ppt 5 chapter 5

8/12/2019 PPT 5 Chapter 5

1/39

Networks Design in the Supply Chain

Prof. Sanjay Choudhari

T. A. Pai Management InstituteManipal

Chapter 5


2/39

Learning Objectives

Role of network design in a supply chain.

Identify factors influencing supply chain network design

decisions.

Develop a framework for making network design decisions.

Use optimization models for facility location and capacity

allocation decisions.


3/39

Network Design Decisions

Facility role

Manufacturing, storage

Facility location

Where should facilities be located?

Toyota has many plants, Netflix

Capacity allocation

How much capacity at each facility?

Market and supply allocation

What markets (Demand) ? Which sources (Supply) ?

Can be changed if facility are flexible

Cost

Responsiveness

(How many plants, DCs, retail stores, etc. to build?)


4/39

Factors InfluencingNetwork Design Decisions

Strategic factors (competitive strategy : C or R)

Manufacturing

Flextronics located assembly in China

Zara located facility in Portugal and Spain to serve Europe

Retails stores network

Convenience store

Discount stores

Global supply chain network

Zara production facilities are in Europe and Asia


5/39


Technological factorsElectronic chip manufacturer (Large investment : few high-capacity

locations, output easy to transport)

Coca-Cola bottling plant (Lower fixed cost : many local facilities, help to

reduce transportation cost) Macroeconomic factors

Tariffs and tax incentives (Developing countries)

Exchange-rate and demand risk (Japanese Manf, Tata

Power)

Freight and fuel costs (Southwest Airline)

Political

Global political risk index (Govt., Society, Security and Economy)


6/39


Infrastructure factors

Availability sites and labor, proximity to transportation

terminals, rails service, airport, seaport, highway,

congestion and utilities (in Shanghai ) Competitive factors

Positive externalities between firms

Competitors locating close to each other (malls)

Competitors develop the infrastructure (Pune developed in local

suppliers network, other located close)

Locating to split the market


7/39


Socioeconomic factors

Industrialization in backward areas (Govt. of India)

Customer response time and local presence

Close to customers (coffee shop, Convenience store)

Transportation

Logistics and facility costs

Close to supply source (iron ore processing )

Inventory + transportation + Facility


8/39

Framework for Network Design Phase I: Define Supply chain strategy

Broad supply chain design Phase II : Define Regional facility configuration

Identify regions for facility locations, potential roles and

approximate capacity Phase III : Select Desirable Sites

Selection of potential sites within each region

Suppliers, transportation services, warehousing facilities, utilities ,

workforce

Phase IV : Location Choices

Precise location and capacity allocation

Expected margin, demand, various facility and logistics cost, tax and

tariff at each location


9/39

Framework for Network Design


10/39

Models for Facility Location andCapacity Allocation

Maximize the overall profitability of the supply chain network

Many trade-offs

Facility, Transportation and Inventory : Cost and Responsiveness

Network design models

Decision on facility locations and capacities to assign to facility

Consider time horizon for above decisions (typically one year) with

annual demand, prices, exchange rate, tariff

Assign the current demand to available facilities

Identify link along which product will be transported


11/39

Models for Facility Location andCapacity Allocation

Important information summary

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 quantitySale price of product in different regions

Taxes and tariffs

Desired response time and other service factors


12/39


13/39

Phase II: Network Optimization ModelsSunOil is a petrochemical factory with sales in N. America, S. America, Europe, Asia andAfrica. As part of SunOils expansion plans, the VP Supply Chains is considering opening

consolidated plants with capacities of 15 million at some of the demand regions.

The demand at N.America, S.America, Europe, Asia and Africa are 12, 8, 14, 16, and 7million units respectively. The fixed costs of developing a facility is given in table below,along with the cost of producing and shipping a million units to each of markets.

Dem and 12 8 14 16 7

Type 1


14/39

Capacitated Plant Location Model

= number of potential plant locations/capacityn

m D j K i f icij

= number of markets or demand points= annual demand from market j

= potential capacity of plant i

= annualized fixed cost of keeping plant i open

= cost of producing and shipping one unit from plant i to market j (cost

includes production, inventory, transportation, and tariffs)

yi xij = quantity shipped from plant i

to market j

= 1 if plant i is open, 0 otherwise

Min f i yi +i= 1

n

cij xij j= 1

m

i= 1

n

subject to xij = D j for j = 1,..., mi= 1

n

xij j= 1

m

= K i yi for i = 1,..., n

yi 0,1{ } for i = 1,..., n, x ij 0


15/39


Cij 1 2 3 4 5 Fi Ki ObjectiveSupply N.America S. America Europe Asia Africa Fixed Cost Capacity Cost

1 N.America 81 92 101 130 115 7000 152 S.America 117 77 108 98 100 5500 15 $03 Europe 102 105 95 119 111 7500 154 Asia 115 125 90 59 74 5100 155 Africa 142 100 103 105 71 5000 15

