Chapter 5 Exercise Answers

Chapter 5: Network Design in the Supply Chain
Exercise Solutions
1.
(a)
The objective of this model is to decide optimal locations of home offices, and number of trips
from each home office, so as to minimize the overall network cost. The overall network cost is a
combination of fixed costs of setting up home offices and the total trip costs.
There are two constraint sets in the model. The first constraint set requires that a specified
number of trips be completed to each state j and the second constraint set prevents trips from a
home office i unless it is open. Also, note that there is no capacity restriction at each of the home
offices. While a feasible solution can be achieved by locating a single home office for all trips to
all states, it is easy to see that this might not save on trip costs, since trip rates vary between home
offices and states. We need to identify better ways to plan trips from different home offices to
different states so that the trip costs are at a minimum. Thus, we need an optimization model to
handle this.
Optimization model:
n
m
Dj
Ki
fi
cij
yi
xij
= 4: possible home office locations.

= 16: number of states.
= Annual trips needed to state j
= number of trips that can be handled from a home office
As explained, in this model there is no restriction
= Annualized fixed cost of setting up a home office
= Cost of a trip from home office i to state j
= 1 if home office i is open, 0 otherwise
= Number of trips from home office i to state j.
It should be integral and non-negative
n
Min
i 1
f i yi cij xij
i 1 j 1
Subject to
n
x
i 1
ij
x
j1
ij
D j for j 1,...,m
(5.1)
K i yi for i 1,...,n (5.2)
yi {0,1} for i 1,...n
(5.3)
Please note that (5.2) is not active in this model since K is as large as needed. However, it will be used in answering
(b).
SYMBOL
INPUT
Dj
Annual trips needed to state j
cij
Transportation cost from office i to state j
fi
xij
fixed cost of setting up office i

number of consultants from office i to state j.
obj.
objective function
5.1
demand constraints
(Sheet SC consulting in workbook exercise5.1.xls)
CELL
E7:E22
G7:G22,I7:I22,
K7:K22,M7:M22
G26,I26,K26,M26
F7:F22,H7:H22,
J7:J22,L7:L22
M31
N7:N22
With this we solve the model to obtain the following results:

Tota
l#
of
trips
Trip
s
from
LA
Cost
from LA
Trip
s
from
Tuls
a
Washington
40
150
Oregon
35
150
California
100
100
Idaho
25
Nevada
Trips
from
Denve
r
Cost
From
Denver
Trips
from
Seattl
e
250
200
40
25
250
200
35
75
75
200
150
125
150
200
125
25
125
40
40
100
200
125
150
Montana
25
175
175
125
25
125
Wyoming
50
150
175
50
100
150
Utah
30
150
150
30
100
200
Arizona
50
50
75
200
100
250
Colorado
65
150
125
65
25
250
New Mexico
40
125
125
40
75
300
North Dakota
30
300
200
30
150
200
South Dakota
20
300
175
20
125
200
Nebraska
30
250
30
100
125
250
Kansas
40
250
25
75
15
75
300
Oklahoma
55
250
55
25
125
300
# of trips
675
190
110
250
125
State
# of Consultants
Fixed Cost of
office
Cost of Trips
Total Office Cost
Cost
from
Tulsa
Cost
from
Seattle
10
165,428
131,230
140,000
145,000
15,250
6,250
20,750
9,875
180,678
137,480
160,750
154,875
The number of consultants is calculated based on the constraint of 25 trips per consultant. As
trips to Kansas cost the same from Tulsa or Denver there are many other solutions possible by
distributing the trips to Kansas between these two offices.
(b)
If at most 10 consultants are allowed at each home office, then we need to add one more
constraint i.e. the total number of trips from an office may not exceed 250. Or in terms of the
optimization model, Ki, for all i, should have a value of 250. We can revise constraint (5.2) with
this Ki value and resolve the model. The new model will answer (b).
However in this specific case, it is clear that only the Denver office violates this new condition.
As trips to Kansas can be offloaded from Denver to Tulsa without any incremental cost, that is a
good solution and still optimal.
Hence we just allocate 5 of the Denver-Kansas trips to Tulsa. This reduces the number of
consultants at Denver to 10 while maintaining 5 consultants at Tulsa.
(c)
Just like the situation in (b), though in general we need a new constraint to model the new
requirement, it is not necessary in this specific case. We note that in the optimal solution of (b),
each state is uniquely served by an office except for Kansas where the load is divided between
Denver and Tulsa. The cost to serve Kansas is the same from either office. Hence we can meet the
new constraint by making Tulsa fully responsible for Kansas. This brings the trips out of Tulsa to
125 and those out of Denver to 235. Again the number of consultants remains at 5 and 10 in Tulsa
and Denver, respectively.
2.
DryIce Inc. faces the tradeoff between fixed cost (that is lower per item in a larger plant) versus
the cost of shipping and manufacturing. The typical scenarios that need to be considered are
either having regional manufacturing if the shipping costs are significant or have a centralized
facility if the fixed costs show significant economies to scale.
We keep the units shipped from each plant to every region as variable and choose the fixed cost
based on the emerging production quantities in each plant location. The total system cost is then
minimized with the following constraints:
a. All shipment numbers need to be positive integers.
b. The maximum production capacity is 400,000
c. All shipments to a region should add up to the requirement for 2006 .
Optimization model:
n
m
Dj
Ki
fi
cij
yi
xij
= 4: potential sites.
= 4: number of regional markets.
= Annual units needed of regional market j
= maximum possible capacity of potential sites.
Each Ki is assigned value 400000. If actually needed
capacity is less than or equal to 200000, we choose fixed cost accordingly.
= Annualized fixed cost of setting up a potential site.
= Cost of producing and shipping an air conditioner from site i to regional market j
= 1 if site i is open, 0 otherwise
= Number of air conditioners from site i to regional market j.

