Transcript module 2 chap. 8 network design

8
NETWORK DESIGN AND OPERATIONS:
FACILITY LOCATION
CONTENT……
Network operation planning
 Network design problems
 Network design and operations models:
extension
 Data for network design
 Strategic role of units in the network
 Locations of service systems

NETWORK DESIGN & OPERATIONS

Design : Location and capacity of plants and
distribution centres ( warehouses) so as to
serve customers in a cost-effective way
Strategic decision
 Relevant cost : Facility cost, Variable production
cost, Transportation cost


Operations: For a given design decide
optimal linkages between
plants and
markets
Tactical decision
 Relevant cost : Variable
Transportation cost

production
cost,
Indian Paints: Five Plants and Six Markets
Indian Paints: Production Plus Transportation
Cost*
*per unit
NETWORK OPTIMIZATION: PARAMETERS AND
VARIABLES*
M= Number of plants. Let i= 1..m describe m respective manufacturing
plants.
N= Number of markets. Let j= 1..n describe n respective markets
Demj , Pricej , = demand & Price at market j
Capi = production capacity at plant i
Costij = Cost of producing and transporting one unit from plant i to market
j
F costi = Fixed cost of facility i
Decision Variables:
Quantij = Quantity shipped from plant i to market j
Fac open i = 0 or 1 binary variable for facility i - If binary value is 1
:facility is open and If binary value is 0 :facility is close
* Parameters in italic type and blue are used in design decisions.
Capacity and demand are for unit time period. Unit time period could be
month, quarter or a year
Network Operations Planning:
Cost Minimization Model
m
n
 Cost
Minimize
ij *
Quantij
i 1 j 1
Subject to following constraints:
m
 Quantij  Demj
i 1
n
 Quantij  Capi
for j=1..n
for i=1…m
j 1
Quant ij  0
for i=1..m , j=1..n
Number of variables= m *n & number of constraints= m+n
Network Operations Planning:
Cost Minimization Model
Objective function value= Total Variable costs=773,770
Revenue= 1,017,450 , Gross Profit = 243,680 , Net Profit= 15,680
Maximise
Network Operations Planning:
Profit Maximization Model
m n
m n
i 1 j 1
i 1 j 1
  Pr icej * Quantij    Costij * Quantij
n
 Quant
ij
 Capi
for i=1…m
ij
 Demj
for j=1..n
j 1
m
 Quant
i 1
Quant ij  0
for i=1..m , j=1..n
Number of variables= m *n & number of constraints= m+n
Network Operations Planning:
Profit Maximization Model
Objective Function = Maximize Total Gross Profit = 245230
Revenue= 885700
Variable cost = 640470, Net Profit=
17,230
COMPARISON OF MODELS
Decision
problem
Type of
decision
Objective
Revenue
Net Profit
% Net
profit/Sales
I
Network
Operations
Cost
Minimisati
on
1017450
15680
1.54
II
Network
Operations
Profit
885700
Maximisati
on
17230
1.95
Why is Kolkata market not served in model II ?
NETWORK DESIGN PROBLEM
Change in market structure
 Change in market demand
 Changes in wage rate
 Changes in utilities and cost of transportation