Decis ion Variables

Xij 1 2 3 4 5 YiSupply N.America S. America Europe Asia Africa Lhs Rhs Plant open

1 N.America 0


16/39


Cij 1 2 3 4 5 Fi Ki ObjectiveSupply N.America S. America Europe Asia Africa Fixed Cost Capacity Cost

1 N.America 81 92 101 130 115 7000 152 S.America 117 77 108 98 100 5500 15 $27,1193 Europe 102 105 95 119 111 7500 154 Asia 115 125 90 59 74 5100 155 Africa 142 100 103 105 71 5000 15

Decis ion Variables

Xij 1 2 3 4 5 YiSupply N.America S. America Europe Asia Africa Lhs Rhs Plant open1 N.America 12 0 3 0 0 15


17/39

Phase II: Network Optimization Models

Now, if the VP Supply Chains is toying the options of opening plants with capacities ofeither 10 million or 20 million at some of the demand regions, which should he choose?

Demand 12 8 14 16 7

Type 2


18/39


Cij 1 2 3 4 5 Fi(L) Ki(L) Fi(H) Ki(H) ObjectiveSupply N.America S. America Europe Asia Africa Fixed Cost Capacity Fixed Cost Capacity Cost

1 N.America 81 92 101 130 115 6000 10 9000 202 S.America 117 77 108 98 100 4500 10 6750 20 $03 Europe 102 105 95 119 111 6500 10 9750 204 Asia 115 125 90 59 74 4100 10 6150 205 Africa 142 100 103 105 71 4000 10 6000 20

Decision Variables

Xij 1 2 3 4 5 Yi(L) Yi(H)Supply N.America S. America Europe Asia Africa Lhs Rhs Plant open Plant open

1 N.America 0


19/39


Cij 1 2 3 4 5 Fi(L) Ki(L) Fi(H) Ki(H) Objective

Supply N.America S. America Europe Asia Africa Fixed Cost Capacity Fixed Cost Capacity Cost1 N.America 81 92 101 130 115 6000 10 9000 202 S.America 117 77 108 98 100 4500 10 6750 20 $23,7513 Europe 102 105 95 119 111 6500 10 9750 204 Asia 115 125 90 59 74 4100 10 6150 205 Africa 142 100 103 105 71 4000 10 6000 20

Decision Variables

Xij 1 2 3 4 5 Yi(L) Yi(H)Supply N.America S. America Europe Asia Africa Lhs Rhs Plant open Plant open

1 N.America 0 0 0 0 0 0


20/39

Phase III: Gravity Location Models Manager identifies potential locations in each region where

the company has decided to locate a plant. Gravity location models can be used when identifying

suitable geographic locations within a region.

Gravity location model is used to find locations thatminimize the cost of transporting raw materials from

suppliers and finished goods to the market served.


21/39

Phase III: Gravity Location Model

x n , y n : Coordinate location of either a market or supply sourcen

F n : Cost of shipping one unit for one mile between thefacility and either market or supply source n

D n : Quantity to be shipped between facility and market or

supply source n(x , y ) is the location selected for the facility, the distance d n between the facility at location ( x , y ) and the supply source ormarket n is given by

d n = x xn( )2

+ y yn( )2


22/39


23/39

Gravity Location Model


24/39

Phase IV: Network Optimization Models Manager decides on the location and capacity allocation for

each facility. Manager also decides how markets are allocated to each

facilities


25/39

Phase IV: Network Optimization Models

Supply City

Demand City

Production and Transportation Costper Thousand Units (Thousand $) Monthly

Capacity(Thousand

Units) K

MonthlyFixed Cost(Thousand

$) fAtlanta Boston Chicago Denver Omaha Portland

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 LakeCity

1,925 2,400 1,450 500 950 800 27 5,000

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

Monthlydemand(thousandunits) D j

10 8 14 6 7 11

HighOpticTelecomOne


26/39

Network Optimization Models

Allocating demand to production facilities

= Number of factory locationsnm

D j K

i

cij

= Number of markets or demand points= Annual demand from market j

= Capacity of factory i

= Cost of producing and shipping one unit from factory i to market j

xij = Quantity shipped from factory i tomarket j

n

i

m

jijij xc Min

1 1

subject to

ni K x

m j D x

i

m

jij

n

i jij

,...,1for

,...,1for

1

1


27/39

Network Optimization Models Optimal demand allocation

Atlanta Boston Chicago Denver Omaha PortlandTelecomOne Baltimore 0 8 2

Memphis 10 0 12

Wichita 0 0 0

HighOptic Salt Lake 0 0 11

Cheyenne 6 7 0

TelecomOne HighOptic BothCombined

Fixed Cost 13950 8500 22450Transporation cost 14886 12865 26463

Total Cost 28836 21365 48913

4891350201


28/39


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

Min f i yi +i= 1

n

cij xij j= 1

m

i= 1

n


29/39


Cij 1 2 3 4 5 6 Fi Ki ObjectiveSupply Atlanta Boston Chicago Denver Omaha Portland ixed Cost Capacity Cost

