Network Design

Designing Distribution and

Supply Chain Networks
1. Key design factors
2. Distribution options
3. Design of optimal distribution
networks under various
configurations and constraints
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
 Drives profitability by directly affecting supply
chain cost and the customer experience
 Choice of distribution network can achieve
supply chain objectives from low cost to high
responsiveness
 2 phases: a) structure, b) detailed specifications
 a) directly or through intermediaries?
 b) convert the structure into locations, capabilities,
capacities, demand allocation
 Network Design
Matching Supply with Demand

Product Multiple
Carriers Demand shifts
Normal demand curve Product Flow Categorization
quickly
Supplier Rates
Capacity Customer
Locations
Products
Demand
Consolidation Cross Docks Pattern
Vendors
Centers & DCs Zone Base
Warehousing Transport
Restrictions Rates for
Sourcing Product Set
Policies Warehouse
Capacity Warehouse
Capability on Utilization &
Handling Products Limitations

Constantly modify supply chain to meet new demand curve

Factors Influencing
Distribution Network Design
 Performance of a distribution network should
be evaluated along two dimensions:
1. Customer needs that are met
2. Cost of meeting customer needs

 What is the impact on customer service and

cost for different distribution network
options?
 Profitability of the delivery network determined
by revenue from met customer needs and
network costs
 Factors Influencing
Distribution Network Design
 Elements of customer  There are trade-offs:
service influenced by  Amazon has high
variety and “low”
network structure: response rate
 Response time  B&N has the opposite
 Product variety
 Product availability
 Big differences in
 Customer experience cost:
 Amazon has 20
(incl. customization +
facilities with high
ease of placing capacity
&receiving orders)  B&N has hundreds of
 Time to market stores with low
 Order visibility capacity
 Returnability
Factors Influencing
Distribution Network Design

 Supply chain costs affected by

network structure:
 Inventories
 Transportation
 Facilities and handling
 Information
Desired Response Time and
Number of Facilities

W.W. Grainger - 370

facilities)

McMaster-Carr (6
facilities 1-2 day lead
time most US cities)
Inventory Costs and Number
of Facilities

B&N

Amazon

Amazon turns its inventory 10 times / year, whereas …

B&N (with 100’s of facilities) turns it 3 times / year
Transportation Costs and
Number of Facilities

Inbound transport cost < outbound cost

Maintain econ of scale for inbound & increase # of facilities
Facility Costs and Number
of Facilities

B&N
PPET = 7

Amazon
PPET = 19

Consolidation of facilities allows economies of scale

Logistics Cost, Response Time,
and Number of Facilities

Have at least as many facilities to minimize total logistics cost!

Design Options for a
Distribution Network
 Distribution network choices from the
manufacturer to the end consumer
 Two key decisions
1. Will product be delivered to the
customer location or picked up from a
prearranged site?
2. Will product flow through an
intermediary (or intermediate location)?
Design Options for a
Distribution Network
 One of six designs may be used
1. Manufacturer storage with direct shipping
(drop-shipping)
2. Manufacturer storage with direct shipping
and in-transit merge
3. Distributor storage with carrier delivery
4. Distributor storage with last-mile delivery
5. Manufacturer/distributor storage with
customer pickup
6. Retail storage with customer pickup
1. Manufacturer Storage with
Direct Shipping

The retailer only receives, disaggregates (if it refers to multiple

manufacturers) and transmits the order
1. Manufacturer Storage with
Direct Shipping Network
Cost Factor Performance
Inventory Lower costs because of aggregation. Benefits
of aggregation are highest for low-demand,
high-value items. Benefits are large if product
customization can be postponed at the
manufacturer.
Transportation Higher transportation costs because of
increased distance and disaggregate
shipping.
Facilities and Lower facility costs because of aggregation.
handling Some saving on handling costs if
manufacturer can manage small shipments
or ship from production line.
Information Significant investment in information
infrastructure to integrate manufacturer and
retailer.
 1. Manufacturer Storage with
Direct Shipping Network
Service Factor Performance
Response time Long response time of one to two weeks because
of increased distance and two stages for order
processing. Response time may vary by product,
thus complicating receiving.
Product variety Easy to provide a high level of variety.
Product availability Easy to provide a high level of product availability
because of aggregation at manufacturer.
Customer Good in terms of home delivery but can suffer if order
experience from several manufacturers is sent as partial shipments.
Time to market Fast, with the product available as soon as the first unit
is produced.
Order visibility More difficult but also more important from a customer
service perspective.
Returnability Expensive and difficult to implement.
 2. In-Transit Merge Network

