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Network Optimization Models

• Allocating demand to production facilities
• Locating facilities and allocating capacity
Key Costs:
• Fixed facility cost
• Transportation cost
• Production cost
• Inventory cost
• Coordination cost

Network Optimization Models

Managers use network design models in two situations:

• Market and supply allocation
– Demand allocation
• Facility location (and capacity allocation)
– Capacitated plant location model
– Capacitated plant location model with single
sourcing

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 Demand Allocation

n supply points m demand points

c11 D1
K1 c12
c13
D2

K2 D3

D4
K3

D5

Demand Allocation Inputs

n = number of factory/plant locations
m = number of markets/demand points
Dj = annual demand from market j
Ki = capacity of plant i

cij = cost of producing and shipping one million units

from plant i to market j (cost includes production,
inventory, transportation, and tariffs)
xij = quantity shipped from plant i to market j

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 Demand Allocation Model
Allocate Demand from different Markets to various Plants to minimize Total Cost
Objective Function:

Subject to Constraints:

n = number of factory/plant locations

m = number of markets/demand points
c11 D1
Dj = annual demand from market j K1 c
c1312
Ki = capacity of plant i D2

K2
cij = cost of producing and shipping one million D3
units from plant i to market j (cost includes
production, inventory, transportation, and tariffs) K3 D4

xij = quantity shipped from plant i to market j D5

Demand Allocation Model

Allocate Demand from different Markets to various Plants to minimize Total Cost
Objective Function:

Subject to Constraints: Constraint:

1. Non negative
2. Shipment = Demand of customer
3. Shipment <= Plant Capacity
n = number of factory/plant locations
m = number of markets/demand points
c11 D1
Dj = annual demand from market j K1 c
c1312
Ki = capacity of plant i D2

K2
cij = cost of producing and shipping one million D3
units from plant i to market j (cost includes
production, inventory, transportation, and tariffs) K3 D4

xij = quantity shipped from plant i to market j D5

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 Demand Allocation
• Which market is served by which n m
plant? Min cij xij
– Given m Demand Points, j=1..m with i 1 j 1
demands Dj
– Given n Supply Points, i=1..n with s.t.
capacity Ki n

– Each unit of shipment from supply x  D

i 1
ij j
point i to demand point j Costs cij
m

• Serve markets from supply points x  K

j 1
ij i
to demand points
– xij = Quantity Shipped from plant site i x ij
0
to customer j

Capacitated Plant Location

Which supply point n supply points m demand points

operates?
c11 D1 France
Romenia y1 = yes or no K1
c12
c13
D2 Germany

Poland y2 = yes or no K2 Italy

D3

D4 Spain
Ireland y3 = yes or no K3

D5 UK

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 Capacitated Plant Location Inputs
n = number of factory/plant locations
m = number of markets/demand points
Dj = annual demand from market j
Ki = potential capacity of plant i

fi = annualized fixed cost of keeping factory i open

cij = cost of producing and shipping one million units

from plant i to market j (cost includes production,
inventory, transportation, and tariffs)
yi = 1 if plant i is open, 0 otherwise
xij = quantity shipped from plant i to market j

Capacitated Plant Location Model

Minimize Total Cost (Fixed + Variable) of establishing and operating the network
Objective Function:

Subject to Constraints:

n = number of factory/plant locations yi = 1 if plant i is open, 0

m = number of markets/demand points otherwise
Dj = annual demand from market j c11 D1
K1 c
c1312
Ki = capacity of plant i D2

cij = cost of producing and shipping one million K2 D3

units from plant i to market j (cost includes
production, inventory, transportation, and tariffs) K3 D4
xij = quantity shipped from plant i to market j
D5

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 Capacitated Plant Location

• Which market is served by n n m

which plant? Min f y   c x ij ij
i i
i 1 i 1 j 1
– None of the plants are open, a
Cost fi is paid to open plant i s.t.
– yi = 1 if plant is located at site i, n

0 otherwise x  D
i 1
ij j

– xij = Quantity Shipped from m

plant site i to customer j x  K y

j 1
ij i i

y {0,1}
i

Capacitated Plant Location With Single Source

(each customer has exactly one supplier)

Which supply point n supply points m demand points

operates?
c11 D1 France
Romenia y1 = yes or no K1 c12
c13
D2 Germany

Poland y2 = yes or no K2 D3 Italy

D4 Spain
Ireland y3 = yes or no K3

D5 UK

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Capacitated Plant Location With Single Source
(each customer has exactly one supplier)

• In some cases, companies want to design

supply chain networks in which a market is
supplied from only one factory
• Reasoning: it lowers the complexity of
coordinating the network and requires less
flexibility from each facility

Capacitated Plant Location With Single Source

(each customer has exactly one supplier)

• Which market is served by n n m

Min f y   D c x
which plant? i 1
i i
i 1 j 1
j ij ij

– None of the plants are open, a s.t.

Cost fi is paid to open plant i n
– yi = 1 if plant is located at site i, x
i 1
ij
1
0 otherwise
m
– xij = 1 if market j is supplied by Dx  K y j ij i
factory i, 0 otherwise j 1
i

yi , xi , j  {0,1}

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 SunOil
• Formerly SunOil and now Sunoco Inc. is a
Fortune 100 company
• American Petroleum and Petrochemical
manufacturer with worldwide sales
• One of the largest gasoline distribution companies
in the USA and the official fuel of NASCAR®
• Sunoco brand gasoline is sold in over 4,700 outlets;
just over a third of these outlets are Sunoco gas
stations and convenience stores
• Needs to decide the regions in which facilities are
to be located 17

SunOil
Capacitated Plant Location Model

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14 16

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8

Dj = annual demand from market j (in million units)

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 SunOil
Capacitated Plant Location Model

10
10 20
20
10
20
10
10
20
20

Ki = capacity of plant i

SunOil
Capacitated Plant Location Model

$6500
$6000 $9750
$9000
$4100
$6150
$4000
$4500
$6000
$6750

fi = annualized fixed cost of keeping plant i open

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 SunOil
Capacitated Plant Location Model

Capacitated Plant Location

• Which market is served by n n m

which plant? Min f y   c x ij ij
i i
i 1 i 1 j 1
– None of the plants are open, a
Cost fi is paid to open plant i s.t.
– yi = 1 if plant is located at site i,
n

0 otherwise x  D
i 1
ij j

– xij = Quantity Shipped from m

plant site i to customer j x  K y

j 1
ij i i

y {0,1}
i

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 SunOil
Capacitated Plant Location Model

Dj – ∑ni=1 xij = 0 for all j = 1, …, m (unmet demand)

SunOil
Capacitated Plant Location Model

10
20

Kiyi – ∑mj=1 xij  0 for all i = 1, …, n (excess capacity)

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Capacitated Plant Location With Single Source
(each customer has exactly one supplier)

• Which market is served by n n m

Min f y   D c x
which plant? i 1
i i
i 1 j 1
j ij ij

– None of the plants are open, a s.t.

Cost fi is paid to open plant i n
– yi = 1 if plant is located at site i, x
i 1
ij
1
0 otherwise
m
– xij = 1 if market j is supplied by Dx  K y j ij i
factory i, 0 otherwise j 1
i

yi , xi , j  {0,1}

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 REFERENCES

•Supply Chain Management (3ed.)

Chopra, Meindl and Kalra

•Principles of Supply Chain Management

Wisner, Leong & Tan

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