VTU MBA SCM Module 2

1. MODULE 2
DESIGNING THE
DISTRIBUTION NETWORK IN A
SUPPLY CHAIN

2. THE ROLE OF DISTRIBUTION
IN THE SUPPLY CHAIN
• Distribution: the steps taken to move and store a product
from the supplier stage to the customer stage in a supply
chain
• Distribution directly affects cost and the customer
experience and therefore drives profitability
• Choice of distribution network can achieve supply chain
objectives from low cost to high responsiveness
• Examples: Wal-Mart, Dell, Proctor & Gamble
16 February 2015 2

3. FACTORS INFLUENCING
DISTRIBUTION NETWORK DESIGN
• Distribution network performance evaluated along two
dimensions at the highest level:
• Customer needs that are met
• Cost of meeting customer needs
• Distribution network design options must therefore be
compared according to their impact on customer service
and the cost to provide this level of service
16 February 2015 3

4. FACTORS INFLUENCING
DISTRIBUTION NETWORK DESIGN
• Elements of customer service influenced by network
structure:
• Response time
• Product variety
• Product availability
• Customer experience
• Order visibility
• Returnability
• Supply chain costs affected by network structure:
• Inventories
• Transportation
• Facilities and handling
• Information
16 February 2015 4

5. SERVICE AND NUMBER OF FACILITIES
16 February 2015 5
Number of
Facilities
Response
Time

6. IMPLICATIONS:
16 February 2015 6
• Increasing the number of facilities moves them closer to the
end consumer.
• This reduces the response time. As Amazon has built
warehouses, the average time from the warehouse to the end
consumer has decreased.
• McMaster-Carr provides 1-2 day coverage of most of the U.S
from 6 facilities.
• W.W. Grainger is able to increase coverage to same day delivery
using about 370 facilities.

7. INVENTORY COSTS AND NUMBER
OF FACILITIES
16 February 2015 7
Inventory
Costs
Number of facilities
Inventory costs increase, facility costs
increase, and transportation costs
decrease as we increase the number of
facilities.

8. TRANSPORTATION COSTS AND
NUMBER OF FACILITIES
16 February 2015 8
Transportation
Costs
Number of facilities
Inventory costs increase, facility costs
increase, and transportation costs
decrease as we increase the number of
facilities.

9. FACILITY COSTS AND NUMBER
OF FACILITIES
16 February 2015 9
Facility
Costs
Number of facilities
Inventory costs increase, facility costs
increase, and transportation costs
decrease as we increase the number of
facilities.

10. Transportation
TotalCosts
Number of Facilities
Inventory
Facilities
Total Costs
TOTAL COSTS RELATED TO NUMBER OF
FACILITIES
16 February 2015 10

11. IMPLICATIONS
16 February 2015 11
• 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.

12. Response Time
Variation in Logistics Costs and Response Time
with Number of Facilities
Number of Facilities
Total Logistics Costs
16 February 2015 12
TotalCosts

13. IMPLICATIONS:
16 February 2015 13
• 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.

14. DESIGN OPTIONS FOR A DISTRIBUTION
NETWORK
1. Manufacturer Storage with Direct Shipping
2. Manufacturer Storage with Direct Shipping and In-Transit
Merge
3. Distributor Storage with Carrier Delivery
4. Distributor Storage with Last Mile Delivery
5. Manufacturer or Distributor Storage with Consumer
Pickup
6. Retail Storage with Consumer Pickup
7. Selecting a Distribution Network Design
16 February 2015 14

15. MANUFACTURER STORAGE WITH
DIRECT SHIPPING
16 February 2015 15
Manufacturer
Retailer
Customers
Product Flow
Information Flow

16. PERFORMANCE CHARACTERISTICS OF MANUFACTURER
STORAGE WITH DIRECT SHIPPING NETWORK
16 February 2015 16
Cost Factor Performance
Inventory Lower cost because of aggregation. Highest
Benefits for low demand and high value items
and largest when product customization can be
postponed by manufacturer
Transportation Higher transportation cost because of increased
distance and disaggregate shipping.
Facilities and
Handling
Lower facility cost because of aggregation.
Saves handling cost if manufacturer can
manage small shipments
Information Significant investment in information
infrastructure to integrate manufacturer and
retailer