The retailer plays same role as before, but carrier merges in-transit the
order if from multiple manufacturers. Example: order a Dell PC and a Sony
monitor; carrier merges at a hub before delivering to customer
2. In-Transit Merge

Cost Factor Performance

Inventory Similar to drop-shipping.
Transportation Somewhat lower transportation costs
than drop-shipping.
Facilities and Handling costs higher than drop-
handling shipping at carrier; receiving costs lower
at customer.
Information Investment is somewhat higher than for
drop-shipping.
2. In-Transit Merge
Service Factor Performance
Response time Similar to drop-shipping; may be marginally
higher.
Product variety Similar to drop-shipping.
Product Similar to drop-shipping.
availability
Customer Better than drop-shipping because only a
experience single delivery has to be received.
Time to market Similar to drop-shipping.
Order visibility Similar to drop-shipping.
Returnability Similar to drop-shipping.
3. Distributor Storage with
Carrier Delivery

Amazon, W.W. Grainger, MaMaster-Carr

3. Distributor Storage with
Carrier Delivery
Cost Factor Performance
Inventory Higher than manufacturer storage.
Difference is not large for faster
moving items but can be large for
very slow-moving items.
Transportation Lower than manufacturer storage.
Reduction is highest for faster
moving items.
Facilities and Somewhat higher than
handling manufacturer storage. The
difference can be large for very
slow-moving items.
Information Simpler infrastructure compared to
manufacturer storage.
3. Distributor Storage with
Carrier Delivery
Service Factor Performance
Response time Faster than manufacturer storage.
Product variety Lower than manufacturer storage.
Product Higher cost to provide the same level of
availability availability as manufacturer storage.
Customer Better than manufacturer storage with drop-
experience shipping.
Time to market Higher than manufacturer storage.
Order visibility Easier than manufacturer storage.
Returnability Easier than manufacturer storage.
4. Distributor Storage with
Last Mile Delivery

Grocery industry; automotive spare parts industry;

Amazon local express delivery for same day delivery
4. Distributor Storage with
Last Mile Delivery
Cost Factor Performance
Inventory Higher than distributor storage with
package carrier delivery, because of
lower aggregation
Transportation Very high cost given minimal scale
economies. Higher than any other
distribution option.
Facilities and Facility costs higher than manufacturer
handling storage or distributor storage with
package carrier delivery, but lower than
a chain of retail stores.
Information Similar to distributor storage with
package carrier delivery.
4. Distributor Storage with
Last Mile Delivery
Service Factor Performance
Response time Very quick. Same day to next-day delivery.
Product variety Somewhat less than distributor storage with
package carrier delivery but larger than retail
stores.
Product More expensive to provide availability than
availability any other option except retail stores.
Customer Very good, particularly for bulky items.
experience Slightly higher than distributor storage with
package carrier delivery.
Time to market Less of an issue and easier to implement than
manufacturer storage or distributor storage
with package carrier delivery.
Order visibility Easier to implement than other previous
options.
Returnability Harder and more expensive than a retail
5. Manufacturer or Distributor
Storage with Customer Pickup

