Network Design in the Supply Chain

Dr. Ch. V. V. S. N. V. Prasad

Assistant Professor in
Management

Learning Objectives

The Role of Network Design in the

Supply Chain
Factors Influencing Network Design
Decisions
Framework for Network Design
Decisions
Models for Facility Location and
Capacity Allocation
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Network Design Decisions

Facility role
Facility location
Capacity allocation
Market and supply allocation

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Network Design Decisions

Facility role: What role should each

facility play? What processes are
performed at each facility?
Decisions concerning the role of each
facility are significant because they
determine the amount of flexibility the
supply chain has in changing the way it
meets demand

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Network Design Decisions

Facility
location:
Where
facilities be located?

should

Facility location decisions have a longterm impact on a supply chain's

performance because it is very expensive
to shut down a facility or move it to a
different location.

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Network Design Decisions

Capacity
allocation:
How
much
capacity should be allocated to each
facility?
Allocating too much capacity to a
location results in poor utilization, and as a
result, higher costs.
Allocating too little capacity results in
poor responsiveness if demand is not
satisfied, or high cost if demand is filled
from a distant facility.
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Network Design Decisions

Market and supply allocation: What

markets should each facility serve?
Which supply sources should feed
each facility?
It affects total production, inventory,
and transportation costs incurred by the
supply chain

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Factors Influencing
Network Design Decisions

Strategic
Technological
Macroeconomic
Political
Infrastructure
Competitive
Logistics and facility costs
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Strategic Factors
Competitive strategy
Firms focusing on cost leadership will tend to
find
the
lowest-cost
location
for
their
manufacturing facilities, even if that means
locating very far from the markets they serve.
Cheap land/labor, nearness to raw material

Firms focusing on responsiveness will tend to

locate facilities closer to the market and may
select a high-cost location if this choice allows the
firm to react quickly to changing market needs.
Good infrastructure and nearness to market

Convenience Vs Discount stores

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Strategic roles for various

facilities
Offshore facility: low-cost facility for export
production.
Source facility: low-cost facility for global
production
Server facility: regional production facility.
Contributor
facility:
regional
production
facility with development skills
Outpost facility: regional production facility
built to gain local skills
Lead
facility:
facility
that
leads
in
development and process technologies
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Technological Factors
If production technology displays significant economies
of scale, a few high-capacity locations are most effective.
Manufacture of Chips

If facilities have lower fixed costs, many local facilities

are preferred because this helps lower transportation
costs.
Coco- Cola

Flexibility of Production Technology

If production technology is very inflexible and product
requirements vary from one country to another, a firm has to set up
local facilities to serve the market in each country.
Flexibility of the production technology affects the degree of
consolidation.

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Macro Economic Factors

Tariffs and Tax incentives
Tariffs refer to any duties that must be paid when
product or equipment are moved across international,
state, or city boundaries.
If a country has a very high tariff, companies
either do not serve the local market or setup
manufacturing plants within the country to save on
duties.
High tariffs lead to more production locations
within a supply chain network, with each location
having a lower allocated capacity.
Tax incentives are a reduction in tariffs or taxes
that countries, states, and cities often provide to
encourage firms to locate their facilities in specific
areas.
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Macro Economic Factors

Exchange Rate and demand risks
Fluctuation in exchange rates has
significant impact on the profits of any
supply chain serving global markets.
An effective way to do this is to build
some over capacity in the network and
make the capacity flexible so that it can be
used to supply different markets.
Companies must also take into account
fluctuations
in
demand
caused
by
fluctuations in the economics of different
countries.
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Political Factors

The political stability of the country

under
consideration
plays
a
significant role in the location choice.
Countries with independent and clear
legal systems is always preferred.

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Infrastructure Factors

Availability of sites, labor availability,

proximity to transportation terminals, rail
service, proximity to airports and seaports,
highway access, congestion, and local
utilities.

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Competitive Factors
A fundamental decision firms make is to whether
their facilities close to their competitors or far from
them.
Positive Externalities Between Firms
Positive externalities are the instances where the
collocation of the multiple firms benefits all of them.
It also lead to the competitors locating close to each other.

