Network Design and Operations:

Facility Location
Rohit Kapoor
Case of a Hypothetical Company
• Indian Paints, a paint manufacturing firm
• Four manufacturing plants
– Ahmedabad, Hubli, Nagpur & Vishakhapatnam
• Recently added one more plant
– at Baddi, Himachal Pradesh
• Because of the attractive tax concessions available
• The firm primarily operates in six major
markets.
 Case: Hypothetical Company
• The marketing group prepares market estimates
every quarter
– expects the supply chain to plan its operations
• so that the firm can deliver its products to all six markets at the
lowest possible cost.
• Keeping in view the capacity constraints of each
plant and the existing cost structure
– the supply chain group has to decide the volume of
produce at each plant
– and allocate market demands to plants.
 Relevant Data
Fixed Unit Variable
Plant Capacity Facility Cost Production Cost
Ahmedabad 350 78000 675
Baddi 400 42000 525
Hubli 450 36000 650
Nagpur 300 38000 625
Vishakhapatnam 400 34000 675

Market Bangalore Chennai Delhi Mumbai Lucknow Kolkata

Quaterly Demand 165 135 280 200 125 155
Price per Unit 1030 950 1000 975 900 850

Bangalore Chennai Delhi Mumbai Lucknow Kolkata

Ahmedabad 235 278 100 65 189 261
Baddi 511 558 97 328 216 305
Hubli 77 138 327 105 372 326
Nagpur 165 160 183 117 148 235
Vishakhapatnam 163 107 328 217 303 203
 Model
• Let, Quantij = Quantity shipped from plant i
to market j every quarter
m n

Minimize Z =  Cost  Quant

i 1 j 1
ij ij

S .t.
m

 Quant
i 1
ij  Dem j  j  1,..., n

 Quant
j 1
ij  Capi  i  1,..., m

Quantij  0  i  1,..., m, j  1,..., n

Production plus Transportation
Cost per Unit

Bangalore Chennai Delhi Mumbai Lucknow Kolkata

Ahmedabad 910 953 775 740 864 936
Baddi 1036 1083 622 853 741 830
Hubli 727 788 977 755 1022 976
Nagpur 790 785 808 742 773 860
Vishakhapatnam 838 782 1003 892 978 878
 Network Operations: Optimal
Allocation with Minimum Cost
as Objective
Bangalore Chennai Delhi Mumbai Lucknow Kolkata Supply
Ahmedabad 0 0 0 200 0 0 200
Baddi 0 0 280 0 120 0 400
Hubli 165 0 0 0 0 0 165
Nagpur 0 0 0 0 5 155 160
Vishakhapatnam 0 135 0 0 0 0 135
 Some Issues
• Assumption
– All the markets must be served
 Network Operations
Optimization: Profit
Maximization Model
m n m n

• Maximize Z =  Pr ice
i 1 j 1
j  Quantij  Costij  Quantij
i 1 j 1

S .t.
m

 Quant
i 1
ij  Dem j  j  1,..., n

 Quant
j 1
ij  Capi  i  1,..., m

Quantij  0  i  1,..., m, j  1,..., n

Network Optimization: Optimal
Allocation with Maximum Profit
as Objective
Bangalore Chennai Delhi Mumbai Lucknow Kolkata Supply
Ahmedabad 0 0 0 200 0 0 200
Baddi 0 0 280 0 120 0 400
Hubli 165 0 0 0 0 0 165
Nagpur 0 0 0 0 5 0 5
Vishakhapatnam 0 135 0 0 0 0 135
 Handling New Markets
• A firm may like to serve a market
– Even if it is not profitable
Impact of Allocation Decision on
Individual Plant Performance
• Till now
– Impact on individual plant performances is not taken
into consideration
– ? Note 1
 Managing Allocation Decisions
in a Multi-Plant Global Firm
• Till now, we have assumed
– Central control
– ? Note 2
 Network Design Problem
• So far,
– Given the network
• Optimal allocation across plant
– Usually, monthly or quarterly – redone!