Many times at Walmart.com, Sears.com

and more … good for bulky items …
5. Manufacturer or Distributor
Storage with Customer Pickup
Cost Factor Performance
Inventory Can match any other option, depending
on the location of inventory.
Transportation Lower than the use of package carriers,
especially if using an existing delivery
network.
Facilities and Facility costs can be high if new facilities
handling have to be built. Costs are lower if
existing facilities are used. The increase
in handling cost at the pickup site can
be significant.
Information Significant investment in infrastructure
required.
5. Manufacturer or Distributor
Storage with Customer Pickup
Service Factor Performance
Response time Similar to package carrier delivery with
manufacturer or distributor storage. Same-
day delivery possible for items stored locally
at pickup site.
Product variety Similar to other manufacturer or distributor
storage options.
Product Similar to other manufacturer or distributor
availability storage options.
Customer Lower than other options because of the lack
experience of home delivery. Experience is sensitive to
capability of pickup location.
Time to market Similar to manufacturer storage options.
Order visibility Difficult but essential.
Returnability Somewhat easier given that pickup location
can handle returns.
6. Retail Storage with
Customer Pickup
Cost Factor Performance
Inventory Higher than all other options.
Transportation Lower than all other options.
Facilities and Higher than other options. The increase
handling in handling cost at the pickup site can
be significant for online and phone
orders.
Information Some investment in infrastructure
required for online and phone orders.

The most traditional type of supply chain

6. Retail Storage with
Customer Pickup
Service Factor Performance
Response time Same-day (immediate) pickup possible for
items stored locally at pickup site.
Product variety Lower than all other options.
Product More expensive to provide than all other
availability options.
Customer Related to whether shopping is viewed as a
experience positive or negative experience by customer.
Time to market Highest among distribution options.
Order visibility Trivial for in-store orders. Difficult, but
essential, for online and phone orders.
Returnability Easier than other options because retail store
can provide a substitute.
 Comparative Performance of
Delivery Network Designs

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 4-32

 Delivery Networks for Different
Product/ Customer Characteristics

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall. 4-33

A Framework for Network
Design Decisions
1. Role of network design in a supply chain.
2. Factors influencing supply chain network design
decisions.
3. Framework for making network design decisions.
Network Design Decisions
 Facility role
 What is the role, what processes are
performed?
 Facility location
 Where should facilities be located?
 Capacity allocation
 How much capacity at each facility?
 Market and supply allocation
 What markets each facility serve? Which
supply sources should feed each facility?
Factors Influencing
Network Design Decisions
 Strategic factors
 Technological factors
 Macroeconomic factors
 Tariffs and tax incentives
 Exchange-rate and demand risk
 Freight and fuel costs
 Political
 Infrastructure factors
 Customer response time and local presence
 Logistics and facility costs
Framework for Network Design
Decisions
Mathematical Models &
Examples
1. Capacitated Plant Location Models
2. Practical considerations
3. Advanced models with multiple attributes
Models for Facility Location
and Capacity Allocation
 Network design models are used to
decide on locations and capacities, and
to assign current demand to facilities
 Objective:
 Maximize the overall profitability of the
supply chain network, while providing
customers with the appropriate
responsiveness
 Many trade-offs during network design
Network Optimization
Models and Numerical
Examples
 Capacitated Plant Location Models (also
known as Facility Location and Capacity
Allocation Models)
 Model 1: Optimal Production Allocation or
Transshipment Problem
 Model 2: Consider location specific costs and
decide which plants should remain open
 Model 3: Enforce single sourcing for each
market
 Model 4: Consider multiple plant capacity
scenarios
Network Model 1:
Transportation Problem
The (simple) Transportation Problem
Shipment of a single product from a set of

suppliers to a set of customers (or similarly

allocating demand to production facilities)
Input parameters:

 Capacities: the maximum amount of products a

supplier can ship in a given amount of time
 Demand: the customer demand (typically
estimated from demand forecasting models)
 Shipping cost: the shipping cost (per unit of
product) for each possible supplier-customer pair
Network Model 1
 Mathematical Model
n = number of factory locations
m = number of markets or demand points xij = quantity shipped from
Dj = 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

subject to
n
n m
x  D j for j  1,..., m
Min cij xij
ij
i 1

i 1 j 1 m

x
j 1
ij  K i for i  1,..., n
 Network Model 1

 Numerical
Example
Demand City
Production and Transportation Cost
per Thousand Units (Thousand $)
Monthly
Capacity
Atlant Bosto (Thousand
Supply City a n Chicago Denver Omaha Portland Units) K
Baltimore 1,675 400 985 1,630 1,160 2,800 18
Cheyenne 1,460 1,940 970 100 495 1,200 24
Salt Lake City 1,925 2,400 1,450 500 950 800 27
Memphis 380 1,355 543 1,045 665 2,321 22
Wichita 922 1,646 700 508 311 1,797 31
Monthly 10 8 14 6 7 11
demand
(thousand
units) D
Network model 1
 Formulation of the model