17. 16 February 2015 17
Service Factor Performance
Response time Longer response time of 1-2 weeks due to
increased distance and 2 stages for order
processing. Response time may vary by product.
Product variety Easy to provide a high level of variety
Product
availability
Easy to provide a high level of product availability
because of aggregation at manufacturer
Customer
experience
Good in terms of home delivery but can suffer if
order from several manufacturers is sent as
partial shipment
Time to market Fast, with the product available as soon as the
first unit is produced.
Order visibility More difficult but also more important for a
customer service perspective
Returnability Expensive and difficult to implement.
PERFORMANCE CHARACTERISTICS OF MANUFACTURER
STORAGE WITH DIRECT SHIPPING NETWORK

18. IN-TRANSIT MERGE NETWORK
16 February 2015 18
Factories
Retailer
Product Flow
Information Flow
In-Transit Merge by
Carrier
Customers

19. PERFORMANCE CHARACTERISTICS OF IN-TRANSIT MERGE
16 February 2015 19
Cost Factor Performance
Inventory Similar to drop shipping
Transportation Somewhat lower transportation cost than drop
shipping
Facilities and
handling
Handling cost higher than drop shipping, receiving
cost lower at customer
Information Investment is somewhat higher than drop shipping
Service Factor Performance
Response time Similar to drop-shipping, may be higher
Product variety Similar to drop-shipping
Product availability Similar to drop-shipping
Customer
experience
Better than drop-shipping, because single delivery
has to be received
Time to market Similar to drop-shipping
Order visibility Similar to drop-shipping
Returnability Similar to drop-shipping

20. DISTRIBUTOR STORAGE WITH CARRIER
DELIVERY
16 February 2015 20
Factories
Customers
Product Flow
Information Flow
Warehouse Storage by
Distributor/Retailer

21. PERFORMANCE CHARACTERISTICS OF DISTRIBUTOR STORAGE
WITH CARRIER DELIVERY
16 February 2015 21
Cost Factor Performance
Inventory Higher than manufacturer storage. Difference is not large
for faster moving items but can large for slow moving
items
Transportation Lower than manufacturer storage. Reduction is higher for
faster moving items
Facilities and handling Somewhat higher than manufacturer storage. The
difference can be large for very large for slow moving
items
Information Simple infrastructure compared to manufacturer storage
Service Factor Performance
Response time Faster than manufacturer storage
Product variety Lower than manufacturer storage
Product availability Higher cost to provide the same level of availability as
manufacturer storage
Customer experience Better than manufacturer storage with drop-shipping
Time to market Higher than manufacturer storage
Order visibility Easier than manufacturer storage
Returnability Easier than manufacturer storage

22. DISTRIBUTOR STORAGE WITH LAST
MILE DELIVERY
16 February 2015 22
Factories
Customers
Product Flow
Information Flow
Distributor/Retailer
Warehouse

23. PERFORMANCE CHARACTERISTICS OF DISTRIBUTOR
STORAGE WITH LAST MILE DELIVERY
16 February 2015 23
Cost factor Performance
Inventory Higher than distributor storage with package
carrier delivery
Transportation Very high cost given minimal scale economies.
Higher than any other distribution option.
Facilities and
handling
Facility costs higher than manufacturer storage
or distributor storage with package carrier
delivery, but lower than a chain of retail stores
Information Similar to distributor storage with package
carrier delivery

24. 16 February 2015 24
PERFORMANCE CHARACTERISTICS OF DISTRIBUTOR
STORAGE WITH LAST MILE DELIVERY
Service factor Performance
Response time Very quick. Same day to next day delivery
Product variety Somewhat less than distributor storage with
package carrier delivery but larger than retail
stores.
Product availability More expensive to provide availability than any
other option except retail stores.
Customer
experience
Very good, particularly for bulky items.
Time to market Slightly higher for distributor storage with
package carrier delivery
Order visibility Less of an issue and easier to implement than
manufacturer storage or distributor storage with
package carrier delivery.
Returnability Easier to implement than other previous options.
Harder and more expensive than retail network

