Supply Chain Management module 2

MODULE 2

DESIGNING THE DISTRIBUTION NETWORK IN A

SUPPLY CHAIN

April 14, 2023 2

THE ROLE OF DISTRIBUTIONIN THE SUPPLY CHAIN

• Distribution: the steps taken to move and store a product from the supplier stage to the customer stage in a supply chain

• Distribution directly affects cost and the customer experience and therefore drives profitability

• Choice of distribution network can achieve supply chain objectives from low cost to high responsiveness

• Examples: Wal-Mart, Dell, Proctor & Gamble

April 14, 2023 3

FACTORS INFLUENCINGDISTRIBUTION NETWORK DESIGN

• Distribution network performance evaluated along two dimensions at the highest level:

• Customer needs that are met

• Cost of meeting customer needs

• Distribution network design options must therefore be compared according to their impact on customer service and the cost to provide this level of service

April 14, 2023 4

FACTORS INFLUENCINGDISTRIBUTION NETWORK DESIGN

• Elements of customer service influenced by network structure:

• Response time

• Product variety

• Product availability

• Customer experience

• Order visibility

• Returnability

• Supply chain costs affected by network structure:

• Inventories

• Transportation

• Facilities and handling

• Information

April 14, 2023 5

SERVICE AND NUMBER OF FACILITIES

Number of Facilities

Response Time

April 14, 2023 6

IMPLICATIONS:

• Increasing the number of facilities moves them closer to the end consumer.

• This reduces the response time. As Amazon has built warehouses, the average time from the warehouse to the end consumer has decreased.

• McMaster-Carr provides 1-2 day coverage of most of the U.S from 6 facilities.

• W.W. Grainger is able to increase coverage to same day delivery using about 370 facilities.

April 14, 2023 7

INVENTORY COSTS AND NUMBEROF FACILITIES

Inventory Costs

Number of facilities

Inventory costs increase, facility costs increase, and transportation costs decrease as we increase the number of facilities.

April 14, 2023 8

TRANSPORTATION COSTS AND NUMBER OF FACILITIES

TransportationCosts



April 14, 2023 9

FACILITY COSTS AND NUMBEROF FACILITIES

FacilityCosts



April 14, 2023 10

Transportation

Tota

l C

osts


Inventory

Facilities

Total Costs

TOTAL COSTS RELATED TO NUMBER OF FACILITIES

April 14, 2023 11

IMPLICATIONS

• Total costs decrease and then increase as we increase the number of facilities.

• The responsiveness improves as we increase the number of facilities.

• A supply chain should always operate above the lowest cost point.

• Operating beyond that point makes sense if the revenue generated from better responsiveness exceeds the cost of better responsiveness.

April 14, 2023 12

Response Time

Variation in Logistics Costs and Response Time with Number of Facilities


Total Logistics Costs

Tota

l C

osts

April 14, 2023 13

IMPLICATIONS:

• Total costs decrease and then increase as we increase the number of facilities.

• The responsiveness improves as we increase the number of facilities.

• A supply chain should always operate above the lowest cost point. Operating beyond that point makes sense if the revenue generated from better responsiveness exceeds the cost of better responsiveness.

April 14, 2023 14

DESIGN OPTIONS FOR A DISTRIBUTION NETWORK

1. Manufacturer Storage with Direct Shipping

2. Manufacturer Storage with Direct Shipping and In-Transit Merge

3. Distributor Storage with Carrier Delivery

4. Distributor Storage with Last Mile Delivery

5. Manufacturer or Distributor Storage with Consumer Pickup

6. Retail Storage with Consumer Pickup

7. Selecting a Distribution Network Design

April 14, 2023 15

MANUFACTURER STORAGE WITHDIRECT SHIPPING

Manufacturer

Retailer

Customers

Product Flow

Information Flow

April 14, 2023 16

PERFORMANCE CHARACTERISTICS OF MANUFACTURER STORAGE WITH DIRECT SHIPPING NETWORK

Cost Factor Performance

Inventory Lower cost because of aggregation. Highest Benefits for low demand and high value items and largest when product customization can be postponed by manufacturer

Transportation Higher transportation cost because of increased distance and disaggregate shipping.

