Designing the Supply Chain
Network
Models from Chapter 4, 5 of Chopra & Meindl
Byung-Hyun Ha
bhha@pusan.ac.kr
Outline
 Designing the Distribution Network in Supply Chain
 Factors Influencing Distribution Network Design
 Design Options for Distribution Network
 Selecting Distribution Network Design
 Models for Facility Location and Capacity Allocation
Designing Distribution Network
 Factors Influencing Distribution Network Design
 Customer needs that are met
 Cost of meeting customer needs
Required
Number of
Facilities
Response Time
Total Logistics Costs
Response Time
Cost
Inventory
Transportation
Number of Facilities
Facility
Number of Facilities
Designing Distribution Network
 Elements of customer service influenced by network
structure
 Response time
 Product variety
 Product availability
 Customer experience
• Ease with which customer can place and receive order
 Order visibility
• Ability of customer to track their order from placement to
delivery
 Returnability
• Ease with which customer can return unsatisfactory merchandise
and ability of logistics network to handle such returns
Designing Distribution Network
 Supply chain costs affected by network structure
 Inventories
 Transportation
 Facilities and handling
 Information infrastructure
Design Options for Distribution Network
 Possible distribution network design






Manufacturer storage with direct shipping
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
• Customers walking into store or ordering online
Design Options for Distribution Network
 Manufacturer storage with direct shipping
 Drop-shipping, demand aggregation, postpone customization
 Slow-moving/low-demand/high-value items
Manufacturer
Retailer
Customers
Product Flow
Information Flow
Inventory
L
Transportation
H
Facilities and handling
L
Information
H
Response time
H
Product variety
H
Product availability
H
Customer experience
M
Order visibility
L
Returnability
L
Design Options for Distribution Network
 Manufacturer storage with direct shipping and intransit merge
 e.g. PC from Dell along with Sony monitor
 low- to medium-demand and high-value items
Factories
Retailer
In-Transit Merge by Carrier
Customers
Product Flow
Information Flow
Inventory
L
Transportation
M
Facilities and handling
M
Information
H
Response time
H
Product variety
H
Product availability
H
Customer experience
H
Order visibility
L
Returnability
L
Design Options for Distribution Network
 Distributor storage with carrier delivery
 High-level inventory at distributor
 Medium- to fast-moving items at distributor, loss of aggregation
Factories
Warehouse Storage by
Distributor/Retailer
Customers
Product Flow
Information Flow
Inventory
M
Transportation
L
Facilities and handling
M
Information
M
Response time
M
Product variety
M
Product availability
M
Customer experience
H
Order visibility
M
Returnability
M
Design Options for Distribution Network
 Distributor storage with last mile delivery
 Delivering to customer’s home instead of using package carrier
 e.g. grocery industry, water, bag of rice at dense city
Factories
Distributor/Retailer
Warehouse
Customers
Product Flow
Information Flow
Inventory
H
Transportation
H
Facilities and handling
H
Information
M
Response time
L
Product variety
L
Product availability
L
Customer experience
H
Order visibility
M
Returnability
M
Design Options for Distribution Network
 Manufacturer or distributor storage with consumer
pickup
 Reusing existing pick-up site, customer participation
Factories
Retailer
Cross Dock DC
Pickup Sites
Customers
Product Flow
Information Flow
Customer Flow
Inventory
?
Transportation
L
Facilities and handling
?
Information
H
Response time
L
Product variety
H
Product availability
H
Customer experience
L
Order visibility
H
Returnability
H
Selecting Distribution Network Design
 Comparative performance
 1: best performance
Manufacturer
storage with
direct
shipping
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
Inventory
1
1
2
3
1
4
Transportation
4
3
2
5
1
1
Facilities and handling
1
2
3
4
5
6
Information
4
4
3
2
5
1
Response time
4
4
3
2
4
1
Product variety
1
1
2
3
1
4
Product availability
1
1
2
3
1
4
Customer experience
4
3
2
1
5
5
Order visibility
5
4
3
2
6
1
Returnability
5
5
4
3
2
1
Selecting Distribution Network Design
 Performance for different product/customer char.
 +2: Very suitable, …, -2: very unsuitable
Manufacturer
storage with
direct
shipping
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
High-demand product
-2
-1
0
+1
-1
+2
Medium-demand product
-1
0
+1
0
0
+1
Low-demand product
+1
0
+1
-1
+1
-1
Very low-demand product
+2
+1
0
-2
+1
-2
Many product source
-1
-1
+2
+1
0
+1
High product value
+2
+1
+1
0
-1
-1
Quick desired response
-2
-2
-1
+1
-2
+2
High product variety
+2
0
+1
0
+2
-1
Low customer effort
+1
+2
+2
+2
-1
-2
Network Design in the Supply Chain
 A framework for network design decision
Competitive STRATEGY
INTERNAL CONSTRAINTS
Capital, growth strategy,
existing network
PRODUCTION TECHNOLOGIES
Cost, Scale/Scope impact, support
required, flexibility
COMPETITIVE
ENVIRONMENT
PHASE I
Supply Chain
Strategy
PHASE II
Regional
Facility
Configuration
GLOBAL COMPETITION
TARIFFS AND TAX
INCENTIVES
REGIONAL DEMAND
Size, growth, homogeneity,
local specifications
POLITICAL, EXCHANGE
RATE AND DEMAND RISK
PHASE III
Desirable Sites
PRODUCTION METHODS
AVAILABLE
INFRASTRUCTURE
Skill needs, response time
FACTOR COSTS
Labor, materials, site specific
PHASE IV
Location
Choices
LOGISTICS COSTS Transport,
inventory, coordination
Phase I: Supply Chain Strategy
 A company’s competitive strategy
 Defining set of customer needs that it seek to satisfy through its
products and services
 Value chain perspective
 Product development strategy/marketing and sales strategy
 Supply chain strategy and achieving strategic fit
 e.g. Wal-Mart, McMaster Carr, Dell
Finance, Accounting, Information Technology, Human Resources
New
Product
Development
Marketing
and
Sales
Operations
Distribution
Services
The Value Chain in a Company
Network Optimization Models
 Useful tools for both Phase II and Phase IV
 Questions for Phase II: “What regions to source
demand in and how to configure network?” given,
 Regional demand, tariffs, economics of scale, aggregate factor
costs
 Not necessary to go to detail of specific plant locations
 Need to also consider less quantifiable factors such as political
and regulatory climate, competition
 Phase IV involves selecting specific facilities and
allocating capacity within those selected, given,
 Fixed facility cost, transportation cost, production cost, inventory
cost, coordination cost
Phase II: Regional Facility Configuration
 Capacitated plant location model
 Example: SunOil, a global energy company
• The world is divvied into 5 different regions: N. America, S. America,
Europe, Asia, Africa
• SunOil has regional demand figures, transport costs, facility costs
and capacities
• We will ignore tariffs and exchange rate fluctuations for now, and
assume all demand must be met (so we can focus on minimizing
costs)
 Question:
• Where to locate facilities to service their demand
• What size to build in the region (small or large), should they locate a
facility there
Phase II: Regional Facility Configuration
 Capacitated plant location model
 n: number of potential plant location
• As we are considering two different type
plants (small, large) for each region, n = 10