25. MANUFACTURER OR DISTRIBUTOR STORAGE
WITH CUSTOMER PICKUP
16 February 2015 25
Factories
Retailer
Pickup Sites
Product Flow
Information Flow
Cross Dock DC
Customer Flow
Customers

26. 16 February 2015 26
PERFORMANCE CHARACTERISTICS OF NETWORK
WITH CONSUMER PICKUP SITES
Cost factor Performance
Inventory Can match any other option, depending on the
location of inventory.
Transportation Lower than the use of package carriers,
especially if using an existing delivery network
Facilities and
handling
Facility costs can be high if new facilities have
to be built. Costs are lower if existing facilities
are used. The increase in handling cost at the
pickup site can be significant
Information Significant investment in infrastructure is
required

27. 16 February 2015 27
PERFORMANCE CHARACTERISTICS OF DISTRIBUTOR
STORAGE WITH LAST MILE DELIVERY
Service factor Performance
Response time Similar to package carrier delivery with
manufacturer or distributor storage. Same day
delivery possible for items stored locally at pickup
sites
Product variety Similar to other manufacturer or distributor storage
options.
Product availability Similar to other manufacturer or distributor storage
options.
Customer experience Lower than other options because of the lack of
home delivery. Experience is sensitive to capability
of pickup location
Time to market Similar to manufacturer storage options.
Order visibility Difficult but essential
Returnability Somewhat easier given that pickup location can
handle returns

28. 16 February 2015 28
PERFORMANCE CHARACTERISTICS OF RETAIL
STORAGE AT CUSTOMER PICKUP SITES
Cost factor Performance
Inventory Higher than all other options
Transportation Lower than all other options
Facilities and
handling
Higher than other options. The increase in
handling cost can be significant for online and
phone orders.
Information Some investment in infrastructure required for
online and phone orders

29. 16 February 2015 29
Service factor Performance
Response time Same day(immediate) pickup possible for items
stored locally at pickup sites
Product variety Lower than all other options
Product availability More expensive to provide than all other options
Customer experience Related to whether shopping is viewed as a positive
or negative experience by customer
Time to market Highest among distribution options.
Order visibility Trivial for in-store orders. Difficult but essential,
for online and phone orders.
Returnability Easier than other options because retail stores can
provide a substitute.
PERFORMANCE CHARACTERISTICS OF RETAIL
STORAGE AT CUSTOMER PICKUP SITES

30. COMPARATIVE PERFORMANCE OF DELIVERY NETWORK
DESIGNS (1=STRONG PERFORMANCE, 6=WEAK PERFORMANCE)
Information
Facility & Handling
Transportation
Inventory
Returnability
Order Visibility
Customer
Experience
Product Availability
Product Variety
Response Time
Manufacturer
storage with
pickup
Distributor
storage with
last mile
delivery
Distributor
Storage with
Package
Carrier
Delivery
Manufacturer
Storage with
In-Transit
Merge
Manufacturer
Storage with
Direct Shipping
Retail
Storage
with
Customer
Pickup
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
2
2
2
2
2
2
2
2
2
2
3
3
3
3
3
3
3
3
3
3
4
4
4
4
4
4
4
4
4
4
4
4
4
5
5
5
5
55
5
6
6
5
16 February 2015 30

31. COMPARATIVE PERFORMANCE OF DELIVERY
NETWORK DESIGNS
16 February 2015 31
• Identify the best and worst network along various dimensions.
• Response time: (B) retail stores (W) Manufacturer storage with
direct ship
• Product variety: (W) retail stores (B) Manufacturer storage with
direct ship
• Product availability: (W) retail store (B) Manufacturer storage
• Inventory: (W) retail store (B) manufacturer storage
• Transportation: (B) retail store (W) last mile delivery
• Facility: (W) retail store (B) manufacturer storage
• Handling: (W) Distributor storage with last mile delivery (B)
• Information: Retail stores may be less complex; manufacturer
storage with pickup may be very complex

