1. Typical supply chain
upstream
downstream

2. Logistics Network Configuration
Configuration of the logistics network (or supply chain) may involve the following strategic decisions
Determining the number of retailers, distribution centers and manufacturing facilities
Determining the location of each facility
Determining the size of each facility
Allocating retailers to different distribution centers
Determining transportation modes
Determining the operation of the network (direct shipments, e.g.)

3. Roles of different type of facilities
Manufacturing plants
Responsible for manufacturing the goods for distribution
Some companies may not own manufacturing plants
Distribution centers
Reducing lead times, increasing product availability at the retailer level (depot effect)
Enabling economies of scale by consolidating shipments from the manufacturing plants.
Delaying the allocation of material to retailers (joint ordering effect)
Providing a second level of support for emergency orders at retailer level
Consolidation point for reverse logistics
Localization of goods to different countries
Retailers (stores, bases)
Primary access point for customers

4. Design options for the network
Direct shipment
Supplier/Plant
Retailer/Base

5. Design options for the network
Direct shipping with milk runs
Supplier/Plant
Retailer/Base
Supplier/Plant
Retailer/Base

6. Design options for the network
Direct shipment DC
Supplier/Plant
Retailer/Base

7. Factors influencing network design
Strategic factors
Cost leadership
Responsiveness/variety
Technological factors
Macroeconomic factors
Tariffs and taxes
Exchange rate and demand risk
Political factors
Infrastructure factors
Competitive factors

8. Factors influencing network design
Customer response time and local presence
Logistics and facility costs
Inventory costs
Transportation costs
Inbound versus outbound
External versus internal fleet
Truckload (TL) versus less than truckload (LTL)
Facility costs
Setup
Operating costs

9. Number of facilities Required Number of Facilities Desired Response
Time

10. Number of facilities
Inventory
Costs
Number of
Facilities

11. Number of facilities
Transportation
Costs
Number of
Facilities

12. Number of facilities
Facility
Costs
Number of
Facilities

13. Number of facilities Response time Total Logistics Costs Number of

14. OR models for facility decisions
Facility location model
minimize transportation and facility costs
Vehicle routing
minimize transportation and vehicle costs
Location-routing:
combination of facility location and vehicle routing
Location-inventory
minimize transportation, facility and inventory holding costs
Inventory-routing
minimize transportation, vehicle and inventory costs

15. Open questions in network design
Do I need a distribution center at all?
How many levels do I need in distribution?
How many distribution centers do I need?
What is the impact of competition on facility decisions?
How many retail stores do I need?

16. Competitive facility location
Suppose the customers are evenly distributed along a line.
Suppose there are two competitors trying to locate their facilities (one each) along this line
The customers will patronize the closest facility
Where should the two competitors locate their facilities?
Spatial competition (Hotelling) x y 1

17. Payoff functions x y 1

18. Equilibrium
1/2 1
x*,y*
In equilibrium, both competitors choose the location ½ and get half of the customers
Average distance traveled by the customers ¼
Competitors might locate their facilities at ¼ and ¾; average distance traveled by the customers will be 1/8 and competitors will still get half of the customers. However this can be achieved only if we can assure each vendor that the other will not start moving on him.
Lessons learned
Tendency towards concentration
The solution of free competition may differ from that of the public interest