1. Chapter 5 Network Design in the Supply Chain
Supply Chain Management (5th Edition)
Chapter 5 Network Design in the Supply Chain
5-1

2. Outline A strategic framework for facility location
Multi-echelon networks
Gravity methods for location
Plant location models
Notes:
5-2

4. Network Design Decisions
Facility role
Facility location
Capacity allocation
Market and supply allocation
5-4

5. Factors Influencing Network Design Decisions
Strategic e.g. Foxconn, Zara, Costco
Technological e.g. Coca-Cola
Macroeconomic e.g. Taxes, exchange rates
Political (GPRI)
Infrastructure
Competitive
Logistics and facility costs e.g. Amazon
5-5

6. Service and Number of Facilities
Response
Time
Notes:
Number of Facilities
5-6

7. Inventory Costs and Number of Facilities
Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities.
Number of facilities

8. Facility Costs and Number of Facilities (Fig. 4.4)
Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities.
Number of facilities

9. Transportation Costs and Number of Facilities (Fig. 4.3)
Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities.
Number of facilities

10. Total Costs Related to Number of Facilities
Inventory
Notes: Total costs decrease and then increase as we increase the number of facilities. The responsiveness improves as we increase the number of facilities. A supply chain should always operate above the lowest cost point. Operating beyond that point makes sense if the revenue generated from better responsiveness exceeds the cost of better responsiveness.
Transportation
Number of Facilities

11. Where inventory needs to be for a one week order response time - typical results --> 1 DC
Customer DC

12. Where inventory needs to be for a 5 day order response time - typical results --> 2 DCs
Customer DC

13. Where inventory needs to be for a 3 day order response time - typical results --> 5 DCs
Customer DC

14. Where inventory needs to be for a next day order response time - typical results --> 13 DCs
Customer DC

15. Where inventory needs to be for a same day / next day order response time - typical results --> 26 DCs
Customer DC

16. A Framework for Global Site Location
Competitive STRATEGY
GLOBAL COMPETITION
PHASE I
Supply Chain
Strategy
INTERNAL CONSTRAINTS
Capital, growth strategy,
existing network
TARIFFS AND TAX
INCENTIVES
PRODUCTION TECHNOLOGIES
Cost, Scale/Scope impact, support
required, flexibility
REGIONAL DEMAND
Size, growth, homogeneity,
local specifications
PHASE II
Regional Facility
Configuration
COMPETITIVE
ENVIRONMENT
POLITICAL, EXCHANGE
RATE AND DEMAND RISK
Notes:
PHASE III
Desirable Sites
AVAILABLE
INFRASTRUCTURE
PRODUCTION METHODS
Skill needs, response time
FACTOR COSTS
Labor, materials, site specific
PHASE IV
Location Choices
LOGISTICS COSTS
Transport, inventory, coordination
5-16

17. Conventional Network Materials DC Vendor DC Finished Goods DC Customer
Store
Customer
Store
Component
Manufacturing
Vendor DC
Customer
Store
Plant
Warehouse
Customer DC
Components DC
Customer
Store
Notes:
Vendor DC
Finished
Goods DC
Final Assembly
Customer DC
Customer
Store
5-17

18. Tailored Network: Multi-Echelon Finished Goods Network
Local DC
Cross-Dock
Store 1
Regional
Finished
Goods DC
Customer 1 DC
Store 1
Local DC
Cross-Dock
Store 2
National
Finished
Goods DC
Customer 2 DC
Store 2
Local DC
Cross-Dock
Notes:
Regional
Finished
Goods DC
Store 3
Store 3
5-18

19. Facility planning and design
Locating a single facility – simple methods

20. Outline
Preference Matrix
Gravity method

21. Location Preference matrix Health-Watch
A new health facility is to be located in Erie, the following table (see next slide) show all the information related to factors and their scores (1- poor, 5= excellent) for the potential site. How good is this site?