Min Z = 1675x11 + 400X12 + ... + 311X55 + 1797X56

s.t.
X11 + X21 + ... + X51 = 10
Satisfy the demand
…. of each demand city
X16 + X26 + ... + X56 = 7

X11 + X12 + ... + X16 ≤ 18 Do not exceed

the capacity
….
X51 + X52 + ... + X56 ≤ 31
Xij  0
Solution of Network Model 1
 Optimal demand allocation

Atlant Bosto Chicago Denve Omah Portlan

a n r a d

Baltimore 0 8 2 0 0 0
Cheyenne 0 0 0 6 0 0
Salt Lake 0 0 0 0 0 11
Memphis 10 0 12 0 0 0
Wichita 0 0 0 0 7 0

Z = $26,463
Network Model 2: Selecting
plants
 Given that you can meet supply with less plants,
decide which plants should remain open
 There are now location-specific costs to consider!

yi = 1 if factory i is open, 0 otherwise

xij = quantity shipped from factory i to market j
 Network Model 2: Selecting
Plants
n = number of potential plant locations/capacity
m = number of markets or demand points yi = 1 if plant i is open, 0 otherwise
Dj = annual demand from market j xij = quantity shipped from plant i
to market j
Ki = potential capacity of plant i
fi = 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
Min f i yi   c x ij ij
subject to
i 1 i 1 j 1
n

x ij  D j for j  1,..., m
i 1 Note!
m

x
j 1
ij  K i yi for i  1,..., n

yi   0,1 for i  1,..., n, x ij  0

 Network Model 2

 Numerical
Example
Demand City
Production and Transportation Cost
per Thousand Units (Thousand $)
Monthly Monthly
Capacity Fixed
(Thousa Cost
Supply Atlant Bosto Chicag Denve Omah Portlan nd Units) (Thousa
City a n o r a d K nd $) f
Baltimor 1,675 400 985 1,630 1,160 2,800 18 7,650
e
Cheyenn 1,460 1,940 970 100 495 1,200 24 3,500
e
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
Network Model 2
 Formulation of the model

Min Z = 7650Y1+…+ 2200Y5+

+1675x11 + 400X12 + ... + 311X55 + 1797X56
s.t.
X11 + X21 + ... + X51 = 10 Satisfy the demand
…. of each demand city
X16 + X26 + ... + X56 = 7

X11 + X12 + ... + X16 ≤ 18Y1 Do not exceed

the capacity
….
X51 + X52 + ... + X56 ≤ 31Y5
Xij  0
Yi = 0/1
Solution of Network Model 2
 Optimal network configuration with fixed
costs

Open/ Atlant Bosto Denve Omah Portlan

Closed a n Chicago r a d
Baltimore Open 0 8 2 0 0 0
Cheyenne Open
0 0 0 6 7 11
Salt Lake Closed
0 0 0 0 0 0
Memphis Open
10 0 12 0 0 0
Wichita Closed
0 0 0 0 0 0

Z= $ 47,401
Network Model 3: Single
sourcing
 Each market should be supplied by only one factory
 Modify objective, constraints & decision variables
as follows:
yi = 1 if factory i is open, 0 otherwise
xij = 1 if market j is supplied by factory i, 0 otherwise
n n m
Min f i yi   D j cij xij
i 1 i 1 j 1
subject to

x
i 1
ij  1 for j  1,..., m
m Note!
D x
j 1
i ij  K i yi for i  1,..., n

xij , yi   0,1
Network Model 3
 Present the formulation of the model

Min Z = 7650*Y1+…+ 2200*Y5+

+10*1675*x11 + 8*400*X12 + ... + 7*311*X55 +
11*1797X56
s.t. One supplier
X11 + X21 + ... + X51 = 1 for each demand city
….
X16 + X26 + ... + X56 = 1
Do not exceed
the capacity
10*X11 + 8*X12 + ... + 11*X16 ≤ 18*Y1
….
10*X51 + 8*X52 + ... + 11*X56 ≤ 31*Y5
Yi,Xij = 0/1
Solution to Network Model 3
 Optimal network configuration with
single sourcing