Locating to Split the Market

When there are no PEs, firms locate to be able to capture
the largest possible share of the market.
When firms do not control price but compete on the
distance from customer, they can maximize market share by
locating close to each other and splitting the market.
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Socioeconomic Factors

Balanced regional development

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Customer Response Time and

Local Presence

A large response time require few

locations and can focus on increasing
the capacity of each location.
A short response times need to
locate close to them.

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Logistics and Facility cost

inventory, transportation, and facility

costs
Inventory and facility costs increase as
the number of facilities increases
Transportation costs decrease as the
number of facilities is increased

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Service and Number of

Facilities
Response
Time

Number of Facilities
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Costs and Number of

Facilities
Inventory
Facility costs

Costs

Transportation

Number of facilities
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Cost Buildup as a Function of

Facilities
Cost of Operations

Total Costs

Percent
Service
Level Within
Promised
Facilities
Time
Inventory

Transportat
ion
Labor

Number of Facilities
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Framework for Network Design

Decisions

Phase I Supply Chain Strategy

Phase
II

Regional
Facility
Configuration
Phase III Desirable Sites
Phase IV Location Choices

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A Framework for
Network Design Decisions
Competitive STRATEGY

PHASE I
Supply Chain
Strategy

INTERNAL CONSTRAINTS
Capital, growth strategy,
existing network
PRODUCTION TECHNOLOGIES
Cost, Scale/Scope impact, support
required, flexibility
COMPETITIVE
ENVIRONMENT

PHASE II
Regional Facility
Configuration

PRODUCTION METHODS
Skill needs, response time

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TARIFFS AND TAX

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

PHASE III
Desirable Sites

FACTOR COSTS
Labor, materials, site specific

GLOBAL COMPETITION

PHASE IV
Location Choices

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AVAILABLE
INFRASTRUCTURE

LOGISTICS COSTS
Transport, inventory, coordination

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A Framework for
Network Design Decisions

Phase I Define a firm's broad supply

chain design strategy in terms of
Wide variety, Lead time, High service
level, Innovative products, Cost,
Capacity utilization
Competitive strategy
Global competition
Internal Constraints

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A Framework for
Network Design Decisions
Phase II Identify regions where facilities will
be located, their potential roles, and their
approximate capacity.
Number of facilities in each region and their
role
Forecast of the demand by country
Economies of scale or scope
Identify demand risk, exchange-rate risk, and
political risk
Tax and tariff information
Competition in each region
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A Framework for
Network Design Decisions

Phase III Select a set of desirable

potential sites within each region
Infrastructure availability

Hard infrastructure : Availability of suppliers,

transportation
services,
communication,
warehousing infrastructure
Soft infrastructure: Availability of skilled work
force, community receptivity to business and
industry

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A Framework for
Network Design Decisions

Phase IV Select a precise location

and capacity allocation for each
facility
Expected Margin
Demand in each market
Logistics and facility costs
Taxes and tariffs

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Models for Facility Location and

Capacity Allocation
Information
Location of supply sources and markets
Location of potential facility sites
Demand forecast by market
Facility, labor, 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
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Factor Rating Model

SCORES (0 TO 100)
LOCATION FACTOR
Labor pool and climate
Proximity to suppliers
Wage rates
Community environment
Proximity to customers
Shipping modes
Air service

WEIGHT

Site 1

Site 2

Site 3

.30
.20
.15
.15
.10
.05
.05

80
100
60
75
65
85
50

65
91
95
80
90
92
65

90
75
72
80
95
65
90

Weighted Score for Labor pool and climate for

Site 1 = (0.30)(80) = 24
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Factor Rating Model

WEIGHTED SCORES
Site 1
24.00
20.00
9.00
11.25
6.50
4.25
2.50
77.50

Site 2
19.50
18.20
14.25
12.00
9.00
4.60
3.25
80.80

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Site 3
27.00
15.00
10.80
12.00
9.50
3.25
4.50
82.05

Site 3 has the

highest factor rating

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Center of Gravity Technique

Locate
facility
at
center
of
geographic area
Based on weight and distance
traveled establish grid-map of area
Identify coordinates and weights
shipped for each location

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Center of Gravity Technique

y

i=1

2 (x2, y2), W2

y2

x=

xiWi

i=1
y=

y1

Wi
i=1

1 (x1, y1), W1

yiWi

Wi
i=1

where,

3 (x3, y3), W3

y3

x1
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x2

x3

x, y = coordinates of new
facility at center of gravity
xi, yi = coordinates of
existing facility i
Wi =
annual weight
shipped from facility i

