Supply Chain Management

(3rd Edition)
Chapter 5
Network Design in the Supply
Chain

2007 Pearson Education

5-1

Outline
A strategic framework for facility location
Multi-echelon networks
Gravity methods for location
Plant location models

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5-2

Network Design Decisions

Facility role
Facility location
Capacity allocation
Market and supply allocation

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5-3

Factors Influencing
Network Design Decisions
Strategic
Technological
Macroeconomic
Political
Infrastructure
Competitive
Logistics and facility costs

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5-4

The Cost-Response Time Frontier

Hi

Local FG
Mix
Regional FG
Local WIP

Cost

Central FG
Central WIP
Central Raw Material and Custom production
Custom production with raw material at suppliers

Low
Low
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Response Time

Hi
5-5

Service and Number of Facilities

Response
Time

Number of Facilities
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5-6

Costs and Number of Facilities

Inventory
Facility costs

Costs

Transportation

Number of facilities
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5-7

Cost Buildup as a Function of Facilities

Cost of Operations

Total Costs

Percent Service
Level Within
Promised Time
Facilities
Inventory
Transportation
Labor

Number of Facilities
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5-8

A Framework for
Global Site Location
Competitive STRATEGY
INTERNAL CONSTRAINTS
Capital, growth strategy,
existing network
PRODUCTION TECHNOLOGIES
Cost, Scale/Scope impact, support
required, flexibility
COMPETITIVE
ENVIRONMENT

GLOBAL COMPETITION

PHASE I
Supply Chain
Strategy

PHASE II
Regional Facility
Configuration

PRODUCTION METHODS
Skill needs, response time

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REGIONAL DEMAND
Size, growth, homogeneity,
local specifications
POLITICAL, EXCHANGE
RATE AND DEMAND RISK

PHASE III
Desirable Sites

FACTOR COSTS
Labor, materials, site specific

TARIFFS AND TAX

INCENTIVES

PHASE IV
Location Choices

AVAILABLE
INFRASTRUCTURE

LOGISTICS COSTS
Transport, inventory, coordination

5-9

Conventional Network
Materials
DC

Vendor
DC

Vendor
DC

Vendor
DC

Finished
Goods DC

Customer
DC

Customer
Store

Component
Manufacturing
Customer
DC

Plant
Warehouse
Components
DC

Final
Assembly
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Customer
Store

Finished
Goods DC

Customer
Store
Customer
Store

Customer
DC

Customer
Store
5-10

Tailored Network: Multi-Echelon

Finished Goods Network
Regional
Finished
Goods DC
National
Finished
Goods DC

Local DC
Cross-Dock

Store 1
Customer 1
DC

Local DC
Cross-Dock
Customer 2
DC

Regional
Finished
Goods DC

Local DC
Cross-Dock

Store 1
Store 2
Store 2
Store 3
Store 3

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5-11

Gravity Methods for Location

Ton Mile-Center Solution

x,y: Warehouse Coordinates
xn, yn : Coordinates of delivery
location n

dn : Distance to delivery
location n

Fn : Annual tonnage to delivery

location n

( x x n) ( y y n)
D
nx F

d
x
D
nF

d
D
ny F

d
y
D
nF

n 1

n 1

n 1

Min

d n Dn F n

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n 1

5-12

Network Optimization Models

Allocating demand to production facilities
Locating facilities and allocating capacity

Key Costs:
Fixed facility cost
Transportation cost
Production cost
Inventory cost
Coordination cost
Which plants to establish? How to configure the network?
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5-13

Demand Allocation Model

Which market is served
by which plant?
Which supply sources
are used by a plant?
xij = Quantity shipped from
plant site i to customer j

Min cij xij

i 1 j 1

s.t.
n

x D
ij

, j 1,..., m

x K

, i 1,..., n

i 1
m

j 1

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ij

ij

5-14

Plant Location with Multiple Sourcing

yi = 1 if plant is located
at site i, 0 otherwise
xij = Quantity shipped
from plant site i to
customer j

Min
i 1

f y c x
i

i 1 j 1

ij

ij

s.t.
n

x D , j 1,..., m
i 1

ij

x K y , i 1,..., n
j 1

ij

y k ; y {0,1}
i 1

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5-15

Plant Location with Single Sourcing

yi = 1 if plant is located
at site i, 0 otherwise
xij = 1 if market j is
supplied by factory i, 0
otherwise

Min
i 1

f y D j c x
i

i 1 j 1

ij

ij

s.t.
n

x
i 1

ij

1, j 1,..., m

D j x K y , i 1,..., n
ij

j 1

xij , y {0,1}
i

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5-16

Summary of Learning Objectives

What is the role of network design decisions in

the supply chain?
What are the factors influencing supply chain
network design decisions?
Describe a strategic framework for facility
location.
How are the following optimization methods used
for facility location and capacity allocation
decisions?
Gravity methods for location
Network optimization models

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5-17