1 Baltimore 1675 400 685 1630 1160 2800 7,650 182 Cheyenne 1460 1940 970 100 495 1200 3,500 24 $03 Salt Lake 1925 2400 1425 500 950 800 5,000 274 Memphis 380 1355 543 1045 665 2321 4,100 225 Wichita 922 1646 700 508 311 1797 2,200 31

Decisio n Variables

Xij 1 2 3 4 5 6 YiSupply Atlanta Boston Chicago Denver Omaha Portland Lhs Rhs Plant open

1 Baltimore 0


30/39


Cij 1 2 3 4 5 6 Fi Ki Objective

Supply Atlanta Boston Chicago Denver Omaha Portland ixed Cost Capacity Cost1 Baltimore 1675 400 685 1630 1160 2800 7,650 182 Cheyenne 1460 1940 970 100 495 1200 3,500 24 $47,4013 Salt Lake 1925 2400 1425 500 950 800 5,000 274 Memphis 380 1355 543 1045 665 2321 4,100 225 Wichita 922 1646 700 508 311 1797 2,200 31

Decisio n Variables

Xij 1 2 3 4 5 6 Yi

Supply Atlanta Boston Chicago Denver Omaha Portland Lhs Rhs Plant open1 Baltimore 0 8 2 0 0 0 10


31/39

Capacitated Model with Single Sourcing

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

Min f i yi + D jcij xij j= 1

m

i= 1

n

i= 1

n

subject to

xij

= 1 for j = 1,..., mi= 1

n

Di xij K i yi j= 1

m

for i = 1,..., n

xij , yi 0,1{ }


32/39

Capacitated Model with Single SourcingCij 1 2 3 4 5 6 Fi Ki Objective

Supply Atlanta Boston Chicago Denver Omaha Portland Fixed Cost Capacity Cost1 Baltimore 1675 400 685 1630 1160 2800 7,650 182 Cheyenne 1460 1940 970 100 495 1200 3,500 24 $49,7173 Salt Lake 1925 2400 1425 500 950 800 5,000 274 Memphis 380 1355 543 1045 665 2321 4,100 225 Wichita 922 1646 700 508 311 1797 2,200 31

Xij 1 2 3 4 5 6 Yi

Supply Atlanta Boston Chicago Denver Omaha Portland Lhs Rhs Plant open1 Baltimore 0 0 0 0 0 0 0


33/39

Locating Plants and WarehousesSimultaneously


34/39


Model inputs

m = Number of markets or demand pointsn = Number of potential factory locationsl = Number of supplierst = Number of potential warehouse locations

D j = Annual demand from customer jK i = Potential capacity of factory at site iS h = Supply capacity at supplier h

W e = Potential warehouse capacity at site eF i = Fixed cost of locating a plant at site if e = Fixed cost of locating a warehouse at site e

c hi = Cost of shipping one unit from supply source h to factory i c ie = Cost of producing and shipping one unit from factory i to

warehouse ec ej = Cost of shipping one unit from warehouse e to customer j


35/39


Goal is to identify plant and warehouse locations and

quantities shipped that minimize the total fixed and variable

costsY i = 1 if factory is located at site i, 0 otherwiseY e = 1 if warehouse is located at site e, 0 otherwise

xej = Quantity shipped from warehouse e to market j xie = Quantity shipped from factory at site i to warehouse e xhi = Quantity shipped from supplier h to factory at site i

Min F i yi + f e ye + chi xiei= 1

n

+ cej xej j= 1

m

e= 1

t

h= 1

l

e= 1

t

i= 1

n


36/39


subject to

xhi S h for h = 1,..., l i= 1

n

xhi xiee= 1

t

0 for i = 1,..., nh= 1

l

xie K i yi for i = 1,..., ne= 1

t

xie xej j= 1

m

0 for e = 1,..., t i= 1

n

xej W e ye for e = 1,..., t j= 1

m

xej = D j for j = 1,..., me= 1

t

yi , ye 0,1{ }, xej , xie , xhi 0


37/39

Accounting for Taxes, Tariffs, andCustomer Requirements

A supply chain network should maximize profits after tariffs

and taxes while meeting customer service requirements

Modified objective and constraint

Max r j xij F i yi cij xij j= 1

m

i= 1

n

i= 1

n

i= 1

n

j= 1

m

xij D j for j = 1,..., mi= 1

n


38/39


39/39

Summary of Learning Objectives

Understand the role of network design in a supply chain

Identify factors influencing supply chain network design

decisions

Develop a framework for making network design decisions

Use optimization for facility location and capacity allocation

decisions

ppt 5 chapter 5

Documents