n
f y c x
Min
i 1
i 1 j 1
ij ij
Subject to
n
x
i 1
ij
D j for j 1,...,m
ij
K i yi for i 1,...,n (5.2)
x
j1
(5.1)
SYMBOL
INPUT
Dj
requirement at market j
cij
Variable cost from plant i to market j
fi
fixed cost of setting up plant i
xij
number of consultants from office i to state j.
obj.
5.1
objective function
demand constraints
CELL
K10:K13
C10:C13,E10:E13
G10:G13,I10:I13
C7:C8,E7:E8
G7:G8,I7:I8
D10:D13,F10:F13
H10:H13,J10:J13
K21
L10:L13
(Sheet DryIce in workbook exercise5.2.xls)

We get the following results:
The optimal solution suggests setting up 4 regional plants with each serving the needs of its own
region. New York, Atlanta, Chicago and San Diego should each have a 200,000 capacity plant
with production levels of 110000, 180000, 120000, 100000, respectively.
3
(a)
Sunchem can use the projections to build an optimization model as shown below. In this case, the
shipments from each plant to every market are assumed to be variable and solved to find the
minimum total cost. This is done by utilizing the following constraints:
Each plant runs at least at half capacity.

Sum of all shipments from the plant needs to be less than or equal to the capacity in that
plant.
All production volumes are non-negative.
All calculations are performed at the exchange rates provided.
Optimization model:
n
m
Dj
Ki
= 5: five manufacturing plants

= 5: number of regional markets.
= Annual tons of ink needed for regional market j
= Maximum possible capacity of manufacturing plants.
Especially for (a) lower limit for capacity is 50%*Ki .
cij = Cost of shipping one ton of printing ink from plant i to regional market j
pi = Cost of producing one ton of printing ink at plant i
xij = Tons of printing ink shipped from site i to regional market j.
n
(c
Min
i 1 j 1
ij
pi ) xij
Subject to
n
ij
D j for j 1,...,m
(5.1)
ij
K i for i 1,...,n
(5.2)
ij
0.5 K i for i 1,...,n (5.3)
i 1
m
x
j1
m
x
j1
SYMBOL
INPUT
Dj
Annual demand at market j
cij
shipping cost from plant i to regional market j
pi
CELL
N4:N8
D4:D8,F4:F8,H4:H8,
J4:J8, L4:L8
production cost of at plant i
D12,F12,H12,J12,L12
xij
printing ink shipped from site i to regional market j
obj.
objective function
5.1
5.2
5.3
demand constraints
capacity constraints
50% capacity constraints
E4:E8,G4:G8,I4:I8,
K4:K8, M4:M8
N18
O4:O8
E10,G10,I10,K10,M10
E10,G10,I10,K10,M10
(Sheet capacity_constraints in workbook exercise5.3.xls)

