1. Designing the Supply Chain Network
Models from Chapter 4, 5 of Chopra & Meindl
Byung-Hyun Ha

2. Outline Designing the Distribution Network in Supply Chain
Factors Influencing Distribution Network Design
Design Options for Distribution Network
Selecting Distribution Network Design
Models for Facility Location and Capacity Allocation

3. Designing Distribution Network
Factors Influencing Distribution Network Design
Customer needs that are met
Cost of meeting customer needs
Required
Number of
Facilities
Response Time
Total Logistics Costs
Number of Facilities
Response Time
Cost
Inventory
Transportation
Facility
Number of Facilities

4. Designing Distribution Network
Elements of customer service influenced by network structure
Response time
Product variety
Product availability
Customer experience
Ease with which customer can place and receive order
Order visibility
Ability of customer to track their order from placement to delivery
Returnability
Ease with which customer can return unsatisfactory merchandise and ability of logistics network to handle such returns

5. Designing Distribution Network
Supply chain costs affected by network structure
Inventories
Transportation
Facilities and handling
Information infrastructure

6. Design Options for Distribution Network
Possible distribution network design
Manufacturer storage with direct shipping
Manufacturer storage with direct shipping and in-transit merge
Distributor storage with carrier delivery
Distributor storage with last mile delivery
Manufacturer or distributor storage with consumer pickup
Retail storage with consumer pickup
Customers walking into store or ordering online

7. Design Options for Distribution Network
Manufacturer storage with direct shipping
Drop-shipping, demand aggregation, postpone customization
Slow-moving/low-demand/high-value items
Inventory
Transportation
Facilities and handling
Information L H
Response time
Product variety
Product availability
Customer experience
Order visibility
Returnability M

8. Design Options for Distribution Network
Manufacturer storage with direct shipping and in-transit merge
e.g. PC from Dell along with Sony monitor
low- to medium-demand and high-value items
Inventory
Transportation
Facilities and handling
Information L M H
Response time
Product variety
Product availability
Customer experience
Order visibility
Returnability

9. Design Options for Distribution Network
Distributor storage with carrier delivery
High-level inventory at distributor
Medium- to fast-moving items at distributor, loss of aggregation
Inventory
Transportation
Facilities and handling
Information M L
Response time
Product variety
Product availability
Customer experience
Order visibility
Returnability H

10. Design Options for Distribution Network
Distributor storage with last mile delivery
Delivering to customer’s home instead of using package carrier
e.g. grocery industry, water, bag of rice at dense city
Inventory
Transportation
Facilities and handling
Information H M
Response time
Product variety
Product availability
Customer experience
Order visibility
Returnability L

11. Design Options for Distribution Network
Manufacturer or distributor storage with consumer pickup
Reusing existing pick-up site, customer participation
Inventory
Transportation
Facilities and handling
Information ? L H
Response time
Product variety
Product availability
Customer experience
Order visibility
Returnability

12. Selecting Distribution Network Design
Comparative performance
1: best performance
Manufacturer storage with direct shipping
Manufacturer storage with direct shipping and in-transit merge
Distributor storage with carrier delivery
Distributor storage with last mile delivery
Manufacturer or distributor storage with consumer pickup
Retail storage with consumer pickup
Inventory
Transportation
Facilities and handling
Information
Response time
Product variety
Product availability
Customer experience
Order visibility
Returnability 1 4 5 3 2 6

13. Selecting Distribution Network Design
Performance for different product/customer char.
+2: Very suitable, …, -2: very unsuitable
Manufacturer storage with direct shipping
Manufacturer storage with direct shipping and in-transit merge
Distributor storage with carrier delivery
Distributor storage with last mile delivery
Manufacturer or distributor storage with consumer pickup
Retail storage with consumer pickup
High-demand product
Medium-demand product
Low-demand product
Very low-demand product
Many product source
High product value
Quick desired response
High product variety
Low customer effort -2 -1 +1 +2

14. Network Design in the Supply Chain
A framework for network design decision
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
PHASE III
Desirable Sites
AVAILABLE
INFRASTRUCTURE
PRODUCTION METHODS
Skill needs, response time
PHASE IV
Location Choices
FACTOR COSTS
Labor, materials, site specific
LOGISTICS COSTS Transport,
inventory, coordination

15. Phase I: Supply Chain Strategy
A company’s competitive strategy
Defining set of customer needs that it seek to satisfy through its products and services
Value chain perspective
Product development strategy/marketing and sales strategy
Supply chain strategy and achieving strategic fit
e.g. Wal-Mart, McMaster Carr, Dell
Finance, Accounting, Information Technology, Human Resources
New
Product
Development
Marketing
and
Sales
Operations
Distribution
Services
The Value Chain in a Company

16. Network Optimization Models
Useful tools for both Phase II and Phase IV
Questions for Phase II: “What regions to source demand in and how to configure network?” given,
Regional demand, tariffs, economics of scale, aggregate factor costs
Not necessary to go to detail of specific plant locations
Need to also consider less quantifiable factors such as political and regulatory climate, competition
Phase IV involves selecting specific facilities and allocating capacity within those selected, given,
Fixed facility cost, transportation cost, production cost, inventory cost, coordination cost

17. Phase II: Regional Facility Configuration
Capacitated plant location model
Example: SunOil, a global energy company
The world is divvied into 5 different regions: N. America, S. America, Europe, Asia, Africa
SunOil has regional demand figures, transport costs, facility costs and capacities
We will ignore tariffs and exchange rate fluctuations for now, and assume all demand must be met (so we can focus on minimizing costs)
Question:
Where to locate facilities to service their demand
What size to build in the region (small or large), should they locate a facility there

18. Phase II: Regional Facility Configuration
Capacitated plant location model
n: number of potential plant location
As we are considering two different type plants (small, large) for each region, n = 10
m: number of markets
Dj: demand from market j
Ki: capacity of plant i
fi: fixed cost of keeping plant i open
cij: variable cost of sourcing market j from plant i
yi = 1 if plant is located at site i, = 0 otherwise
xij: quantity shipped from plant i to market j

19. Phase II: Regional Facility Configuration

20. Phase III: Desirable Sites
Gravity methods for location
x, y: Warehouse Coordinates
xn, yn: Coordinates of delivery location n
Dn: Quantity to be shipped to delivery location n
Fn: Annual tonnage to delivery location n
Limitions?

21. Phase IV: Location Choices
Network optimization model
Example: TelecomOne merged with High Optic
They have plants in different cities and service several regions
Supply cities
Baltimore (capacity 18K), Cheyenne (24K), Salt Lake City (27K), Memphis (22K) and Wichita (31K)
Monthly regional demands
Atlanta (demand 10K), Boston (6K), Chicago (14K), Denver (6K), Omaha (7K)
They will consider consolidating facilities

22. Phase IV: Location Choices
Network optimization model
n: number of plant location
m: number of markets
Dj: demand from market j
Ki: capacity of plant i
cij: variable cost of sourcing market j from plant i
xij: quantity shipped from plant i to market j

23. Phase IV: Location Choices
Considering additional layers: simultaneously locating plants and DCs
DCs
suppliers
plants
customer1
customer2
customer3