Introduction

Overview

  • why network planning
    • find the right balance between inventory, transportation and manufacturing costs
    • match supply and demand under uncertainty by positioning and managing inventory effectively
    • utilize resources effectively by sourcing products from the most appropriate manufacturing facility
  • three hierarchical steps
    • network design
      • number, locations and size of manufacturing plants & warehouses
      • assignment of retail outlets to warehouses
      • major sourcing decisions
      • typical planning horizon is a few years
    • inventory positioning
      • identifying stocking points
      • selecting facilities that will produce to stock & thus keep inventory
      • selecting facilities that will produce to order & hence keep no inventory
      • inventory management strategies
    • resource allocation
      • determine whether production and packaging of different products is done at the right facility
      • what should be the plants sourcing strategies
      • how much capacity each plant should have to meet seasonal demand

Logistic network

  • key strategic decisions
    • plant, warehouse, and retailer location
    • determining the appropriate number of warehouses
    • determining the location of each warehouse
    • determining the size of each warehouse
    • allocating space for products in each warehouse
    • determining which products customers will receive from each warehouse
  • problem
    • assuming that plant and retailer locations will not be changed, the objective is to design or reconfigure the logistics network so as to
      • minimize annual systemwide costs
        • including production & purchasing costs, inventory holding costs, facility costs (storage, handling, and fixed costs), and transportation costs
      • subject to a variety of service level requirements
        • tactical decision - the selection of transportation mode (e.g., truck, rail)

Trade-offs by increasing the number of warehouse

  • disadvantages
    • an increase in overhead & setup costs
    • an increase in inbound transportation costs: transportation costs from the suppliers and/or manufacturers to the warehouses
    • an increase in inventory costs due to increased safety stocks required to protect each warehouse against uncertainties in customer demands
  • advantages
    • an improvement in service level due to the reduction in average travel time to the customers
    • a reduction in outbound transportation costs: transportation costs from the warehouses to the customers
    • firm must balance the costs of opening new warehouses with the advantages of being close to the customer

Network desgin

  • key issues
    • pick the optimal number, location and size of warehouses and/or plants
    • determine optimal sourcing strategy
      • which plant/vendor should produce which product
    • determine best distribution channels
      • which warehouses should service which customers
    • the objective is to balance service level against
      • production/purchasing costs
      • inventory carrying costs
      • facility costs (handling & fixed costs)
      • transportation costs
      • i.e. we would like to find a minimal-annual-cost configuration of the distribution network that satisfies product demands at specified customer service levels

Data Collection

Overview

  • information required for network configuration problems
    • location - retailers, distribution centers, manufacturing facilities, suppliers, etc.
    • all products - volumes, transport modes
    • annual demand - product /customer location
    • transportation rates - mode
    • warehousing costs - labor, inventory carrying charges, fixed operating costs, etc.
    • shipment sizes & frequencies - delivery
    • order processing costs
    • customer service - requirements and goals
  • data collection issues
    • data aggregation
    • transportation rates
    • mileage estimation
    • warehouse costs
    • warehouse capacities
    • potential warehouse locations
    • service level requirements
    • future demand
  • too much information
    • sales data is typically collected on a by-customer basis
    • network planning is facilitated if sales data is in a geographic rather than accounting database
      • distances and transportation costs
    • customers located in close proximity are aggregated using a grid network or cluster
      • refer as a customer zone
  • why aggregate
    • the cost of obtaining & processing data
    • the form in which data is available
    • the size of the resulting location model
    • the accuracy of forecast demand
    • the customer zone balances
      • loss of accuracy (due to over aggregation)
      • needless complexity
    • factors affect efficiency of aggregation
      • the number of aggregated points, i.e. the # of different zones
      • distribution of customers in each zone

