Chapter 5

Network Design in the Supply Chain

Learning Objectives
• Understand the role of network design in a supply
chain.
• Identify factors influencing supply chain network
design decisions.
• Discuss a framework for making network design
decisions.
• Develop an optimization model to design an
regional network configuration.
The Role of Network Design
• Network design decisions
• How many manufacturing plants, production lines, distribut
centers, cross-docking facilities?
• Where should facilities be located?
• How much capacity at each facility?
• Which products?
• What markets?
• Revisit design decisions after market changes, merge
or factor cost changes
Factors Influencing
Network Design Decisions
• Strategic
• Technological
• Macroeconomic
• Political
• Infrastructure
• Competitive
• Logistics and facility costs

5-4
Factors Influencing Network
Design Decisions
• Strategic Factors
• Technological
• Competitive Factors
• Positive externalities
• Locating to split the market
• Political Factors
• Infrastructure Factors
Factors Influencing Network
Design Decisions (2 of 2)
• Customer Response Time and Service Level
• Total Logistics Cost
• Macroeconomic Factors
• Tariffs and tax incentives
• Exchange-rate and demand risk
Competitive Factors
• Locating to split the market
– Locate to capture largest market share

Figure 5-1 Two Firms Locating on a Line

1– b – a 1 b – a
d1 a  and d 2 
2 2
Framework for Network Design
Decisions
• Maximize the overall profitability of the supply chain
network while providing customers with the appropriate
responsiveness
• Many trade-offs during network design
• Network design models used
• to decide on locations and capacities
• to assign current demand to facilities and identify
transportation lanes
Figure 5-2 Framework for Network
Design Decisions
Framework for Network Design
Decisions
• Phase I: Define a Supply Chain
Strategy/Design
• Clear definition of the firm’s competitive
strategy
• Forecast the likely evolution of global
competition
• Identify constraints on available capital
• Determine broad supply strategy
Framework for Network Design
Decisions
• Phase II: Define the Regional Facility
Configuration
• Forecast of the demand by country or region
• Identify fixed and variable costs, economies of
scale or scope
• Identify regional tariffs, requirements for local
production, tax incentives, and export or
import restrictions
• Identify competitors
• Identify demand risk, exchange-rate risk,
political risk
Framework for Network Design
Decisions
• Phase III: Select a Set of Desirable Potential
Sites
• Hard infrastructure requirements
• Soft infrastructure requirements
• Phase IV: Location Choices and Market
Allocation
Models for Designing a Regional
Network Configuration
• Inputs Required By Region
• Demand
• Desired response time
• Fixed cost of opening a facility
• Variable cost of labor and material
• Inventory holding cost
• Transportation cost between pairs of regions
• Sale price of product
• Taxes and tariffs
• Potential facility capacity
Models for Designing a Regional
Network Configuration (2 of 2)

Cost Data (in Thousands of Dollars) and Demand Data (in Millions of
Units) for SunOil
 Capacitated Plant Location Model
n = number of potential plant locations/capacity
m = number of markets or demand points
Dj = annual demand from market j
Ki = potential capacity of plant i
fi = 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)
yi = 1 if plant i is open, 0 otherwise
xij = quantity shipped from plant i to market j
Capacitated Plant Location Model (2
of 9)

n n m
Min  fi y i    cij xij
i 1 i 1 j 1

Subject to

x
i 1
ij D j for j 1, , m
m

 x
j 1
ij K i y i for i 1, , n

y i   0,1 for i 1, , n,xij 0

Plant Location Methods
Transportation
Factor-rating
method of linear
system programming

Centroid
method
Factor-Rating System
• Is the most widely used. Example – refinery location
factors
• List of factors is developed.
• Range of possible points is
assigned to each factor.
• Each site is rated against each
factor.
• The sums of assigned points for
each site are computed.
• The site with the most points is
selected.
• Logistics Consultants Inc. (LCI) provides various logistics analysis
services to other firms, including facility location decisions. They have
just completed a project for a major customer, but on the eve of their
presentation they discovered a computer malfunction partially
deleted some of their data. One file that was impacted contains the
final factor rating results. Following are the partial results they were
able to recover. As you’ll notice, some ratings are missing.
Ratings
Factor Max Points City X City Y
Availability of labor 150 130 123
Availability of utilities 130 122 110
Transportation infrastructure 80 73
Warehousing availability/costs 75 70 63
Proximity to customers 65 59
Business climate 40 30 24
Taxation structure 30 15
Quality of life 25 22 17
Centroid Method
• Used for locating single facilities that
considers existing facilities, the
distances between them, and the
volumes of goods to be shipped
between them.
• Assumes inbound and outbound
transportation costs are equal
• Does not include special shipping costs Cx = X coordinate of centroid
Cy = Y coordinate of centroid
for less than a full load
dix = X coordinate of the ith
• This methodology involves formulas location
used to compute the coordinates of diy = Y coordinate of the ith
the two-dimensional point that meets location
Vi = volume of goods moved to
the distance and volume criteria or from the ith location
stated earlier.
Example :
• The HiOctane Refining Company needs to locate an intermediate
holding facility between its refining plant in Long Beach and its major
distributors. Next slide shows the coordinate map and the amount of
gasoline shipped to or from the plant and distributors. In this
example, for the Long Beach location (the first location),
dix = 325, diy = 75, and Vi = 1,500.
Solution

Cx = X coordinate of centroid
Cy = Y coordinate of centroid
dix = X coordinate of the ith location
diy = Y coordinate of the ith location
Vi = volume of goods moved to or
from the ith location