Week 8 | Session 4: SC Network Design — Heuristic Approaches (H1 & H2)

Course: Supply Chain Digitization — Module 3: Analytics in SCM

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Session Agenda

Note

• Case — SC Network Design Problem
• What is a Heuristic?
• Heuristic 1 — Cheapest Warehouse First
• Heuristic 2 — Cheapest End-to-End Path per Retailer
• Heuristic Comparison & Open Question

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1. Case — SC Network Design Problem

Network Structure: 2-tier network (Manufacturer → Warehouse → Retailer).

• Manufacturers: M1, M2
• Warehouses: W1, W2, W3
• Retailers: R1, R2, R3, R4

Assumptions: Production and handling costs are the same across facilities (simplified). Only transportation costs vary.

Objective: Find the optimal distribution strategy — which manufacturer supplies which warehouse, and which warehouse serves which retailer — to minimize total distribution cost.

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2. What is a Heuristic?

A rule-based, practical approach to find a good (not necessarily optimal) solution.

• Faster and simpler than full LP optimization.
• Different heuristics can give different costs for the same problem.
• Useful as a starting point.

Note

★ Heuristic = good solution quickly. LP = best solution (but more effort). Always compare both.

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3. Heuristic 1 — Cheapest Warehouse First

Logic

1. Pick the warehouse with lowest total shipping cost to all retailers.
2. Route all retailer demand through that warehouse.
3. Pick the cheapest manufacturer to supply that warehouse — exhaust its capacity first.
4. Fulfill remaining demand from the next manufacturer.

Applying to the Case

• W1 has the lowest cost to all 4 retailers.
• M1 is cheaper to W1 and supplies first (capacity 1,50,000). Supplies R1, R2, R3 fully, and 2,000 units to R4.
• M2 supplies the balance for R4 (68,000 units).

Result: Total Cost = ₹9,61,000

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4. Heuristic 2 — Cheapest End-to-End Path per Retailer

Logic

• For each retailer individually, evaluate all 6 possible paths (2 Manufacturers × 3 Warehouses).
• Select the path (M → W → Retailer) with the minimum total cost.
• Apply capacity constraints after selecting paths.

Applying to the Case

• R1, R2, R3: Best path is M1 → W1.
• R4: Tie between M1→W1 and M2→W2. Since M1’s capacity is almost full, the balance of 68,000 goes via M2 → W2.

Result: Total Cost = ₹7,57,000 ← better than H1. (H2 routes R4 via W2 instead of W1).

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5. Heuristic Comparison & Open Question

	Heuristic 1	Heuristic 2	Optimal (next session)
Logic	Pick cheapest WH globally, then cheapest Mfr	Find cheapest end-to-end path per retailer	LP / solver
Total Cost	₹9,61,000	₹7,57,000	? (≤ ₹7,57,000)

H2 improved cost by ~21% over H1 simply by evaluating full paths. But: Is H2 the best possible? We don’t know yet. The next session will solve this using LP/Solver to find the true optimal.

Note

★ Heuristics are path-dependent — the order in which you assign demand changes your result. Only LP guarantees the global optimum.

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Session Summary

• SC Network Design: 2-tier problem (Mfr → WH → Retailer). Minimize total cost.
• Heuristic 1: Pick cheapest WH for all retailers → assign cheapest Mfr first. Cost: ₹9,61,000.
• Heuristic 2: Evaluate full end-to-end path per retailer → pick min cost path. Cost: ₹7,57,000.
• Key insight: H2 beats H1 because it considers the full Mfr→WH→Retailer path.

Tip

★ Exam Tip: H1 logic = cheapest warehouse globally. H2 logic = cheapest path per retailer. H2 cost is always ≤ H1 cost. Heuristics are feasible but not necessarily optimal.