32. LINKING PRODUCT CHARACTERISTICS AND CUSTOMER
PREFERENCES TO NETWORK DESIGN (+2=VERY SUITABLE,
+1SOMEWHAT SUITABLE, 0=NEUTRAL, -1=SOMEWHAT UNSUITABLE, -2=VERY
UNSUITABLE
Low customer effort
High product variety
Quick desired
response
High product value
Many product sources
Very low demand
product
Low demand product
Medium demand
product
High demand product
Manufacturer
storage with
pickup
Distributor
storage with last
mile delivery
Distributor Storage
with Package
Carrier Delivery
Manufacturer
Storage with
In-Transit
Merge
Manufacturer
Storage with
Direct
Shipping
Retail
Storage with
Customer
Pickup
+2
+2
+2
+2
+2
+2
+2 +2 +2
+2
+1
+1
+1
+1
+1
+1
+1
+1
+1
+1
+1
+1
+1
+1
+1
0
0
0
0
0
0
0
0 0
0
-1
-1
-1
-1
-1 -1
-1
-1
-1
-1
-1
-2 -2
-2
-2
-2
-2 -2
-2
16 February 2015 32

33. LINKING PRODUCT CHARACTERISTICS AND
CUSTOMER PREFERENCES TO NETWORK DESIGN
16 February 2015 33
• When designing the delivery network we should account for product
and market characteristics.
• High demand products will have transportation cost play a
significant role. Use network with good transportation cost (retail
stores)
• Very low demand products will have inventory play a significant role.
Use network with low inventory costs (direct shipping)
• Many product sources: transportation + information plays a role.
Distributor storage with package carrier
• Few product sources but high customization: manufacturer storage
with merge in transit
• High product variety: inventory cost will be significant. Use
distributor storage
• Low customer effort: Distributor storage with package carrier
delivery or last mile delivery depending upon desired response time

34. E-BUSINESS AND THE DISTRIBUTION
NETWORK
• Impact of E-Business on Customer Service
• Response time to customers
• Product variety
• Product availability
• Customer experience
• Faster time to market
• Order visibility
• Returnability
• Direct sales to customers
• Flexible pricing, product portfolio and promotions
• Efficient fund transfer
16 February 2015 34

35. E-BUSINESS AND THE DISTRIBUTION
NETWORK
16 February 2015 35
• Impact of E-Business on Cost
• Inventory
• Facilities
• Transportation
• Information
• Using E-Business: Dell, Amazon, Peapod, Grainger

36. DISTRIBUTION NETWORKS IN PRACTICE
• The ownership structure of the distribution network can have as big
as an impact as the type of distribution network
• The choice of a distribution network has very long-term
consequences
• Consider whether an exclusive distribution strategy is
advantageous
• Product, price, commoditization, and criticality have an impact on
the type of distribution system preferred by customers
16 February 2015 36

37. ASSIGNMENT…
• What are the key factors to be considered when designing the
distribution network?
• What are the strengths and weaknesses of various distribution
options?
• What roles do distributors play in the supply chain?
• Using E-Business: Dell, Amazon, Peapod, Grainger
16 February 2015 37

38. ROLE OF NETWORK DESIGN IN THE
SUPPLY CHAIN
• Supply chain network design decisions include the assignment of
facility role; location of manufacturing; storage or transportation
related facilities; allocation of capacity and markets to each
facility.
• Facility role- what role should each facility play? What processes
are performed at each facility?
• Facility location- where should facilities be located?
• Capacity allocation- how much capacity be allocated to each
facility?
• Market and supply allocation- what market should each facility
serve? Which supply sources should feed each facility?
16 February 2015 38

