricej , = demand & Price at market j
Capi = production capacity at plant i
Costij = Cost of producing and transporting one unit from
plant i to market j
F costi = Fixed cost of facility i

Decision Variables:
Quantij = Quantity shipped from plant i to market j

Fac open i = 0 or 1 binary variable for facility i
- If binary value is 1: facility is open and
If binary value is 0 :facility is close
* Parameters in italic type and blue are used in design
decisions.
Capacity and demand are for unit time period. Unit
time period could be month, quarter or a year

Network Operations Planning:
Cost Minimization Model
m n
Minimize  Cost
i 1 j 1
ij * Quantij
Subject to following constraints:

m
 Quantij  Demj for j=1..n
i 1
n
 Quantij  Capi for i=1…m
j 1
Quantij  0 for i=1..m , j=1..n
Number of variables= m *n & number of constraints= m+n
Demand allocation problem modeled as linear

8/5/2019
programming problem
Dr. Rabindranath Bhattacharya 77
Cost Minimization Model
Objective function value= Total Variable costs=773,770

Revenue= 1,017,450 , Gross Profit = 243,680 , Net Profit= 15,680

280
120
5
200 155
135
165

Profit Maximization Model
Maximise
m n m n
  Pr icej * Quantij    Costij * Quantij
i 1 j 1 i 1 j 1
n
 Quant
j 1
ij  Capi for i=1…m
 Quant
i 1
ij  Demj for j=1..n
Number of variables= m *n & number of

constraints= m+n
Objective Function = Maximize Total Gross Profit = 245230

Revenue= 885700 Variable cost = 640470, Net Profit= 17,230

280
120
5
200
135
165

Comparison of Models
Decision Type of Objective Revenue Net Profit % Net

problem decision profit/Sales
I Network Cost 1017450 15680 1.54

Operations Minimisation
II Network Profit 885700 17230 1.95

Operations Maximisation

Network Design: Cost Minimization Model
Minimize
σ𝑚
𝑖=1 𝐹𝑎𝑐_𝑜𝑝𝑒𝑛 𝑖 ∗ 𝐹𝑐𝑜𝑠𝑡𝑖 + σ𝑚 σ𝑛
𝑖=1 𝑗=1 𝐶𝑜𝑠𝑡𝑖𝑗 ∗ 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦𝑖𝑗

m
 Quantij  Demj for j=1..n
n
i 1
 Quantij  Fac  openi  Capi for i=1…m
j 1
Fac  openi  0 or1, For i= 1..m

Number of linear variables= m *n, number of binary variables=m & number
of constraints= m+n

Minimize σ𝑚 𝑌
𝑖=1 𝑖 ∗ 𝐹𝑖 + σ𝑚 σ𝑛
𝑖=1 𝑗=1 𝐶𝑖𝑗 ∗ 𝑋𝑖𝑗

𝑚
෍ 𝑋𝑖𝑗 = 𝐷𝑗 for j=1..n

𝑖=1
𝑛
෍ 𝑋𝑖𝑗 ≤ 𝑌𝑖 × 𝐶𝑎𝑝𝑖 for i=1…m

𝑗=1
𝑌𝑖 = 0 𝑜𝑟1, For i = 1..m
𝑋𝑖𝑗 ≥ 0 for i=1..m , j=1..n

of constraints= m+n
Bang Chen Mum Luck Kolka Suppl Plant
Delhi
alore nai bai now ta y (open/close)
Ahmed No
abad 0 0 0 0 0 0 0
Baddi 0 0 280 0 120 0 400 Yes
Hubli 165 135 0 60 0 0 360 Yes
Nagpur 0 0 0 140 5 155 300 Yes

Vishakh
apatna No
m 0 0 0 0 0 0 0
Objective function
Supply 165 135 = Total
280 Costs ( Fixed
200 125 155+ Variable)
0 = 891760
8/5/2019 Dr. Rabindranath Bhattacharya
Revenue=1,017,450 , Gross Profit = 241,690 , Net Profit=125,69086
280
120
155
140
60
135
165

