CHAPTER 3

SUPPLY CHAIN NETWORK

DESIGN
Part2

2017/2018 – Sem. 1
Framework for Network Design
Decisions Figure 5-2
 Phase III: Gravity Location Models
• Gravity location models can be useful when
identifying suitable geographic locations
within a region.
• Gravity models are used to find locations for
facility that minimize the cost of transporting
raw materials receives from suppliers and
ships finished product to markets.
 Gravity Location Model
xn, yn: coordinate location of either a market or supply source n
Fn: cost of shipping one unit ( a unit can 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
(x, y) is the location selected for the facility, the distance dn between the
facility at location (x, y) and the supply source or market n is given by

(x – x ) + ( y – y )
2 2
dn = n n

The optimal location is one that minimizes the total Transportation

Cost, TC k
TC = å d n Dn Fn
n=1
 Example 2
• Steel Appliances (SA), a manufacturer of high-
quality refrigerators and cooking ranges.
• SA has one assembly factory located near
Denver, from which it has supplied the entire
United States. Demand has grown rapidly and
the CEO of SA has decided to set up another
factory to serve its eastern markets.
• The supply chain manager is asked to find a
suitable location for the new factory.
 Example 2(cont.)
• Three parts plants located in Buffalo,
Memphis, and St. Louis will supply parts to the
new factory, which will serve markets in
Atlanta, Boston, Jacksonville, Philadelphia, and
New York.
• The coordinate location, the demand in each
market, the required supply from each parts
plant, and the shipping cost for each supply
source or market are shown in Table 1
 Table 1
Transportation Cost Quantity in Tons Coordinates
Sources/Markets $/Ton Mile (Fn) (Dn) xn yn
Supply sources
Buffalo 0.90 500 700 1,200
Memphis 0.95 300 250 600
St. Louis 0.85 700 225 825
Markets
Atlanta 1.50 225 600 500
Boston 1.50 150 1,050 1,200
Jacksonville 1.50 250 800 300
Philadelphia 1.50 175 925 975
New York 1.50 300 1,000 1,080

k
Total transportation cost TC = å d n Dn Fn
n=1
 Example 2-Gravity Location Model
(x – x ) + ( y – y )
2 2
dn = n n

k
TC = å d n Dn Fn
n=1
 Example 2-Gravity Location Model
• Solution

• Coordinates (x, y) = (681, 882) as the location of the factory that

minimizes total cost TC.
• The precise coordinates provided by the gravity model may not
correspond to a feasible location. The manager should look for
desirable sites close to the optimal coordinates that have the
required infrastructure as well as the appropriate worker skills
available.
 Phase IV: Network Optimization
Models
• During Phase IV ,a manager decides on the
location and capacity allocation for each
facility.
• Besides locating the facilities, a manager also
decides how markets are allocated to facilities.
This allocation must account for customer
service constraints in terms of response time.
 Network Optimization Models
• Allocating demand to production facilities
n = number of factory locations
m = number of markets or demand points xij = quantity shipped from
D j = annual demand from market j factory i to market j

K i = capacity of factory i
cij = cost of producing and shipping one unit from factory i to market j

Obj - to allocate the demand from different markets to the various plants to
minimize the total cost.
Constraints - to ensure that all market demand is satisfied and no factory produces
more than its capacity.
n m subject to
Minå å cij xij n

i=1 j=1 åx ij
= D j for j = 1,...,m
i=1
m

åx ij
= K i for i = 1,...,n
j=1
 Example 3
• TelecomOne and HighOptic are manufacturers of the latest
generation of telecommunication equipment.
• TelecomOne has focused on the eastern half of the United
States. It has manufacturing plants located in Baltimore,
Memphis, and Wichita and serves markets in Atlanta,
Boston, and Chicago.
• HighOptic has targeted the western half of the United States
and serves markets in Denver, Omaha, and Portland.
HighOptic has plants located in Cheyenne and Salt Lake City.
• Each year, managers in both companies must decide
how to allocate the demand to their production facilities
as demand and costs change.
 Table 2
Plant capacities, market demand, variable production and
transportation cost per thousand units shipped, and fixed costs
per month at each plant
Demand City
Monthly Monthly
Production and Transportation Cost
Capacity Fixed Cost
per Thousand Units (Thousand $)
(Thousand (Thousand
Supply City Atlanta Boston Chicago Denver Omaha Portland Units) K $) f
Baltimore 1,675 400 985 1,630 1,160 2,800 18 7,650
Cheyenne 1,460 1,940 970 100 495 1,200 24 3,500
Salt Lake 1,925 2,400 1,450 500 950 800 27 5,000
City
Memphis 380 1,355 543 1,045 665 2,321 22 4,100
Wichita 922 1,646 700 508 311 1,797 31 2,200
Monthly 10 8 14 6 7 11
demand
(thousand
units) Dj
Network Optimisation Models

=J2-SUM(C12:H12)

=C7-SUM(C12:C16)

=SUMPRODUCT(C2:H6,C12:H16)
Network Optimisation Models
 Network Optimization Models
• Optimal demand allocation
Atlanta Boston Chicago Denver Omaha Portland

TelecomOne Baltimore 0 8 2

Memphis 10 0 12

Wichita 0 0 0

HighOptic Salt Lake 0 0 11

Cheyenne 6 7 0

TelecomOne incurs a monthly variable cost of $14,886,000 and a monthly fixed cost of
$13,950,000 for a total monthly cost of $28,836,000.
HighOptic incurs a monthly variable cost of $12,865,000 and a monthly fixed cost of
$8,500,000 for a total monthly cost of $21,365,000.
 Locating Plant: Capacitated Plant
Location Model
• Merge the companies
• Solve using location-specific costs

yi = 1 if factory i is open, 0 otherwise

xij = quantity shipped from factory i to market j

n n m
Minå f i yi + å åc x ij ij
i=1 i=1 j=1
 Example 4
• Management executives at both TelecomOne
and HighOptic have decided to merge the two
companies into a single entity to be called
TelecomOptic. Management believes that
significant benefits will result if the two
networks are merged appropriately.
TelecomOptic will have five factories from
which to serve six markets. Management is
debating whether all five factories are needed.
Capacitated Plant Location Model
Capacitated Plant Location Model
Capacitated Plant Location Model
Capacitated Plant Location Model