The optimal result is summarized in the following table:
US
N. America
S. America
Europe
Japan
Asia
Capacity (ton/yr)
Minimum Run Rate
600
1,200
1,300
2,000
1,700
185
ShipmentGermany
Shipment
Japan
Shipment Brazil
Shipment India
Shipment Demand(ton/yr)
100
1,300
160
2,000
1,200
10
2,200
270
1,400
2,100
800
190
2,300
190
600
200
1,400
1,400
1,300
200
1,400
95
300
25
2,100
1,000
120
1,300
20
900
2,100
800
80
100
100
475
475
50
25
200
200
80
80
93
$
238
Mark
25
Yen
100
Real
40
Rs.
Production Cost per Ton

Exch Rate
Prod Cost per Ton(US$)
Production Cost In US$
Tpt Cost in US$
10,000
1.000
10,000
1,000,000
60,000
15,000
0.502
7,530
3,576,750
487,000
1,800,000
0.009
16,740
418,500
7,500
13,000
0.562
7,306
1,461,200
164,000
400,000
0.023
9,200
736,000
64,000
Total
1,060,000
4,063,750
426,000
1,625,200
800,000
0
0
-
7,974,950
This is clearly influenced by the production cost per ton and the local market demand. Low cost
structure plants need to operate at capacity.
(b)
If there are no limits on production we can perform the same exercise as in (a) but without the
capacity constraints (5.2) and (5.3). This gives us the following results:
US
N. America
S. America
Europe
Japan
Asia
Capacity (ton/yr)
600
1,200
1,300
2,000
1,700
185
Minimum Run Rate

Exch Rate
Tpt Cost in US$
Total
ShipmentGermany
Shipment
Japan
Shipment Brazil
Shipment India
1,300
2,000
1,200
270
2,200
270
1,400
2,100
800
190
2,300
190
600
200
1,400
1,400
1,300
200
1,400
120
300
2,100
1,000
120
1,300
100
900
2,100
800
100
475
420
50
200
460
80
-
93
$
238
Mark
25
Yen
100
Real
40
Rs.
10,000
1.000
10,000
-
15,000
0.502
7,530
3,162,600
418,000
1,800,000
0.009
16,740
-
13,000
0.562
7,306
3,360,760
476,000
400,000
0.023
9,200
-
3,580,600
3,836,760
0
0
-
7,417,360
Clearly by having no restrictions on capacity SunChem can reduce costs by $557,590. The
analysis shows that there are gains from shifting a significant portion of production to Brazil and
having no production in Japan, US and India.
(c)
From the scenario in (a) we see that two of the plants are producing at full capacity. And in (b),
we see that it is more economical to produce higher volumes in Brazil. Once we add 10 tons/year
to Brazil, the cost reduces to $7,795,510.
US
N. America
S. America
Europe
Japan
Asia
Capacity (ton/yr)
Minimum Run Rate
600
1,200
1,300
2,000
1,700
185
ShipmentGermany
Shipment
Japan
Shipment Brazil
Shipment India
115
1,300
135
2,000
1,200
20
2,200
0
270
1,400
2,100
800
190
2,300
190
600
200
1,400
1,400
1,300
200
1,400
120
300
2,100
1,000
120
1,300
20
900
2,100
800
80
100
115
475
475
50
210
210
80
80
93
$
238
Mark
25
Yen
105
Real
40
Rs.

Exch Rate
Tpt Cost in US$
10,000
1.000
10,000
1,150,000
69,000
15,000
0.502
7,530
3,576,750
489,500
1,800,000
0.009
16,740
-
13,000
0.562
7,306
1,534,260
176,000
400,000
0.023
9,200
736,000
64,000
Total
1,219,000
4,066,250
1,710,260
800,000
(0)
-
7,795,510
(d)
It is clear that fluctuations in exchange rates will change the cost structure of each plant. If the
cost at a plant becomes too high, there is merit in shifting some of the production to another plant.
Similarly if a plants cost structure becomes more favorable, there is merit in shifting some of the
production from other plants to this plant. Either of these scenarios requires that the plants have
built in excess capacity. Sunchem should plan on making excess capacity available at its plants.
4
(a)
Starting from the basic models in (a), we will build more advanced models in the subsequent
parts of this question. Prior to merger, Sleekfon and Sturdyfon operate independently, and so we
need to build separate models for each of them.
Optimization model for Sleekfon:
n = 3: Sleekfon production facilities.
m = 7: number of regional markets.
Dj = Annual market size of regional market j
Ki = maximum possible capacity of production facility i
cij = Variable cost of producing, transporting and duty from facility i to market j
fi = Annual fixed cost of facility i
xij = Number of units from facility i to regional market j.
It should be integral and non-negative.
n
Min
i 1
fi cij xij
i 1 j 1
Subject to
n
x
i 1
ij
D j for j 1,...,m
(5.1)
ij
K i for i 1,...,n
(5.2)
x
j1
Please note that we need to calculate the variable cost cij before we plug it into the optimization
model. Variable cost cij is calculated as follows:
cij = production cost per unit at facility i + transportation cost per unit from facility i to market j
+ duty*( production cost per unit at facility i + transportation cost per unit from facility i to
market j + fixed cost per unit of capacity)
SYMBOL
INPUT
Dj
Annual market size of regional market j
Ki
maximum possible capacity of production facility i
cij
Variable cost of producing, transporting and duty from facility i to market j

