Supply Chain Management
Chapter 5
Network Design in the Supply
Chain
5-1
Network Design Decisions
 Facility role
 Facility location
 Capacity allocation
 Market and supply allocation
Factors Influencing Network Design Decisions







Strategic
Technological
Macroeconomic
Political
Infrastructure
Competitive
Logistics and facility costs
2-2
5-2
A Framework for
Global Site Location
Competitive STRATEGY
INTERNAL CONSTRAINTS
Capital, growth strategy,
existing network
PRODUCTION TECHNOLOGIES
Cost, Scale/Scope impact, support
required, flexibility
COMPETITIVE
ENVIRONMENT
GLOBAL COMPETITION
PHASE I
Supply Chain
Strategy
PHASE II
Regional Facility
Configuration
REGIONAL DEMAND
Size, growth, homogeneity,
local specifications
POLITICAL, EXCHANGE
RATE AND DEMAND RISK
PHASE III
Desirable Sites
PRODUCTION METHODS
Skill needs, response time
FACTOR COSTS
Labor, materials, site specific
TARIFFS AND TAX
INCENTIVES
PHASE IV
Location Choices
AVAILABLE
INFRASTRUCTURE
LOGISTICS COSTS
Transport, inventory, coordination
2-3
5-3
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?
2-4
5-4
Gravity Methods for Location
 Ton Mile-Center Solution
– x,y: Warehouse Coordinates
– xn, yn : Coordinates of delivery
location n
– dn : Distance to delivery location n
– Dn : Annual tonnage to delivery
location n
– Fn: cost of shipping one unit for one
mile to location n
( x  xn)  ( y  y n)
D
nx F

d
x
D
nF

d
D
ny F

d
y
D
nF

d
d
n
2

k
n
n
n 1
n
k
n
n 1
n
k
n
n
n 1
Min
 d n Dn F n
2
n
k
n
n 1
n
2-5
5-5
Demand Allocation Model
 Which market is served by
which plant?
 Which supply sources are
used by a plant?
xij = Quantity shipped from
plant site i to customer j
n
m
Min  cij xij
i 1 j 1
s.t.
n
x
i 1
ij
 D j , j  1,..., m
m
x  K
j 1
x
ij
ij
i
, i  1,..., n
0
2-6
5-6
Plant Location with Multiple Sourcing
 yi = 1 if plant is located at
site i, 0 otherwise
 xij = Quantity shipped from
plant site i to customer j
n
Min 
i 1
n
m
f y   c x
i
i
i 1 j 1
ij
ij
s.t.
n
 x  D , j  1,..., m
i 1
ij
j
n
 x  K y , i  1,..., n
j 1
ij
i
i
m
 y  k ; y {0,1}
i 1
i
i
2-7
5-7
Plant Location with Single Sourcing
 yi = 1 if plant is located at
site i, 0 otherwise
 xij = 1 if market j is supplied
by factory i, 0 otherwise
n
Min 
i 1
n
m
f y   D j c x
i
i
i 1 j 1
ij
ij
s.t.
n
x
i 1
ij
 1, j  1,..., m
n
 D j x  K y , i  1,..., n
ij
j 1
i
i
xij , y {0,1}
i
2-8
5-8