Open/ Atlant Bosto Denve Omah Portlan

Closed a n Chicago r a d
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

Z= $49,717
Network Model 4: Multiple
Capacity Options
 We need to decide both the location and
capacity allocation for each facility as
earlier, however:
 We have multiple capacity options for each
location (in particular a high and a low
option)
Network Model 4
 Modelling approach:
 Treat each scenario option as a separate
facility and introduce binary variables for
each one of them as earlier. For example:
 Binary variables Y1 and Y5 will refer to N.
America, and will denote the low and high
capacity, respectively.
 Add a constraint to make sure that only one
capacity will be realized!
 e.g. Y1+Y5 ≤ 1
 Network Model 4
 Formulation of the model
Min Z = 6000Y1+…+ 4000Y5+
+ 9000Y6+…+6000Y10
+1675x11 + 400X12 + ... + 311X55 + 1797X56
+1675x61 + 400X62 + ... + 311X12,5 + 1797X10,6
s.t.
(X11 + X21 + ... + X51) + (X61 + X71 + ... + X101) = 10Satisfy the demand
…. of each demand city
(X16 + X26 + ... + X56) + (X66 + X76 + ... + X10,6) = 7

(X11 + X12 + ... + X16) + (X61 + X62 + ... + X66) ≤ 18(YDo 1+Y6)
not exceed
the capacity
….
(X51 + X52 + ... + X56) + (X10,1 + X10,2 + ... + X10,6) ≤ 31(Y5+Y10)
Make sure that at most only one capacity
scenario will be realized for each location
Y1+Y6 ≤ 1 …. Y5+Y10 ≤ 1
Solution to Network Model 4
Network Optimization
Models and Examples cont.
 What happens if I have a complex network
with multiple transshipment points and
transportation capacities?

 If the supply chain network is given, and

no fixed costs are associated with the use
of particular facilities or locations, then the
problem can be initially modeled as the so-
called minimum cost network flow
problem!
Minimum Cost Network
Flow
 Basic Assumptions
 Ship products from a set of locations to another
set of locations
 Assume a network with multiple nodes and links
 The nodes can be suppliers, demanders and
transshipment points
 The demand of demanders and the supply
capacities of suppliers are know
 Each link has a known capacity and unit cost
 Inflows and outflows can be associated with any
node
Network Model 5: Network
Flow for Single Product
Minimum cost network flow model - Single Product
All plants (or suppliers) have the same production cost

A single product and a single mode of transportation

Shipping cost among all connections are known

Capacity of the plants (in ton per year) and demand from

customers is also known

Uniform flow restrictions among all arcs of the network

Capacity constraints on the amount of product that can be

moved between any two nodes

Determine the minimum cost shipping schedule so that

demand is met and plant capacities are not exceeded
Network Model 5
 Mathematical Model
xij = quantity shipped from node i to node j

Dj = demand or supply of a node j, and it can be positive or negative or

zero
uij = capacity of an arc ij of the network

cij = cost of producing and shipping one unit from node i to node j

subject to
n n n n

Min cij xij x x

j 1
ij
j 1
ji  Di for i  1,..., n
i 1 j 1
0  xij  uij forall i, j
Network Model 5
Numerical Example
Nodes 1, 2 & 3 represent plants

Nodes 4 & 5 represents transshipment point (e.g.

warehouses)
Nodes 6 & 7 represent demand points (e.g.
T:0
4

customers) D:400

S:200
There are linear costs and capacities 6

across each arc. 1

There are production costs

2 7

and storage costs. S:300

D:180

3 S:100 T:0
5
 Network Model 5
Numerical Example (cont.)

Shipping Costs (in thousand dollars for shipping a ton)

