1

Course Name: Supply Chain

Management Course Number:
MGSC-5114

Winter 2024 – Week 3

Shervin Espahbod Page 1
Supply Chain Management: Strategy,
Planning, and Operation
Seventh Edition

Chapter 5
Network Design in the
Supply Chain

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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?

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Distribution Network Design in the Supply
Chain
• Distribution – the steps taken to move and store
a product from the supplier stage to the customer
stage in a supply chain
• Drives profitability by directly affecting supply
chain cost and the customer value
• Choice of distribution network can achieve supply
chain objectives from low cost to high
responsiveness

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Factors Affecting Distribution Network
Design (1 of 3)
• Distribution network performance evaluated along
two dimensions
1. Value provided to the customer
2. Cost of meeting customer needs
• Evaluate the impact on customer service and cost
for different distribution network options
• Profitability of the delivery network determined by
revenue from met customer needs and network
costs

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Figure 4-9 Distributor Storage with Last
Mile Delivery

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Distributor Storage with Last Mile
Delivery (1 of 2)
Table 4-4 Performance Characteristics of Distributor Storage with Last-
Mile Delivery

Cost Factor Performance

Inventory Higher than distributor storage with package carrier
delivery.
Transportation Very high cost given minimal scale economies. Higher
than any other distribution option.
Facilities and handling Facility costs higher than manufacturer storage or
distributor storage with package carrier delivery, but
lower than a chain of retail stores.
Information Similar to distributor storage with package carrier
delivery.

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Distributor Storage with Last Mile
Delivery (2 of 2)
Table 4-4 [Continued]

Service Factor Performance

Response time Very quick. Same day to next-day delivery.
Product variety Somewhat less than distributor storage with package carrier
delivery but larger than retail stores.
Product availability More expensive to provide availability than any other option
except retail stores.
Customer experience Very good, particularly for bulky items.
Time to market Slightly longer than distributor storage with package carrier
delivery.
Order visibility Less of an issue and easier to implement than manufacturer
storage or distributor storage with package carrier delivery.
Returnability Easier to implement than other previous options. Harder and
more expensive than a retail network.

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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

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A typical transportation problem
• A typical transportation problem requires three sets of numbers: capacities (or
supplies), demands (or requirements), and unit shipping (and possibly production)
costs.

• The capacities indicate the most each plant can supply in a given amount of time
under current operating conditions. In some cases it might be possible to increase the
“base” capacities, by using overtime, for example. In such cases the model could be
modified to determine the amounts of additional capacity to use (and pay for).

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A typical transportation problem continued
• The customer demands are typically estimated from some type of forecasting model.
The forecasts are often based on historical customer demand data.

• The unit shipping costs come from a transportation cost analysis - what does it really
cost to send a single automobile from any plant to any region?
– The unit “shipping” cost can also include the unit production cost at each plant.

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Representing transportation as a network
model continued
• A node, indicated by a circle, generally represents a geographical location.

• An arc, indicated by an arrow, generally represents a route for getting a product from
one node to another.

• The decision variables are usually called flows. They represent the amounts shipped
on the various arcs.

• Upper limits are called arc capacities, and they can also be shown on the model.

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Practice
• 1- https://www.youtube.com/watch?v=WZIyL6pcItY

• 2- https://www.youtube.com/watch?v=k9iFrgWD-WY

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Network

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Input data in Excel

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Adding Constraint and Decision Variables

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Adding Objective function
• In our example, we suppose that one large truck has a maximum carry volume of 110
units.

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Applying Solver

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Finding results

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Capacitated Plant Location Model (1 of 9)
n = number of potential plant locations/capacity
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 tariffs)
yi = 1 if plant i is open, 0 otherwise

xij = quantity shipped from plant i to market j

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Capacitated Plant Location Model (2 of 9)

n n m
Min  fi y i    cij xij
i 1 i 1 j 1

Subject to

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Capacitated Plant Location Model (3 of 9)

Figure 5-4 Spreadsheet Area for Decision Variables for SunOil

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Capacitated Plant Location Model (4 of 9)

Figure 5-5 Spreadsheet Area for Constraints and Objective Function

for SunOil

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Capacitated Plant Location Model (5 of 9)

Cell Cell Formula Equation Copied To

B28 =B9 − SUM(B14:B18) 5.1 C28:F28
= G14 * H4 + H14 * J4  SUM B14 : F14 
= G 14 times H 4 + H 14 times J 4 minus SUM of B 14:F14
B22 5.2 B23:B26
B31 =SUMPRODUCT(B14:F18,B4:F8) + Objective –
SUMPRODUCT(G14:G18,G4:G8) + Function
SUMPRODUCT(H14:H18,I4:I8)

