Supply Chain Management

Chapter 5 – Network Design in the Supply Chain

DR. RISHABH RATHORE

ICFAI BUSINESS SCHOOL, HYDERABAD
Learning Objectives
1. Understand the role of network design in a supply chain.
2. Identify factors influencing supply chain network design
decisions.
3. Develop a framework for making network design decisions.
4. Use optimization for facility location and capacity allocation
decisions.
The Role of Network Design
Factors Influencing Network Design
Decisions
Factors Influencing Network Design
Decisions
Framework
for Network
Design
Decisions
Framework for Network Design
Decisions
Framework for Network Design
Decisions
Framework for Network Design
Decisions
Models for Facility Location and Capacity
Location
Models for Designing a Regional Network
Configuration
1. Optimization Model to design a regional network configuration
2. Optimization Model to identify potential sites in a region
3. Optimization Model to design to locate plants and allocate market
demands
Models for Designing a Regional Network
Configuration
1. Optimization Model to design a regional network configuration
2. Optimization Model to identify potential sites in a region
3. Optimization Model to design to locate plants and allocate market
demands
Optimization Model to design a regional
network configuration
Optimization Model to design a regional
network configuration
The capacitated plant location network optimization model requires the
following inputs:
𝑛= number of potential plant locations/capacity (each level of capacity will count
as a separate location)
𝑚= number of markets or demand points
𝐷𝑗 = annual demand from market 𝑗
𝐾𝑖 = potential capacity of plant 𝑖
𝑓𝑖 = Annualized fixed cost of keeping plant 𝑖 open
𝑐𝑖𝑗 = cost of producing and shipping one unit from plant i to market j (cost includes
production, inventory, transportation, and tariff
Optimization Model to design a regional
network configuration
◦ The supply chain team’s goal is to decide on a network design that maximizes
profits after taxes.
◦ For the sake of simplicity, however, we assume that all demand must be met and
taxes on earnings are ignored.
◦ The model thus focuses on minimizing the cost of meeting global demand.
◦ It can be modified, however, to include profits and taxes. Define the following
decision variables:

𝑦𝑖 = 1 if plant i is open, 0 otherwise

𝑥𝑖𝑗 = quantity shipped from plant i to market j
Optimization Model to design a regional
network configuration
The problem is then formulated as the following mixed integer program:

Subject to:
Models for Designing a Regional Network
Configuration
1. Optimization Model to design a regional network configuration
2. Optimization Model to identify potential sites in a region
3. Optimization Model to design to locate plants and allocate market
demands
Optimization Model to identify potential
sites in a region
Gravity Location Model:
Gravity models assume that both the markets and the supply sources can be located as grid points on a
plane.
All distances are calculated as the geometric distance between two points on the plane.
These models also assume that the transportation cost grows linearly with the quantity shipped.
We discuss a gravity model for locating a single facility that receives raw material from supply sources
and ships finished product to markets.
The basic inputs to the model are as follows:

𝑥𝑛 , 𝑦𝑛 = coordinate location of either a market or supply source n

𝐹𝑛 = cost of shipping one unit (a unit could be a piece, pallet, truckload or ton) for
one mile between the facility and either market or supply source n
𝐷n = quantity to be shipped between facility and market or supply source n
Optimization Model to identify potential
sites in a region
Optimization Model to identify potential
sites in a region
Gravity Location Model:
Models for Designing a Regional Network
Configuration
1. Optimization Model to design a regional network configuration
2. Optimization Model to identify potential sites in a region
3. Optimization Model to design to locate plants and allocate
market demands
Optimization Model to design to locate
plants and allocate market demands
Optimization Model to design to locate
plants and allocate market demands
Optimization
Model to design
to locate plants
and allocate
market demands
Optimization
Model to design
to locate plants
and allocate
market demands
Logistics unboxed: Inside India's largest
warehouse
https://www.youtube.com/watch?v=sWpb-bR0Uw8