Facilities and Handling

Lower facility cost because of aggregation. Saves handling cost if manufacturer can manage small shipments

Information Significant investment in information infrastructure to integrate manufacturer and retailer

April 14, 2023 17

Service Factor Performance

Response time Longer response time of 1-2 weeks due to increased distance and 2 stages for order processing. Response time may vary by product.

Product variety Easy to provide a high level of variety

Product availability

Easy to provide a high level of product availability because of aggregation at manufacturer

Customer experience

Good in terms of home delivery but can suffer if order from several manufacturers is sent as partial shipment

Time to market Fast, with the product available as soon as the first unit is produced.

Order visibility More difficult but also more important for a customer service perspective

Returnability Expensive and difficult to implement.

PERFORMANCE CHARACTERISTICS OF MANUFACTURER STORAGE WITH DIRECT SHIPPING NETWORK

April 14, 2023 18

IN-TRANSIT MERGE NETWORK

Factories

Retailer

Product Flow

Information Flow

In-Transit Merge by Carrier

Customers

April 14, 2023 19

PERFORMANCE CHARACTERISTICS OF IN-TRANSIT MERGE


Inventory Similar to drop shipping

Transportation Somewhat lower transportation cost than drop shipping

Facilities and handling

Handling cost higher than drop shipping, receiving cost lower at customer

Information Investment is somewhat higher than drop shipping


Response time Similar to drop-shipping, may be higher

Product variety Similar to drop-shipping

Product availability Similar to drop-shipping

Customer experience

Better than drop-shipping, because single delivery has to be received

Time to market Similar to drop-shipping

Order visibility Similar to drop-shipping

Returnability Similar to drop-shipping

April 14, 2023 20

DISTRIBUTOR STORAGE WITH CARRIER DELIVERY

Factories

Customers

Product FlowInformation Flow

Warehouse Storage by Distributor/Retailer

April 14, 2023 21

PERFORMANCE CHARACTERISTICS OF DISTRIBUTOR STORAGE WITH CARRIER DELIVERY


Inventory Higher than manufacturer storage. Difference is not large for faster moving items but can large for slow moving items

Transportation Lower than manufacturer storage. Reduction is higher for faster moving items


Somewhat higher than manufacturer storage. The difference can be large for very large for slow moving items

Information Simple infrastructure compared to manufacturer storage


Response time Faster than manufacturer storage

Product variety Lower than manufacturer storage

Product availability Higher cost to provide the same level of availability as manufacturer storage

Customer experience Better than manufacturer storage with drop-shipping

Time to market Higher than manufacturer storage

Order visibility Easier than manufacturer storage

Returnability Easier than manufacturer storage

April 14, 2023 22

DISTRIBUTOR STORAGE WITH LAST MILE DELIVERY

Factories

Customers

Product Flow

Information Flow

Distributor/Retailer Warehouse

April 14, 2023 23

PERFORMANCE CHARACTERISTICS OF DISTRIBUTOR STORAGE WITH LAST MILE DELIVERY

Cost factor Performance

Inventory Higher than distributor storage with package carrier delivery

Transportation Very high cost given minimal scale economies. Higher than any other distribution option.


Facility costs higher than manufacturer storage or distributor storage with package carrier delivery, but lower than a chain of retail stores

Information Similar to distributor storage with package carrier delivery

April 14, 2023 24


Service factor Performance

Response time Very quick. Same day to next day delivery

Product variety Somewhat less than distributor storage with package carrier delivery but larger than retail stores.

Product availability More expensive to provide availability than any other option except retail stores.

Customer experience

Very good, particularly for bulky items.

Time to market Slightly higher for distributor storage with package carrier delivery

Order visibility Less of an issue and easier to implement than manufacturer storage or distributor storage with package carrier delivery.

Returnability Easier to implement than other previous options. Harder and more expensive than retail network

April 14, 2023 25

MANUFACTURER OR DISTRIBUTOR STORAGE WITH CUSTOMER PICKUP

Factories

Retailer

Pickup Sites

Product FlowInformation Flow

Cross Dock DC

Customer Flow

Customers

April 14, 2023 26

PERFORMANCE CHARACTERISTICS OF NETWORK WITH CONSUMER PICKUP SITES


Inventory Can match any other option, depending on the location of inventory.