Network Design:
Maximise 𝑚 𝑛
෍ ෍ 𝑃𝑟𝑖𝑐𝑒𝑗 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦𝑖𝑗
n

j 1
ij  ( Fac  openi )  Capi for i=1…m
𝑖=1 𝑗=1
Quant
𝑚 𝑚 𝑛
m
 − (෍ij 𝐹𝑎𝑐_𝑜𝑝𝑒𝑛
Quant
i 1
 Dem
𝑖=1
j 𝑖 ∗for
𝐹𝑐𝑜𝑠𝑡𝑖 + ෍ ෍ 𝑐𝑜𝑠𝑡𝑖𝑗 ∗ 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦𝑖𝑗 )
j=1..n
𝑖=1 𝑗=1
Fac  openi  0or1, for i=1…m
Quantij  0 for i =1..m , j = 1..n

of constraints= m+n

Network Design: Profit Maximization Model
Plant
Bangalore Chennai Delhi Mumbai Lucknow Kolkata Supply
(open/close)
0 No
Ahmedabad 0 0 0 0 0 0
400 Yes
Baddi 0 0 280 0 120 0
450 Yes
Hubli 165 85 0 200 0 0
0 No
Nagpur 0 0 0 0 0 0
0 No
Vishakapatnam 0 0 0 0 0 0
Supply 165 85 280 200 120 0
Objective function = Total Net Profit = 154,685

Revenue= 833,700 , Variable Cost = 601,015 Gross Profit= 232, 685 Fixed Cost= 78,000
280
120
200
85
165

A Performance Comparison of the
Four Models

Short life cycle products: A Suitable
Network Design

Global Supply Chain Configuration
How many configurations of Supply chain are possible?

LT : 2 WK Configuration I
VA : $ 68
DISK
Germany LT : 2 WK
VA : $ 50 LT : 1 WK
VA : $ 8
PC BOX MARKET
Canada USA
LT : 3 WK
VA : $ 150
MOTHERBOARD
Mexico

LT : 3 WK Configuration II
VA : $ 50
DISK
Malaysia LT : 1 WK
VA : $ 35 LT : 3 WK
VA : $ 20
PC BOX MARKET
Taiwan USA
LT : 2 WK
VA : $ 130
MOTHERBOARD
China

Calculation of Timings and Cost for
Configuration I
Cycle Time(CT)= Max { 2+2, 3+1} + 2 +1 = 7 WK
TC = 68+ 5 +150 + 5 + 50 + 8 = $286
Weighted Activity Time(WAT) = 68*2 +

(68+5)*2 +150*3 + (150+5)*1
+(68+5+150+5+50)*2+
(68+5+150+5+50+8)*1 = 1729 WKS
Calculation of Timings and Cost for
Configuration II
Cycle Time(CT)= Max { 3+1, 2+1} + 1 +3 = 8 WK
TC = 50+ 4 +130 + 5 + 35 + 20 = $244
Weighted Activity Time(WAT) = 50*3 +

(50+4)*1 +130*2 + (130+5)*1
+(50+4+130+5+35)*1+
(50+4+130+5+35+20)*3 = 1555 WKS
Comparison of
Supply Chain Configurations
Supply Conf Confi Confi Confi Confi Confi Confi Confi
chain igura gurati gurati gurati gurati gurati gurati gurati
tion on on on on on on on
I II III IV V VI VII VIII
WAT 1729 1555
CT 7 8
TC 286 244
IS IT NOT A TRADE OFF BETWEEN
TIME AND COST?
𝑀𝑖𝑛𝑖𝑚𝑖𝑧𝑒 𝑍 = 𝛼 ∗ 𝐶𝑜𝑠𝑡 + 1 − 𝛼 ∗ 𝑇𝑖𝑚𝑒

