Models for Facility Location and Capacity Allocation

A manager s goal when locating facilities and allocating capacity should be to maximize the overall profitability of the resulting supply chain network while providing customers with the appropriate responsiveness. Revenues come from the sale of product, whereas costs arise from facilities, labor, transportation, material, and inventories. The profits of the firm are also affected by taxes and tariffs. Ideally, profits after tariffs and taxes should be maximized when designing a supply chain network. 

A manager must consider many trade-offs during network design. For example, building many facilities to serve local markets reduces transportation cost and provides a fast response time, but it increases the facility and inventory costs incurred by the firm. 

Location of supply sources and markets Location of potential facility sites Demand forecast by market Facility, labor, and material costs by site Transportation costs between each pair of sites Inventory costs by site and as a function of quantity Sale price of product in different regions Taxes and tariffs 

Desired response time and other service factors 

Given this information, either gravity models or netwoik optimization models may be used to design the network. We organize the models according to the phase of the network design framework at which each model is likely to be useful. 

---