Supply Chain Management: Strategy,

Planning, and Operation

Seventh Edition, Global Edition

Chapter 5
Network Design in the
Supply Chain

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Learning Objectives (1 of 2)
5.1 Understand the role of network design in a supply chain.
5.2 Identify factors influencing supply chain network design
decisions.
5.3 Discuss a framework for making network design decisions.
5.4 Develop an optimization model to design an regional network
configuration.

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The Role of Network Design (1 of 2)
• Network design decisions
– How many manufacturing plants, production lines,
distribution centers, cross-docking facilities?
– Where should facilities be located?
– How much capacity at each facility?
– Which products?
– What markets?

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The Role of Network Design (2 of 2)
• Revisit design decisions after market changes, mergers, or
factor cost changes

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Factors Influencing Network Design
Decisions (1 of 2)
• Strategic Factors
• Competitive Factors
– Positive externalities
– Locating to split the market
• Political Factors
• Infrastructure Factors

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Factors Influencing Network Design
Decisions (2 of 2)
• Customer Response Time and Service Level
• Total Logistics Cost
• Macroeconomic Factors
– Tariffs and tax incentives
– Exchange-rate and demand risk

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Competitive Factors
• Locating to split the market
– Locate to capture largest market share

Figure 5-1 Two Firms Locating on a Line

1– b – a 1 b – a
d1  a  and d 2 
2 2

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Framework for Network Design
Decisions (1 of 4)
• 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
– to assign current demand to facilities and identify
transportation lanes

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Figure 5-2 Framework for Network Design
Decisions

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Framework for Network Design
Decisions (2 of 4)
• 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 broad supply strategy

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Framework for Network Design
Decisions (3 of 4)
• Phase II: Define the Regional Facility Configuration
– Forecast of the demand by country or region
– Identify fixed and variable costs, economies of scale or
scope
– Identify regional tariffs, requirements for local production,
tax incentives, and export or import restrictions
– Identify competitors
– Identify demand risk, exchange-rate risk, political risk

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Framework for Network Design
Decisions (4 of 4)
• Phase III: Select a Set of Desirable Potential Sites
– Hard infrastructure requirements
– Soft infrastructure requirements
• Phase IV: Location Choices and Market Allocation

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Capacitated Plant Location Model (1 of 9)
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 i open

cij = cost of producing and shipping one unit from plant i to market j
(cost includes production, inventory, transportation, and tariffs)
yi = 1 if plant i is open, 0 otherwise

xij = quantity shipped from plant i to market j

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Capacitated Plant Location Model (2 of 9)

n n m
Min  fi y i   cij xij
i 1 i 1 j 1

Subject to

x
i 1
ij  D j for j  1, , m
m

x
j 1
ij  K i y i for i  1, , n

y i   0,1 for i  1, , n, xij  0

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Capacitated Plant Location Model (3 of 9)

Figure 5-4 Spreadsheet Area for Decision Variables for SunOil

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Capacitated Plant Location Model (4 of 9)

Figure 5-5 Spreadsheet Area for Constraints and Objective Function

for SunOil

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Capacitated Plant Location Model (5 of 9)

Cell Cell Formula Equation Copied To

B28 =B9 − SUM(B14:B18) 5.1 C28:F28
B22 = G14 * H4 + H14 * J4  SUM  B14 : F14 
= G 14 times H 4 + H 14 times J 4 minus SUM of B 14:F14
5.2 B23:B26
B31 =SUMPRODUCT(B14:F18,B4:F8) + Objective –
SUMPRODUCT(G14:G18,G4:G8) + Function
SUMPRODUCT(H14:H18,I4:I8)

Figure 5-5 [Continued]

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Capacitated Plant Location Model (6 of 9)
• Constraints

B14:H18  0  All decision variables are nonnegative

 m

B22:B26  0 K i y i   xij  0 for i  1,,5 
 j=1 
 n

B28:F28  0 D j   xij  0 for j  1,,5 
 i=1 
G14:H18 binary  Location variable y i are binary; that is, 0 or 1

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Capacitated Plant Location Model (7 of 9)

Figure 5-6 Using Solver to Set Regional Configuration for SunOil

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Capacitated Plant Location Model (8 of 9)

Figure 5-7 Optimal Regional Network Configuration for SunOil

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