Supply Chain Analytics
Predictive and Prescriptive Analytics for operations, logistics and managing
the supply chain
Week 9: Network Design and facility location models (mixed integer
programs)
Supply Chain Management: Strategy,
Planning, and Operation
Seventh Edition, Global Edition
Chapter 5
Network Design in the
Supply Chain
Copyright © 2019 Pearson Education, Ltd.
Copyright © 2019 Pearson Education, Ltd.
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.
Copyright © 2019 Pearson Education, Ltd.
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?
Copyright © 2019 Pearson Education, Ltd.
Factors Influencing Network Design
Decisions (1 of 2)
• Strategic Factors
• Competitive Factors
– Positive externalities
– Locating to split the market
• Political Factors
• Infrastructure Factors
Copyright © 2019 Pearson Education, Ltd.
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
Copyright © 2019 Pearson Education, Ltd.
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
Copyright © 2019 Pearson Education, Ltd.
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
Copyright © 2019 Pearson Education, Ltd.
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
Copyright © 2019 Pearson Education, Ltd.
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
Copyright © 2019 Pearson Education, Ltd.
Models for Designing a Regional Network
Configuration (1 of 2)
• Inputs Required By Region
– Demand
– Desired response time
– Fixed cost of opening a facility
– Variable cost of labor and material
– Inventory holding cost
– Transportation cost between pairs of regions
– Sale price of product
– Taxes and tariffs
– Potential facility capacity
Copyright © 2019 Pearson Education, Ltd.
Models for Designing a Regional Network
Configuration (2 of 2)
Figure 5-3 Cost Data (in Thousands of Dollars) and Demand Data
(in Millions of Units) for SunOil
Copyright © 2019 Pearson Education, Ltd.
Capacitated Plant Location Model (1 of 9)
n = number of potential plant locations/capacity
m = number of markets or demand points
D
j = annual demand from market j
Ki
= potential capacity of plant i
fi = annualized fixed cost of keeping plant i open
c
ij = 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
x
ij = quantity shipped from plant i to market j
Copyright © 2019 Pearson Education, Ltd.
Capacitated Plant Location Model
= = =
∑ ∑∑ +
n n m
i i ij ij
i i j
Min f y c x
1 1 1
Subject to
{ }
=
=
= =
= =
∈ = ≥
∑ ∑
 

n
ij j
i m
ij i i
j 1
i ij
x D j m
x K y i n
y i n,x
1
for 1, ,
for 1, ,
0,1 for 1, , 0
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Capacitated Plant Location Model (3 of 9)
Figure 5-4 Spreadsheet Area for Decision Variables for SunOil
Copyright © 2019 Pearson Education, Ltd.
Capacitated Plant Location Model (7 of 9)
Copyright © 2019 Pearson Education, Ltd.
Locating Plants and Warehouses
Simultaneously (1 of 5)
Figure 5-13 Stages in a Supply Network