Annual fixed cost of facility i
fi
xij
Number of units from facility i to regional market j.
obj.
objective function
5.1
demand constraints
5.2
(Sheet sleekfon in workbook problem5.4)
CELL
B4:H4
C12:C14
B22:H28
D12:D17
C43:I45
D48
J43:J45
C46:I46
The above model gives optimal result as in following table:
Quantity Shipped
Sleekfon
N.
America
Europe
(EU)
N.
America
S.
America
Demand
S.
America
Europe
(EU)
Europe
Japan
(Non EU)
Rest of
Asia/Australia
Africa
Capacity
0.00
0.00
20.00
0.00
0.00
0.00
0.00
0.00
10.00
0.00
0.00
3.00
2.00
2.00
0.00
3.00
0.00
4.00
0.00
0.00
0.00
0.00
1.00
5.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Total Cost for Sleekfon =
$ 564.39
And we use the same model but with data from Sturdyfon to get following optimal production
and distribution plan for Sturdyfon:
Quantity Shipped
N.
America
Europe
(EU)
Sturdyfon N.
America
Rest of
Asia
Demand
Total cost for Sturdyfon =
S.
America
Europe
(EU)
Europe
Japan
(Non EU)
Rest of
Asia/Australia
Africa
Capacity
0.00
0.00
4.00
8.00
0.00
0.00
1.00
7.00
12.00
1.00
0.00
0.00
0.00
0.00
0.00
7.00
0.00
0
0.00
0
0.00
0
0.00
0
7.00
0
3.00
0
0.00
0
0.00
512.68
(b)
Under conditions of no plant shutdowns, the previous model is still applicable. However, we need
to increase the number of facilities to 6, i.e., 3 from Sleekfon and 3 from Sturdyfon. And the
market demand at a region needs revised by combining the demands from the two companies.
Decision maker has more facilities and greater market share in each region, and hence has more
choices for production and distribution plans. The optimal result is summarized in the following
table.
N.
America
Europe
(EU)
Sleekfon N.
America
S.
America
Europe
(EU)
Sturdyfon N.
America
Rest of
Asia
Demand
S.
America
Europe
(EU)
Europe
Japan
(Non EU)
Rest of
Asia/Australia
Africa
Capacity
0.00
0.00
4.00
11.00
0.00
0.00
2.00
3.00
16.00
0.00
0.00
0.00
4.00
0.00
0.00
0.00
0.00
5.00
0.00
0.00
0.00
0.00
0.00
5.00
0.00
0.00
20.00
0.00
0.00
0.00
0.00
0.00
6.00
0.00
0.00
0.00
0.00
0.00
0.00
14.00
0.00
0.00
0.00
0.00
5.00
5.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Total Cost for Merged Network =
1066.82
(c)
This model is more advanced since it allows facilities to be scaled down or shutdown.
Accordingly we need more variables to reflect this new complexity.
n = 6: Sleekfon and Sturdyfon production facilities.
Dj = Annual market size of regional market j, sum of the Sleekfon and Sturdyfon market share.
Ki =capacity of production facility i
Li =capacity of production facility if it is scaled back
gi = Annual fixed cost of facility i if it is scaled back
hi = Shutdown cost of facility i
yi = Binary variable indicating whether to scale back facility i. yi = 1 means to scale it back, 0 otherwise.
Since two facilities, Sleekfon S America and Sturdyfon Rest of Asia, can not be scaled back, the index i
doesnt include these two facilities.
zi = Binary variable indicating whether to shutdown facility i. zi =1 means to shutdown it, 0 otherwise.
(1-yi zi) would be the binary variable indicating whether the facility is unaffected.
10
( f (1 y z ) g y h z ) c x
Min
i 1
i i
i 1 j 1
ij ij
Subject to
n
x
i 1
ij
x
j 1
ij
D j for j 1,..., m
(5.1)
K i (1 yi zi ) Li yi for i 1,..., n
(5.2)
1 yi zi 0
for i 1,..., n
(5.3)
yi , zi are binary for i 1,..., n
(5.4)
Please note that we need to calculate the variable cost cij before we plug it into the optimization
model. Variable cost cij is calculated as following:
cij = production cost per unit at facility i + transportation cost per unit from facility i to market j
+ duty*( production cost per unit at facility i + transportation cost per unit from facility i to
market j + fixed cost per unit of capacity)
And we also need to prepare fixed cost data for the two new scenarios: shutdown and scale back.
As explained in the problem description, fixed cost for a scaled back facility is 70% of the
original one; and it costs 20% of the original annual fixed cost to shutdown it.
Above model gives optimal solution as summarized in the following table. The lowest cost
possible in this model is $988.93, much lower than the result we got in (b) $1066.82. As shown in
the result, the Sleekfon N.America facility is shutdown, and the market is mainly served by
Sturdyfon N.America facility. The N.America market share is 22, and there are 40 in terms of
production capacity, hence it is wise to shutdown one facility whichever is more expensive.
Quantity Shipped
Europe
(EU)
Sleekfon N.
America
S.
America
Europe
(EU)
Sturdyfon N.
America
Rest of
Asia
Demand
N.
America
S.
America
Europe
(EU)
Europe
Japan
(Non EU)
Rest of
Asia/Australia
Africa
Scale back Shut down Plant