22. Preference matrix Six steps: Develop a list of relevant factors.
Assign a weight to each factor reflecting its relative importance to the firm.
Develop a rating scale for the factors.
Score each location on each factor based on the scale.
Multiply the scores by the weights for each factor and total the weighted scores for each location.
Make a recommendation based on the maximum point score, considering other [quantitative?] factors.

23. Location Health-Watch North Erie Scranton State College Pittsburgh
Harrisburg
Philadelphia
Scranton
Uniontown
State College
Example 9.1

24. Location Health-Watch Location Factor Weight Score
North
Erie
Pittsburgh
Harrisburg
Philadelphia
Scranton
Uniontown
State College
Location Factor Weight Score
Total Patient miles per month 25 4
Facility utilization 20 3
Average time per emergency trip 20 3
Expressway accessibility 15 4
Land and construction costs 10 1
Employee preference 10 5
Example 9.1

25. Location Health-Watch Location Factor Weight Score Weighted Score
North
Erie
Pittsburgh
Harrisburg
Philadelphia
Scranton
Uniontown
State College
Weighted Score
Location Factor Weight Score
Total Patient miles per month 25 4
Facility utilization 20 3
Average time per emergency trip 20 3
Expressway accessibility 15 4
Land and construction costs 10 1
Employee preference 10 5
Example 9.1

26. Location Health-Watch Weighted Score Location Factor Weight Score
North
Erie
Pittsburgh
Harrisburg
Philadelphia
Scranton
Uniontown
State College
Weighted Score
Location Factor Weight Score
Total Patient miles per month 25 4
Facility utilization 20 3
Average time per emergency trip 20 3
Expressway accessibility 15 4
Land and construction costs 10 1
Employee preference 10 5
WS = (25 x 4)
Example 9.1

27. Location Health-Watch Weighted Score Location Factor Weight Score
North
Erie
Pittsburgh
Harrisburg
Philadelphia
Scranton
Uniontown
State College
Weighted Score
Location Factor Weight Score
Total Patient miles per month 25 4
Facility utilization 20 3
Average time per emergency trip 20 3
Expressway accessibility 15 4
Land and construction costs 10 1
Employee preference 10 5
WS = (25 x 4) + (20 x 3)
Example 9.1

28. Location Health-Watch Weighted Score Location Factor Weight Score
North
Erie
Pittsburgh
Harrisburg
Philadelphia
Scranton
Uniontown
State College
Weighted Score
Location Factor Weight Score
Total Patient miles per month 25 4
Facility utilization 20 3
Average time per emergency trip 20 3
Expressway accessibility 15 4
Land and construction costs 10 1
Employee preference 10 5
WS = (25 x 4) + (20 x 3) + (20 x 3)
Example 9.1

29. Location Health-Watch Weighted Score Location Factor Weight Score
North
Erie
Pittsburgh
Harrisburg
Philadelphia
Scranton
Uniontown
State College
Weighted Score
Location Factor Weight Score
Total Patient miles per month 25 4
Facility utilization 20 3
Average time per emergency trip 20 3
Expressway accessibility 15 4
Land and construction costs 10 1
Employee preference 10 5
WS = (25 x 4) + (20 x 3) + (20 x 3) + (15 x4) + (10 x 1) + (10 x 5)
Example 9.1

30. Location Health-Watch Weighted Score Location Factor Weight Score
North
Erie
Pittsburgh
Harrisburg
Philadelphia
Scranton
Uniontown
State College
Weighted Score
Location Factor Weight Score
Total Patient miles per month 25 4
Facility utilization 20 3
Average time per emergency trip 20 3
Expressway accessibility 15 4
Land and construction costs 10 1
Employee preference 10 5
WS = 340
Example 9.1

31. Center of gravity method
An intuitive but non-optimal approach, because it does not minimize the travel distances from each location to the service facility.
Center of gravity solution could serve as a starting point for the previous, rather tedious, method.

