Case Study 1 – Network Design

Exercise 1: Network Design for emergent startup SportStuff.com

SportStuff.com is a startup company which has constantly been growing in the last years. The current
supply chain network needs to be reevaluated and redesigned to best cope with the rapid growth
anticipated over the next three years.

Currently, SportStuff leased part of a warehouse in the outskirts of St. Louis. Generally, SportStoff has
divided their primary market, the US, into six customer zones. Demand from 2017 is shown in the table
below:
Table 1: Demand 2017 per customer zone.

ZONE NW SW UMW LMW NE SE

DEMAND 2017 320,000 200,000 160,000 220,000 350,000 175,000

The forecasts for the upcoming years 2018 to 2020 are joyful, as SportStuff assumes a growth of 80%
from 2017 to 2018, an increase in demand of 60% from 2018 to 2019 and another 50% demand
increase from 2019 to 2020. From 2020 on, SportStuff assumes a demand growth of 10% steadily.

As the current warehouse in St. Louis has a capacity of only 1,500,000 units, it is obvious, that over the
next few years, additional warehouse space needs to be acquired. Hence, SportsStuff Management
has found the following possible locations. In each location, either a small warehouse (capacity of
1,500,000) or a large warehouse (with capacity of 3,000,000 units) can be leased.
Table 2: Fixed and variable costs for different potential warehouse locations.

Small Warehouse Large Warehouse

Variable Variable
Fixed Costs Fixed Costs
Location Costs/Unit Costs/Unit
Seattle 300,000 0.20 500,000 0.20
Denver 250,000 0.20 420,000 0.20
St. Louis 220,000 0.20 375,000 0.20
Atlanta 220,000 0.20 375,000 0.20
Philadelphia 240,000 0.20 400,000 0.20

Transportation Costs per Shipment from each of the potential locations to the 6 customer zones are
given in the table below. Note, that one shipment on average consists of 4 units.
Table 3: Transportation costs per 4 unit shipments from potential warehouses to customer zones.

From/To NW SW UMW LMW NE SE

Seattle 2.00 2.50 3.50 4.00 5.00 5.50
Denver 2.50 2.50 2.50 3.00 4.00 4.50
St. Louis 3.50 3.50 2.50 2.50 3.00 3.50
Atlanta 4.00 4.00 3.00 2.50 3.00 2.50
Philadelphia 4.50 5.00 3.00 3.50 2.50 4.00

Besides the facility and transport costs of course you also want to consider inventory holding costs.
Assume, that those costs can be approximated by a step-wise linear function (see upcoming table).

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 Case Study 1 – Network Design

Read the table as follows: In case the flow in units being stored at the warehouse is between 0 and
2,000,000, then the inventory holding costs are 250,000 + 0.310 times the flow in units.
Table 4: Inventory holding costs.

Flow in units stored at any Inventory Costs

warehouse F
0 to 1,500,000 units 250,000 + 0.310 * F
2,000,001 to 3,000,000 530,000 + 0.170 * F
3,000,001 to 4,000,000 678,000 +0.133 * F

Note, that management estimates that inbound transportation costs for shipments from suppliers to
the warehouses are likely to remain unchanged, independent of the warehouse selection.

Study Questions:
1. Optimize for each upcoming year 2017, 2018, 2019, 2020 the supply chain network.
Determine, where SportStuff shall open warehouses and which size is appropriate (small or
large) – of course a warehousing location can either be small or large, not both. Assume you
want the warehouse in St. Louis to remain. However, you can of course switch from a small to
a large warehouse in St. Louis.
2. Note, that building/opening a warehouse needs some setup time. Also, once opened, a
warehouse needs to stay open for at least 5 years. Hence, you need to find a warehouse
opening strategy for the next years. Find the cost optimizing strategy.
3. How would your recommendations from 1 and 2 change, if transportation costs doubled?
What would you recommend if transportation costs were only half the price?

Hints:
Note, that the inventory holding costs is a non-linear function. Hence, you should try and use the
nonlinear solver in Excel. If this is not possible, use a weighted average cost from Table 4 and linearize
the function.

Exercise 2: Location choices

The SportStuff founder and CEO has a friend in Austria, who is excited by the idea of SportStuff. Hence,
he wants create a spin-off in mid-Europe together with his US friends. They partners agree, that they
want to in the beginning address the markets Switzerland, Austria and Bavaria. They now assume, that
opening one warehouse for all three regions is sufficient in the beginning for those three regions. The
table below gives the locations (coordinates) of the suppliers that will deliver their products to the
warehouse. Customers will be located all over Austria, Switzerland and Bavaria. Luckily, even though
the distances to the customers might vary from the warehouse, the costs per package delivered is fixed
to 4 EUR.

Cost per 1,000

Units delivered
Supplier # units delivered & X coordinate Y coordinate
[in 1,000]
km
1 43 6 0.5 2.2
2 51 6 0.5 2.7

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 Case Study 1 – Network Design

3 35 3 3.7 4.7
4 41 5 5.6 5.6
5 65 3 6.6 8.0
6 45 7 6.5 12.6
7 53 6 8.4 13.0
8 42 6 9.4 9.3
9 64 3 10.7 7.9
10 78 5 9.6 7.2
11 43 5 10.7 6.3
12 14 3 11.6 9.6
13 38 7 13.4 8.6
14 24 7 12.6 6.1
15 12 3 10.7 5.6
16 33 3 12.1 2.9
17 11 5 15.2 2.3
18 53 4 17.3 3.7
19 56 7 19.2 7.3
20 223 6 15.3 6.8
21 41 6 14.6 7.3
22 7 3 15.1 7.7
23 64 6 17.7 7.4
24 46 5 9.3 6.8
25 73 4 20.2 9.0

Study Questions:
1. Find the best location choice for the warehouse of SportStuff Europe. You can either use the
Excel Solver for doing so, or optimize using the Modified Miehle Method. The latter requires
𝜖 = 0.0001 and 𝛼 = 0.1.
2. Assume the resulting optimal lies between Passau in Germany and Wels in Austria. Provide a
list of 5 possible properties in this regions and discuss advantages and disadvantages.

Exercise 3: Literature review

Comparing multiple possible locations according to qualitative factors like infrastructure, taxes, other
incentives, staff, etc. (see an overview listed e.g. in Chopra/Meindl), is difficult. First, provide a
thorough list of influencing factors from literature. Then present a method of how to compare different
sites according to those factors. Hint: Search for “scoring” or “weighted factor” analysis.