Data aggregation

  • customer aggregation
    • grid network, clustering technique
    • zip code
    • service levels, frequency of delivery
  • item aggregation - product groups
    • distribution pattern & logistics characteristics
    • product type
    • companies may have thousands of individual items in their production line
      • variations in product models and style
      • same products are packaged in many sizes
    • within each of the source-groups, aggregate the SKU’s by similar logistics characteristics (e.g. weight, volume, holding cost, etc.)
    • SKU (Stock Keeping Unit) - associated with any purchasable item in a store or catalog
      • e.g. a woman's blouse of a particular style and size - “3726-8” meaning “Style 3726, size 8”
      • a source group is a group of SKU’s all sourced from the same place(s)
  • guideline
    • aggregate demand points for 300 zones
    • make sure each zone has approximately an equal amount of total demand
    • place the aggregated points at the center of the zone
    • aggregate the products into 20 to 50 product groups
    • the error is typically no more than 1%

Others

  • transportation rates
    • huge number of rates representing all combinations of product flow
    • rates: linear with distance and volume (e.g. truck, rail, UPS)
    • transportation costs associated with an internal and an external fleet
      • internal - estimating transportation costs for company owned trucks
      • external - Truckload (TL) mode and less than Truckload (LTL) mode
      • ex. CZAR (Complete Zip Auditing & Rating)
  • warehouse costs
    • fixed costs
      • proportional to warehouse size (capacity) but in a nonlinear way; this cost is fixed in certain ranges of the warehouse size
    • handling costs
      • labour & utility costs which are proportional to annual flow through the warehouse
    • storage costs
      • inventory holding costs, which are proportional to average inventory levels

  • warehouse capacity

    • amount of space is proportional to peak inventory, not annual flow

    \[annual \ storage \ costs = average \ inventory \ level \times inventory \ holding \ cost\]

    • assume a regular shipment and delivery schedule
    • required storage space is approximately 2λ

    \[inventory \ turnover \ ratio(\lambda)=\frac{annual \ sales(flow)}{average \ inventory \ level}\]

    • space for access & handling pallet; for aisles, picking, sorting, and processing facilities
    • multiply by a factor (typical 3)

  • other issues

    • warehouse location
      • geographical & infrastructure conditions; natural resources & labour availability; local industry & tax regulations; public interest
    • service level requirement
      • maximum distance between each customer and the warehouse serving it; proportion of customers (demand) within a given distance
    • future demand
      • changes in customer demand over the next few years - possible scenarios

  • a typical network design model

    • several products are produced at several plants
    • each plant has a known production capacity
    • there is a known demand for each product at each customer zone
    • the demand is satisfied by shipping the products via regional distribution centers
    • there may be an upper bound on total throughput at each distribution center

  • a typical location model

    • there may be an upper bound on the distance between a distribution center and a market area served by it
      • like Hema, 3km, ensuing the food is fresh
    • a set of potential location sites for the new facilities was identified
    • costs
      • set-up costs
      • transportation cost is proportional to the distance
      • storage and handling costs
      • production/supply costs

  • complexity of network design

    • location problems are, in general, very difficult problems
    • the complexity increases with
      • the number of customers
      • the number of products
      • the number of potential locations for warehouses
      • the number of warehouses located
    • industry benchmarks: number of distribution centers

Network Design

Logistics network optimization

  • mathematical optimization techniques
    • exact algorithms that are guaranteed to find optimal solutions (i.e. least-cost solutions), mathematical programming
      • minimization on network
    • heuristic algorithms that find good solutions, not necessarily optimal solutions
      • minimization on links
      • minimization on paths
    • these tools can determine strategies that will significantly reduce the total system cost
      • program complexity
      • integer programming (IP) vs. linear programming (LP)
  • simulation models
    • provide a mechanism to evaluate specified design alternatives created by the designer
    • limitation of optimization techniques
      • characterizing performance for a given design – sometimes it is not realistic
      • static models / system dynamics – sometimes it is not meaningful
    • micro-level analysis
      • e.g. individual ordering pattern, specific inventory policies, inventory movements inside the warehouse
    • characterizing the performance of a particular configuration but not in determining an effective configuration from a large set of potential configurations

Combination

  • hybrid model
    • use an optimization model to generate a number of least-cost solutions at the macrolevel, taking into account the most important cost components
    • use a simulation model to evaluate the solutions generated in the first phase
  • key features of a network configuration DSS
    • flexibility
      • the ability of the system to incorporate a large set of preexisting network characteristics
      • customer-specific service level; existing warehouse; expansion of existing warehouse; warehouse-to-warehouse flow; bill of material
    • effectiveness
    • robustness
    • reasonable running time