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Learning Objectives (1 of 2) Learning Objectives (2 of 2)

5.1 Understand the role of network design in a supply 5.5 Develop an optimization model to identify potential sites
chain. in a region.
5.2 Identify factors influencing supply chain network design 5.6 Develop an optimization model to locate plants and
decisions. allocate market demand.
5.3 Discuss a framework for making network design
decisions.
5.4 Develop an optimization model to design an regional
network configuration.

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The Role of Network Design (1 of 2) The Role of Network Design (2 of 2)

• Network design decisions • Revisit design decisions after market changes, mergers,
– How many manufacturing plants, production lines, or factor cost changes
distribution centers, cross-docking facilities?
– Where should facilities be located?
– How much capacity at each facility?
– Which products?
– What markets?

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Factors Influencing Network Design

Summary of Learning Objective 1 Decisions (1 of 2)

Network design decisions include identifying facility • Strategic Factors

locations, capacities, products handled, and allocating
• Competitive Factors
markets to be served by different facilities. These decisions
define the physical constraints within which the network – Positive externalities
must operate as market conditions change. Good network – Locating to split the market
design decisions increase profits by supporting the supply
• Political Factors
chain strategy.
• Infrastructure Factors

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Factors Influencing Network Design

Decisions (2 of 2) Summary of Learning Objective 2

• Customer Response Time and Service Level Network design decisions are influenced by non-
quantifiable factors including strategic, competitive,
• Total Logistics Cost
political, and infrastructure. These decisions are also
• Macroeconomic Factors influenced by quantifiable factors including desired
– Tariffs and tax incentives response time and service levels, total logistics costs, and
taxes and tariffs. Network design decisions should be
– Exchange-rate and demand risk
checked for robustness in the face of fluctuations in
demand, costs, and exchange rates.

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Framework for Network Design Figure 5-2 Framework for Network Design
Decisions (1 of 4) Decisions

• 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

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Framework for Network Design Framework for Network Design

Decisions (2 of 4) Decisions (3 of 4)

• Phase I: Define a Supply Chain Strategy/Design • Phase II: Define the Regional Facility Configuration
– Clear definition of the firm’s competitive strategy – Forecast of the demand by country or region
– Forecast the likely evolution of global competition – Identify fixed and variable costs, economies of scale
– Identify constraints on available capital or scope
– Determine broad supply strategy – Identify regional tariffs, requirements for local
production, tax incentives, and export or import
restrictions
– Identify competitors
– Identify demand risk, exchange-rate risk, political risk

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Framework for Network Design

Decisions (4 of 4) Summary of Learning Objective 3

• Phase III: Select a Set of Desirable Potential Sites The goal of network design is to maximize the supply chain’s long-term
profitability. The process starts by defining the supply chain strategy,
– Hard infrastructure requirements which must be aligned with the competitive strategy of the firm. The
– Soft infrastructure requirements supply chain strategy, regional demand, costs, infrastructure, and
competitive environment are used to define a regional facility
• Phase IV: Location Choices and Market Allocation configuration. For regions where facilities are to be located, potentially
attractive sites are then selected based on costs and available
infrastructure. The optimal configuration is determined from the
potential sites using demand, logistics cost, factor costs, taxes, and
margins in different markets. The robustness of the network should be
checked in the context of various risks and uncertainties faced by the
supply chain. The allocation of markets to facilities should be revised as
demand and costs change.

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Models for Designing a Regional Network

Configuration (1 of 2) Capacitated Plant Location Model (1 of 9)

• Inputs Required By Region n = number of potential plant locations/capacity

– Demand m = number of markets or demand points
– Desired response time Dj = annual demand from market j
– Fixed cost of opening a facility Ki = potential capacity of plant i
– Variable cost of labor and material
fi = annualized fixed cost of keeping plant i open
– Inventory holding cost
cij = cost of producing and shipping one unit from plant i to market j
– Transportation cost between pairs of regions (cost includes production, inventory, transportation, and tariffs)
– Sale price of product yi = 1 if plant i is open, 0 otherwise
– Taxes and tariffs
xij = quantity shipped from plant i to market j
– Potential facility capacity

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Summary of Learning Objective 4 Models for Identifying Potential Sites

The capacitated plant location model can be used to obtain • Gravity Location Models
a regional configuration that minimizes total cost or – Inputs required
maximizes total profits. The model provides optimal plant xn , y n : coordinate location of either a market or supply source n
locations while ensuring that no plant supplies more than Fn : cost of shipping one unit for one mile between the facility and
its capacity and each market obtains enough supply to either market or supply source n
meet demand. Dn : quantity to be shipped between facility and market or supply
source n
(x, y) is the location selected for the The total transportation cost
facility, the distance d n between the is given by
facility at location (x, y) and the supply k

source or market n is given by TC   d n Dn Fn

n 1

 x – xn    y – y n 
2 2
dn 

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Summary of Learning Objective 5 Summary of Learning Objective 6

The gravity model can be used to identify potential facility The capacitated plant location model can be used to locate
locations in each region. Given the quantity coming from production facilities and ware- houses to minimize total
supply sources and market demand, the model identifies network costs or maximize network profits. A similar model
the geographic location in a region that minimizes the total can also be used to allocate market demand across an
transportation cost. This geographic location can be used existing set of facilities in a supply chain network. Both
to identify nearby potential sites that satisfy both hard and models optimize the objective function while ensuring that
soft infrastructure requirements. capacity constraints are satisfied and market demand is
served.

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