Transportation Lower than the use of package carriers, especially if using an existing delivery network


Facility costs can be high if new facilities have to be built. Costs are lower if existing facilities are used. The increase in handling cost at the pickup site can be significant

Information Significant investment in infrastructure is required

April 14, 2023 27



Response time Similar to package carrier delivery with manufacturer or distributor storage. Same day delivery possible for items stored locally at pickup sites

Product variety Similar to other manufacturer or distributor storage options.

Product availability Similar to other manufacturer or distributor storage options.

Customer experience Lower than other options because of the lack of home delivery. Experience is sensitive to capability of pickup location

Time to market Similar to manufacturer storage options.

Order visibility Difficult but essential

Returnability Somewhat easier given that pickup location can handle returns

April 14, 2023 28

PERFORMANCE CHARACTERISTICS OF RETAIL STORAGE AT CUSTOMER PICKUP SITES


Inventory Higher than all other options

Transportation Lower than all other options


Higher than other options. The increase in handling cost can be significant for online and phone orders.

Information Some investment in infrastructure required for online and phone orders

April 14, 2023 29


Response time Same day(immediate) pickup possible for items stored locally at pickup sites

Product variety Lower than all other options

Product availability More expensive to provide than all other options

Customer experience Related to whether shopping is viewed as a positive or negative experience by customer

Time to market Highest among distribution options.

Order visibility Trivial for in-store orders. Difficult but essential, for online and phone orders.

Returnability Easier than other options because retail stores can provide a substitute.

PERFORMANCE CHARACTERISTICS OF RETAIL STORAGE AT CUSTOMER PICKUP SITES

April 14, 2023 30

COMPARATIVE PERFORMANCE OF DELIVERY NETWORK DESIGNS (1=STRONG PERFORMANCE, 6=WEAK PERFORMANCE)

Information

Facility & Handling

Transportation

Inventory

Returnability

Order Visibility

Customer Experience

Product Availability

Product Variety

Response Time

Manufacturer storage with

pickup

Distributor storage with

last mile delivery

Distributor Storage with

Package Carrier Delivery

Manufacturer Storage with

In-Transit Merge


Direct Shipping

Retail Storage

with Customer Pickup

1

1

1

1

1

1

1

1

1

1

1

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1

1

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1

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55

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5

April 14, 2023 31

COMPARATIVE PERFORMANCE OF DELIVERY NETWORK DESIGNS

• Identify the best and worst network along various dimensions.

• Response time: (B) retail stores (W) Manufacturer storage with direct ship

• Product variety: (W) retail stores (B) Manufacturer storage with direct ship

• Product availability: (W) retail store (B) Manufacturer storage

• Inventory: (W) retail store (B) manufacturer storage

• Transportation: (B) retail store (W) last mile delivery

• Facility: (W) retail store (B) manufacturer storage

• Handling: (W) Distributor storage with last mile delivery (B)

• Information: Retail stores may be less complex; manufacturer storage with pickup may be very complex

April 14, 2023 32

LINKING PRODUCT CHARACTERISTICS AND CUSTOMER PREFERENCES TO NETWORK DESIGN (+2=VERY SUITABLE, +1SOMEWHAT SUITABLE, 0=NEUTRAL, -1=SOMEWHAT UNSUITABLE, -2=VERY UNSUITABLE

Low customer effort

High product variety

Quick desired response

High product value

Many product sources

Very low demand product

Low demand product

Medium demand product

High demand product

Manufacturer storage with

pickup

Distributor storage with last

mile delivery

Distributor Storage with Package

Carrier Delivery


In-Transit Merge


Direct Shipping

Retail Storage with

Customer Pickup

+2

+2

+2

+2

+2

+2

+2 +2 +2

+2

+1

+1

+1

+1

+1

+1

+1

+1

+1

+1

+1

+1

+1

+1

+1

0

0

0

0

0

0

0

0 0

0

-1

-1

-1

-1

-1 -1

-1

-1

-1

-1

-1

-2 -2

-2

-2

-2

-2 -2

-2

April 14, 2023 33

LINKING PRODUCT CHARACTERISTICS AND CUSTOMER PREFERENCES TO NETWORK DESIGN

• When designing the delivery network we should account for product and market characteristics.