32. Location Health-Watch Center of Gravity Approach North B A C E G F D
(2.5, 4.5)
[2]
(2.5, 2.5)
[5]
(5, 2)
[7]
(7, 2)
[20]
(9, 2.5)
[14]
(8, 5)
[10]
(5.5, 4.5)
x (miles)
East 1 2 3 4 5 6 7 8 9 10
y (miles)
Example 9.4

33. Location Health-Watch Center of Gravity Approach North B A C E G F D
(2.5, 4.5)
[2]
(2.5, 2.5)
[5]
(5, 2)
[7]
(7, 2)
[20]
(9, 2.5)
[14]
(8, 5)
[10]
(5.5, 4.5)
x (miles)
East 1 2 3 4 5 6 7 8 9 10
y (miles)
Census Population
Tract (x,y) (l) lx ly
A (2.5, 4.5) 2
B (2.5, 2.5) 5
C (5.5, 4.5) 10
D (5, 2) 7
E (8, 5) 10
F (7, 2) 20
G (9, 2.5) 14
Example 9.4

34. Location Health-Watch Center of Gravity Approach North B A C E G F D
(2.5, 4.5)
[2]
(2.5, 2.5)
[5]
(5, 2)
[7]
(7, 2)
[20]
(9, 2.5)
[14]
(8, 5)
[10]
(5.5, 4.5)
x (miles)
East 1 2 3 4 5 6 7 8 9 10
y (miles)
Census Population
Tract (x,y) (l) lx ly
A (2.5, 4.5) 2 5
B (2.5, 2.5)
C (5.5, 4.5)
D (5, 2)
E (8, 5)
F (7, 2)
G (9, 2.5)
Example 9.4

35. Location Health-Watch Center of Gravity Approach North B A C E G F D
(2.5, 4.5)
[2]
(2.5, 2.5)
[5]
(5, 2)
[7]
(7, 2)
[20]
(9, 2.5)
[14]
(8, 5)
[10]
(5.5, 4.5)
x (miles)
East 1 2 3 4 5 6 7 8 9 10
y (miles)
Census Population
Tract (x,y) (l) lx ly
A (2.5, 4.5) 2 5 9
B (2.5, 2.5)
C (5.5, 4.5)
D (5, 2)
E (8, 5)
F (7, 2)
G (9, 2.5)
Example 9.4

36. Location Health-Watch Center of Gravity Approach North B A C E G F D
(2.5, 4.5)
[2]
(2.5, 2.5)
[5]
(5, 2)
[7]
(7, 2)
[20]
(9, 2.5)
[14]
(8, 5)
[10]
(5.5, 4.5)
x (miles)
East 1 2 3 4 5 6 7 8 9 10
y (miles)
Census Population
Tract (x,y) (l) lx ly
A (2.5, 4.5) 2 5 9
B (2.5, 2.5)
C (5.5, 4.5)
D (5, 2)
E (8, 5)
F (7, 2)
G (9, 2.5)
Example 9.4

37. Location Health-Watch Center of Gravity Approach North B A C E G F D
(2.5, 4.5)
[2]
(2.5, 2.5)
[5]
(5, 2)
[7]
(7, 2)
[20]
(9, 2.5)
[14]
(8, 5)
[10]
(5.5, 4.5)
x (miles)
East 1 2 3 4 5 6 7 8 9 10
y (miles)
Census Population
Tract (x,y) (l) lx ly
A (2.5, 4.5) 2 5 9
B (2.5, 2.5)
C (5.5, 4.5)
D (5, 2)
E (8, 5)
F (7, 2)
G (9, 2.5)
Example 9.4

38. Location Health-Watch Center of Gravity Approach North B A C E G F D
(2.5, 4.5)
[2]
(2.5, 2.5)
[5]
(5, 2)
[7]
(7, 2)
[20]
(9, 2.5)
[14]
(8, 5)
[10]
(5.5, 4.5)
x (miles)
East 1 2 3 4 5 6 7 8 9 10
y (miles)
Census Population
Tract (x,y) (l) lx ly
A (2.5, 4.5) 2 5 9
B (2.5, 2.5)
C (5.5, 4.5)
D (5, 2)
E (8, 5)
F (7, 2)
G (9, 2.5)
Totals
Example 9.4