• However,
– Over the period of time
• Market structure changes
– Market demand in South India may increase at a faster rate or the cost
structure may change drastically
» Differential rate of changes in wages
» Utilities or transport cost alters the competitiveness of plants
 Details about Network Design
Issue
• ? Note 3
Indian Paints Example … Contd.
• Minimize Z =  Fac _ open  F cos t   Cost
m

i i
m n

ij  Quantij
i 1 i 1 j 1

S .t.
m

 Quant
i 1
ij  Dem j  j  1,..., n

 Quant
j 1
ij  Fac _ openi  Capi  i  1,..., m

Quantij  0  i  1,..., m, j  1,..., n

Fac _ openi  0 or 1 binary var iable  i  1,..., m

 Network Design: Optimal
Allocation with Cost as Objective

Plant
Bangalore Chennai Delhi Mumbai Lucknow Kolkata Supply (Open/Close)
Ahmedabad 0 0 0 0 0 0 0 Close
Baddi 0 0 280 0 120 0 400 Open
Hubli 165 135 0 60 0 0 360 Open
Nagpur 0 0 0 140 5 155 300 Open
Vishakhapatnam 0 0 0 0 0 0 0 Close
 Network Design Model: Profit
Maximization Model
• Maximize Z =
m n m m n

 Pr ice
i 1 j 1
j  Quantij   Fac _ openi  F cos ti   Costij  Quantij
i 1 i 1 j 1

S .t.
m

 Quant
i 1
ij  Dem j  j  1,..., n

 Quant
j 1
ij  Fac _ openi  Capi  i  1,..., m

Quantij  0  i  1,..., m, j  1,..., n

Fac _ openi  0 or 1 binary var iable  i  1,..., m

 Network design: Optimal
Allocation with Maximum Profit
as Objective

Plant
Bangalore Chennai Delhi Mumbai Lucknow Kolkata Supply (Open/Close)
Ahmedabad 0 0 0 0 0 0 0 Close
Baddi 0 0 280 0 120 0 400 Open
Hubli 165 85 0 200 0 0 450 Open
Nagpur 0 0 0 0 0 0 0 Close
Vishakhapatnam 0 0 0 0 0 0 0 Close
 Performance Comparison of
Different Decisions

Decision ProblemType of Decision Objective Revenue Net Profit % Net Profit/Sales

I Network Operations Cost Minimization 1017450 15680 1.54
II Network Operations Profit Maximization 885700 17230 1.95
III Network Design Cost Minimization 1017450 125690 12.35
IV Network Design Profit Maximization 833700 154685 18.55
Political Dimensions of Network
Design Problem
• Tough challenge!
– Note 4
 Short Life Cycle Products: A
Suitable Network Design
• Hypothetical Example
– PC supply chain
• Supply chain comprises of
– Manufacturing disks and motherboards
– Assembling PCs
– Finally shipping them to the North American Market
Short Life Cycle Product …
contd.
Production Lead Time Production
Product/Component Location (PLT) (in Weeks) Cost (US $)
PC Box Canada 2 50
PC Box Taiwan 1 35
Disk Malaysia 3 50
Disk Germany 2 68
Motherboard Mexico 3 150
Motherboard China 2 130
Component Transportation Time Transportation
/Subassembly (TLT) (in Weeks) Cost (TCST) (US $)
PC Box (PC) Canada - USA 1 8
PC Box Taiwan - USA 3 20
Disk (DK) Malaysia - Canada 2 7
Disk Malaysia - Taiwan 1 4
Disk Germany - Canada 2 5
Disk Germany - Taiwan 1 3
Motherboard (MB) Mexico - Canada 1 5
Motherboard Mexico - Taiwan 2 10
Motherboard China - Canada 3 13
Motherboard China - Taiwan 1 5