Designing Supply

Chain Networks
Distribution Network Design

• Choice of distribution network affects

supply chain efficiency and
responsiveness
• Outstanding distribution network
design and operation is the key to
the success of Walmart and 7-Eleven
• In a product like cement, distribution
costs are about 30% of total cost
Desired Response Time and
Number of Facilities
Inventory Costs and Number of
Facilities
Transportation Costs and Number
of Facilities
Facility Costs and Number of
Facilities
Logistics Cost, Response Time,
and Number of Facilities
Design Options for a Distribution
Network

• Two key decisions

 Will product be delivered to the customer
location or picked up from a prearranged site?
 Will product flow through an intermediary (or
intermediate location)?
Manufacturer Storage with
Direct Shipping
In-Transit Merge Network
Distributor Storage with
Carrier Delivery
Distributor Storage with
Last Mile Delivery
 Manufacturer or Distributor
Storage with Customer Pickup
Retail Storage with Customer
Pickup
Factories

Retailers

Customers

Product Flow
Customer Flow
Models for Facility Location and
Capacity Allocation
• Important information
 Location of supply sources and markets
 Location of potential facility sites
 Demand forecast by market
 Facility, labour, and material costs by site
 Transportation costs between each pair of sites
 Inventory costs by site and as a function of
quantity
 Sale price of product in different regions
 Taxes and tariffs
 Desired response time and other service
factors
Allocating demand to prodn facilities
(The Transportation Problem)
n = Number of factory locations
m = Number of markets or demand points
D j = Annual demand from market j
K i = 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
n m
Min cij xij
i 1 j 1
subject to
n
∑ xij  D j for j  1,...,m
i 1
m
∑ xij  Ki for i  1,...,n
j 1
xij  0 for i  1, ..., n; j  1, 2, ..., m
Network Optimization Models:
Capacitated Plant Location Model
n = number of potential plant locations/capacity
m = number of markets or demand points yi = 1 if plant i is open, 0 otherwise
D j = annual demand from market j xij = quantity shipped from
plant i to market j
K i = potential capacity of plant i
f i = 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)
n n m
Min f i yi +  c x ij ij
i1 i1 j1
subject to n
 xij  D j for j  1,..., m
i 1
m
 xij  K i yi for i  1,..., n
j 1
y i  0,1 for i  1,..., n, x ij  0
Network Optimization Models:
Capacitated Plant Location Model
m
Linking  xij and yi to each other
j 1
m
Consider  xij  K i yi for i  1,..., n
j 1
m
1. If  xij = 0  yi = 0 or 1
j 1
m
2. If  xij > 0  yi = 1
j 1
m
3. If yi = 0   xij = 0
j 1
m
4. If yi = 1   xij  K i
j 1
 Capacitated Model with
Single Sourcing
• Each Market supplied by only one factory
• Modify decision variables
yi = 1 if factory i is open, 0 otherwise
xij = 1 if market j is supplied by factory i, 0 otherwise
n n m
Min f i yi +   D j cij xij
i1 i1 j1
subject to n
 xij  1 for j  1,..., m
i 1
m
 D j xij  K i yi for i  1,..., n
j 1
xij , y i  0,1
 Locating Plants and
Warehouses Simultaneously
 Locating Plants and
Warehouses Simultaneously
Model 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 customer j
Ki = Potential capacity of factory at site i
Sh = Supply capacity at supplier h
We = Potential warehouse capacity at site e
Fi = Fixed cost of locating a plant at site i
fe = Fixed cost of locating a warehouse at site e
chi = Cost of shipping one unit from supply source h to
factory i
cie = Cost of producing and shipping one unit from factory i
to warehouse e
cej = Cost of shipping one unit from warehouse e to
customer j
 Locating Plants and
Warehouses Simultaneously
• Goal is to identify plant and warehouse locations
and quantities shipped that minimize the total
fixed and variable costs
yi = 1 if factory is located at site i, 0 otherwise
ye = 1 if warehouse is located at site e, 0 otherwise
xhi = Quantity shipped from supplier h to factory at
site i
xie = Quantity shipped from factory at site i to
warehouse e
xej = Quantity shipped from warehouse e to market j
n t l n n t t m
Min  Fi yi +  f e ye +   chi xhi +  cie xie +  cej xej
i 1 e 1 h 1 i 1 i 1 e 1 e 1 j 1
 Locating Plants and
Warehouses Simultaneously
subject to
n m

x hi
 Sh for h  1,...,l x ej
 We ye for e  1,...,t
i1 j1
l t t

x hi
–  xie  0 for i  1,...,n x ej
 D j for j  1,...,m
h1 e1 e1
t

x ie
 Ki yi for i  1,...,n yi , y e  0,1, xhi , xie , xej  0
e1
n m

x – x
ie ej
 0 for e  1,...,t
i1 j1
Accounting for Taxes, Tariffs,
and Customer Requirements
• If tax structure is different in different
markets, a supply chain network should
maximize profits after tariffs and taxes
while meeting customer service
requirements
• Modified objective and constraint
m n n n m
Max rj  xij –  Fi yi –   cij xij
j1 i1 i1 i1 j1
n

x ij
 D j for j  1,...,m
i1
 Risk Management in
Global Supply Chains
• Risks include supply disruption, supply delays,
demand fluctuations, price fluctuations, and
exchange-rate fluctuations
• Critical for global supply chains to be aware of
the relevant risk factors and build in suitable
mitigation strategies
• Good network design can play a significant
role in mitigating supply chain risk
• Every mitigation strategy comes at a price and
may increase other risks
 Flexibility, Chaining, and
Containment
• Three broad categories of flexibility
 New product flexibility
o Ability to introduce new products into the market at a
rapid rate
 Mix flexibility
o Ability to produce a variety of products within a short
period of time
 Volume flexibility
o Ability to operate profitably at different levels of output
Flexibility, Chaining, and
Containment
 Flexibility, Chaining, and
Containment
• As flexibility is increased, the marginal benefit
derived from the increased flexibility decreases
 With demand uncertainty, longer chains pool
available capacity
 Long chains may have higher fixed cost than
multiple smaller chains
• Flexibility and chaining are effective when dealing
with demand and supply fluctuation but less
effective when dealing with supply disruption