Week 2: Basic Network Design

The Weber one, the single location up here, the red dot, minimized the distance times the
weight.
The centroid-- what its actually doing if you look at it-- it's minimizing the distance squared
times the weight.
o So in other words it's implicitly over-weighting the further locations.
We want to use the method that minimizes distance and volume, not distance squared volume.
Trade-off between opening more distribution centers:
o Improve all service metrics
o Improve transportation
o Outbound transportation decreases
Tightening a constraint cannot improve the solution!
Always conduct sensitivity analysis
Outbound transportation costs, much more expensive.
o Makes sense, because you have less economies of scale.
o You have more loading.
o The distance, you don't have those economies for longer distances.
The normal network flow models can handle fixed costs for facilities
o While in practice transportation costs often have fixed and variable
components (e.g. charges per shipment as well as unit), normal
network flow models only handle unit transportation costs.
o When creating the baseline, any non-unit-variable costs (including
fixed costs) need to be converted.
o The baseline is made using historical data for those lanes where such
data exists. While this data normally does not provide the best
possible costs, it gives us a reasonable estimate. For lanes where no
such data exists, one has to use e.g. rates from carriers or regress to
find the unit cost.
When you run an optimization model over several scenarios to find the
optimal number of DCs, you will optimize the transport flows at the same
time. Consequently, you should compare your scenarios to the baseline with
the current number of DCs where the transport flow is also optimized.
Otherwise, you are not comparing the potential of the change in this one
decision variable!