• High demand products will have transportation cost play a significant role. Use network with good transportation cost (retail stores)

• Very low demand products will have inventory play a significant role. Use network with low inventory costs (direct shipping)

• Many product sources: transportation + information plays a role. Distributor storage with package carrier

• Few product sources but high customization: manufacturer storage with merge in transit

• High product variety: inventory cost will be significant. Use distributor storage

• Low customer effort: Distributor storage with package carrier delivery or last mile delivery depending upon desired response time

April 14, 2023 34

E-BUSINESS AND THE DISTRIBUTION NETWORK• Impact of E-Business on Customer Service

• Response time to customers

• Product variety

• Product availability

• Customer experience

• Faster time to market

• Order visibility

• Returnability

• Direct sales to customers

• Flexible pricing, product portfolio and promotions

• Efficient fund transfer

April 14, 2023 35

E-BUSINESS AND THE DISTRIBUTION NETWORK

• Impact of E-Business on Cost

• Inventory

• Facilities

• Transportation

• Information

• Using E-Business: Dell, Amazon, Peapod, Grainger

April 14, 2023 36

DISTRIBUTION NETWORKS IN PRACTICE

• The ownership structure of the distribution network can have as big as an impact as the type of distribution network

• The choice of a distribution network has very long-term consequences

• Consider whether an exclusive distribution strategy is advantageous

• Product, price, commoditization, and criticality have an impact on the type of distribution system preferred by customers

April 14, 2023 37

ASSIGNMENT…

• What are the key factors to be considered when designing the distribution network?

• What are the strengths and weaknesses of various distribution options?

• What roles do distributors play in the supply chain?

• Using E-Business: Dell, Amazon, Peapod, Grainger

April 14, 2023 38

ROLE OF NETWORK DESIGN IN THE SUPPLY CHAIN

• Supply chain network design decisions include the assignment of facility role; location of manufacturing; storage or transportation related facilities; allocation of capacity and markets to each facility.

• Facility role- what role should each facility play? What processes are performed at each facility?

• Facility location- where should facilities be located?

• Capacity allocation- how much capacity be allocated to each facility?

• Market and supply allocation- what market should each facility serve? Which supply sources should feed each facility?

April 14, 2023 39

FACTORS INFLUENCING NETWORK DESIGN DECISIONS

• Strategic- firms focusing on low cost leadership tend to find the lowest cost location for their manufacturing facilities. Ex: Electronic goods. Whereas firms focusing on responsiveness tend to locate facilities closer to the market and may select high cost location Ex: apparels which responds quickly to changing fashion trends.

• Technological-if production technology displays significant economies of scale, a few high capacity locations are most effective. Ex: manufacture of computer chips. Whereas if facilities have lower fixed costs, many local facilities are preferred because this helps in lower transportation costs. Ex: bottling plants for coca cola.

• Macroeconomic factors- include taxes tariffs, exchange rates, and shipping costs, freight and fuel cost that are not internal to an individual firm. Ex: BMW built its US factory in south Carolina mainly because of tax incentives offered by the state.

• Political-companies prefer to locate facilities in politically stable countries where the rules of commerce and ownership are well defined

April 14, 2023 40


• Infrastructure- the availability of good infrastructure is a prerequisite to locating facility in a given area. Poor infrastructure adds on to the cost of doing business from a given location. Key elements include sites and labor, proximity to all transportation terminals and local utilities.

• Competitive- companies must consider competitors’ strategy, size and location. Fundamental decision firm make is whether to locate their facilities close to or far from competitors.

• Positive externalities between firms-retails stores tend to locate close to each other because doing so increases overall demand

• Locating to split the market- when firms do not control price but compete on distance from the customer, they can maximize market share by locating close to each other and splitting the market.

April 14, 2023 41

• Socioeconomic factors-Govt. of India has promoted industrial development of industrially backward areas like J&K, and northeastern states. Balanced regional development through locational dispersal of industries has been one of the principle objectives of 5 Year Plans. Industrial policy aims to spread industrialization to backward areas on the country.

• Customer response time and local presence- firms that target customers who value for shorter response time must locate close to them. Most towns have fewer supermarkets than convenience stores.