39. FACTORS INFLUENCING NETWORK
DESIGN DECISIONS
• Strategic- firms focusing on low cost leadership tend to find the lowest
cost location for their manufacturing facilities. Ex: Electronic goods.
Whereas firms focusing on responsiveness tend to locate facilities closer
to the market and may select high cost location Ex: apparels which
responds quickly to changing fashion trends.
• Technological-if production technology displays significant economies of
scale, a few high capacity locations are most effective. Ex: manufacture
of computer chips. Whereas if facilities have lower fixed costs, many
local facilities are preferred because this helps in lower transportation
costs. Ex: bottling plants for coca cola.
• Macroeconomic factors- include taxes tariffs, exchange rates, and
shipping costs, freight and fuel cost that are not internal to an individual
firm. Ex: BMW built its US factory in south Carolina mainly because of tax
incentives offered by the state.
• Political-companies prefer to locate facilities in politically stable
countries where the rules of commerce and ownership are well defined
16 February 2015 39

40. FACTORS INFLUENCING NETWORK
DESIGN DECISIONS
16 February 2015 40
• Infrastructure- the availability of good infrastructure is a prerequisite
to locating facility in a given area. Poor infrastructure adds on to the
cost of doing business from a given location. Key elements include
sites and labor, proximity to all transportation terminals and local
utilities.
• Competitive- companies must consider competitors’ strategy, size and
location. Fundamental decision firm make is whether to locate their
facilities close to or far from competitors.
• Positive externalities between firms-retails stores tend to locate
close to each other because doing so increases overall demand
• Locating to split the market- when firms do not control price but
compete on distance from the customer, they can maximize market
share by locating close to each other and splitting the market.

41. 16 February 2015 41
• Socioeconomic factors-Govt. of India has promoted industrial
development of industrially backward areas like J&K, and
northeastern states. Balanced regional development through
locational dispersal of industries has been one of the principle
objectives of 5 Year Plans. Industrial policy aims to spread
industrialization to backward areas on the country.
• Customer response time and local presence- firms that target
customers who value for shorter response time must locate close to
them. Most towns have fewer supermarkets than convenience stores.
• Logistics and facility costs- cost incurred within a supply chain
change as a number of facilities, their location and capacity
allocation change. Ex: locating the steel factory close to the supply
source is preferred because it reduces transportation cost. Total
logistics cost are the sum of the inventory, transportation, and
facilities cost.
FACTORS INFLUENCING NETWORK
DESIGN DECISIONS

42. THE COST-RESPONSE TIME FRONTIER
Local FG
Mix
Regional FG
Local WIP
Central FG
Central WIP
Central Raw Material and Custom production
Custom production with raw
material at suppliers
Cost
Response Time HiLow
Low
Hi
16 February 2015 42

43. SERVICE AND NUMBER OF FACILITIES
Number of Facilities
Response
Time
16 February 2015 43

44. Customer
DC
Where inventory needs to be for a one week order response time - typical
results --> 1 DC
16 February 2015 44

45. Customer
DC
Where inventory needs to be for a 5 day order response time - typical results --
> 2 DCs
16 February 2015 45

46. Customer
DC
Where inventory needs to be for a 3 day order response time - typical results --
> 5 DCs
16 February 2015 46

47. Customer
DC
Where inventory needs to be for a next day order response time - typical results
--> 13 DCs
16 February 2015 47

48. Customer
DC
Where inventory needs to be for a same day / next day order response time -
typical results --> 26 DCs
16 February 2015 48

49. COSTS AND NUMBER OF FACILITIES
Costs
Number of facilities
Inventory
Transportation
Facility costs
16 February 2015 49

50. Percent Service
Level Within
Promised Time
Transportation
COST BUILDUP AS A FUNCTION OF FACILITIES
CostofOperations
Number of Facilities
Inventory
Facilities
Total Costs
Labor
16 February 2015 50

51. Conventional Network
Customer
Store
Materials
DC
Component
Manufacturing
Vendor
DC
Final
Assembly
Finished
Goods DC
Components
DC
Vendor
DC Plant
Warehouse
Finished
Goods DC
Customer
DC
Customer
DC
Customer
DC
Customer
Store
Customer
Store
Customer
Store
Customer
Store
Vendor
DC
16 February 2015 51