Nodes 1 2 3 4 5 6 7
1 0.0 5.0 3.0 5.0 5.0 20.0 20.0
2 9.0 0.0 9.0 1.0 1.0 8.0 15.0
3 0.4 8.0 0.0 1.0 0.5 10.0 12.0
4 0.0 0.0 0.0 0.0 1.2 2.0 12.0
5 0.0 0.0 0.0 0.8 0.0 2.0 12.0
6 0.0 0.0 0.0 0.0 0.0 0.0 1.0
7 0.0 0.0 0.0 0.0 0.0 7.0 0.0

At most 200 tons of product can be moved

between any two nodes
 Network model 5
 Formulation of the model
Min Z = 5X12+3X13+5X14+5X15+20X16+20X17+ ... + 1X67 + 7X76

s.t.
Node 1: (X12 + X13 + ... + X17) – (X21 + X31) = 200
Node 2: (X21 + X23 + ... + X27) – (X12 + X32) = 300
Node 3: (X32 + X31 + ... + X37) – (X13 + X23) = 100

Node 4: (X14 + X24 + X34 + X54) – (X45 + X46 + X47) = 0

Node 5: (X15 + X25 + X35 + X45) – (X54 + X56 + X57) = 0

Node 6: X67 - (X16 + X26 + ... + X76) = - 180

Node 7: X76 - (X17 + X27 + ... + X67) = - 400

Xij  0 and Xij ≤ 200

 Solution of the
Network structure, flows and
arc capacity constraints
Destinat Unit

Network model 5
Origin ion Cost Flow
1 2 5.0 0
1 3 3.0 180
1 4 5.0 0
1 5 5.0 0
1 6 20.0 0
T:0
1 7 20.0 0
4
2 1 9.0 0
D:400
2 3 9.0 0
S:200 6 2 4 1.0 300
2 5 1.0 0
1
2 6 8.0 0
2 7 15.0 0
2 7 3 1 0.4 0
S:300
3 2 8.0 0
D:180
3 4 1.0 0
3 5 0.5 280
3 6 10.0 0
3 S:100 5 T:0 3 7 12.0 0
4 5 1.2 0
4 6 2.0 300
4 7 12.0 0
5 4 0.8 0
Z 5 6 2.0 280
: 2320 5 7 12.0 0
6 7 1.0 180
7 6 7.0 0
Network Model 6: Network
flow for multiple products
Minimum cost network flow model - Multiple
Products
Same network structure as before (this can easily

relaxed)
Shipment of 2 products (P and P )
1 2

The arc capacity represent the maximum flow for

both products
 Note that in this case the 2 products are competing
for the arc capacity
Each plant has separate capacity for each product
and each customer separate demand for each product
Network Model 6:
 Numerical Example (cont.)
T:0
4
D1:400
D2:200
S1:200
S2:200 6

2 7

S1:300
D1:180
S2:100
D2:140

3 T:0
 Assume that the
S1:100
S2:100 unit shipping costs
5
are the same for
both products (this can be easily relaxed)
 Network Model 6
 Mathematical Model
xijp = quantity shipped of product p from node i to node j

D jp = demand or supply of a node j, and it can be positive or negative or

zero for product p
uij = capacity of an arc ij of the network

cij = cost of producing and shipping one unit from node i to node j

p n n
Min  c x ij ijp
subject to

p 1 i 1 j 1 n n

x
j 1
ijp   x jip  Di for all p and i  1,..., n
j 1

0   xiijp  uij forall i, j

p
 Network model 6
 Formulation of the model
Min Z = 5X121+3X131+5X141+5X151+20X161+20X171+ ... + 1X671 +
7X761 + 5X122+3X132+5X142+5X152+20X162+20X172+ ... +
1X672 + 7X762

s.t.
Node 1, P1: (X121 + X131 + ... + X171) – (X211 + X311) = 200
Node 1, P2: (X122 + X132 + ... + X172) – (X212 + X312) = 200
…
Node 7, P1: X761 - (X171 + X271 + ... + X671) = - 400
Node 7, P2: X762 - (X172 + X272 + ... + X672) = - 200