Figure 5-5 [Continued]

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Capacitated Plant Location Model (6 of 9)
• Constraints

B14:H18 0  All decision variables are nonnegative

 m

B22:B26 0 K i y i   xij 0 for i 1,,5 
 j=1 
 n

B28:F28 0 D j   xij 0 for j 1,,5 
 i=1 
G14:H18 binary Location variable y i are binary; that is, 0 or 1

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Capacitated Plant Location Model (7 of 9)

Figure 5-6 Using Solver to Set Regional Configuration for SunOil

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Capacitated Plant Location Model (8 of 9)

Figure 5-7 Optimal Regional Network Configuration for SunOil

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Accounting for Taxes, Tariffs, and
Customer Requirements
• Networks should be structured to maximize profit
after taxes while meeting customer service
requirements
• Objective function maximizes profits
m n n n m
Max  r j  xij   F y   c x
i i ij ij
j 1 i 1 i 1 i 1 j 1

• Constraint Equation 5.1 becomes

n

x i=1
ij D j for j 1, ,m

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Summary of Learning Objective 4
The capacitated plant location model can be used
to obtain a regional configuration that minimizes
total cost or maximizes total profits. The model
provides optimal plant locations while ensuring that
no plant supplies more than its capacity and each
market obtains enough supply to meet demand.

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 Warm-up Exercise
• How Trump-re-election affect logistics?

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Models for Identifying Potential Sites
• Gravity Location Models
– Inputs required
xn , y n : coordinate location of either a market or supply source n
Fn : cost of shipping one unit 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 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 – x n   y – y n 
2 2
dn 

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Gravity Model (1 of 3)

Figure 5-8 Using Solver to Optimize Location for Steel Appliances

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Gravity Model (2 of 3)

Cell Cell Formula Equation Copied to

 
G5 = SQRT(($B$16  E5) 2 + ($B$17  F5) 2) 5.5 G6:G12
equals square root of left parenthesis, left parenthesis $ B $ 16 minus E 5 right parenthesis, caret 2
+ left parenthesis $ B $ 17 minus f 5 right parenthesis, caret 2 right parenthesis

B19 = SUMPRODUCT(G5:G12,D5:D12,C5:C12) 5.6 –

Figure 5-8 [Continued]

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Gravity Model (3 of 3)
1. For each supply source or market n, evaluate dn
2. Obtain a new location (x’, y’) for the facility,
where
k k
Dn Fn xn Dn Fn y n

n 1 d

n 1 dn
x'  k n
and y'  k
Dn Fn Dn Fn

n 1 d

n 1 d n
n

3. If the new location (x’ , y’ ) is almost the same

as
(x, y) stop. Otherwise, set (x, y) = (x’ , y’ ) and
go to step 1
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Summary of Learning Objective 5
The gravity model can be used to identify potential
facility locations in each region. Given the quantity
coming from supply sources and market demand,
the model identifies the geographic location in a
region that minimizes the total transportation cost.
This geographic location can be used to identify
nearby potential sites that satisfy both hard and
soft infrastructure requirements.

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Models for Demand Allocation and Plant
Location
Table 5-1 Capacity, Demand, and Cost Data for TelecomOne and HighOptic
Demand City Production and Transportation Cost per Thousand Units
(Thousand $)
Monthly Monthly
Capacity Fixed Cost
Supply (Thousand (Thousand
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 Blank Blank
demand
(thousand
units) Dj

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Allocating Demand to Existing Production
Facilities (1 of 8)
• Inputs required

n = number of factory locations

m = number of markets or demand points
Dj = annual demand from market j
Ki = capacity of factory i
cij = cost of producing and shipping one unit from factory i
to market j
xij = quantity shipped from factory i to market j

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Allocating Demand to Existing Production
Facilities (2 of 8)
n m
Min   cij xij
i 1 j 1

Subject to

x
i 1
ij D j for j 1, ,m
m

x
j 1
ij K i for i 1, ,n

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Allocating Demand to Existing Production
Facilities (3 of 8)
Table 5-2 Optimal Demand Allocation for TelecomOne and
HighOptic
Blank Blank Atlanta Boston Chicago Denver Omaha Portland
TelecomOne Baltimore 0 8 2 Blank Blank Blank
Blank Memphis 10 0 12 Blank Blank Blank
Blank Wichita 0 0 0 Blank Blank Blank
HighOptic Salt Lake Blank Blank Blank 0 0 11
Blank Cheyenne Blank Blank Blank 6 7 0

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Allocating Demand to Existing Production
Facilities (4 of 8)

Figure 5-9 Spreadsheet Area for Decision Variables for TelecomOptic

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Allocating Demand to Existing Production
Facilities (5 of 8)