52. TAILORED NETWORK: MULTI-ECHELON
FINISHED GOODS NETWORK
Regional
Finished
Goods DC
Regional
Finished
Goods DC
Customer 1
DC
Store 1
National
Finished
Goods DC
Local DC
Cross-Dock
Local DC
Cross-Dock
Local DC
Cross-Dock
Customer 2
DC
Store 1
Store 2
Store 2
Store 3
Store 3
16 February 2015 52

53. A FRAMEWORK FOR NETWORK DESIGN
DECISIONS
PHASE I
Supply Chain
Strategy
PHASE II
Regional
Facility
Configuration
PHASE III
Desirable
Sites
PHASE IV
Location
Choices
Competitive STRATEGY
INTERNAL CONSTRAINTS
Capital, growth strategy,
existing network
PRODUCTION TECHNOLOGIES
Cost, Scale/Scope impact,
Support, required, flexibility
COMPETITIVE
ENVIRONMENT
PRODUCTION METHODS
Skill needs, response time
FACTOR COSTS
Labor, materials, site specific
GLOBAL COMPETITION
TARIFFS AND TAX
INCENTIVES
REGIONAL DEMAND
Size, growth,
homogeneity,
local specifications
POLITICAL, EXCHANGE
RATE AND DEMAND RISK
AVAILABLE
INFRASTRUCTURE
LOGISTICS COSTS
Transport, inventory,
coordination
16 February 2015 53
AGGREGATE FACTOR AND
LOGISTICS COSTS

54. MODELS FOR FACILITY LOCATION AND
CAPACITY ALLOCATION
16 February 2015 54
 Goal is to maximize the overall profitability while providing
customers with appropriate responsiveness.
 Revenues come from sale of products, whereas cost arises from
facilities, labor, transportation, material and inventories.
 A manager must consider many trade-offs during network design.
Ex: building many facilities reduces transportation cost and
provides fast response time, but it increases the facility and
inventory cost.
 Managers use network design models in 2 situations:
1. To decide on locations where facilities will be established and
the capacity to be assigned to each facility.(long term)
2. Models are used to assign current demand to the available
facilities and identify lanes along which product will be
transported.(annual basis)

55. NETWORK OPTIMIZATION MODELS
Case let: SunOil decides to view worldwide demand in
terms of 5 regions. Annual demand is shown in the
last row, and fixed cost for low and high capacity is
shown in the table.
Available Data; manager’s decision on economies of
scale, Cost data and demand data for SunOil is as
shown
16 February 2015 55

56. The optimization model requires
following constraints:(min costs)
n= number of potential plant
locations/ capacity
m= number of market 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 1 unit from plant i to
market j (cost include production,
inventory, transportation and
tariffs)
The following are the decision
variables:
Yi= 1, if plant i is open, 0
otherwise
Xij= quantity shipped from plant
i to market j
THE CAPACITATED PLANT LOCATION MODEL:
Formulated as:
n n n
Min Σ fi Yi + Σ Σ cij Xij
i=1 i=1 j=1
Subject to;
n
Σ Xij=D for j=1…….m (1)
i=1
m
Σ Xij≤ Ki Yi for i=1…….n (2)
j=1
Yi∈{0,1} for i=1……n, Xij ≥0 (3)

57. 16 February 2015 57
• The objective function minimizes the total cost of setting up and
operating the network.
• The constraint in (1) requires that demand at each regional
market be satisfied.
• The constraint in (2) sates that no plant can supply more than
its capacity
• The constraint in (3) enforces that each plant is either open or
close
• The solution identifies the plants that are to be kept open, their
capacity, and the allocation of regional demand to these plants.
• If sun oil decides to locate a plant in Europe for strategic reasons,
we can modify the model by adding a constraint that requires one
plant to be located in Europe.
• The cost associated with a variety of options incorporating different
combinations of strategic concerns such as local presence should
be evaluated.
• A suitable regional configuration is then selected

58. GRAVITY METHODS FOR LOCATION
• Gravity models assumes that both the markets and the
supply sources can be located as a grid points on a plane.
• All distances are calculated as geometric distance
between 2 points.
• The transportation cost grows linearly with the quantity
shipped.
• The gravity model helps to locate a single facility that
receives raw material from supply sources and ships
finished products to markets.