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Center of Gravity Technique

y
700
600

Miles

500

C
(135)

B
100
500
105

C
250
600
135

(105)

400
300

x
y
Wt

A
200
200
75

D
(60)

200

(75)

100
0

100 200 300 400 500 600 700 x

Miles
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D
500
300
60

Center of Gravity Technique

n

xW
i
i

x=

i=1
n

W
i

(200)(75) + (100)(105) + (250)(135) + (500)(60)

= 75 + 105 + 135 + 60

= 238

(200)(75) + (500)(105) + (600)(135) + (300)(60)

= 75 + 105 + 135 + 60

= 444

i=1
n

yW
i
i

y=

i=1
n

W
i

i=1

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Load Distance Technique

Compute (Load x Distance) for each

site
Choose site with lowest (Load x
Distance)
Distance can be actual or straightline

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Load Distance Technique

n

LD =

l i di

i=1

where,
LD =

load-distance value

li

load expressed as a weight, number of trips or units

being shipped from proposed site and location i
distance between proposed site and location i

di

di

(xi - x)2 + (yi - y)2

where,
(x,y) = coordinates of proposed site
(xi , yi) = coordinates of existing facility
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Load Distance Technique

Potential Sites
Site
X
1
360
2
420
3
250

Y
180
450
400

A
200
200
75

X
Y
Wt

Suppliers
B
C
100
250
500
600
105
135

D
500
300
60

Compute distance from each site to each supplier

Site 1 dA =

(xA - x1)2 + (yA - y1)2

(200-360)2 + (200-180)2 = 161.2

dB =

(xB - x1)2 + (yB - y1)2

(100-360)2 + (500-180)2 = 412.3

dC = 434.2
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dD = 184.4
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Load Distance Technique

Site 2 dA = 333

dB = 323.9 dC = 226.7 dD = 170

Site 3 dA = 206.2 dB = 180.4 dC = 200

dD = 269.3

Compute load-distance

LD =

l i di
i=1

Site 1 = (75)(161.2) + (105)(412.3) + (135)(434.2) + (60)(434.4) = 125,063

Site 2 = (75)(333) + (105)(323.9) + (135)(226.7) + (60)(170) = 99,791
Site 3 = (75)(206.2) + (105)(180.3) + (135)(200) + (60)(269.3) = 77,555*

* Choose site 3
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Capacitated Plant Location

Model

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Gravity Location Model

Ton Mile-Center Solution
x,y: Warehouse Coordinates
xn, yn : Coordinates of
delivery location n
dn : Distance to delivery
location n
D n : quantity of shipping to

n 1

n 1

n 1

location n

FMin
of shippingFone unit
n : cost

d
n Dn n
to location n
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( x x n) ( y y n)
D
nx F

d
x
D
nF

d
D
ny F

d
y
D
nF

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n 1

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Network Optimization
Models
Market and supply allocation
Demand allocation

Facility
location
allocation)

(and

capacity

Capacitated plant location model

Facility location 1-source (and capacity

allocation)
Capacitated plant location model with
single sourcing
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Demand Allocation Model

n supply points

m demand points

c11
c12

c13

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Demand Allocation Model

Which market is served by which plant?
Given m demand points, j=1..m with
demands Dj
Given n supply points, i=1..n with capacity
Ki
Each unit of shipment from supply point i to
demand point j costs cij

Serve markets from supply points to

demand points
xij = quantity shipped from plant site i to
customer j
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Demand Allocation Model

n

Min cij
i 1

j 1

ij

s.t .
n

x
i 1

ij

ij

x
j 1

ij

, j 1,..., m
, i 1,..., n

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Capacitated Plant Location

n supply points
y1 = yes or no
K1
Romenia

m demand points

c11
c12

c13

y2 = yes or no Poland
K2
y3 = yes or no Ireland
K3
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Plant Location with Multiple

Sourcing
n

Which market is served by which plant?

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

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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ij

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ij

Plant Location with Single

Sourcing
n

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

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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ij

Locating Plants and

Warehouses Simultaneously

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Summary
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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