Inference
Cycle time is a measure of responsiveness of the chain

whereas weighted activity time would capture the pipe
line inventory in the system

Practical Network Design of Supply
Chain

Problem Background
Consider a Hypothetical country based on
the principles of a rational organisation.
Let’s call this country as LOGISTICA. The
citizens are looking for a place for their
capital. Everybody wishes to live at a place
close to the seat of Government but is it
feasible/possible? Watch the analysis!
Problem
(Where to locate the Capital?)
• The planners want to decide to place the
Capital in central position.
• First they want to locate it by considering
the boundaries of Logistica and selecting
the location that centres the country
geographically.

Geographic Centre

Results
• The capital, if located at the red square, would be on
average 471 miles from each citizen
• Distance =
69 (Long – Long )^2 + (Lat + Lat)^2 Miles
or
111 (Long – Long )^2 + (Lat + Lat)^2 Kms

Find location of Capital between Two
Cities
• Let’s take a simplified example
Location of
Capital
X 100-X
Portland Eugene
Population: 0.90 Million Population:0.40 Million

Distance between two cities is 100 miles

Centre of Gravity Problems
• For logistics, a center of gravity problem is usually
defined as selecting the location of a facility so that the
weighted-average distance to all the demand points is
minimized. So, in effect, the problem is similar to the
waitress balancing the tray. The items on the tray are
like the demand points, and the placement of her hand
is like the facility location.
Courtesy: Watson, Michael. Supply Chain Network

Design: Applying Optimization and Analytics to the Global
Supply Chain (FT Press Operations Management) .
Pearson Education. Kindle Edition.

Calculation of Person Mile
• If Capital is at Portland X=0 and if at Eugene X= 100
Total Person Miles Travel
T = 9,00,000 X + 4,00,000 (100-X)
If X=0, on average a person has to travel 31 miles to
reach capital (40/1.3)
And if X = 50, a person has to travel 50 Miles (65/1.3)
on Average
If X=100 a person has to travel 69 Miles (90/1.3) on
average
Hence minimum person miles is 31 and hence Capital should
be at Portland. Isn’t it? It follows a straight line starting
from
8/5/2019
31 miles at Portland to 69 miles, if located at Eugene
Dr. Rabindranath Bhattacharya 110
Physics Weighted Average
• Here X would be determined using weighted
average method(Centre of Gravity method)
• X= (900,000 * 0+ 400,000 * 100)/1,300,000
= 31 Miles
• Hence Capital should be located 31 miles from
Portland but the person mile for this distance
works out to be 43 Miles /person which is worse
than 31 miles per person if located at Portland.
So where is the catch?

What is being Minimized?
• Assume
S = 900000*(X-0)^2+ 400000* (100-X)^2
Taking derivative of S w. r. t. X and equating to 0
we get
𝜕𝑆
= 0 = 2*900000*X + 400000(2X - 200)
𝜕𝑋
Hence X ≈ 31 Miles
The capital should be located at a distance of 31
miles from Portland. It minimizes total citizen
miles-squared value S rather than total citizen
miles T.

Graph with Different COG objectives

Inference
Physics Centre of Gravity Model(Weighted Average)
is good for balancing a tray/basket or stabilizing a
plane but not very good for Supply Chain Network
Design

Practical Centre of Gravity

Physics Centre of Gravity

Map of Logistica and
Population by City

Physics Centre of Gravity
(Weighted average method)

Results
• Capital falls in a shark infested water offshore
from a mountainous and deserted region.
Hence the people would not be happy although
the average distance a citizen has to travel has
come down to 388 miles - an improvement by
83 miles!
• Hence it proves impractical and hence not
accepted.