• Logistics and facility costs- cost incurred within a supply chain change as a number of facilities, their location and capacity allocation change. Ex: locating the steel factory close to the supply source is preferred because it reduces transportation cost. Total logistics cost are the sum of the inventory, transportation, and facilities cost.


April 14, 2023 42

THE COST-RESPONSE TIME FRONTIER

Local FG

Mix

Regional FG

Local WIP

Central FG

Central WIP

Central Raw Material and Custom production

Custom production with raw material at suppliers

Cost

Response Time HiLow

Low

Hi

April 14, 2023 43

SERVICE AND NUMBER OF FACILITIES


ResponseTime

April 14, 2023 44

Customer

DC

Where inventory needs to be for a one week order response time - typical results --> 1 DC

April 14, 2023 45

CustomerDC

Where inventory needs to be for a 5 day order response time - typical results --> 2 DCs

April 14, 2023 46

Customer

DC

Where inventory needs to be for a 3 day order response time - typical results --> 5 DCs

April 14, 2023 47

Customer

DC

Where inventory needs to be for a next day order response time - typical results --> 13 DCs

April 14, 2023 48

Customer

DC

Where inventory needs to be for a same day / next day order response time - typical results --> 26 DCs

April 14, 2023 49

COSTS AND NUMBER OF FACILITIES

Costs


Inventory

Transportation

Facility costs

April 14, 2023 50

Percent Service Level

Within Promised Time

Transportation

COST BUILDUP AS A FUNCTION OF FACILITIESC

ost

of

Op

era

tion

s


Inventory

Facilities

Total Costs

Labor

April 14, 2023 51

Conventional Network

CustomerStore

MaterialsDC

ComponentManufacturing

VendorDC

Final Assembly

FinishedGoods DC

ComponentsDC

VendorDC Plant

Warehouse

FinishedGoods DC

CustomerDC

CustomerDC

CustomerDC

CustomerStore

CustomerStore

CustomerStore

CustomerStore

VendorDC

April 14, 2023 52

TAILORED NETWORK: MULTI-ECHELON FINISHED GOODS NETWORK

RegionalFinished

Goods DC

RegionalFinished

Goods DC

Customer 1DC

Store 1

NationalFinished

Goods DC

Local DCCross-Dock

Local DC Cross-Dock

Local DCCross-Dock

Customer 2DC

Store 1

Store 2

Store 2

Store 3

Store 3

April 14, 2023 53

A FRAMEWORK FOR NETWORK DESIGN DECISIONS

PHASE ISupply Chain

Strategy

PHASE IIRegional Facility

Configuration

PHASE IIIDesirable

Sites

PHASE IVLocation Choices

Competitive STRATEGY

INTERNAL CONSTRAINTSCapital, growth strategy,existing network

PRODUCTION TECHNOLOGIESCost, Scale/Scope impact, Support, required, flexibility

COMPETITIVEENVIRONMENT

PRODUCTION METHODSSkill needs, response time

FACTOR COSTSLabor, materials, site specific

GLOBAL COMPETITION

TARIFFS AND TAXINCENTIVES

REGIONAL DEMANDSize, growth, homogeneity,local specifications

POLITICAL, EXCHANGERATE AND DEMAND RISK

AVAILABLEINFRASTRUCTURE

LOGISTICS COSTSTransport, inventory, coordination

AGGREGATE FACTOR AND LOGISTICS COSTS

April 14, 2023 54

MODELS FOR FACILITY LOCATION AND CAPACITY ALLOCATION Goal is to maximize the overall profitability while providing

customers with appropriate responsiveness.

Revenues come from sale of products, whereas cost arises from facilities, labor, transportation, material and inventories.

A manager must consider many trade-offs during network design. Ex: building many facilities reduces transportation cost and provides fast response time, but it increases the facility and inventory cost.

Managers use network design models in 2 situations:

1. To decide on locations where facilities will be established and the capacity to be assigned to each facility.(long term)

2. Models are used to assign current demand to the available facilities and identify lanes along which product will be transported.(annual basis)

April 14, 2023 55

NETWORK OPTIMIZATION MODELS

Case let: SunOil decides to view worldwide demand in terms of 5 regions. Annual demand is shown in the last row, and fixed cost for low and high capacity is shown in the table.