Capacity
unaffected
0.00
0.00
5.00
11.00
0.00
0.00
2.00
0.00
0.00
1.00
2.00
20.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
1.00
0.00
2.00
5.00
0.00
0.00
3.00
0.00
0.00
0.00
1.00
0.00
0.00
0.00
19.00
0.00
1.00
0.00
0.00
0.00
0.00
1.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
1.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
5.00
0.00
5.00
0.00
0.00
0.00
0.00
0.00
1.00
0.00
Total Cost for Merged Network =
988.93
For questions (d) and (e), we need to change the duty to zero and run the optimization model
again to get the result. We can achieve this by resetting B7:H7 to zeros in sheet merger
(shutdown) in workbook problem5.4.xls.
11
5
(a)
The model we developed in 4.d is applicable to this question. We only need to update the demand
data accordingly. And the new demand structure yields a quite different optimal configuration of
the network.
Quantity Shipped
Europe
(EU)
Sleekfon N.
America
S.
America
Europe
(EU)
Sturdyfon N.
America
Rest of
Asia
Demand
N.
America
S.
America
Europe
(EU)
Europe
Japan
(Non EU)
Rest of
Asia/Australia
Africa
Scale back Shut down Plant

Small
unaffected addition
Large
Addition
Capacity
0.00
0.00
20.00
0.00
0.00
0.00
0.00
0.00
0.00
1.00
0.00
15.60
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
1.00
4.40
0.00
6.00
0.00
0.00
0.00
0.00
0.00
0.00
1.00
4.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
1.00
0.00
0.00
6.40
0.00
4.00
9.60
0.00
0.00
0.00
0.00
0.00
1.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
3.60
0.00
9.00
0.00
15.00
0.00
2.40
0.00
0.00
0.00
1.00
Total Cost for Merged Network
0.00
1.00
1.00
0.00
1141.77
As shown in the table, Sturdyfon N.America is not shutdown in this optimal result. Instead,
Sturdyfon EU facility is shutdown.
For questions (b), (c) and (d), we need to update Excel sheet data accordingly and rerun the
optimization model.
6
(a)
StayFresh faces a multi-period decision problem. If we treated each period separately, only two
constraints are relevant, i.e., the demand and capacity constraints. Considering the multi-period
nature of this problem, it must be noted that as the demand increases steadily, we need to add
capacities eventually. However due to the discount factor, we want to increase capacities as late
as possible. On the other hand, even when the total capacity at a certain period is greater than or
equal to the total demand, we might want to increase capacity anyway. This is because a regional
market might run short while the total supply is surplus, and it may be more expensive to ship
from other regions than to increase local capacity. This complexity calls for an optimization
model to find an optimal solution which can serve all demands, satisfy capacity constraints,
adjust the regional imbalance, and take benefit of discount effect over periods.
12
I: set of plants and potential plants