Why Physics COG method cannot
be used?
• It does not minimize what we want to minimize
• It might point to a place middle of sea or on top of
mountain or middle of desert etc.
• It might not land at a place to exploit the existing
infrastructure
• The method cannot take advantage of true road distances
or travel restrictions
• It cannot be extended to take care of different products,
costs, multiple level of facilities (like suppliers,
warehouses, factories etc) or other practical
considerations.
Practical Centre of Gravity
Models

Geographic Centre

Inference
• Cities 4 and 10 are interesting
• These are further away from Physics or
mathematical Centre
• Both have 24% population within 100 miles
• City 10 dominates the percentage within 200
and 300 miles
• City 10 happens to be very close to vast
majority

Observations
• Comparing candidate locations allows the planners
exploit the richness of the problem (trade off between
Average distance with percentage within certain
distance)
• The more realistic and practical formulation of the
problem is best solved by Linear and Integer Program
techniques
• The technique used would ensure minimization of
weighted average distance and picks locations we can
use. This could be further expanded to include other
factors also.
Lessons Learnt
• In this chapter we learnt that locating a

single point relative to demand is best
done by minimizing the average weighted
distance. You can pick the solution from a
candidate list of locations. List out all
combinations and pick the best one.

• Break for a Glass of water?
Thanks

Locating Facilities using a Distance
based approach

Nine city Problem in Excel

A1Athelatics
• A major Retailer in USA specializing in
sporting equipment and apparel. It has
grown to be one of the largest retail
sporting goods chain over 60 years and
has retail outlets in 41 states of USA now.

Philosophy
A1 believes in old philosophy of first
generation Entrepreneur “ Customer is
God and means everything in
business”.

AI’s Athletics Warehouse
location problem
(Using LP/IP techniques for
distance based approach )

Objective
• AI wants to adding and optimizing
warehouse locations across the
country to lower costs and provide
the best service of any sporting
goods chain in USA.

Methodology
• Most Supply chain network design
modelling begins with a set of potential
facility locations from which to
determine the optimal.

Salient points of modelling
• If you model retail supply chain customers may
be the each of the stores location
• If retailer sells to online customers or their
homes customers may be each ZIP postal code.
• If the retailers have stores in shopping malls the
pool points may be treated as the customers
• If we are looking from manufacturers point of
view the customers may be warehouses of
retailers or whole sellers

Salient points of modelling
• If you model a manufacturing supply chain supplying
materials to another manufacturer the customer would be
the other manufacturing sites
• If a firm’s supply chain services the home building
industries the customer may represent the job sites where
we need to provide the product
• If a firm exports its products the customer may be ports of
exit

AI’s athletic Customer Map

A1 Athletic Customer Map

Where do you start?
• The way capital location problem was solved we would
have to give importance to customers who have more
demand. For example a customer receiving 300 truck
loads in a year is more important than one with 50
truckloads in a year. Hence it is a less costly affair to be
close to high demand customer than low demand
customers. However for this problem we assume
demand in terms of weight. Selection of weight is the
most common unit of measure in Network design.
• Determining the best unit measure for demand,
production and transportation is an important step at
the beginning of all supply chain models.
Other units of measure
• Total Pallets
• Total Cubes (Volume)
• Total Truck Loads
• Total Cases

Relative Demand Formatted

Data
• Demand of each store in a year (Seasonal
demand?)
• Distance of each location from each
customer(Prepare a matrix)

Typical Network studies use entire
year’s worth of demand

26 Possible Locations for
Warehouses

Current Problem A1 trying to solve
Find out the best P # of facilities (warehouses)
that minimizes the total weighted distance from
the facility to the customers assuming that each
facility can satisfy the full demand of the
customer and that all demand is satisfied. It
means we are minimizing the weighted distance
to the customers.