Figure 5-10 Spreadsheet Area for Constraints for TelecomOptic

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Allocating Demand to Existing Production
Facilities (6 of 8)

Cell Formula Equation Copied to

= I 4 times H 14 minus sum, left parenthesis B 14:G 14 right parenthesis
B22 = I4 * H14  SUM(B14 : G14) 5.1 B23:B26
B29 = B9 − SUM(B14:B18) 5.2 C29:G29
B32 = SUMPRODUCT(B4:G8, B14:G18) + Objective –
SUMPRODUCT(H4:H8, H14:H18) function

Figure 5-10 Spreadsheet Area for Constraints for TelecomOptic

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Allocating Demand to Existing Production
Facilities (7 of 8)

Figure 5-11 Solver Dialog Box for TelecomOptic

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Allocating Demand to Existing Production
Facilities (8 of 8)

Figure 5-12 Optimal Network Design for TelecomOptic

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Models for Locating Production Facilities
• 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
Min  fi y i   c x ij ij
i 1 i 1 j 1

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Capacitated Plant Location Model (9 of 9)
B14:G18 0  All decision variables are nonnegative
 m

B22:B26 0 K i y i   xij 0 for i 1,,5 
 j 1 
 n

B29:G29 0 D j   xij 0 for j 1,,6 
 i =1 
H14:H18 binary Location variables y i are binary; that is, 0 or 1

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More Complex Capacitated Plant Location
Model (1 of 2)
• Capacitated plant location model with single sourcing

yi = 1 if factory i is located at site i, 0

otherwise
xij = 1 if market j is supplied by factory i, 0
n n m
otherwise

Min f y 
i 1
iDc x
i 
i 1 j 1
j ij ij

Subject to
n

x
i 1
ij 1 for j 1, ,m
m

D x
j 1
j ij K i y i for i 1, ,n

xij ,y i   0,1
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More Complex Capacitated Plant Location
Model (2 of 2)
Table 5-3 Optimal Network Configuration for TelecomOptic
with Single Sourcing

Blank Open/Closed Atlanta Boston Chicago Denver Omaha Portland

Baltimore Closed 0 0 0 0 0 0
Cheyenne Closed 0 0 0 0 0 0
Salt Lake Open 0 0 0 6 0 11
Memphis Open 10 8 0 0 0 0
Wichita Open 0 0 14 0 7 0

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Locating Plants and Warehouses
Simultaneously (1 of 5)

Figure 5-13 Stages in a Supply Network

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Locating Plants and Warehouses
Simultaneously (2 of 5)
• Inputs
m = number of markets or demand points
n = number of potential factory locations
l = number of suppliers
t = number of potential warehouse locations
Dj = annual demand from market j
Ki = potential capacity of factory at location l
Sh = supply capacity at supplier h

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Locating Plants and Warehouses
Simultaneously (3 of 5)
We = potential warehouse capacity at location e
Fi = fixed cost of locating plant at location l
fe = fixed cost of locating a warehouse at location e
chi = cost of shipping one unit from supply source h
to factory l
cie = cost of producing and shipping one unit from
factory l to warehouse e
cej = cost of shipping one unit from warehouse e to
market j
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Locating Plants and Warehouses
Simultaneously (4 of 5)
• Decision variables

yi = 1 if factory is located at location i, 0 otherwise

ye = 1 if factory is located at location e, 0 otherwise
xej = quantity shipped from warehouse e to market j
xie = quantity shipped from factory at location i to
warehouse e
xhi function
• Objective = quantity shipped from supplier h to factory at
location
n
i t l n n t t m
Min  Fi y i   fe y e   chi xhi   cie xie   cej xej
i 1 e 1 h 1 i 1 i 1 e 1 e 1 j 1

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Locating Plants and Warehouses
Simultaneously (5 of 5)
• Constraint equations
n m
x
i 1
hi Sh for h 1, ,l x ej We y e for e = 1, ,t
j 1
l t
t
x
h 1
hi  x
e 1
ie 0 for i 1, ,n
x ej  D j for j = 1, ,m
e 1
t
y i ,y e   0,1 ,xej ,xie ,xhi 0
x
e 1
ie K i y i for i 1, ,n
n m

x  x
i 1
ie
j 1
ej 0 for e 1, ,t

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Summary of Learning Objective 6
The capacitated plant location model can be used
to locate production facilities and ware- houses to
minimize total network costs or maximize network
profits. A similar model can also be used to allocate
market demand across an existing set of facilities in
a supply chain network. Both models optimize the
objective function while ensuring that capacity
constraints are satisfied and market demand is
served.

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Copyright

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