Chapter 5
Network Design in the Supply
Chain
5-1
Outline
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
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A strategic framework for facility location
Multi-echelon networks
Gravity methods for location
Plant location models
5-2
Network Design Decisions
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Facility role
Facility location
Capacity allocation
Market and supply allocation
5-3
Factors Influencing
Network Design Decisions
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Strategic
Technological
Macroeconomic
Political
Infrastructure
Competitive
Logistics and facility costs
5-4
The Cost-Response Time Frontier
Hi
Local FG
Mix
Regional FG
Local WIP
Cost
Central FG
Central WIP
Central Raw Material and Custom production
Custom production with raw material at suppliers
Low
Low
Response Time
Hi
5-5
Service and Number of Facilities
Response
Time
Number of Facilities
5-6
Where inventory needs to be for a one week order response time - typical results --> 1 DC
Customer
DC
Where inventory needs to be for a 5 day order response time - typical results --> 2 DCs
Customer
DC
Where inventory needs to be for a 3 day order response time - typical results --> 5 DCs
Customer
DC
Where inventory needs to be for a next day order response time - typical results --> 13 DCs
Customer
DC
Where inventory needs to be for a same day / next day order response time - typical results -> 26 DCs
Customer
DC
Costs and Number of Facilities
Inventory
Facility costs
Costs
Transportation
Number of facilities
5-12
Cost Buildup as a Function of Facilities
Cost of Operations
Total Costs
Percent
Service Level
Within
Promised Time
Facilities
Inventory
Transportation
Labor
Number of Facilities
5-13
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
5-14
Conventional Network
Vendor
DC
Vendor
DC
Vendor
DC
Materials
DC
Component
Manufacturin
g
Finished
Goods DC
Customer
DC
Customer
Store
Customer
DC
Plant
Warehouse
Components
DC
Final
Assembly
Customer
Store
Finished
Goods DC
Customer
Store
Customer
Store
Customer
DC
Customer
Store
5-15
Tailored Network: Multi-Echelon
Finished Goods Network
Regional
Finished
Goods DC
National
Finished
Goods DC
Local DC
Cross-Dock
Store 1
Customer 1
DC
Local DC
Cross-Dock
Customer 2
DC
Regional
Finished
Goods DC
Local DC
Cross-Dock
Store 1
Store 2
Store 2
Store 3
Store 3
5-16
Gravity Methods for Location
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Ton Mile-Center Solution
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x,y: Warehouse Coordinates
xn, yn : Coordinates of delivery
location n

dn : Distance to delivery
location n

Fn : Annual tonnage to delivery
location n
( x  xn)  ( y  y n)
x
 Dn F d
x
F
 Dn d
y
 Dn F d
y
F
 Dn d
d
2
2

n
k
n
n
n 1
n
k
n
n 1
n
k
n
n
n 1
n
k
n
n 1
Min
n
 d n Dn F n
5-17
Network Optimization Models
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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?
5-18
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  D , j  1,..., m
i 1
ij
j
m
 x  K , i  1,..., n
j 1
x
ij
ij
i
0
5-19
Plant Location with Multiple
Sourcing
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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
f y
i
i
m
  cij xij
i 1 j 1
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
5-20
Plant Location with Single
Sourcing
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
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
5-21
Summary of Learning Objectives
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What is the role of network design decisions in
the supply chain?
What are the factors influencing supply chain
network design decisions?
Describe a strategic framework for facility
location.
How are the following optimization methods
used for facility location and capacity allocation
decisions?


Gravity methods for location
Network optimization models
5-22