Notations
• ‘I’ set of potential facilities. 25 in case of AI
Athelatics
• ‘dist i, j’ stands for distance from facility i to
customer j
• If Xi = 1 facility is selected as location and if 0
not selected
• Yij = 1 the facility i would serve the customer j
and if 0 would not serve.
We assumed 9 cities as customers and nine cities
as our potential warehouses in a nine city
problem solved in Excel. See link below

No of combinations
• It would be N𝐶𝑛 if we are to choose n

out of N possible locations. So in our
example the possible combinations for
locating 2 to 10 warehouses out of 25
possible locations would be as given in
the chart in the next slide. Problem is
complex!
Total Potential facilities 25
Numbers Picked No of combinations
2 300
3 2300
4 12650
5 53130
6 177100
7 480700
8 1081575
9 2042975
10 3268760
Hence it is imperative that problem is sorted out

through Integer/Linear Programming techniques
Formulation

What’s the objective?
• Minimize the average weighted distance from
the warehouses to stores. This is equal to
minimizing the total weighted distance.
• We would have to meet all the demand
• We are limiting the number of facilities to P

Subject to some constraints …….
Analysis of the Model
We would run scenarios

with different value of P
and compare the
answers for the problem

Formulation
• Constraint 3 denotes that one facility if
not open cannot supply materials to
customer from that facility.
•
Hence Yij ≠1 when Xi =0 and
Xi >= Yij

Analysis
• Our goal is to determine the best P
warehouses but we are not assuming we
know the best value of P. We would run
multiple scenarios with different values
of P and compare their answers.
• We ran the model for best 1, 2, 3…….., 10
warehouses and the resultant networks
(with star burst collection pattern) are
shown in subsequent slides
9-city Problem in Excel
• Visit link
http://networkdesignbook.com/academic-
use/course-materials/

9-City Distribution

1- City Warehouse

2- City Warehouses

3- City Warehouses

4-City Warehouses

Best five and Best 6 warehouse
solution method

9-Warehouse Locations

10 Warehouse Locarions

Results

Inference
• Average Distance goes down as the number of

warehouses increases.
• Distance is a quick measure of your ability to
quickly deliver the materials. Hence response
time to customers being important in SCM this
model could serve that purpose
• You get an insight into how much value you gain
by using an additional facility and the resultant
financial implications thereafter

Inference
• Distance and transportation cost are interrelated and this
model is a good approximation for minimizing the
transportation cost.
• Although we are keen to find out a single optimum
solution of a problem world is more complicated than
what we visualize. You need to run multiple scenarios to
understand trade offs and marginal value of adding
facilities. This information could be coupled with strategic
business objectives to make a final decision.
• This model is the building block for more complicated
models apart from providing lot of values.

Service levels added

Service Levels added

Capacity added

Transportation cost added

What we have covered …
• Network Planning
• Role of Transportation
• Distribution Strategy
• Optimization models
• Practical SCM Network Design
– Operational decision for network problem
– Strategic decisions for supply chain design

https://www.scmglobe.com/user_ses
sions/new
https://www.youtube.com/watch?v=
aN6BWAHUXy0

Networking and DSTRBN Management - IIFT - June 2019

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Network Design and Distribution

Dr. Rabindranath Bhattacharya

8/5/2019 VGSOM, Indian Dr.Institute of Technology KGP

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• Utilize resources effectively by sourcing

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Appropriate number of facilities

Location of each facility

Size of each facility

Allocating space for products in each facility

Distribution strategies- Allocation of customers to each warehouse

Cost of opening new warehouses

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• Data required for network configuration

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• Optimal Distribution of goods from a set of known plants

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• To evaluate which of the alternate ‘p’

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Department # X- coordinate Y - coordinate Average # of

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Department # X- coordinate Weights Average # of

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Department # Y- coordinate Weights Cumulative

Optimum location is found to be 10,6 using Median method.

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= ෍ ci fi [ (𝑥𝑖 −𝑥)ҧ 2 + (𝑦𝑖 −𝑦)

As before, substituting wi = cifi and taking the

Department # X- coordinates Y-coordinates Weights

Find the Optimum location of the new facility

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Find the Optimum location of the new facility

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• Distribution network performance evaluated along

• Distribution network design options must therefore

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