J: set of regional markets
T: set of periods under consideration. 6~10 year is treated separately. And T 5 in this model.
K: set of capacity incremental options
d jt : demand of regional market j at period t
M i : capacity of plant i at beginning
cij : production and transportation cost from plant i to reginal market j
e k : capacity increment amount of option k
f k : capacity increment cost of option k
r : discount factor
Yikt : binary variable. 1 means to increase capacity of plant i using option k at time t; 0 otherwise.
X ijt : decision variable, shipment amount from plant i to market j at time t
Min
10
t
t
c
f
y
/(
1
r)
xij 5cij f k yik5 /( 1 r)
ijt ij
k ikt
t
i
j
i
k
t 5
i
j
i
k
5.1
xijt M i yikt ek for each plant i at each period t
x
j
ijt
dj
for each regional market j
5.2
xijt 0 , binary yikt
for all plant, market, period, and capacity incremental options
13
SYMBOL
INPUT
d jt
demand of regional market j at period t
CELL
B9:H9
Mi
capacity of plant i at beginning
C12:C14
cij
Production and transportation cost from plant i to regional market j
B5:F8
ek
capacity increment amount of option k
D12:D17
fk
r
capacity increment cost of option k
C43:I45
discount factor
D48
Yikt
binary variable. 1 means to increase capacity of plant i using option k at time t; 0 otherwise
X ijt
decision variable, shipment amount from plant i to market j at time t
obj
objective function
5.1
capacity constraint
5.2
demand constraint
I5:Q8
B22:E25
H22:K25
N22:Q25
T22:W25
Z22:AC25
C31
G22:G25
M22:M25
S22:S25
Y22:Y25
Ae22:Ae25
B26:E26
H26:K26
N26:Q26
T26:W26
Z26:AC26
(Sheet StayFresh in workbook problem5.6.xls)

In the first year, original total capacity was 600,000 units, which was 60,000 units more than the
total demand. However, a new plant in Kolkata is built in the optimal solution anyway, since it is
cheaper to server the local market from Kolkata than to ship from other regions.
In the second year, no new capacity is added, since the plant location is reasonable and the total
capacity still exceeds the demand.
In the third and fourth years, new capacity is added consecutively, which has lead to high surplus
capacity. Note that this additional capacity is needed for the fifth year. While there is no reason to
add capacity earlier than necessary, especially under the consideration of the discount factor, the
solution is optimal in this particular model. Since the cost of fifth year will be added into the
total cost six times, it is strategically correct to spend as little as possible in the fifth year. This
explains why extra capacity is built into the network earlier than necessary.
For questions (b) and (c), we need to change data in the Excel sheet accordingly.
14
7
(a)
Blue Computers has two plants in Kentucky and Pennsylvania, however both have high variable
costs to serve the West regional market. On the other hand, West regional market has 2 nd highest
demand. Hence it is not hard to see that Blue Computers needs a new plant, which can serve the
West regional market at a lower cost. From this point of view, California is a better choice than
N.Carolina since California has a lower variable cost serving West regional market. However,
N.Carolina has extra tax benefit. Even if a network of Kentucky, Pennsylvania, and California
might yield higher before-tax profit than a network of Kentucky, Pennsylvania, and N.Carolina,
the after-tax profit might be worse.
n = 2 potential sites.
Dj = Annual units needed of regional market j
Ki = maximum possible capacity of potential sites.
fi = Annualized fixed cost of setting up a potential site.
cij = Cost of producing and shipping a computer r from site i to regional market j
yi = 1 if site i is open, 0 otherwise
xij = Number of products from site i to regional market j.
n
f y c x
Min
i 1
i 1 j 1
ij ij
Subject to
n
x
i 1
ij
x
j 1
ij
D j for j 1,..., m
(5.1)
K i yi for i 1,..., n
(5.2)
y3 y4 1 add at most one site (5.3)

