Chapter 5

Network
Design in
the Supply
Chain

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 Network Design Decisions
Facility role: What role should each facility play? What process
are performed at each Facility?
Facility location: Where should facilities be located?
Capacity allocation: How much capacity should be allocated to
each facility?
Market and supply allocation: What markets should each
facility serve? Which supply sources should feed each facility?

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 Factors Influencing
Network Design Decisions
Strategic Socioeconomic factors
Technological Infrastructure
Macroeconomic Competitive
 Tax and Tariffs Incentives Logistics and facility costs
Exchange rate and demand
risks
Freight and Fuel Risks
Political

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 Framework for Network Design Decisions

Phase I – Define a Supply Chain Strategy

Phase II – Define the Regional Facility Configuration
Phase III – Select the set of Desirable Potential Sites
Phase IV – Location Choices

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 A Framework for Network Design
Decisions

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 Conventional Network

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 Tailored Network: Multi-Echelon
Finished Goods Network

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 Gravity Methods for Location

Ton Mile-Center Solution

◦ x,y: Warehouse Coordinates d n( x  x n)  ( y  y n)

2 2

◦ xn, yn : Coordinates of delivery k

x
 Dn F d n n

location n x n 1

F
n

 Dn d
k
n

◦ dn : Distance to delivery location n n 1 n

y
 Dn F d
k

◦ Fn : Annual tonnage to delivery y n 1

n n

F
location n  Dn d
k
n

n 1 n

Min  d n Dn F n
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 Models for Facility Location
and Capacity Allocation
Phase II
◦ Capacitated Plant location model

Phase III
◦ Gravity location models

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 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?

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 Demand Allocation Model
n m
Which market is served by which plant? Min cij xij
i 1 j 1
Which supply sources are used by a plant?
s.t.
xij = Quantity shipped from plant site i to n

customer j  x  D , j  1,..., m
i 1
ij j

 x  K , i  1,..., n
j 1
ij i

x ij
0

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 Plant Location with Multiple
Sourcing

yi = 1 if plant is located at
site i, 0 otherwise n n m
Min f y   cij xij
i i
i 1 i 1 j 1

xij = Quantity shipped from s.t.

plant site i to customer j

n

 x  D , j  1,..., m
i 1
ij j

 x  K y , i  1,..., n
j 1
ij i i

 y  k ; y {0,1}
i 1
i i

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 Plant Location with Single Sourcing
n n m
Min f y   D j c x ij
yi = 1 if plant is located at i 1
i i
i 1 j 1
ij

site i, 0 otherwise s.t.

n
xij = 1 if market j is supplied x ij
 1, j  1,..., m
by factory i, 0 otherwise i 1
n

 D j x  K y , i  1,..., n
j 1
ij i i

xij , y {0,1}i

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 The Role of IT in Network
Design
IT systems help with network design by:
1. Making the modeling of the network design problems easier
2. Containing high-performance optimization technologies
3. Allowing for “what-if” scenarios
4. Interfacing with planning and operational software

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 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

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