39. Location Health-Watch x* = y* = Center of Gravity Approach North B A CD
(2.5, 4.5)
[2]
(2.5, 2.5)
[5]
(5, 2)
[7]
(7, 2)
[20]
(9, 2.5)
[14]
(8, 5)
[10]
(5.5, 4.5)
x (miles)
East 1 2 3 4 5 6 7 8 9 10
y (miles)
x* =
y* =
Census Population
Tract (x,y) (l) lx ly
A (2.5, 4.5) 2 5 9
B (2.5, 2.5)
C (5.5, 4.5)
D (5, 2)
E (8, 5)
F (7, 2)
G (9, 2.5)
Totals
Example 9.4

40. Location Health-Watch 453.5 x* = 68 205.5 y* =
Center of Gravity Approach
Health-Watch
North B A C E G F D
(2.5, 4.5)
[2]
(2.5, 2.5)
[5]
(5, 2)
[7]
(7, 2)
[20]
(9, 2.5)
[14]
(8, 5)
[10]
(5.5, 4.5)
x (miles)
East 1 2 3 4 5 6 7 8 9 10
y (miles)
453.5 68
205.5
x* =
y* =
Census Population
Tract (x,y) (l) lx ly
A (2.5, 4.5) 2 5 9
B (2.5, 2.5)
C (5.5, 4.5)
D (5, 2)
E (8, 5)
F (7, 2)
G (9, 2.5)
Totals
Example 9.4

41. Location Health-Watch 453.5 x* = 68 205.5 y* =
Center of Gravity Approach
Health-Watch
North B A C E G F D
(2.5, 4.5)
[2]
(2.5, 2.5)
[5]
(5, 2)
[7]
(7, 2)
[20]
(9, 2.5)
[14]
(8, 5)
[10]
(5.5, 4.5)
x (miles)
East 1 2 3 4 5 6 7 8 9 10
y (miles)
453.5 68
205.5
x* =
y* =
Census Population
Tract (x,y) (l) lx ly
A (2.5, 4.5) 2 5 9
B (2.5, 2.5)
C (5.5, 4.5)
D (5, 2)
E (8, 5)
F (7, 2)
G (9, 2.5)
Totals
Example 9.4

42. Location Health-Watch x* = 6.67 y* = 3.02 Center of Gravity Approach
North B A C E G F D
(2.5, 4.5)
[2]
(2.5, 2.5)
[5]
(5, 2)
[7]
(7, 2)
[20]
(9, 2.5)
[14]
(8, 5)
[10]
(5.5, 4.5)
x (miles)
East 1 2 3 4 5 6 7 8 9 10
y (miles)
x* =
y* =
Census Population
Tract (x,y) (l) lx ly
A (2.5, 4.5) 2 5 9
B (2.5, 2.5)
C (5.5, 4.5)
D (5, 2)
E (8, 5)
F (7, 2)
G (9, 2.5)
Totals
Example 9.4

43. Location Health-Watch x* = 6.67 y* = 3.02 Center of Gravity Approach
North B A C E G F D
(2.5, 4.5)
[2]
(2.5, 2.5)
[5]
(5, 2)
[7]
(7, 2)
[20]
(9, 2.5)
[14]
(8, 5)
[10]
(5.5, 4.5)
x (miles)
East 1 2 3 4 5 6 7 8 9 10
y (miles)
x* =
y* =
Example 9.4

44. Location Health-Watch x* = 6.67 y* = 2.96 Center of Gravity Approach
North B A C E G F D
(2.5, 4.5)
[2]
(2.5, 2.5)
[5]
(5, 2)
[7]
(7, 2)
[20]
(9, 2.5)
[14]
(8, 5)
[10]
(5.5, 4.5)
x (miles)
East 1 2 3 4 5 6 7 8 9 10
y (miles)
x* =
y* =
Figure 9.6

45. 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
Notes:
Min
5-45

46. 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
Notes:
Which plants to establish? How to configure the network?
5-46

47. 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
5-47

48. 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
Notes:
5-48

49. 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
Notes:
5-49

50. 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
Notes:
5-50