y3 , y4 are binary
(5.4)
SYMBOL
INPUT
Dj
Ki
cij

fi
xij
obj.
5.1
5.2
5.4
objective function
demand constraints
see explanation in next paragraph
CELL
B9:F9
H5:H8
B5:F8
G5:G8
B17:F20
I21
B21:F21
H17:H20
(Sheet Blue in workbook problem5.7.xls)
15
Even though constraint (5.4) is simple in its mathematical notation, we can do better in practice.
Since at most one site can be open, we can run the optimization three times for three scenarios
respectively: none open, only California, or only N.Carolina. And we compare the three results
and choose the best one. It is much faster to solve these three scenarios separately given that
EXCEL solver cannot achieve a converging result with constraint (5.4). The result below shows
the optimal solution when California is picked up.
Shipment
Northeast
Kentucky
Pennsylvania
N. Carolina
California
Demand
constraint
0
0
0
1050
-2.65E-06
Southeast Midwest
0
600
150 2.43E-09
0
0
450
0
-1.5E-06 5.01E-10
South
West
0
450
0
0
-1.1E-06
Open (1) / Capacity

Shut (0) Constraint
0
1
400.00
900
1
0.00
0
1.00
1500.00
0
1
0.00
-2.3E-06
Cost
$ 255,000
$ 516,500
$ 200,000
$ 530,000
Total Cost =
1501500
(b)
We only need to change the objective function from minimize cost to maximize profit. On the
Excel sheet, all we need to do is to set the target cell from I21 to L21, and change the direction of
optimization from minimizing to maximizing. The following table shows the result. It is easy to
see that lowest cost doesnt mean maximum after tax profit.
Shipment
Kentucky
Pennsylvania
N. Carolina
California
Demand
constraint
Northeast
0
1050
0
0
-2.65E-06
Southeast Midwest
600
0
0
0
-1.5E-06
0
450
0
150
-1.5E-06
South
400
0
0
50
-1.1E-06
West
Open (1) / Capacity

Shut (0) Constraint
0
1
0.00
0
1
0.00
0
0.00
0.00
900
1
400.00
-2.3E-06
Total Cost =
Cost
Revenue
Profit
After tax
profit
$ 328,000
$ 1,000,000
672,000
490,560
$ 459,500
$ 1,500,000
$ 1,040,500
759,565
$ 396,500
$ 1,100,000
1184000
(0) $
703,500
Total Profit =
(0)
513,555
$ 1,763,680
8
(a)
Starting from the basic models in (a), we will build more advanced models in the subsequent
parts of this question. Prior to merger, Hot&Cold and CaldoFreddo operate independently, and
we need to build separate models for each of them.
Optimization model for Hot&Cold:
n = 3: Hot&Cold production facilities.
Dj = Annual market size of regional market j
Ki = maximum possible capacity of production facility i
ti =Tax rate at facility i
16
f c x
Min
i 1
i 1 j 1
ij ij
Subject to
n
x
i 1
ij
D j for j 1,...,m
(5.1)
ij
K i for i 1,...,n
(5.2)
x
j1
And replace above objective function to the following one to maximize after tax profit:
n
Max
(1 t ) px f c x
i
i 1
j 1
ij
i 1
i 1 j 1
ij ij
SYMBOL
INPUT
Dj
Ki
cij

fi
xij
CELL
C8:F8
G5:G7
C5:F7
H5:H7
C20:F22
H24
C23:F23
G20:G22
of units from facility i to regional market j.
obj.
objective function
5.1
demand constraints
5.2
(Sheet Hot&Cold in workbook problem5.8.xls)
The above model gives optimal result as in following table:
Shipment
Hot&Cold
France
Germany
Finland
Demand
North
East
0.0
10.0
20.0
0
South
0.0
0.0
20.0
0
West
15.0
5.0
0.0
0
Capacity
35.0
0.0
0.0
0
Annual
Cost
0
6150
35
2475
4650
Total Cost
13275
And we use the same model but with data from CaldoFreddo to get following optimal production
and distribution plan for CaldoFreddo:
Shipment
CaldoFreddo
U.K.
Italy
Demand
Capacity
Annual Cost
Quantity Shipped (million units)
15
0
0
15
5
0
0
30
0
20
0
0
0 $
6,175
25 $
4,225
Total Cost $
10,400
17
(b)
If none of the plants is shut down, the previous model is still applicable. However, we need to
update the number of facilities to 5, with 3 from Hot&cold and 2 from CaldoFreddo. And we
need to update the market demand Dj, which should be the sum of market shares. Decision maker
has more facilities and greater market share in each region, and hence has more choices for
production and distribution plans. The optimal result is summarized in the following table.
Shipment
Merged
Company
France
Germany
Finland
U.K.
Italy
Demand
Capacity
Open (1) /
Shut (0)
0
30
15
0
0
0
0
25
0
10
0
0
0
0
50
5
0
0
50
0
1.3E-10
-9.8E-09
0.0E+00
-1.9E-09
Annual
Cost
45 $
1,500
20 $
3,850
7.9492E-09 $
4,700
0 $
5,500
0 $
6,450
22,000
(c)
This model is more advanced since it allows facilities to be shutdown. Accordingly we need more
variables to reflect this new complexity.
n = 5: Hot&Cold and caldoFreddo production facilities.
Dj = Annual market size of regional market j, sum of the : Hot&Cold and caldoFreddo market share.
Ki =capacity of production facility i
zi = Binary variable indicating whether to shutdown facility i. zi =1 means to shutdown it, 0 otherwise.
n
f (1 z ) c x
Min
i 1
i 1 j 1
ij ij
Subject to
n
x
i 1
ij
x
j 1
ij
D j for j 1,..., m
K i (1 zi )
zi are binary for i 1,..., n
(5.1)
for i 1,..., n
(5.2)
(5.3)
18
SYMBOL
INPUT
Dj
Ki
cij

