Laboratory no.

3 
Network design in supply chain. 
Optimizing network model 
1. Subject: Supply chain management and logistics 
2. Master program: Service Engineering and Management 
3. Lecturer: Silviu RAILEANU 
4. Objectives 
Decide which facilities to use based on regional demand. The application consists 
of a case study presented in (Sunil, Mendil, 2010). 
5. Theoretical Summary 
The capacitated plant location network optimization model requires the following 
inputs: 
n = number of potential plan locations/capacity (each level of capacity will count as 
a separate location) 
m = number of markets or demand points 
D j 

= annual demand from market j 

K i 

= potential capacity of plant i 

f i 

= annualized fixed cost of keeping factory i open 

c 
ij 

= cost of producing and shipping one unit from factory I to market j (cost includes 
production, inventory, transportation and tariffs). 
The supply chain team’s goal is to decide on a network design that maximizes 
profits after taxes. The model focuses on minimizing the cost of meeting global demand 
and can also be modified to include profits and taxes. 
 
In order to establish a network layout the following decisions, associated to network 
variables, must be taken: 
y i 

= 1 if plant i is open, 0 otherwise 

x 
ij 

= quantity shipped from plant I to market j 

In these conditions the problem is formulated as the following integer program (the 
minimization of the total cost of operation (factory operation and production and 
shipment 
of goods) subject to common sense restrictions): 
Subject to: 
Demand is equal to the produced quantity. 
No plant can supply more than its capacity. 
Integrated supply chains and logistics 
A factory can be opened or closed. 
6. Application Description 
The input data (Costs, Capacities, Demands) is given as a table with locations on 
both columns (supply region) and rows (supplied region). At the intersection of a column 
with a row there is the price of a product produced in X (column) and shipped in Y (row). 
The problem will be solved using the Solver tool found in Excel. The solution 
consists of 5 steps: 
• Reading the inputs 
• Establishing the decision variables 
2 
 
• Modelling the constraints 
• Writing the objective function 
• Running the solver 
Before running the solver the decision variables must be chosen (By Changing 
Variable Cells) and also the constraints as specified before. 
The result will be observable in the same page: chosen values for the decision 
variables, how the constraints are exceeded and also the computed objective function 
(minimization of the total cost). 
7. Support Information 
Chapter 5, Sunil Chopra, Peter Mendil, Supply Chain Management. Strategy, 
Planning and Operation, 2010, Fourth Edition 
http://www.wikihow.com/Use-Solver-in-Microsoft-Excel 
References 
Sunil Chopra, Peter Mendil, Supply Chain Management. Strategy, Planning and 
Operation, 2010, Fourth Edition 
3 
 
Inputs - Costs, Capacities, Demands 
Demand region Production and transportation cost per 1 mil units 
Fixed 
Low 
Fixed cost ($) 
capacity 
cost ($) 
High capacity 
Supply region N. America 
S. America Europe Asia Africa N. America 81 92 101 130 113 6000 10 9000 20 S. America 117 77 108 
98 100 4500 10 6750 20 Europe 102 105 95 119 111 6500 10 9750 20 Asia 115 125 90 59 74 4100 10 
6150 20 Africa 142 100 103 105 71 4000 10 6000 20 Demand 12 8 14 16 7 
Decision variables 
Demand region Production allocation (1000 units) 
Plants (1=open) 
Supply region N. America 
Plants (1=open) S. America Europe Asia Africa N. America 0 0 0 0 0 0 0 S. America 0 0 0 0 0 0 0 Europe 
0 0 0 0 0 0 0 Asia 0 0 0 0 0 0 0 Africa 0 0 0 0 0 0 0 
Constraints 
Supply region 
Excess capacity N. America 0 S. America 0 Europe 0 Asia 0 Africa 0 
 
S. N. America 
America Europe Asia Africa Unmet demand 12 8 14 16 7 
Objective function Cost= 0 
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