X121+X122 ≤ 300
…
X761+X762 ≤ 300
 Solution of Network Model 6
Destinatio Unit Flow Product Flow Product
Origin n Cost 1 2 Total flow   Arc Capacity
1 2 5.0 0 0 0 <= 300
1 3 3.0 180 120 300 <= 300
1 4 5.0 0 20 20 <= 300
1 5 5.0 0 0 0 <= 300
1 6 20.0 0 0 0 <= 300
1 7 20.0 0 0 0 <= 300
2 1 9.0 0 0 0 <= 300
2 3 9.0 0 0 0 <= 300
2 4 1.0 100 0 100 <= 300
2 5 1.0 0 0 0 <= 300
2 6 8.0 200 100 300 <= 300
2 7 15.0 0 0 0 <= 300
3 1 0.4 0 0 0 <= 300
3 2 8.0 0 0 0 <= 300
3 4 1.0 0 180 180 <= 300
3 5 0.5 280 20 300 <= 300
3 6 10.0 0 0 0 <= 300
3 7 12.0 0 20 20 <= 300
4 5 1.2 0 0 0 <= 300
4 6 2.0 100 200 300 <= 300
4 7 12.0 0 0 0 <= 300
 Z=5570 5 4 0.8 0 0 0 <= 300
5 6 2.0 280 20 300 <= 300
5 7 12.0 0 0 0 <= 300
6 7 1.0 180 120 300 <= 300
7 6 7.0 0 0 0 <= 300
Network Optimization
Models and Examples cont.
 More enhanced Capacitated Plant Location Models
 Model 7: Simultaneous location of plants and warehouses
 Model 8: Accounting for Taxes, Tariffs, and Customer
Requirements
 Model 9: Adding restrictions on the number of locations +
alternative objective functions (see excel file “AI's
Athletic.xls”)
 Model 10: Production and shipping through
transshipment points with multiple modes of
transportation + location decisions (see excel file “MIP
network flow with multiple trans modes and location.xls”
Network Model 7

Locating Plants and Warehouses Simultaneously

Network Model 7
 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
 Network Model 7
 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
n xiet = l quantity
n shipped
n from
t factory at
t site
m i


i 1

Min Fi yi  to warehouse
xehi1

f e ye  e
= h 1
c x   c x   c
i 1
hi hi
i 1 e 1
ie ie
quantity shipped from supplier h to e 1 j 1
x
ej ej

factory at site i
 Network Model 7
subject to

x hi  S h for h  1,..., l m
i 1 x
j 1
ej  We ye for e  1,..., t
l t

x –x  0 for i  1,..., n t

x
hi ie
h 1 e 1 ej  D j for j  1,..., m
e 1
t

x  K i yi for i  1,..., n
yi , ye   0,1 , xej , xie , xhi  0
ie
e 1

n m

x –x
i 1
ie
j 1
ej  0 for e  1,..., t
 Network Model 8
 A supply chain network should maximize profits after
tariffs and taxes while meeting customer service
requirements
 If rj is the revenue of selling one product unit to market
j, then the objective and constraint are modified as:

m n n n m
Max rj  xij –  Fi yi –  cij xij
j 1 i 1 i 1 i 1 j 1

x
i 1
ij  D j for j  1,..., m
Network Model 9

Yij = 1 if location i serves customer j; 0

otherwise
Xi = 1 if a warehouse is located at site i, 0
otherwise
distij = distance between warehouse at site i


to customer j
P =Min total number
distij of
d jwarehouses
Yij to locate
dj = demandiIof jcustomer
J j

Y
i 1
ij  1 for j  1,..., J
Yij  X i i  I , j  J
x
iI
i P
Network Models 9 & 10
 AI’s Athletic excel file
 MIP network flow with multiple trans
modes and location excel file
Network Optimization
Models and Examples cont.
Multiple products and modes of transportation?


 DHL Supply Chain Case

Multiple products, modes of transportation +
location decisions but no fixed costs?
 Logistics Network Design Problem see paper of
Cordeau, Pasin and Solomon 2003
Multiple products, location decisions + fixed
costs?
 Mixed Integer Non-Linear Programming (see Floudas
1995)
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