fi
xij
Zi
CELL
C8:F8
C12:C14
C5:F7
H5:H7
C19:F23
G19:G23
I25
C24:F24
H19:H23

open or shutdown facility i
obj.
objective function
5.1
demand constraints
5.2
(Sheet Merged in workbook problem5.8.xls)
It turned out that all sites are open so as to achieve best objective value. Following table shows
the optimal configuration.
Shipment
Merged
Company
Demand
France
Germany
Finland
U.K.
Italy
Capacity
Open (1) /
Shut (0)
0
40
5
0
0
0
0
35
0
0
0
0
0
0
50
5
0
0
50
0
0.0
0.0
0.0
0.0
Annual
Cost
45 $
1,500
10 $
4,800
0 $
4,800
0 $
5,500
10 $
5,400
22,000
Total Cost
19

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Chapter 5: Network Design in the Supply Chain

= 4: possible home office locations.

K i yi for i 1,...,n (5.2)

yi {0,1} for i 1,...n

Annual trips needed to state j

Transportation cost from office i to state j

fixed cost of setting up office i

With this we solve the model to obtain the following results:

It should be integral and non-negative

K i yi for i 1,...,n (5.2)

Variable cost from plant i to market j

fixed cost of setting up plant i

number of consultants from office i to state j.

(Sheet DryIce in workbook exercise5.2.xls)

Each plant runs at least at half capacity.

= 5: five manufacturing plants

0.5 K i for i 1,...,n (5.3)

Annual demand at market j

shipping cost from plant i to regional market j

production cost of at plant i

printing ink shipped from site i to regional market j

(Sheet capacity_constraints in workbook exercise5.3.xls)

Production Cost per Ton

Minimum Run Rate

Production Cost per Ton

Annual market size of regional market j

maximum possible capacity of production facility i

Variable cost of producing, transporting and duty from facility i to market j

Number of units from facility i to regional market j.

The above model gives optimal result as in following table:

Total Cost for Sleekfon =

Total Cost for Merged Network =

yi , zi are binary for i 1,..., n

Scale back Shut down Plant

Total Cost for Merged Network =

Scale back Shut down Plant

Total Cost for Merged Network

I: set of plants and potential plants

xij 5cij f k yik5 /( 1 r)

for each regional market j

xijt 0 , binary yikt

for all plant, market, period, and capacity incremental options

demand of regional market j at period t

capacity of plant i at beginning

Production and transportation cost from plant i to regional market j

capacity increment amount of option k

capacity increment cost of option k

decision variable, shipment amount from plant i to market j at time t

(Sheet StayFresh in workbook problem5.6.xls)

y3 y4 1 add at most one site (5.3)

Annual market size of regional market j

maximum possible capacity of production facility i

Variable cost of producing, transporting and duty from facility i to market j

Number of units from facility i to regional market j.

(Sheet Blue in workbook problem5.7.xls)

Open (1) / Capacity

Open (1) / Capacity

Annual market size of regional market j

maximum possible capacity of production facility i

Variable cost of producing, transporting and duty from facility i to market j

of units from facility i to regional market j.

Quantity Shipped (million units)

Quantity Shipped (million units)

zi are binary for i 1,..., n