m: number of markets
Dj: demand from market j
Ki: capacity of plant i
fi: fixed cost of keeping plant i open
cij: variable cost of sourcing market j
from plant i
 yi = 1 if plant is located at site i,
= 0 otherwise
 xij: quantity shipped from plant i to
market j
n
n
m
min  f i yi   cij xij
i 1
i 1 j 1
s.t.
n
x
i 1
ij
m
x
j 1
ij
 Dj
 K i yi
for j  1,  , m
for i  1,  , n
yi  {0,1} for i  1,  , n
Phase II: Regional Facility Configuration
Phase III: Desirable Sites
 Gravity methods for location
 x, y: Warehouse Coordinates
 xn, yn: Coordinates of delivery location n
 Dn: Quantity to be shipped to delivery location n
 Fn: Annual tonnage to delivery location n
d n  ( x  xn ) 2  ( y  y n ) 2
k
min  d n Dn Fn
n 1
Limitions?
Phase IV: Location Choices
 Network optimization model
 Example: TelecomOne merged with High Optic
• They have plants in different cities and service several regions
• Supply cities
• Baltimore (capacity 18K), Cheyenne (24K), Salt Lake City (27K),
Memphis (22K) and Wichita (31K)
• Monthly regional demands
• Atlanta (demand 10K), Boston (6K), Chicago (14K), Denver
(6K), Omaha (7K)
• They will consider consolidating facilities
Phase IV: Location Choices
 Network optimization model





n: number of plant location
m: number of markets
Dj: demand from market j
Ki: capacity of plant i
cij: variable cost of sourcing
market j from plant i
 xij: quantity shipped from plant i to
market j
n
m
min  cij xij
i 1 j 1
s.t.
n
x
i 1
ij
m
x
j 1
ij
 Dj
for j  1, , m
 Ki
for i  1, , n
xij  0
Phase IV: Location Choices
 Considering additional layers: simultaneously
locating plants and DCs
suppliers
DCs
plants
customer1
customer2
customer3
n
t
i 1
e 1
l
n
n
t
t
m
min  f i yi   f e ye   chi xhi   cie xie   cej xej
s.t.

h 1 i 1
i 1 e 1
e 1 j 1