59. GRAVITY METHODS FOR LOCATION
• x,y: Warehouse Coordinates
• xn, yn : Coordinates of
delivery location n
• dn : Distance to delivery
location n
• Fn : Annual tonnage to
delivery location n
• Dn : quantity to be shipped
between facility and marketer
supply source n












k
n n
n
k
n n
nn
k
n n
n
k
n n
nn
n
d
FD
d
FyD
d
FD
d
FxD
yyxxd
n
n
y
n
n
x
nn
1
1
1
1
22
)()(
Transportation
Cost =
 FDd nn n
1-59

60. 16 February 2015 60
• Thus the manager identifies the coordinates (x,y) as the
location of the factory that minimizes total cost TC.
• The precise coordinates provided by the gravity model
may not correspond to a feasible location.
• The manager should look for desirable sites close to the
optimal coordinates that have the required infrastructure
as well as the appropriate work skill available.
GRAVITY METHODS FOR LOCATION

61. NETWORK OPTIMIZATION MODELS
• Allocating demand to production facilities
• Locating facilities and allocating capacity
Which plants to establish? How to configure the network?
Key Costs:
• Fixed facility cost
• Transportation cost
• Production cost
• Inventory cost
• Coordination cost
16 February 2015 61

62. 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
0
,...,1,
,...,1,
..
1
1
1 1








 
x
Kx
Dx
xc
ij
i
m
j
ij
j
n
i
ij
n
i
m
j
ijij
ni
mj
ts
Min
16 February 2015 62

63. 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
}1,0{;
,...,1,
,...,1,
..
1
1
1
1 11











 
yy
yKx
Dx
xcyf
i
m
i
i
ii
n
j
ij
j
n
i
ij
n
i
m
j
ijiji
n
i
i
k
ni
mj
ts
Min
1-63

64. 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
}1,0{
,...,1,
,...,1,1
..
,
1
1
1 11









 
yx
yKxD
x
xcDyf
ij
nij
mj
ts
jMin
i
ii
n
j
ij
n
i
ij
n
i
m
j
ijiji
n
i
i
1-64

65. PROCURE
RAW WOOL
SORT AND
BLEND RAW
WOOL
SPIN BY
HAND
RECEIVE UNDYED
YARN AT HEAD
OFFICE
DYE WOOLEN
YARN
OPEN HANK
YARN TO MAKE
SPINDLES
RECEIVE
SPINDLES AT
HEAD OFFICE
DELIVER RAW
MATERIAL AND
MAP TO THE
BRANCH OFFICE
DELIVER RAW
MATERIAL AND
MAP TO THE
WEAVER
WEAVE
CARPET
COLLECT CARPETS
FROM WEAVERS AND
BRING TO THE
BRANCH OFFICE
RECEIVE
CARPET AT THE
HEAD OFFICE
INSPECT
CARPETS
REPAIR
CARPETS
WASH AND
FINISH
CARPETS
E X A M P L E : Q U A L I T Y W O O L E N R U G S
BIKANEER-
PRODUCED AT
AUCTION CENTRE
BIKANEER 275 KM
FROM JAIPUR
IN VILLAGES 30-KM
AROUND BIKANEER
JAIPUR
AT DYING HOUSES
5-20KMS FROM HO
JAIPUR, 20KMS FROM
HO
JAIPURTHANAGAZI
110KMS
FROM HO
NARHET, 60 LOOMS
200 WEAVERS,
25 KMS FROM
THANAGAZI BRANCH
OFFICE
AREA VISITS EVERY 15-20
DAYSTO CHECK PROGRESS
THANAGAZI, NAHRET
JAIPUR
20KMS FROM HO

66. ASSIGNMENT…
• 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
16 February 2015 66

67. END OF MODULE 2