Network Design: Cost Minimization Model
Minimize
m n
 Fac  openi  F costi   Costij * Quantij
Subject to following constraints:
i 1 j 1
m
 Quantij  Demj
n
for j=1..n
i 1
for i=1…m
 Quantij  Fac  openi  Capi
j 1
Fac  openi  0or1,
Quantij  0
For i= 1..m
for i=1..m , j=1..n
Number of linear variables= m *n, number of binary variables=m &
number of constraints= m+n
Network Design: Cost Minimization Model
Supply Plant
(open/close)
Bangalore Chennai
Delhi
Mumbai Lucknow Kolkata
Ahmedabad
0
0
0
0
0
0
0
No
Baddi
0
0
280
0
120
0
400
Yes
Hubli
165
135
0
60
0
0
360
Yes
Nagpur
0
0
0
140
5
155
300
Yes
No
Vishakapatna
m
0
0
0
0
0
0
0
Supply
165
135
280
200
125
155
0
Objective function = Total Costs ( Fixed + Variable) = 891760
Revenue=
1,017,450 , Gross Profit = 241,690 , Net Profit= 125,690
Network Operations Planning:
Profit
Maximization
Model
m n
m n
Maximise
  Pr icej * Quantij   Fac  Openi   Costij * Quantij
i 1 j 1
i 1 j 1
n
 Quantij  Fac  openi  Capi
for i=1…m
j 1
m
 Quant
ij
for j=1..n
 Demj
i 1
Fac  openi  0or1,
Quantij  0
for i=1…m
for i=1..m , j=1..n
Number of linear variables= m *n, number of binary variables=m &
number of constraints= m+n
Network Design: Profit Maximization Model
Supply Plant
Bangalore
(open/close)
Chennai
Delhi
Mumbai
Lucknow
Kolkata
Ahmedabad 0
0
0
0
0
0
0
No
Baddi
0
0
280
0
120
0
400
Yes
Hubli
165
85
0
200
0
0
450
Yes
Nagpur
0
0
0
0
0
0
0
No
0
No
Vishakapatn
am
0
0
0
0
Supply
165
85
280
200
Objective function = Total Net Profit = 154,685
Revenue=
0
0
120
0
833,700 , Variable Cost = 601,015 Gross Profit= 232, 685
Fixed Cost= 78,000
A Performance Comparison of the
Four Models
-Under what circumstances Indian paints choose not to use model IV ?
- How do choice of organisation structure affect selection of model ?
NETWORK DESIGN AND OPERATIONS:
EXTENSION OF THE MODELS
Handling new/Strategic markets
 Handling Seasonal products

 Including
Inventory in model
Handling Multiple capacity option in
network design decisions
 Handling Short life cycle products

 Cost
versus time trade offs
 Cycle
time
 Weighted activity time

Incorporating Uncertainty
DISK
(Malasiya or
Germany)
PC assembly
(Canada or Taiwan)
Motherboard
(Mexico or China)
Market
(India)
DATA FOR NETWORK DESIGN

Demand
 Aggregate

products and customers
Production Cost
 Comparable
costs across facilities
Transportation costs
 Time horizon

STRETEGIC ROLE OF UNIT IN THE NETWORK
STRATEGIC ROLE
HIGH
LOW
SOURCE
LEAD
CONTRIBUTOR
OFFSHORE
OUTPOST
SERVER
Access to low
cost
resources
Access to
skills
Access to
markets
SRATEGIC REASON FOR PLANT
ROLE OF FACILITY
Offshore facility – labour, RM
 Server facility- market
 Outpost facility- Skills , knowledge
 Source: Serving global market
 Contributor- contributes to product and
process innovations
 Lead: leader in product and process
innovations
Source: Ferdow – HBR(1997)

STRATEGIC ROLE OF PLANT:
LOW STRATEGIC CONTRIBUTION
Offshore –To gain access to low wages or
other factors integral to low-cost
production
 ServerServes specific national or
regional markets
 Outpost – To gain access to the
knowledge or skills

Source: Ferdows (HBR 1997)
STRATEGIC ROLE OF PLANTS:
HIGH STRATEGIC CONTRIBUTION
SourceStrategic Role Broader than
offshore unit. Has a global responsibility
for a part or a product
 Contributor- Serves local market but also
assumes responsibility for product
customization , process improvements.
 Lead- Ability and knowledge to create new
products, processes, and technologies for
the company

Source: Ferdows (HBR 1997)
LOCATION OF SERVICE SYSTEMS

Market coverage gets affected by location
decision
 Retail
outlets
 Impact of ownership structure

Emergency systems
 CTC

at Bangalore ( Operation Sanjeevani)
Guaranteed delivery time
 After-market

service
Public systems
 Equity
issues