Available Data; manager’s decision on economies of scale, Cost data and demand data for SunOil is as shown

The optimization model requires following constraints:(min costs)

n= number of potential plant locations/ capacity

m= number of market or demand points

Dj= annual demand from market j

Ki= potential capacity of plant i

fi= annualized fixed cost of keeping plant i open

cij= cost of producing and shipping 1 unit from plant i to market j (cost include production, inventory, transportation and tariffs)

The following are the decision variables:

Yi= 1, if plant i is open, 0 otherwiseXij= quantity shipped from plant i to market j

THE CAPACITATED PLANT LOCATION MODEL:

Formulated as: n n n

Min Σ fi Yi + Σ Σ cij Xij i=1 i=1 j=1 Subject to;n

Σ Xij=D for j=1…….m (1)i=1

m

Σ Xij≤ Ki Yi for i=1…….n (2)j=1

Yi∈{0,1} for i=1……n, Xij ≥0 (3)

April 14, 2023 57

• The objective function minimizes the total cost of setting up and operating the network.

• The constraint in (1) requires that demand at each regional market be satisfied.

• The constraint in (2) sates that no plant can supply more than its capacity

• The constraint in (3) enforces that each plant is either open or close

• The solution identifies the plants that are to be kept open, their capacity, and the allocation of regional demand to these plants.

• If sun oil decides to locate a plant in Europe for strategic reasons, we can modify the model by adding a constraint that requires one plant to be located in Europe.

• The cost associated with a variety of options incorporating different combinations of strategic concerns such as local presence should be evaluated.

• A suitable regional configuration is then selected

GRAVITY METHODS FOR LOCATION

• Gravity models assumes that both the markets and the supply sources can be located as a grid points on a plane.

• All distances are calculated as geometric distance between 2 points.

• The transportation cost grows linearly with the quantity shipped.

• The gravity model helps to locate a single facility that receives raw material from supply sources and ships finished products to markets.


• x,y: Warehouse Coordinates

• xn, yn : Coordinates of delivery location n

• dn : Distance to delivery location n

• Fn : Annual tonnage to delivery location n

• Dn : quantity to be shipped between facility and marketer supply source n

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April 14, 2023 60

• Thus the manager identifies the coordinates (x,y) as the location of the factory that minimizes total cost TC.

• The precise coordinates provided by the gravity model may not correspond to a feasible location.

• The manager should look for desirable sites close to the optimal coordinates that have the required infrastructure as well as the appropriate work skill available.


April 14, 2023 61

NETWORK OPTIMIZATION MODELS

• Allocating demand to production facilities

• Locating facilities and allocating capacity

Which plants to establish? How to configure the network?

Key Costs:

• Fixed facility cost• Transportation cost• Production cost• Inventory cost• Coordination cost

April 14, 2023 62

DEMAND ALLOCATION MODEL

• Which market is served by which plant?

• Which supply sources are used by a plant?

xij = Quantity shipped from plant site i to customer j

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PLANT LOCATION WITH MULTIPLE SOURCING

• yi = 1 if plant is located at site i, 0 otherwise

• xij = Quantity shipped from plant site i to customer j

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• xij = 1 if market j is supplied by factory i, 0 otherwise

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E X A M P L E : Q U A L I T Y W O O L E N R U G S

BIKANEER-PRODUCED AT AUCTION CENTRE

BIKANEER 275 KM FROM JAIPUR

IN VILLAGES 30-KM AROUND BIKANEER

JAIPUR

AT DYING HOUSES 5-20KMS FROM HO

JAIPUR, 20KMS FROM HO

JAIPURTHANAGAZI110KMS FROM HO

NARHET, 60 LOOMS200 WEAVERS,25 KMS FROM THANAGAZI BRANCHOFFICE

AREA VISITS EVERY 15-20 DAYSTO CHECK PROGRESS

THANAGAZI, NAHRETJAIPUR

20KMS FROM HO

April 14, 2023 66

ASSIGNMENT…

• What is the role of network design decisions in the supply chain?

• What are the factors influencing supply chain network design decisions?

• Describe a strategic framework for facility location.

• How are the following optimization methods used for facility location and capacity allocation decisions?• Gravity methods for location

• Network optimization models

END OF MODULE 2